<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 21, 1997
REGISTRATION NO. 333-14041
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
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
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 G. 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>
PROPOSED PROPOSED
TITLE OF SECURITIES AMOUNT TO BE MAXIMUM OFFERING MAXIMUM AGGREGATE AMOUNT OF
TO BE REGISTERED REGISTERED PRICE PER UNIT(1) OFFERING PRICE(1) REGISTRATION FEE
<S> <C> <C> <C> <C>
Asset Backed Certificates........ $1,000,000,000(2) 100% $1,000,000,000 $303,030.30(3)
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee.
(2) Not specified as to each class of Asset-Backed Certificates to be registered
pursuant to General Instruction II.D of Form S-3.
(3) Of this amount, $303.03 has been previously paid.
------------------------
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus supplement and the accompanying 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 JANUARY 21, 1997
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JANUARY , 1997)
BLOCK MORTGAGE FINANCE, INC.
DEPOSITOR
$103,197,000
(APPROXIMATE)
ASSET BACKED CERTIFICATES, SERIES 1997-1
BLOCK FINANCIAL CORPORATION
MASTER SERVICER AND SELLER
------------------------
THE BLOCK MORTGAGE FINANCE ASSET BACKED CERTIFICATES, SERIES 1997-1 (THE
'CERTIFICATES'), WILL CONSIST OF (I) THE CLASS A-1, CLASS A-2 AND CLASS A-3
CERTIFICATES (THE 'FIXED RATE CERTIFICATES'), (II) THE CLASS A-4
CERTIFICATES (THE 'ADJUSTABLE RATE CERTIFICATES'; THE ADJUSTABLE RATE
CERTIFICATES AND THE FIXED RATE CERTIFICATES ARE COLLECTIVELY REFERRED
TO AS THE 'CLASS A CERTIFICATES'), (III) THE CLASS X-1 AND CLASS X-2
CERTIFICATES (THE 'CLASS X CERTIFICATES') AND (IV) THE RESIDUAL
CERTIFICATES (THE 'CLASS R CERTIFICATES'). ONLY THE CLASS A CERTIFICATES
ARE OFFERED HEREBY.
--------------------------------------
ON OR BEFORE THE ISSUANCE OF THE CERTIFICATES, THE MASTER SERVICER WILL OBTAIN
FROM MBIA INSURANCE CORPORATION (THE 'CERTIFICATE INSURER') TWO CERTIFICATE
GUARANTY INSURANCE POLICIES RELATING TO THE CLASS A CERTIFICATES (THE
'CERTIFICATE INSURANCE POLICIES') IN FAVOR OF THE TRUSTEE. THE CERTIFICATE
INSURANCE POLICIES WILL PROVIDE COVERAGE OF THE ULTIMATE PRINCIPAL
AMOUNT OF, INTEREST DUE ON, THE FIXED RATE CERTIFICATES AND THE
ADJUSTABLE RATE CERTIFICATES PURSUANT TO THE TERMS OF THE
CERTIFICATE INSURANCE POLICIES.
------------------------
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, THE
CERTIFICATE INSURER OR ANY OF THEIR AFFILIATES. NEITHER THE
CERTIFICATES NOR THE 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.
[LOGO]
------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE
ACCOMPANYING PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
--------------------------------------------
PROSPECTIVE INVESTORS SHOULD CONSIDER THE RISK FACTORS SET FORTH UNDER 'RISK
FACTORS' IN THIS PROSPECTUS SUPPLEMENT COMMENCING ON PAGE S-16
HEREIN AND IN THE PROSPECTUS COMMENCING ON PAGE 12 THEREIN.
------------------------
<TABLE>
<CAPTION>
INITIAL CLASS PASS-
CERTIFICATE THROUGH PRICE TO UNDERWRITING PROCEEDS TO
BALANCE(1) RATE PUBLIC DISCOUNT DEPOSITOR(3)
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Per Class A-1 Certificate........... $ % %(2) % %(2)
Per Class A-2 Certificate........... $ % %(2) % %(2)
Per Class A-3 Certificate........... $ % %(2) % %(2)
Per Class A-4 Certificate........... $ %(4) %(5) % %(5)
Total............................... $ $ $ $
</TABLE>
- ------------
(1) Subject to the permitted variance described herein.
(2) Plus accrued interest from January 1, 1997.
(3) Before deducting expenses payable by the Depositor, estimated to be $ .
(4) Initial Pass-Through Rate. The Pass-Through Rate of the Class A-4
Certificates is adjustable based on One-Month LIBOR, as described herein.
(5) Plus accrued interest, if any, from January , 1997.
------------------------
The Class A Certificates are offered by Morgan Stanley & Co. Incorporated
and Salomon Brothers Inc (each, an 'Underwriter') subject to prior sale, when,
as and if issued and accepted by each Underwriter and subject to each
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 Class A
Certificates will be delivered in book-entry form through the facilities of The
Depository Trust Company, CEDEL S.A. and the Euroclear System against payment
therefor in immediately available funds on or about January , 1997.
------------------------
MORGAN STANLEY & CO. SALOMON BROTHERS INC
INCORPORATED
JANUARY , 1997
<PAGE>
(continuation of cover page)
The Certificates will represent the entire undivided ownership interest in
a trust fund (the 'Trust Fund') to be created pursuant to a Pooling and
Servicing Agreement, dated as of December 31, 1996 (the 'Pooling and Servicing
Agreement') among the Depositor, the Seller, the Master Servicer and Bankers
Trust Company of California, N.A. as trustee (the 'Trustee'). The Trust Fund
will consist primarily of a pool (the 'Mortgage Pool') of mortgage loans (the
'Mortgage Loans') secured by mortgages, deeds of trust or other instruments
(each, a 'Mortgage') creating a first or second lien on one- to four-family
dwellings (each, a 'Mortgaged Property') and certain other assets described
herein. The Mortgage Pool will be divided into two separate groups of Mortgage
Loans (each, a 'Loan Group') based on whether the interest rate for the related
Mortgage Loans is fixed or adjustable. The Fixed Rate Certificates will
represent an undivided ownership interest in a Loan Group of fixed-rate Mortgage
Loans (the 'Fixed Rate Group'). The Adjustable Rate Certificates will represent
an undivided ownership interest in a Loan Group of adjustable-rate Mortgage
Loans (the 'Adjustable Rate Group'). The Class A Certificates will also
represent undivided ownership interests in (i) all monies received on the
Mortgage Loans after the Cut-off Date (as defined herein), (ii) the Certificate
Insurance Policies, (iii) amounts on deposit in the Distribution Account and the
Collection Account and (iv) certain other property. The Mortgage Loans will be
purchased by the Depositor from Block Financial Corporation (in its capacity as
seller, the 'Seller') and will be master serviced by Block Financial Corporation
(in its capacity as master servicer, the 'Master Servicer').
Distributions on the Class A Certificates will be made, to the extent of
funds available therefor, on the 25th day of each month, or, if such day is not
a Business Day, then on the next Business Day, commencing in February 1997
(each, a 'Distribution Date'). Interest will be passed through on each
Distribution Date to the holders of the Class A Certificates (the 'Class A
Certificateholders') based on the related Class Certificate Balance (as defined
herein) at the rate applicable to each Class of the Class A Certificates (each,
a 'Pass-Through Rate'). The Pass-Through Rate for each Class of Fixed Rate
Certificates is set forth on the cover hereof. The Pass-Through Rate for the
Adjustable Rate Certificates adjusts monthly based, subject to certain
limitations described herein, upon One-Month LIBOR (as defined herein) or as
otherwise described herein. Distributions of principal in reduction of the Class
Certificate Balance of the Class A Certificates will be made on each
Distribution Date in the manner and the amounts described herein.
THE YIELD TO INVESTORS ON THE CLASS A CERTIFICATES WILL BE SENSITIVE IN
VARYING DEGREES TO, AMONG OTHER THINGS, THE RATE AND TIMING OF PRINCIPAL
PAYMENTS (INCLUDING PREPAYMENTS) OF, AND LOSSES ON, THE MORTGAGE LOANS IN THE
RELATED LOAN GROUP AND, IN CERTAIN CIRCUMSTANCES, THE RATE AND TIMING OF
PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS) OF, AND LOSSES ON, THE MORTGAGE LOANS
IN THE OTHER LOAN GROUP. THE YIELD TO INVESTORS ON THE ADJUSTABLE RATE
CERTIFICATES WILL ALSO BE SENSITIVE TO THE LEVEL OF THE LONDON INTERBANK OFFERED
RATE FOR ONE-MONTH UNITED STATES DOLLAR DEPOSITS ('ONE-MONTH LIBOR'), THE LEVEL
OF THE MORTGAGE INDICES AND THE ADDITIONAL LIMITATIONS ON THE PASS-THROUGH RATE
FOR THE ADJUSTABLE RATE CERTIFICATES, AS DESCRIBED HEREIN. ALTHOUGH ALL OF THE
MORTGAGE LOANS IN THE ADJUSTABLE RATE GROUP BEAR INTEREST AT ADJUSTABLE RATES
('ARMS'), THE MORTGAGE RATES ON 0.94% AND 11.40% (BY AGGREGATE LOAN BALANCE AS
OF THE CUT-OFF DATE) OF THE ARMS IN THE ADJUSTABLE RATE GROUP AS OF THE CUT-OFF
DATE WILL NOT ADJUST FOR TWO AND THREE YEARS, RESPECTIVELY, FOLLOWING
ORIGINATION. IN ADDITION, THE YIELD TO MATURITY OF THE CLASS A CERTIFICATES
PURCHASED AT A DISCOUNT OR PREMIUM WILL BE MORE SENSITIVE TO THE RATE AND TIMING
OF PRINCIPAL PAYMENTS THEREON. CLASS A CERTIFICATEHOLDERS SHOULD CONSIDER, IN
THE CASE OF ANY CLASS A CERTIFICATE PURCHASED AT A DISCOUNT, THE RISK THAT A
LOWER THAN ANTICIPATED RATE OF PRINCIPAL PAYMENTS COULD RESULT IN AN ACTUAL
YIELD THAT IS LOWER THAN THE ANTICIPATED YIELD AND, IN THE CASE OF ANY CLASS A
CERTIFICATE PURCHASED AT A PREMIUM, THE RISK THAT A FASTER
S-ii
<PAGE>
(continuation of cover page)
THAN ANTICIPATED RATE OF PRINCIPAL PAYMENTS COULD RESULT IN AN ACTUAL YIELD THAT
IS LOWER THAN THE ANTICIPATED YIELD. THE MORTGAGE LOANS GENERALLY MAY BE PREPAID
IN WHOLE OR IN PART AT ANY TIME; HOWEVER, BECAUSE CERTAIN OF THE MORTGAGE LOANS
WILL PROVIDE FOR PREPAYMENT PENALTIES, THE RATE OF PRINCIPAL PAYMENTS MAY BE
LESS THAN THE RATE OF PRINCIPAL PAYMENTS FOR MORTGAGE LOANS WHICH DO NOT PROVIDE
FOR PREPAYMENT PENALTIES. NO REPRESENTATION IS MADE AS TO THE ANTICIPATED RATE
OF PREPAYMENTS ON THE MORTGAGE LOANS, THE AMOUNT AND TIMING OF LOSSES THEREON,
THE LEVEL OF ONE-MONTH LIBOR OR THE MORTGAGE INDICES OR THE RESULTING YIELD TO
MATURITY OF ANY CLASS OF CERTIFICATES.
The Trust Fund is subject to optional termination and a termination auction
under the limited circumstances described herein. Any such optional termination
or termination auction, if exercised, will result in an early retirement of the
Certificates.
There is currently no secondary market for the Class A Certificates. The
Underwriters intend to make a secondary market in the Class A Certificates, but
neither is obligated to do so. There can be no assurance that a secondary market
for the Class A Certificates will develop or, if one does develop, that it will
continue. The Class A Certificates will not be listed on any securities
exchange.
As described herein, the Trust Fund will include two segregated asset
pools, with respect to which elections will be made to treat each as a separate
'real estate mortgage investment conduit' (a 'REMIC') for federal income tax
purposes. The Class A Certificates will constitute 'regular interests' in the
Master REMIC as described herein. For a description of certain tax consequences
of owning the Class A Certificates, including, without limitation, original
issue discount, see 'Federal Income Tax Consequences' herein and in the
Prospectus.
THIS PROSPECTUS SUPPLEMENT DOES NOT CONTAIN COMPLETE INFORMATION ABOUT THE
CLASS A CERTIFICATES. ADDITIONAL INFORMATION IS CONTAINED IN THE PROSPECTUS
DATED JANUARY , 1997, 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 CLASS A
CERTIFICATES MAY NOT BE CONSUMMATED UNLESS THE PURCHASER HAS RECEIVED BOTH THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS.
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, the Seller, the Certificate Insurer or the Underwriters. 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 CLASS A 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 AN
UNDERWRITER AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
S-iii
<PAGE>
(continuation of cover page)
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
In addition to the documents described under 'Incorporation of Certain
Documents by Reference' in the Prospectus, the consolidated financial statements
of the Certificate Insurer, a wholly owned subsidiary of MBIA Inc., and the
Certificate Insurer's subsidiaries as of December 31, 1995 and December 31, 1994
and for the three years ended December 31, 1995, prepared in accordance with
generally accepted accounting principles ('GAAP'), included in the Annual Report
on Form 10-K of MBIA Inc. for the year ended December 31, 1995 and the
consolidated financial statements of the Certificate Insurer and its
subsidiaries for the nine months ended September 30, 1996 and September 30,
1995, included in the Quarterly Report on Form 10-Q of MBIA Inc. for the period
ending September 30, 1996, are hereby incorporated by reference into this
Prospectus Supplement and shall be deemed to be a part hereof. Any statement
contained in a document incorporated by reference herein shall be modified or
superseded for purposes of this Prospectus Supplement to the extent that a
statement contained herein or in any other subsequently filed document which
also is incorporated by reference herein modifies or supersedes such statement.
Any statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus Supplement.
All financial statements of the Certificate Insurer and its subsidiaries
included in documents filed by MBIA Inc. pursuant to Section 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934, as amended, (the '1934 Act')
subsequent to the date of this Prospectus Supplement and prior to the
termination of the offering of the Class A Certificates shall be deemed to be
incorporated by reference into this Prospectus Supplement and to be a part
hereof from the respective dates of filing such documents.
The Depositor hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, as amended, each filing of the
financial statements of the Certificate Insurer included in or as an exhibit to
the documents of MBIA Inc. referred to above and filed pursuant to Section
13(a), 13(c), 14 or 15(d) of the 1934 Act that is incorporated by reference in
the Registration Statements of which this Prospectus Supplement and the
accompanying Prospectus is a part shall be deemed to be a new registration
statement relating to the Class A Certificates offered hereby, and the offering
of such Class A Certificates at that time shall be deemed to be the initial BONA
FIDE offering thereof.
THE DEPOSITOR ON BEHALF OF THE TRUST FUND WILL PROVIDE WITHOUT CHARGE TO
EACH PERSON TO WHOM THIS PROSPECTUS SUPPLEMENT IS DELIVERED, ON THE WRITTEN OR
ORAL REQUEST OF SUCH PERSON, A COPY OF ANY OR ALL OF THE DOCUMENTS REFERRED TO
ABOVE AND IN THE PROSPECTUS UNDER 'INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE' THAT HAVE BEEN OR MAY BE INCORPORATED BY REFERENCE HEREIN OR IN THE
PROSPECTUS (NOT INCLUDING EXHIBITS TO THE INFORMATION THAT IS INCORPORATED BY
REFERENCE UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE INTO
THE INFORMATION THAT THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS INCORPORATES).
SUCH REQUESTS SHOULD BE DIRECTED TO THE ADDRESS OF THE DEPOSITOR AT ONE MAIN
PLAZA, 4435 MAIN STREET, SUITE 500, KANSAS CITY, MISSOURI 64111, TELEPHONE:
(816) 751-6090, FACSIMILE NUMBER: (816) 561-0673, ATTENTION: BRET G. WILSON.
S-iv
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PROSPECTUS SUPPLEMENT PAGE
<S> <C>
Incorporation of Certain Documents by Reference........................................................... S-iv
Summary of Terms.......................................................................................... S-1
Risk Factors.............................................................................................. S-16
Description of the Mortgage Pool.......................................................................... S-20
Certain Yield and Prepayment Considerations............................................................... S-34
The Depositor, the Seller and the Master Servicer......................................................... S-42
Foreclosure and Delinquency Experience.................................................................... S-42
Formation of the Trust Fund and Trust Property............................................................ S-42
Description of the Certificates........................................................................... S-43
Credit Enhancement........................................................................................ S-50
The Pooling and Servicing Agreement....................................................................... S-55
The Trustee............................................................................................... S-62
Federal Income Tax Consequences........................................................................... S-63
State Taxes............................................................................................... S-65
ERISA Considerations...................................................................................... S-66
Legal Investment Considerations........................................................................... S-66
Underwriting.............................................................................................. S-67
Use of Proceeds........................................................................................... S-67
Report of Experts......................................................................................... S-67
Legal Matters............................................................................................. S-67
Ratings................................................................................................... S-68
PROSPECTUS
Available Information..................................................................................... 2
Reports to Holders........................................................................................ 2
Incorporation of Certain Documents by Reference........................................................... 2
Summary of Prospectus..................................................................................... 3
Risk Factors.............................................................................................. 12
Description of the Primary Assets......................................................................... 18
Certain Yield and Prepayment Considerations............................................................... 22
The Trusts................................................................................................ 23
The Depositor............................................................................................. 29
The Seller................................................................................................ 30
The Master Servicer....................................................................................... 30
Use of Proceeds........................................................................................... 30
The Primary Asset Program................................................................................. 30
Description of the Certificates........................................................................... 34
Certain Legal Aspects of the Primary Assets............................................................... 51
Legal Investment Matters.................................................................................. 60
Federal Income Tax Consequences........................................................................... 60
State and Other Tax Consequences.......................................................................... 79
ERISA Considerations...................................................................................... 79
Plan of Distribution...................................................................................... 82
Ratings................................................................................................... 83
Legal Matters............................................................................................. 83
Index of Definitions...................................................................................... 84
</TABLE>
<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.
<TABLE>
<S> <C>
Title of Certificates..................... Block Mortgage Finance Asset Backed Certificates, Series 1997-1 (the
'Certificates').
Certificates Offered...................... $103,197,000 (approximate) Block Mortgage Finance Asset Backed
Certificates, Series 1997-1, to be issued in the following Classes
(each, a 'Class'):
</TABLE>
<TABLE>
<CAPTION>
INITIAL CLASS PASS-THROUGH
CERTIFICATE BALANCE(1) RATE CLASS
---------------------- ------------ -----
<S> <C> <C> <C>
$ % A-1
$ % A-2
$ % A-3
$ %(2) A-4
</TABLE>
<TABLE>
<S> <C>
(1) The aggregate Initial Class Certificate Balances of the Class A
Certificates will be subject to a permitted variance in the aggregate
of plus or minus 5%.
(2) The initial Pass-Through Rate. On each Distribution Date, the
Pass-Through Rate on the Class A-4 Certificates will be equal to the
lesser of (i) the rate equal to the London interbank offered rate for
one-month United States dollar deposits ('One-Month
LIBOR')(calculated as described under 'Description of the
Certificates--Calculation of One-Month LIBOR' herein) plus (a) %
per annum prior to the Optional Termination Date, or (b) % per
annum on and after the Optional Termination Date (such percentage,
the 'Adjustable Rate Margin'), and (ii) the weighted average of the
Mortgage Rates on the Mortgage Loans in the Adjustable Rate Group as
of the first day of the related Due Period, less the sum of (a) the
Servicing Fee Rate, (b) the Trustee Fee Rate, (c) the Insurance
Premium Rate and (d) commencing on the seventh Distribution Date,
0.50% per annum (the 'Available Funds Cap').
The Class A-1, Class A-2 and Class A-3 Certificates are collectively
referred to herein as the 'Fixed Rate Certificates.' The Class A-4
Certificates are referred to herein as the 'Adjustable Rate
Certificates.' The Fixed Rate Certificates and Adjustable Rate
Certificates are collectively referred to herein as the 'Class A
Certificates.' Only the Class A Certificates are offered hereby.
On any date after the Closing Date, the 'Class Certificate Balance'
of a specific Class is the Initial Class Certificate Balance for such
Class as set forth above, less all amounts previously distributed to
such Class of Class A Certificates on account of principal.
Depositor................................. Block Mortgage Finance, Inc., a Delaware corporation (the
'Depositor') and a wholly-owned, limited purpose subsidiary of the
Seller.
Seller.................................... Block Financial Corporation, a Delaware corporation (in its capacity as
seller, the "Seller")
Master Servicer........................... Block Financial Corporation, a Delaware corporation (in its capacity
as servicer, the 'Master Servicer').
Trustee................................... Bankers Trust Company of California, N.A., a national banking
association having its principal place of business in Irvine,
</TABLE>
S-1
<PAGE>
<TABLE>
<S> <C>
California, not in its individual capacity but solely as trustee on
behalf of the Certificateholders and the Certificate Insurer (the
'Trustee'). See 'The Trustee' herein.
Certificate Insurer....................... MBIA Insurance Corporation (the 'Certificate Insurer'). See 'Credit
Enhancement--The Certificate Insurer' herein.
Cut-off Date.............................. December 31, 1996 (the 'Cut-off Date').
Closing Date.............................. On or about January , 1997 (the 'Closing Date').
Distribution Date......................... The 25th calendar day of each month or, if such day is not a Business
Day, the first Business Day following such 25th calendar day,
commencing in February 1997 (each, a 'Distribution Date').
The Mortgage Loans........................ The Mortgage Loans deposited into the Trust Fund (the 'Mortgage
Loans') consist of mortgage loans which bear interest at either a
fixed rate or an adjustable rate (the 'Mortgage Rates') and were
purchased by the Seller and are evidenced by promissory notes or
other evidence of indebtedness (the 'Notes') secured by mortgages,
deeds of trust or other instruments (each, a 'Mortgage') creating a
first or second lien on one- to four-family dwellings (each, a
'Mortgaged Property'). Unless otherwise noted, all numeric
information in this Prospectus Supplement is based on the Mortgage
Pool as of the close of business on the Cut-off Date and all
statistical percentages in this Prospectus Supplement are approximate
and measured by the aggregate outstanding Loan Balance of the
Mortgage Loans in the Mortgage Pool as of the close of business on
the Cut-off Date (the 'Original Pool Principal Balance'), or in the
respective Loan Groups as of the close of business on the Cut-off
Date (the 'Original Loan Group Balance').
The Mortgaged Properties securing the Mortgage Loans are located in
24 states and the District of Columbia. The Mortgaged Properties may
be owner-occupied and non-owner occupied investment properties. No
Combined Loan-to-Value Ratio of a Mortgage Loan (based upon
appraisals made at the time of origination) exceeded 125% as of the
Cut-off Date. Generally, the Mortgage Loans will not be insured by
either primary mortgage insurance policies or pool mortgage insurance
policies; however, certain distributions due the holders of the Class
A Certificates (the 'Class A Certificateholders') are insured by the
Certificate Insurer pursuant to the Certificate Insurance Policies.
The Mortgage Loans will not be guaranteed by the Depositor, the
Master Servicer, the Seller or any affiliate thereof. The Mortgage
Loans are required to be serviced generally in accordance with the
standards and procedures specified in the Pooling and Servicing
Agreement.
All of the Mortgage Loans were purchased by the Seller in accordance
with the underwriting standards as described in the Prospectus under
'The Primary Asset Program.' See 'Description of the Mortgage Pool'
herein.
FIXED RATE GROUP. As of the Cut-off Date, the average Loan Balance
of the Mortgage Loans in the Fixed Rate Group was $36,639.56; the
Mortgage Rates ranged from 8% per annum to 16.990% per annum; the
weighted average Combined Loan-to-Value Ratio was 85.35%; the
weighted average Mortgage Rate was 12.400% per annum; and the
weighted average remaining term to maturity was approximately 209
months. The remaining terms to
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maturity as of the Cut-off Date of the Mortgage Loans in the Fixed
Rate Group ranged from 52 months to 360 months. The maximum Loan
Balance of the Mortgage Loans in the Fixed Rate Group as of the
Cut-off Date was $307,921.01. The aggregate Loan Balance of the
Mortgage Loans in the Fixed Rate Group containing 'balloon' payments
as of the Cut-off Date represented not more than 28.14% of the
Original Loan Group Balance of the Fixed Rate Group. No Mortgage Loan
in the Fixed Rate Group is scheduled to mature later than January
2027. As of the Cut-off Date, $35,752,278.10 in aggregate Loan
Balance of the Mortgage Loans in the Fixed Rate Group are secured by
first mortgages representing in the aggregate 59.03% of the Original
Loan Group Balance of the Fixed Rate Group and $24,812,912.99 in
aggregate Loan Balance of the Mortgage Loans in the Fixed Rate Group
are secured by second lien mortgages representing in the aggregate
40.97% of the Original Loan Group Balance of the Fixed Rate Group.
See 'Description of the Mortgage Pool--Mortgage Loans--Fixed Rate
Group' herein.
ADJUSTABLE RATE GROUP. In general, the Mortgage Loans in the
Adjustable Rate Group bear interest at rates that adjust (each, an
'Adjustment Date') (a) annually based upon One-Month LIBOR, as set
forth in The Wall Street Journal as of the first business day of the
month in which the related Adjustment Date occurs, (b) semi-annually
based upon the average of the London interbank offered rates for
six-month U.S. dollar deposits in the London Market, as set forth in
The Wall Street Journal ('Six-Month LIBOR') as of the first business
day of the month in which the related Adjustment Date occurs or (c)
annually based upon the weekly average yield on United States
Treasury Securities adjusted to a constant maturity of one year, as
made available by the Federal Reserve Board ('One-Year CMT' and
together with One-Month LIBOR and Six-Month LIBOR, the 'Mortgage
Indices'). The Mortgage Rates with respect to all of the Mortgage
Loans in the Adjustable Rate Group are subject to periodic and
lifetime interest rate adjustment caps. See 'Description of the
Mortgage Pool--Mortgage Loans--Adjustable Rate Group' herein.
As of the Cut-off Date, the average Loan Balance of the Mortgage
Loans in the Adjustable Rate Group was $119,753.97; the Mortgage
Rates ranged from 6.00% per annum to 13.780% per annum; the weighted
average Loan-to-Value Ratio was 81.76%; the weighted average Mortgage
Rate was 9.724% per annum; and the weighted average remaining term to
maturity was approximately 340 months. The remaining terms to
maturity as of the Cut-off Date of the Mortgage Loans in the
Adjustable Rate Group ranged from 169 months to 360 months. The
maximum Loan Balance of the Mortgage Loans in the Adjustable Rate
Group as of the Cut-off Date was $638,879.04. The aggregate Loan
Balance of the Mortgage Loans in the Adjustable Rate Group containing
'balloon' payments as of the Cut-off Date represented not more than
9.59% of the Original Loan Group Balance of the Adjustable Rate
Group. No Mortgage Loan in the Adjustable Rate Group is scheduled to
mature later than January 2027. All of the Mortgage Loans in the
Adjustable Rate Group are secured by first mortgages. See
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'Description of the Mortgage Pool--Mortgage Loans--Adjustable Rate
Group' herein.
All of the Mortgage Loans in the Adjustable Rate Group have maximum
Mortgage Rates. The weighted average maximum Mortgage Rate of the
Mortgage Loans in the Adjustable Rate Group as of the Cut-off Date is
16.444% per annum, with maximum Mortgage Rates that range from
approximately 11.000% per annum to 20.070% per annum. The Mortgage
Loans in the Adjustable Rate Group have a weighted average gross
margin as of the Cut-off Date of 6.365% per annum with gross margins
that range from 2.000% per annum to 9.375% per annum. Although all
the Mortgage Loans in the Adjustable Rate Group bear interest at
adjustable rates, the Mortgage Rates on 0.94% and 11.40% (by
aggregate Loan Balance as of the Cut-off Date) will not adjust for
two and three years, respectively, following origination.
Registration of the
Class A Certificates...................... The Class A Certificates will initially be issued in book-entry form.
Persons acquiring beneficial ownership interests in the Class A
Certificates ('Certificate Owners') may elect to hold their Class A
Certificate interests through The Depository Trust Company ('DTC'),
in the United States, or Centrale de Livraison de Valeurs Mobilieres
S.A. ('CEDEL') or the Euroclear System ('Euroclear'), in Europe.
Transfers within DTC, CEDEL or Euroclear, as the case may be, will be
in accordance with the usual rules and operating procedures of the
relevant system. So long as the Class A Certificates are Book-Entry
Certificates (as defined herein), each Class of such Certificates
will be evidenced by one or more Certificates registered in the name
of Cede & Co. ('Cede'), as the nominee of DTC or one of the relevant
depositaries (collectively, the 'European Depositaries').
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and counterparties holding directly or
indirectly through CEDEL or Euroclear, on the other, will be effected
in DTC through Citibank N.A. ('Citibank') or The Chase Manhattan Bank
('Chase'), the relevant depositaries of CEDEL or Euroclear,
respectively, and each a participating member of DTC. The Class A
Certificates will initially be registered in the name of Cede. The
interests of the Class A Certificate Owners will be represented by
book entries on the records of DTC and participating members thereof.
No Certificate Owner will be entitled to receive a definitive
certificate representing such person's interest, except in the event
that Definitive Certificates (as defined herein) are issued under the
limited circumstances described under 'Description of the
Certificates--Book-Entry Certificates' herein. All references in this
Prospectus Supplement to any Class A Certificates reflect the rights
of Certificate Owners only as such rights may be exercised through
DTC and its participating organizations for so long as such Class A
Certificates are held by DTC.
Final Scheduled Distribution Dates........ The Final Scheduled Distribution Date for each Class of Class A
Certificates is set forth below, although it is anticipated that the
actual final Distribution Date for each Class may occur earlier than
its Final Scheduled Distribution Date. See 'Certain Yield and
Prepayment Considerations' herein.
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<CAPTION>
FINAL SCHEDULED
DISTRIBUTION DATE
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Class A-1 Certificates:
Class A-2 Certificates:
Class A-3 Certificates:
Class A-4 Certificates:
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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, the Seller and the Trustee (the 'Pooling and
Servicing Agreement').
The Certificates will consist of (i) the Class A-1, Class A-2, and
Class A-3 (the 'Fixed Rate Certificates'), (ii) the Class A-4
Certificates (the 'Adjustable Rate Certificates,' and together with
the Fixed Rate Certificates, the 'Class A Certificates'), (iii) the
Class X-1 and Class X-2 Certificates (the 'Class X Certificates') and
(iv) the Class R Certificates (the 'Class R Certificates'). Distributions
on the Class X and Class R Certificates (collectively, the 'Subordinate
Certificates') will be subordinate to distributions on the Class A
Certificates to the extent described herein and in the Pooling and Servicing
Agreement. Only the Class A Certificates are offered hereby. Interest due on
the Class X Certificates on any Distribution Date shall be calculated based on a
notional principal amount. The notional principal amount of the Class X-1
Certificates on any Distribution Date shall be the aggregate Loan Balance of the
Mortgage Loans in the Fixed Rate Group as of the prior Distribution Date. The
notional principal amount of the Class X-2 Certificates on any Distribution Date
shall be the aggregate Class Certificate Balance of the Adjustable Rate Certificates
as of the prior Distribution Date.
B. Distributions--General................. On the 25th day of each month, or, if such day is not a Business Day,
then the next succeeding Business Day, commencing in February 1997
(each such day being a 'Distribution Date'), the Trustee will be
required to distribute to the holders of the Fixed Rate Certificates
of record as of the last day of the calendar month immediately
preceding the calendar month in which such Distribution Date occurs
and to the holders of the Adjustable Rate Certificates of record as
of the calendar day immediately preceding such Distribution Date (or,
if Definitive Certificates are issued, the first calendar day of the
month in which such Distribution Date occurs) (each such date, the
'Record Date'), to the extent of funds available, the 'Class A
Distribution Amount' which shall be the sum of (x) Current Interest
and (y) the Principal Distribution Amount (each as defined below).
For each Distribution Date, interest due with respect to the Fixed
Rate Certificates will be interest which has accrued on the related
Class Certificate Balance during the calendar month immediately
preceding the month in which such Distribution Date occurs. The
interest due with respect to the Adjustable Rate Certificates will be
the interest which has accrued on the related Class Certificate
Balance from the preceding Distribution Date (or from the Closing
Date in the case of the first Distribution Date) to and including the
day prior to the current Distribution Date. Each such period relating
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to the accrual of interest is an 'Accrual Period' for the related
Class of Class A Certificates. All calculations of interest on the
Fixed Rate Certificates will be made on the basis of a 360-day year
assumed to consist of twelve 30-day months. Calculations of interest
on the Adjustable Rate Certificates will be made on the basis of the
actual number of days elapsed in the related Accrual Period and a
year of 360 days.
A 'Business Day' is any day other than a Saturday, Sunday or a day on
which banking institutions in New York City or in the city in which
the corporate trust office of the Trustee is located are authorized
or obligated by law or executive order to close.
B. Allocations of Interest and Principal.. The Class A Distribution Amount relating to each of the Fixed Rate
Certificates and the Adjustable Rate Certificates (each, a
'Certificate Group') for each Distribution Date (to the extent funds
are available therefor) shall be allocated among the Class A
Certificates in the following amounts and in the following order of
priority:
(i) First, with respect to each Certificate Group, to the holders of
the Class A Certificates of such Certificate Group, the related
Current Interest for such Class or Classes of Certificates on a pro
rata basis without any priority among such Class A Certificates;
(ii) Second, with respect to each Certificate Group, to the holders
of the Class A Certificates of such Certificate Group, the Principal
Distribution Amount (as defined under the sub-heading 'C. Principal'
below). The Principal Distribution Amount (A) applicable to the Fixed
Rate Group shall be distributed as follows: (I) first, to the holders
of the Class A-1 Certificates until the Class Certificate Balance
thereof is reduced to zero; (II) second, to the holders of the Class
A-2 Certificates until the Class Certificate Balance thereof is
reduced to zero; and (III) third, to the holders of the Class A-3
Certificates, until the Class Certificate Balance thereof is reduced
to zero; and (B) applicable to the Adjustable Rate Group shall be
distributed to the holders of the Class A-4 Certificates until the
Class Certificate Balance thereof is reduced to zero; and
(iii) Third, with respect to the Adjustable Rate Group, to the
holders of the Adjustable Rate Certificates, the Basis Risk Carryover
Amount (as defined below), if any.
'Current Interest' with respect to each Class of Class A Certificates
means, with respect to any Distribution Date (i) the aggregate amount
of interest accrued at the related Pass-Through Rate during the
preceding Accrual Period on the Class Certificate Balance of the
related Class A Certificates immediately prior to such Distribution
Date (net of Net Prepayment Interest Shortfalls and the interest
portion of reductions due to the Relief Act) plus (ii) the Preference
Amount as it relates to interest previously paid on such Class of the
Class A Certificates prior to such Distribution Date plus (iii) the
portion of the Carry Forward Amount relating to interest, if any,
with respect to such Class of Class A Certificates (net of Net
Prepayment Interest Shortfalls and the interest portion of reductions
due to the Relief Act).
The 'Carry Forward Amount' with respect to any Class of the Class A
Certificates for any Distribution Date is the sum of (x) the amount,
if any, by which (i) the Class A Distribution Amount
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allocable to such Class as of the immediately preceding Distribution
Date exceeded (ii) the amount of the actual distribution made to the
holders of such Class of Class A Certificates on such immediately
preceding Distribution Date plus (y) 30 days' interest on such
amount, calculated at the related Pass-Through Rate in effect with
respect to such Class of Class A Certificates.
If on any Distribution Date, the Pass-Through Rate for the Adjustable
Rate Certificates is based on the Available Funds Cap, the excess
(the 'Basis Risk Excess') of (i) the amount of interest the
Adjustable Rate Certificates would be entitled to receive on such
Distribution Date at the lesser of (a) the Net Lifetime Cap for such
Distribution Date and (b) the then-applicable Pass-Through Rate on
the Adjustable Rate Certificates without reference to the Available
Funds Cap, over (ii) the amount of interest such Adjustable Rate
Certificates will receive on such Distribution Date at the Available
Funds Cap shall not be paid on such date to the holders of the
Adjustable Rate Certificates. The Basis Risk Excess for such
Distribution Date, together with any Basis Risk Excess from prior
Distribution Dates, is referred to herein as the 'Basis Risk
Carryover Amount.' If, on any Distribution Date, the Available Funds
Cap equals the Net Lifetime Cap, the Basis Risk Excess for such
Distribution Date will equal zero. Any Basis Risk Carryover Amount
will be paid, to the extent of funds, if any, available to make such
payment, on any Distribution Date, as set forth under 'Description of
the Certificates--Distributions' herein. No interest will accrue on
the Basis Risk Carryover Amount and no Basis Risk Carryover Amount
will be paid to the holders of the Adjustable Rate Certificates after
the Class Certificate Balance thereof has been reduced to zero. The
Certificate Insurance Policies will not cover the payment of, and the
ratings assigned to the Adjustable Rate Certificates do not address
the likelihood of the payment of, any Basis Risk Carryover Amount.
The 'Net Lifetime Cap' on any Distribution Date is equal to the
weighted average of the maximum Mortgage Rates on the Mortgage Loans
in the Adjustable Rate Group as of the first day of the related
Due Period less the sum of (a) the Servicing Fee Rate, (b) the
Trustee Fee Rate, (c) the Insurance Premium Rate and (d) commencing
on the seventh Distribution Date, 0.50% per annum.
The credit enhancement provisions of the Trust Fund result in a
limited acceleration of principal payments to the Class A
Certificateholders; such provisions are more fully described under
'Credit Enhancement--Overcollateralization Provisions' and 'Credit
Enhancement--Crosscollateralization Provisions' herein. Such credit
enhancement provisions also have an effect on the weighted average
lives of the Class A Certificates; see 'Certain Yield and Prepayment
Considerations' herein. In addition, the following discussion makes
use of a number of defined terms which are defined under 'Credit
Enhancement--Overcollateralization Provisions' and 'Credit
Enhancement--Crosscollateralization Provisions' herein.
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C. Principal.............................. The Fixed Rate Certificates are 'sequential pay' Classes such that
the holders of the Class A-3 Certificates will receive no payments of
principal until the Class Certificate Balance of the Class A-2
Certificates has been reduced to zero, and the holders of the Class
A-2 Certificates will receive no payments of principal until the
Class Certificate Balance of the Class A-1 Certificates has been
reduced to zero; provided, however, that in the event of a
Certificate Insurer Default (as defined in the Pooling and Servicing
Agreement), if there is a Subordination Deficit with respect to the
Fixed Loan Group, the Principal Distribution Amount for the Fixed
Rate Certificates shall be distributed pro rata to the holders of the
Fixed Rate Certificates then outstanding.
On each Distribution Date, distributions in reduction of the Class
Certificate Balance of the Class A Certificates will be made in the
amounts described herein. The 'Principal Distribution Amount' for
each of the Fixed Rate Certificates and the Adjustable Rate
Certificates on each Distribution Date shall be the lesser of:
(a) the Total Available Funds (as defined below) for the related
Certificate Group plus any related Insured Payments minus the related
Current Interest with respect to the related Certificate Group; and
(b) the excess, if any, of (i) the sum of (without duplication):
(A) the Preference Amount with respect to principal owed to the Class
A Certificates for the related Loan Group that remains unpaid as of
such Distribution Date;
(B) the principal collected by the Master Servicer for the related
Due Period on or prior to the related Determination Date or advanced
by the Master Servicer for such Distribution Date;
(C) the principal portion of all Prepayments received by the Master
Servicer during the Prepayment Period and remitted to the Trustee as
of the Monthly Remittance Date;
(D) the principal portion of any Loan Purchase Price for each
Mortgage Loan in the related Loan Group that was repurchased by the
Seller or purchased by the Master Servicer on or prior to the related
Monthly Remittance Date, to the extent such Loan Purchase Price is
actually received by the Trustee on or prior to the related Monthly
Remittance Date;
(E) the principal portion of any Substitution Adjustments (i.e., the
excess, if any, of the Loan Balance of a Mortgage Loan being replaced
over the outstanding Loan Balance of a replacement Mortgage Loan)
delivered by the Seller on or prior to the related Monthly Remittance
Date in connection with a substitution of a Mortgage Loan in the
related Loan Group, to the extent such Substitution Adjustments are
actually received by the Trustee on or prior to the related Monthly
Remittance Date;
(F) all Net Liquidation Proceeds and Curtailments actually collected
by the Master Servicer in the related Loan Group during the related
Due Period (to the extent such Net Liquidation Proceeds
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or Curtailment are related to principal) to the extent such Net
Liquidation Proceeds or Curtailment are actually received by the
Trustee on or prior to the related Monthly Remittance Date;
(G) the amount of any Subordination Deficit with respect to the
related Loan Group for such Distribution Date;
(H) the portion of the proceeds received with respect to the related
Loan Group by the Trustee upon termination of the Trust Fund (to the
extent such proceeds relate to principal);
(I) the amount of any Subordination Increase Amount with respect to
the related Loan Group for such Distribution Date to the extent of
any Net Monthly Excess Cash Flow available for such purpose; and
(J) the portion of any Carry Forward Amount relating to principal
with respect to the related Loan Group for such Distribution Date;
over
(ii) the amount of any Subordination Reduction Amount with respect to
the related Loan Group for such Distribution Date.
The 'Due Period' with respect to any Monthly Remittance Date is the
calendar month immediately preceding the calendar month in which the
Monthly Remittance Date occurs. A 'Monthly Remittance Date' is any
date on which funds on deposit in the Collection Account are remitted
by the Master Servicer to the Trustee for deposit into the
Distribution Account, which is the second Business Day following the
related Determination Date commencing in February 1997.
With respect to any Distribution Date, the 'Determination Date' is
the 15th day of the month of such Distribution Date, or if such day
is not a Business Day, the Business Day immediately preceding such
15th day of the month, commencing in February 1997. With respect to
any Distribution Date, the 'Prepayment Period' is the day following
the prior Determination Date to and including the Determination Date
relating to the Distribution Date.
A 'Liquidated Mortgage Loan' is, in general, a defaulted Mortgage
Loan as to which the Master Servicer has determined that all amounts
that it expects to recover on such Mortgage Loan have been recovered
(exclusive of any possibility of a deficiency judgment).
The Class A Certificateholders are entitled to receive ultimate
recovery of Realized Losses which occur in the related Loan Group to
the extent such Realized Losses create a Subordination Deficit in the
related Loan Group, and payment in recovery of such losses will be in
the form of an Insured Payment payable in accordance with the terms
of the applicable Certificate Insurance Policy on the next following
Distribution Date if not covered through Net Monthly
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Excess Cashflow from the related Loan Group or crosscollateralization
from the other Loan Group.
A 'Subordination Deficit' with respect to a Loan Group and a
Distribution Date is the amount, if any, by which (x) the aggregate of
the Class Certificate Balances relating to such Loan Group, after
taking into account all distributions to be made on such Distribution
Date, exceeds (y) the aggregate Loan Balances of the Mortgage Loans in
the related Loan Group as of the close of business on the last day of
the related Due Period (taking into account all payments of principal,
other than Prepayments, due during the related Due Period and received
on or prior to the related Determination Date, or, in connection with
Curtailments and Net Liquidation Proceeds, collected during the related
Due Period, together with all Prepayments received on such Mortgage
Loans in such Loan Group during the related Prepayment Period).
A 'Subordination Increase Amount' with respect to a Loan Group and
Distribution Date is the amount, if any, of Net Monthly Excess
Cashflow (as defined herein) actually applied as an accelerated
payment of principal on the Class A Certificates relating to the
applicable Loan Group. A 'Subordination Reduction Amount' with
respect to a Loan Group and Distribution Date is the amount, if any,
distributed to the Subordinate Certificates in an amount equal to the
lesser of (x) the Excess Subordinated Amount (as defined herein) and
(y) the amount available for distribution on account of principal
with respect to the Class A Certificates relating to the applicable
Loan Group on such Distribution Date. See 'Credit
Enhancement--Overcollateralization Provisions' herein.
'Preference Amount' means any amount previously distributed to a
Class A Certificateholder that is recoverable and sought to be
recovered as a voidable preference by a trustee in bankruptcy under
the United States Bankruptcy Code, as amended from time to time, in
accordance with a final nonappealable order of a court having
competent jurisdiction.
Servicing................................. The Master Servicer will be responsible for servicing, managing and
making collections on the Mortgage Loans. The Master Servicer will be
permitted to service the Mortgage Loans through subservicers, and
will initially do so through NF Investments, Inc. ('NFI') as
subservicer. See 'The Pooling and Servicing Agreement--Servicing and
Sub-Servicing' herein. The Master Servicer will receive a monthly
servicing fee (the 'Servicing Fee'), payable out of the interest
amounts collected by the Master Servicer on each Mortgage Loan, as
compensation for acting as Master Servicer, and will be responsible
for all fees payable to NFI and any subsequent subservicers. The
Servicing Fee for each Mortgage Loan will be paid on each
Distribution Date for the related Due Period, and will be equal to
0.50% per annum (the 'Servicing Fee Rate') of the then outstanding
Loan Balance of each such Mortgage Loan as of the first day of the
related Due Period. The amount of the Servicing Fee is subject to
adjustment with respect to prepaid Mortgage Loans, as described
herein under 'The Pooling and Servicing Agreement--Servicing and
Sub-Servicing.' 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 received with respect to the Mortgage Loans after the
Cut-off Date, except late payment penalties, prepayment premiums,
extension fees and similar items which will be retained by the Master
Servicer as
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additional servicing compensation. The Master Servicer is entitled to
receive investment earnings on amounts in the Collection Account and
shall be responsible for investment losses thereon without the right
to reimbursement thereof. See 'Description of the
Certificates--Deposits to Collection Account' and 'The Pooling and
Servicing Agreement--Servicing and Sub-Servicing' herein.
P&I Advances and Compensating Interest.... The Master Servicer will be obligated to make P&I Advances to the
extent that such P&I Advances, in the Master Servicer's reasonable
judgment, are reasonably recoverable from the related Mortgage Loan.
P&I Advances are recoverable from (i) future collections on the
Mortgage Loan which gave rise to the P&I Advance, (ii) Liquidation
Proceeds for such Mortgage Loan and (iii) from certain excess cash
flows not applied for any other purpose. 'P&I Advances' will equal,
on any Distribution Date (A) interest on the Mortgage Loans due
during the related Due Period but uncollected as of the related
Determination Date (net of the Servicing Fee) and (B) principal on
the Mortgage Loans required to be paid during the related Due Period
but uncollected as of the related Determination Date, other than a
balloon payment. The Master Servicer is only obligated to make a P&I
Advance if it reasonably believes that such P&I Advance will
ultimately be recoverable from the related Mortgage Loan.
In addition, the Master Servicer will also be required to pay
Compensating Interest with respect to any Prepayment received on a
Mortgage Loan during the related Prepayment Period as described
herein under 'The Pooling and Servicing Agreement--Servicing and
Sub-Servicing.' The Master Servicer will not be required to pay
Compensating Interest with respect to any Prepayment Period in an
amount in excess of the one-half the Servicing Fee received by the
Master Servicer for such Mortgage Loan.
Credit Enhancement........................ The credit enhancement provided for the benefit of the Class A
Certificateholders consists of (x) the overcollateralization and
crosscollateralization mechanics, which utilize the internal cash
flows of the Trust Fund, and (y) the Certificate Insurance Policies.
Overcollateralization. The credit enhancement provisions of the
Trust Fund result in a limited acceleration of the Classes of Class A
Certificates then entitled to receive distributions of principal
relative to the amortization of the related Mortgage Loans in the
related Loan Group in the early months of the transaction. The
accelerated amortization is achieved by the application of certain
excess interest to the payment of principal on the Fixed Rate
Certificates and Adjustable Rate Certificates. This acceleration
feature creates, with respect to each Loan Group,
overcollateralization (i.e., the excess of the aggregate Loan Balance
of the Mortgage Loans in the related Loan Group over the aggregate
Class Certificate Balance of the Class A Certificates in the related
Certificate Group). Once the required level of overcollateralization
is reached, and subject to the provisions described in the next
paragraph, the acceleration feature will cease, until necessary to
maintain the required level of overcollateralization.
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The Pooling and Servicing Agreement provides that, subject to certain
floors, caps and triggers, the required level of
overcollateralization with respect to a Loan Group may increase or
decrease over time. An increase would result in a temporary period of
accelerated amortization of the Classes of Class A Certificates then
entitled to receive distributions of principal to increase the actual
level of overcollateralization to its required level; a decrease
would result in a temporary period of decelerated amortization to
reduce the actual level of overcollateralization to its required
level.
As a result of the 'sequential pay' feature of the Fixed Rate
Certificates, any such accelerated principal will be paid to that
Class of the Fixed Rate Certificates then entitled to receive
distributions of principal on the related Distribution Date.
Crosscollateralization. In addition to the foregoing, the Pooling
and Servicing Agreement provides for crosscollateralization through
the application of excess amounts generated by one Loan Group to fund
shortfalls in Available Funds and the required overcollateralization
level in the other Loan Group, subject to certain prior debt service
and credit enhancement requirements of such Loan Group.
See 'Certain Yield and Prepayment Considerations,' 'Credit En-
hancement--Overcollateralization Provisions' and 'Credit En-
hancement--Crosscollateralization Provisions' herein and 'Description
of the Certificates--Description of Credit Enhancement' in the
Prospectus.
Certificate Insurance Policies. MBIA Insurance Corporation (the
'Certificate Insurer'), will provide two Certificate Insurance
Policies with respect to the Class A Certificates, one with respect
to the Fixed Rate Certificates and the other with respect to the
Adjustable Rate Certificates.
Subject to the terms thereof, each Certificate Insurance Policy
unconditionally and irrevocably guarantees the obligation of the
Trust Fund on any Distribution Date to pay Current Interest (net of
Net Prepayment Interest Shortfalls and the interest portion of
reductions due to the Relief Act) and any Subordination Deficit with
respect to the related Certificate Group.
The Certificate Insurance Policies are not cancellable for any
reason.
"Insured Payment" means, with respect to the Related Loan Group and any
Distribution Date, without duplication, (A) the excess, if any, of (i) the
sum of (a) the aggregate amount of interest accrued at the related
Pass-Through Rate during the preceding Accrual Period on the Class A
Certificate Principal Balance of the related Class A Certificates (net of
any Prepayment Interest Shortfall and the interest portion of reductions due
to the Relief Act), (b) the Preference Amount as it relates to interest
previously paid on each Class of the related Class A Certificates prior to
such Distribution Date, (c) the portion of the Carry Forward Amount related
to interest with respect to each Class of the related Class A Certificates
(net of any Prepayment Interest Shortfall and the interest portion of
reductions due to the Relief Act) and (d) the then existing Subordination
Deficit for the Related Loan Group, if any over (ii) Total Available Funds
(net of the Insurance Premium Amount for Related Loan Group) after taking
into account any Principal Distribution Amount to be actually distributed on
such Distribution Date and (y) the cross-collateralization provisions of the
Trust Fund plus (B) an amount equal to the principal portion of the
Preference Amount with respect to the Related Loan Group.
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Insured Payments do not cover Realized Losses except to the extent
that a Subordination Deficit exists. Insured Payments do not cover
the Master Servicer's failure to make P&I Advances, except to the
extent that a Subordination Deficit would otherwise result therefrom.
Nevertheless, the effect of each Certificate Insurance Policy is to
guarantee the timely payment of Current Interest (net of Prepayment
Interest Shortfalls and the interest portion of reductions due to the
Relief Act) on all Classes of the Class A Certificates and the
ultimate payment of the principal amount of the Class A Certificates.
The Certificate Insurance Policies do not guarantee any specified
rate of prepayments, nor do the Certificate Insurance Policies
provide funds to redeem the Class A Certificates on any specified
date. The Certificate Insurer's obligation under the Certificate
Insurance Policies will be discharged to the extent that funds are
received by the Trustee for distribution to the Class A
Certificateholders. See 'Credit Enhancement--Certificate Insurance
Policies' herein.
Ratings................................... It is a condition to the issuance of the Class A Certificates that
each be rated AAA by Standard and Poor's Ratings Services, a division
of The McGraw-Hill Companies ('S&P') and Aaa by Moody's Investors
Service, Inc. ('Moody's', and each of S&P and Moody's, 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
Class A Certificates and, accordingly, there can be no assurance that
the rating assigned to any Class of Class A 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 Class A 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. In addition, the Rating Agencies do not
address the likelihood of payment of any Basis Risk Carryover Amount.
See 'Risk Factors--Limited Liquidity' in the Prospectus and 'Ratings'
herein and in the Prospectus.
Optional Termination...................... On any Distribution Date on or after the date on which the aggregate
Loan Balance of the Mortgage Loans in the Trust Fund has declined to
less than 10% of the Original Pool Principal Balance (the 'Optional
Termination Date'), the Holder of the 99.999% Percentage Interest in
the Class R Certificates (the 'Class R Optionholder') 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 and other assets of the Trust Fund, 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 and may have an effect on an investor's yield on
such Certificates.
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On any Distribution Date on or after the date on which the aggregate
Loan Balance of the Mortgage Loans in the Trust Fund has declined to
less than 5% of the Original Pool Principal Balance, the Master
Servicer will also 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 and other assets of the
Trust Fund, 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 and may have an effect or an
investor's yield on such Certificates.
See 'The Pooling and Servicing Agreement--Termination; Retirement of
the Certificates' herein.
Termination Auction....................... Within 90 days following the Optional Termination Date, the Trustee
shall solicit bids for the Mortgage Loans remaining in the Trust
Fund. In the event that satisfactory bids are received as described
in the Pooling and Servicing Agreement, the net sales proceeds will
be distributed to the holders of the outstanding Certificates, in the
same order of priority as collections received in respect of the
Mortgage Loans. If bids which meet the requirements set forth in the
Pooling and Servicing Agreement are not received, the Trustee shall
decline to sell the Mortgage Loans and shall not be under any
obligation to solicit any further bids or otherwise negotiate any
further sale of the Mortgage Loans. Such sale and consequent
termination of the Trust Fund must constitute a 'qualified
liquidation' of the Trust Fund under Section 860F of the Code,
including the requirement that the qualified liquidation takes place
over a period not to exceed 90 days. See 'Description of the
Certificates--Termination Auction' herein and 'The Trusts-- Mandatory
Disposition of Primary Assets' in the Prospectus. Any early
termination of the Trust Fund and early retirement of the
Certificates that results from a successful termination auction may
have an effect on an investor's yield on such Certificates. See
'Prepayment and Yield Considerations' herein and in the Prospectus.
Certain Legal Aspects of
the Mortgage Loans........................ 40.97% of the Mortgage Loans in the Fixed Rate Group (by Original
Loan Group Balance of the Fixed Rate Group) and none of the Mortgage
Loans in the Adjustable Rate Group as of the Cut-off Date are secured
by second lien Mortgages which are subordinate to a mortgage lien 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 second lien Mortgages is that foreclosure funds received
in connection therewith may not be sufficient to satisfy fully both
the Senior Lien and the Mortgage relating to the Mortgage Loan. See
'Risk Factors' herein and in the Prospectus and 'Certain Legal
Aspects of the Primary Assets' in the Prospectus.
Certain Federal Income
Tax Consequences.......................... For federal income tax purposes, the Trust Fund will include two
segregated asset pools, with respect to which elections will be made
to treat each as a separate 'real estate mortgage investment conduit'
('REMIC'). The Class A Certificates and Class X
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Certificates will constitute 'regular interests' in the Master REMIC.
The Class R Certificates will represent the beneficial ownership of
the sole class of 'residual interest' in the Master REMIC and the
sole class of 'residual interest' in the Subsidiary REMIC and will be
the class of Residual Certificates, as described in the Prospectus.
Upon the issuance of the Certificates, Brown & Wood LLP, special tax
counsel to the Depositor ('Tax Counsel'), and counsel to the
Underwriters, 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, each of the Master REMIC
and Subsidiary REMIC will qualify as a REMIC under Sections 860A
through 860G of the Internal Revenue Code of 1986 (the 'Code').
For further information regarding the federal income tax consequences
of investing in the Class A Certificates, see '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 A
Certificates will be rated AAA by S&P and Aaa by Moody's, the Class A
Certificates will not constitute 'mortgage related securities' under
the Secondary Mortgage Market Enhancement Act of 1984. Investors
should consult their own legal advisers in determining whether and to
what extent the Class A Certificates constitute legal investments for
such investors.
Use of Proceeds........................... The Depositor will apply the net proceeds of the sale of the Class A
Certificates to purchase the Mortgage Loans.
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RISK FACTORS
Investors should consider, among other things, the risk factors discussed
under 'Risk Factors' in the Prospectus and the following risk factors in
connection with the purchase of the Class A Certificates:
RISKS OF THE MORTGAGE LOANS
Underwriting Standards. The Mortgage Loans have been originated using
underwriting standards that are less stringent than the underwriting standards
applied by mortgage loan purchase programs such as those administered by FNMA or
by FHLMC. For example, the Mortgage Loans may have been made to Mortgagors
having credit histories with incidents ranging from minor delinquencies to
bankruptcies, or Mortgagors with higher ratios of monthly mortgage payments to
income or higher ratios of total monthly credit payments to income. As a result,
the Mortgage Loans are likely to experience rates of delinquency, foreclosure
and bankruptcy that are higher, and that may be substantially higher, than those
experienced by mortgage loans underwritten in a more traditional manner. As of
the Cut-off Date, none of the Mortgage Loans are 30 days or more delinquent in
payment of principal or interest. The Mortgage Loans with higher Loan-to-Value
Ratios and Combined Loan-to-Value Ratios may also present a greater risk of
loss. See 'Description of the Mortgage Pool' herein.
Junior Liens. Approximately 40.97% of the Mortgage Loans in the Fixed Rate
Group and none of the Mortgage Loans in the Adjustable Rate Group are secured by
second lien Mortgages. Although little data is available, the rate of loss and
delinquency of junior mortgage loans may be greater than that of mortgage loans
secured by Senior Liens on comparable properties. See 'Risk Factors--Nature of
Security' in the Prospectus.
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, 26.89%, 18.51%, 14.73% and 13.54% (based upon the aggregate Loan
Balances as of the Cut-off Date) of the Mortgage Loans in the Fixed Rate Group
are secured by Mortgaged Properties located in the States of Florida, South
Carolina, Tennessee and Georgia, respectively, and 59.15% and 8.92% (based upon
the aggregate Loan Balances as of the Cut-off Date) of the Mortgage Loans in the
Adjustable Rate Group are secured by Mortgaged Properties located in the States
of Georgia and Arizona, 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.
Occupancy Types. As of the Cut-off Date, 96.40% (based upon the aggregate
Loan Balances as of the Cut-off Date) of the Mortgage Loans in the Adjustable
Rate Group and 96.04% (based upon the aggregate Loan Balances as of the Cut-off
Date) of the Mortgage Loans in the Fixed Rate Group were secured by Mortgaged
Properties that are the primary residence of the owner, and 3.60% (based upon
the aggregate Loan Balances as of the Cut-off Date) of such Mortgage Loans in
the Adjustable Rate Group and 3.96% (based upon the aggregate Loan Balances as
of the Cut-off Date) of the Mortgage Loans in the Fixed Rate Group 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 mortgage loans secured by the primary residence of the
borrower.
Risk of Early Defaults. 97.80% (based upon the aggregate Loan Balances as
of the Cut-off Date) of the Mortgage Loans in the Fixed Rate Group and all of
the Mortgage Loans in the Adjustable Rate Group were originated after December
31, 1995. The weighted average remaining term to maturity of the Mortgage Loans
in the Fixed Rate Group and the Adjustable Rate Group as of the Cut-off Date is
approximately 209 and 340 months, respectively. Although little data is
available, defaults on mortgage loans are generally expected to occur with
greater frequency in their early years.
Risk of Higher Default Rates for Mortgage Loans with Balloon
Payments. 28.14% (based upon the aggregate Loan Balances as of the Cut-off
Date) of the Mortgage Loans in the Fixed Rate Group are 'balloon
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loans' that provide for the payment of the unamortized loan balance of such
Mortgage Loan in a single payment at maturity ('Balloon Loans'). 9.59% (based
upon the aggregate Loan Balances as of the Cut-Off Date) of the Mortgage Loans
in the Adjustable Rate Group are Balloon Loans. Such Balloon Loans provide for
equal monthly payments, consisting of principal and interest, generally based on
a 30-year amortization schedule, and a single payment of the remaining balance
of the Balloon Loan 15 years after origination. Amortization of a Balloon Loan
based on a scheduled period that is longer than the term of the loan results in
a remaining principal balance at maturity that is substantially larger than the
regular scheduled payments. The Depositor does not have any information
regarding the default history or prepayment history of payments on Balloon
Loans. Because borrowers of Balloon Loans are required to make substantial
single payments upon maturity, it is possible that the default risk associated
with the Balloon Loans is greater than that associated with fully-amortizing
Mortgage Loans.
LEGAL CONSIDERATIONS
State law generally regulates interest rates and other charges, requires
certain disclosures, and, unless an exemption is available, requires licensing
of originators of mortgage loans. In addition, other state laws, public policy
and general principles of equity relating to the protection of consumers, unfair
and deceptive practices and debt collection practices may apply to the
origination, servicing and collection of the Mortgage Loans.
The Mortgage Loans are also subject to federal laws, including: (i) the
federal Truth-in-Lending Act and Regulation Z promulgated thereunder, which
require certain disclosures to the borrowers regarding the terms of the notes or
other documents or agreements evidencing the borrower's indebtedness in respect
of the Mortgage Loans; (ii) the Equal Credit Opportunity Act and Regulation B
promulgated thereunder, which prohibit discrimination in the extension of credit
on the basis of age, race, color, sex, religion, marital status, national
origin, receipt of public assistance or the exercise of any right under the
Consumer Credit Protection Act; (iii) the Fair Credit Reporting Act, which
regulates the use and reporting of information related to the borrower's credit
experience and (iv) the Fair Debt Collection Practices Act and the Federal Trade
Commission rule on Credit Practices, which regulates practices used to effect
collections on consumer loans. 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 additional disclosure and other requirements on
creditors with respect of 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 orginated 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.
The application of state and federal consumer protection laws to particular
circumstances is not always certain and in some cases courts and regulatory
authorities have shown a willingness to adopt novel interpretations of these
laws. Depending on the provisions of the applicable law and the specific facts
and circumstances involved, violations of these laws may limit the ability of an
assignee (including the Trust Fund) 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 assignee to damages
and administrative sanctions. In some instances, particularly in actions
involving fraud or deceptive practices, damage awards have been large. If the
Trust Fund were obligated to pay any such damages, its assets would be reduced,
resulting in a possible loss to Certificateholders.
The Seller will represent and warrant in the Pooling and Servicing
Agreement that each Mortgage Loan was originated in compliance with applicable
law in all material respects. See 'Risk Factors--Legal Considerations' and
'Certain Legal Aspects of the Primary Assets' in the Prospectus.
CREDITORS' RIGHTS CONSIDERATIONS.
Under the terms of the Pooling and Servicing Agreement, during the period
that the Certificates are outstanding and so long as (i) there is no occurrence
and continuation of an Event of Default (as defined in the Pooling & Servicing
Agreement), (ii) the Master Servicer's short-term, commercial paper rating is at
least P-1 by
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Moody's and A-1 by S&P, (iii) there is no suspension, termination or withdrawal
of the Master Servicer's short-term, commercial paper rating by Moody's or S&P,
(iv) the Certificate Insurer has not made a demand on the Depositor to record
assignments of the Mortgages and (v) the Master Servicer is controlled by H&R
Block, Inc., the Depositor will not be required to record assignments of
Mortgages in favor of the Trustee.
Failure to record assignments of the Mortgages in favor of the Trustee, in
many states in which the Mortgaged Properties are located, will have the result
of making the sale thereof potentially ineffective against any creditors of the
holder of record of the Mortgage Loan who may have been fraudulently or
inadvertently induced to rely on the Mortgage Loans as assets of the holder of
record of the Mortgage Loan. Thirty days following any of (i) the occurrence and
continuation of any Event of Default (as defined in the Pooling and Servicing
Agreement), (ii) the reduction of the Master Servicer's short-term, commercial
paper rating below P-1 by Moody's or A-1 by S&P, (iii) the suspension,
termination or withdrawal of the Master Servicer's short-term, commercial paper
rating by Moody's or S&P, (iv) the Certificate Insurer having requested the
recordation of the assignments of the Mortgages, if in its reasonable judgment
it deems such action necessary to protect its interests or (v) the Master
Servicer ceasing to be controlled by H&R Block, Inc., the Depositor will be
required to record assignments of Mortgages in favor of the Trustee unless
opinions of counsel satisfactory to the Certificate Insurer and each Rating
Agency are delivered to the Trustee and the Certificate Insurer to the effect
that recordation of the assignments is not required in the relevant
jurisdictions to protect the interests of the Trustee in the Mortgage Loans. All
recording of assignments of Mortgages shall be at the expense of the Master
Servicer. See 'The Pooling and Servicing Agreement--Sale and Assignment of the
Mortgage Loans'.
YIELD AND PREPAYMENT CONSIDERATIONS
Although all of the Mortgage Loans may be prepaid in whole or in part at
any time, generally the Mortgage Loans provide for prepayment penalties during
the first three years following origination, to the extent permitted by law. In
addition, a substantial portion of the Mortgage Loans contain due-on-sale
provisions which, to the extent enforced, will result in prepayment of such
Mortgage Loans. Mortgage Loans in the Mortgage Pool may also be repurchased or
substituted as a result of a breach of a representation or warranty, as provided
in the Pooling and Servicing Agreement. The rate of prepayments on fixed-rate
mortgage loans, (and to a lesser extent, adjustable rate mortgage loans), is
sensitive to prevailing interest rates. Generally, if prevailing interest rates
fall significantly below the Mortgage Rates on the Mortgage Loans, the Mortgage
Loans are likely to be subject to higher prepayment rates than if prevailing
rates remain at or above the Mortgage Rates on the Mortgage Loans,
notwithstanding any prepayment penalty on such Mortgage Loans. Conversely, if
prevailing interest rates rise significantly above the Mortgage Rates on the
Mortgage Loans, the rate of prepayments is likely to decrease. The average life
of the Class A Certificates, and, if purchased at other than par, the yields
realized by Class A Certificateholders, will be sensitive to levels of payment
(including prepayments in full relating to the Mortgage Loans ('Prepayments')
and partial prepayments relating to the Mortgage Loans ('Curtailments')) on the
Mortgage Loans. In general, the yield on a Class A Certificate that is purchased
at a premium from the Class Certificate Balance thereof will be adversely
affected by a higher than anticipated level of Prepayments and Curtailments of
the Mortgage Loans and enhanced by a lower than anticipated level. Conversely,
the yield on a Class A Certificate that is purchased at a discount from the
Class Certificate Balance thereof will be enhanced by a higher than anticipated
level of Prepayments and Curtailments and adversely affected by a lower than
anticipated level.
In addition to the foregoing, the Class R Optionholder and the Master
Servicer have the right to purchase, and the Trustee has the obligation to
conduct an auction for, all, but not less than all, of the Mortgage Loans then
outstanding, at the purchase price described herein, on any Distribution Date on
or after the date on which the aggregate Loan Balances of the Mortgage Loans in
the Trust Fund has declined to less than a certain percentage of the Original
Pool Principal Balance. The payment of such purchase price or sale price will
effect retirement of the Certificates which are outstanding on the date of
purchase or sale. Any reinvestment risks resulting from the optional termination
or termination auction will be borne entirely by the Certificateholders
remaining at the time of such termination. See 'The Pooling and Servicing
Agreement--Termination; Retirement of the Certificates' and '--Termination
Auction' herein.
In addition to the foregoing factors affecting the weighted average life of
each Class of the Class A Certificates, the overcollateralization provisions of
the Trust Fund may result in a limited acceleration of the
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Class A Certificates relative to the amortization of the Mortgage Loans in the
early months of the transaction. The accelerated amortization is achieved by the
application of certain excess interest and principal to the payment of the Class
A Class Certificate Balance. Once the required level of overcollateralization is
reached, the acceleration feature will cease, unless necessary to maintain the
required level of overcollateralization. See 'Credit Enhancement--Overcollater-
alization Provisions.'
RISK OF MORTGAGE LOAN RATES REDUCING THE CLASS A-4 PASS-THROUGH RATE
The calculation of the Class A-4 Pass-Through Rate is based upon (i) the
value of One-Month LIBOR which is different from the value of the Mortgage
Indices applicable to the Mortgage Loans in the Adjustable Rate Group (either as
a result of the use of a different index, a different rate determination date or
a different rate adjustment date) and (ii) the weighted average of the Mortgage
Rates of the Mortgage Loans in the Adjustable Rate Group, which are subject to
periodic adjustment caps, maximum rate caps and minimum rate floors. In general,
the Mortgage Loans in the Adjustable Rate Group adjust based upon either
One-Month LIBOR, Six-Month LIBOR or One-Year CMT, as applicable, whereas the
Pass-Through Rate on the Class A-4 Certificates adjusts monthly based upon
One-Month LIBOR, as described under 'Description of the Certificates--
Calculation of One-Month LIBOR' herein, subject to the Available Funds Cap.
Consequently, the interest which becomes due on the Mortgage Loans in the
Adjustable Rate Group (net of the Servicing Fee, the Insurance Premium Amount,
the Trustee Fee and certain reductions required by the Certificate Insurer)
during any Due Period may not equal the amount of interest that would accrue at
One-Month LIBOR plus the Adjustable Rate Margin on the Class A-4 Certificates
during the related Accrual Period. In particular, the Class A-4 Pass-Through
Rate adjusts monthly, while the Mortgage Rates of the Mortgage Loans in the
Adjustable Rate Group adjust less frequently with the result that the Available
Funds Cap may limit increases in the Class A-4 Pass-Through Rate for extended
periods in a rising interest rate environment. The Mortgage Rates on 0.94% and
11.40% (based upon the aggregate Loan Balances as of the Cut-off Date) of the
Mortgage Loans in the Adjustable Rate Group will not adjust for two and three
years, respectively, following origination. In addition, the Mortgage Rates on
certain of the Mortgage Loans in the Adjustable Rate Group may respond to
different economic and market factors than the Class A-4 Pass-Through Rate and
there is not necessarily a correlation between them. Thus, it is possible, for
example, that the Mortgage Rates on certain of the Mortgage Loans in the
Adjustable Rate Group may fall during periods in which One-Month LIBOR is stable
or is rising or that, even if both the Mortgage Rates on the Mortgage Loans in
the Adjustable Rate Group and One-Month LIBOR fall during the same period, the
Mortgage Rates on certain of the Mortgage Loans in the Adjustable Rate Group may
fall more rapidly than One-Month LIBOR. Furthermore, if the Available Funds Cap
is used to determine the Class A-4 Pass-Through Rate for a Distribution Date,
the value of the Class A-4 Certificates may be temporarily or permanently
reduced.
If, with respect to any Distribution Date, the amount of interest that
would accrue during the related Accrual Period on the Class A-4 Certificates
based on the applicable level of One-Month LIBOR plus the Adjustable Rate Margin
is less than the weighted average (calculated as described herein) of the
Mortgage Rates on the Mortgage Loans in the Adjustable Rate Group as of the
first day of the related Due Period, less the sum of (a) the Servicing Fee Rate,
(b) the Trustee Fee Rate, (c) the Insurance Premium Rate and (d) commencing on
the seventh Distribution Date, 0.50% per annum, and the Pass-Through Rate on the
Class A-4 Certificates is therefore based on the Available Funds Cap, a Basis
Risk Excess will, except as provided below, arise. However, no assurance can be
given that there will be sufficient Net Monthly Excess Cashflow generated from
the Mortgage Loans in the Adjustable Rate Group (or, with respect to any
crosscollateralization provisions, from the Mortgage Loans in the Fixed Rate
Group) to pay the Basis Risk Carryover Amount on any given Distribution Date.
Interest will not accrue on or be paid on the Basis Risk Carryover Amount and
the Certificate Insurance Policies will not cover any Basis Risk Carryover
Amount. Moreover, to the extent that the Available Funds Cap for any
Distribution Date equals the Net Lifetime Cap, the Basis Risk Excess for such
Distribution Date will equal zero.
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DESCRIPTION OF THE MORTGAGE POOL
GENERAL
The Mortgage Loans will consist of fixed-rate and adjustable-rate Mortgage
Loans with remaining terms to maturity as of the Cut-off Date of not more than
360 months (including both fully amortizing Mortgage Loans and Balloon Loans).
The Mortgage Loans have the characteristics set forth below as of the close of
business on the Cut-off Date. Percentages expressed herein based on Loan
Balances and number of Mortgage Loans have been rounded, and in the tables set
forth herein the sum of the percentages may not equal the respective totals due
to such rounding.
Each Mortgage Loan in the Trust Fund will be assigned to one of two Loan
Groups comprised of Mortgage Loans which bear fixed interest rates only, in the
case of the Fixed Rate Group, and Mortgage Loans which bear adjustable interest
rates only, in the case of the Adjustable Rate Group. The Fixed Rate
Certificates represent undivided ownership interests in all Mortgage Loans
contained in the Fixed Rate Group, and distributions on the Fixed Rate
Certificates will be based primarily on amounts available for distribution in
respect of Mortgage Loans in the Fixed Rate Group. The Adjustable Rate
Certificates represent undivided ownership interests in all Mortgage Loans
contained in the Adjustable Rate Group, and distributions on the Adjustable Rate
Certificates will be based primarily on amounts available for distribution in
respect of Mortgage Loans in the Adjustable Rate Group.
If the residential real estate market should experience an overall decline
in property values such that the outstanding balance of any Mortgage Loan,
together with the outstanding balance of any first mortgage, if applicable,
becomes equal to or greater than the value of the Mortgaged Property, the actual
rates of delinquencies, foreclosures and losses could be higher than those now
generally experienced in the mortgage lending industry.
Most of the Mortgage Loans in the Fixed Rate Group and in the Adjustable
Rate Group with Loan-to-Value Ratios at origination greater than 80%, will not
be covered by a primary mortgage guaranty insurance policy issued by a mortgage
insurance company. Such policy generally provides coverage of a portion of the
original principal balance of the related mortgage loan equal to the product of
the original principal balance thereof and a fraction, the numerator of which is
the excess of the original principal balance of the related mortgage loan over
75% of the lesser of the appraised value and selling price of the related
mortgage property and the denominator of which is the original principal balance
of the related mortgage loan, plus accrued interest thereon and related
foreclosure expenses.
The Loan-to-Value Ratios and Combined Loan-to-Value Ratios shown below were
calculated based upon the appraisal, if any, drive-by evaluation or other method
made at the time of origination of the Mortgage Loan (the 'Appraised Values').
No assurance can be given that the values of the Mortgaged Properties have
remained or will remain at their Appraised Values on the dates of origination of
the related Mortgaged Loans.
The statistical information presented in this Prospectus Supplement
concerning the pool of Mortgage Loans is based on the pool of Mortgage Loans as
of the close of business on Cut-off Date. Certain Mortgage Loans included in the
Trust Fund as of the Cut-off Date may prepay in full, or may be determined not
to meet the eligibility requirements, and may not be included in the Trust Fund.
As a result of the foregoing, the statistical distribution of characteristics as
of the Closing Date for the Trust Fund may vary from the statistical
distribution of such characteristics as of the Cut-off Date as presented in this
Prospectus Supplement. The Depositor believes that the information set forth
herein with respect to the Mortgage Pool as presently constituted is
representative of the characteristics of the Mortgage Pool as it will be
constituted at the Closing Date, although certain characteristics of the
Mortgage Loans in the Mortgage Pool may vary. Unless otherwise indicated,
information presented herein expressed as a percentage (other than rates of
interest) are approximate percentages based on the Original Pool Principal
Balance or Original Loan Group Balance, as applicable, as of the Cut-off Date.
MORTGAGE LOANS--FIXED RATE GROUP
As of the Cut-off Date, the average loan balance of the Mortgage Loans in
the Fixed Rate Group was $36,639.56; the Mortgage Rates ranged from 8.000% per
annum to 16.990% per annum; the weighted average Combined Loan-to-Value Ratio
was 85.35%; the weighted average Mortgage Rate was 12.400% per annum; the
weighted average remaining term to maturity was approximately 209 months; and
the weighted average original term to maturity was approximately 212 months. The
remaining terms to maturity as of the Cut-off Date of the Mortgage Loans in the
Fixed Rate Group ranged from 52 months to 360 months. The minimum and maximum
S-20
<PAGE>
Loan Balances of the Mortgage Loans in the Fixed Rate Group as of the Cut-off
Date were $4,410.93 and $307,921.01, respectively. As of the Cut-off Date,
Mortgage Loans in the Fixed Rate Group containing 'balloon' payments represented
not more than 28.14% of the Original Loan Group Balance of the Fixed Rate Group.
No Mortgage Loan in the Fixed Rate Group is scheduled to mature later than
January 2027. As of the Cut-off Date, none of the Mortgage Loans in the Fixed
Rate Group was more than 30 days delinquent.
The Mortgage Loans in the Fixed Rate Group will be predominantly home
equity loans, i.e., loans used (x) to refinance an existing mortgage loan on
more favorable terms, (y) to consolidate debt or (z) to obtain cash proceeds by
borrowing against the Mortgagor's equity in the related Mortgaged Property.
Set forth below is a description of certain additional characteristics of
the Mortgage Loans in the Fixed Rate Group as of the Cut-off Date. The
percentages set forth in the tables below may not always add to 100% due to
rounding.
REMAINING PRINCIPAL BALANCES
<TABLE>
<CAPTION>
% OF FIXED
RATE GROUP BY
AGGREGATE AGGREGATE NUMBER OF
PRINCIPAL PRINCIPAL MORTGAGE
RANGE OF PRINCIPAL BALANCES BALANCE BALANCE LOANS
- ------------------------------------------------------------ -------------- ------------- ---------
<S> <C> <C> <C>
$1- $9,999.99........................................ $ 411,984.39 0.68% 44
$10,000- $19,999.99........................................ 7,489,361.82 12.37 495
$20,000- $29,999.99........................................ 9,687,462.86 16.00 397
$30,000- $39,999.99........................................ 6,882,311.60 11.36 197
$40,000- $49,999.99........................................ 7,178,513.37 11.85 159
$50,000- $59,999.99........................................ 6,443,149.26 10.64 118
$60,000- $69,999.99........................................ 5,595,462.49 9.24 87
$70,000- $79,999.99........................................ 2,902,050.72 4.79 39
$80,000- $89,999.99........................................ 2,509,183.58 4.14 30
$90,000- $99,999.99........................................ 2,292,444.28 3.79 24
$100,000-$109,999.99........................................ 1,374,304.68 2.27 13
$110,000-$119,999.99........................................ 819,718.44 1.35 7
$120,000-$129,999.99........................................ 1,119,725.03 1.85 9
$130,000-$139,999.99........................................ 1,072,305.54 1.77 8
$140,000-$149,999.99........................................ 1,165,270.15 1.92 8
$150,000-$159,999.99........................................ 306,253.79 0.51 2
$160,000-$169,999.99........................................ 492,476.44 0.81 3
$170,000-$179,999.99........................................ 707,937.19 1.17 4
$180,000-$189,999.99........................................ 371,789.64 0.61 2
Greater than $200,000....................................... 1,743,485.82 2.88 7
-------------- ------------- ---------
Total................................................... $60,565,191.09 100.00% 1,653
-------------- ------------- ---------
-------------- ------------- ---------
</TABLE>
S-21
<PAGE>
MORTGAGE RATES
<TABLE>
<CAPTION>
% OF FIXED
RATE GROUP BY
AGGREGATE AGGREGATE NUMBER OF
RANGE OF MORTGAGE PRINCIPAL PRINCIPAL MORTGAGE
INTEREST RATES BALANCE BALANCE LOANS
- --------------------------------------------------------- -------------- ------------- ---------
<S> <C> <C> <C>
8.00%- 8.24%.............................................. $ 19,966.86 0.03% 1
8.751%- 9.000%............................................ 198,705.86 0.33 3
9.001%- 9.250%............................................ 130,455.29 0.22 3
9.251%- 9.500%............................................ 692,796.49 1.14 16
9.501%- 9.750%............................................ 570,612.65 0.94 10
9.751%-10.000%............................................ 2,405,935.24 3.97 50
10.001%-10.250%............................................ 1,233,396.75 2.04 28
10.251%-10.500%............................................ 2,012,310.83 3.32 42
10.501%-10.750%............................................ 2,361,769.38 3.90 51
10.751%-11.000%............................................ 2,563,319.74 4.23 52
11.001%-11.250%............................................ 3,478,480.81 5.74 63
11.251%-11.500%............................................ 2,975,036.23 4.91 60
11.501%-11.750%............................................ 3,655,135.55 6.04 70
11.751%-12.000%............................................ 3,275,719.14 5.41 72
12.001%-12.250%............................................ 2,075,968.91 3.43 43
12.251%-12.500%............................................ 6,224,670.91 10.28 132
12.501%-12.750%............................................ 2,310,415.94 3.81 50
12.751%-13.000%............................................ 4,983,193.03 8.23 162
13.001%-13.250%............................................ 875,168.40 1.45 24
13.251%-13.500%............................................ 2,047,554.29 3.38 64
13.501%-13.750%............................................ 837,741.65 1.38 23
13.751%-14.000%............................................ 6,246,005.90 10.31 248
14.001%-14.250%............................................ 510,376.69 0.84 15
14.251%-14.500%............................................ 3,448,804.29 5.69 151
14.501%-14.750%............................................ 601,110.03 0.99 22
14.751%-15.000%............................................ 2,882,550.78 4.76 108
15.001%-15.250%............................................ 584,905.39 0.97 33
15.251%-15.500%............................................ 523,911.47 0.87 25
15.501%-15.750%............................................ 98,501.15 0.16 6
15.751%-16.000%............................................ 343,397.89 0.57 14
16.001%-16.250%............................................ 143,240.60 0.24 3
16.251%-16.500%............................................ 34,965.08 0.06 1
16.501%-16.750%............................................ 119,900.00 0.20 4
16.751%-17.000%............................................ 99,167.87 0.16 4
-------------- ------------- ---------
Total.................................................. $60,565,191.09 100.00% 1,653
-------------- ------------- ---------
-------------- ------------- ---------
</TABLE>
S-22
<PAGE>
MONTHS REMAINING TO SCHEDULED MATURITY
<TABLE>
<CAPTION>
% OF FIXED
RATE GROUP BY
RANGE OF MONTHS AGGREGATE AGGREGATE NUMBER OF
REMAINING TO PRINCIPAL PRINCIPAL MORTGAGE
SCHEDULED MATURITY BALANCE BALANCE LOANS
- ------------------------------------------------------------------- -------------- ------------- ---------
<S> <C> <C> <C>
52 to 59......................................................... $ 125,972.15 0.21% 8
60 to 119......................................................... 1,425,119.80 2.35 64
120 to 179......................................................... 32,386,534.39 53.47 950
180 to 239......................................................... 15,296,448.26 25.26 448
240 to 299......................................................... 1,126,327.40 1.86 25
300 to 359......................................................... 8,602,212.96 14.20 132
360................................................................ 1,602,576.13 2.65 26
-------------- ------------- ---------
Total.............................................................. $60,565,191.09 100.00% 1,653
-------------- ------------- ---------
-------------- ------------- ---------
</TABLE>
DISTRIBUTION OF OCCUPANCY STATUS
<TABLE>
<CAPTION>
% OF FIXED
RATE GROUP BY
AGGREGATE AGGREGATE NUMBER OF
PRINCIPAL PRINCIPAL MORTGAGE
OWNER OCCUPANCY BALANCE BALANCE LOANS
- ------------------------------------------------------------------- -------------- ------------- ---------
<S> <C> <C> <C>
Owner Occupied..................................................... $58,165,897.70 96.04% 1,598
Non-Owner Occupied................................................. 2,399,293.39 3.96 55
-------------- ------------- ---------
Total.............................................................. $60,565,191.09 100.00% 1,653
-------------- ------------- ---------
-------------- ------------- ---------
</TABLE>
DISTRIBUTION OF PROPERTY TYPES
<TABLE>
<CAPTION>
% OF FIXED
RATE GROUP BY
AGGREGATE AGGREGATE NUMBER OF
PRINCIPAL PRINCIPAL MORTGAGE
PROPERTY TYPE BALANCE BALANCE LOANS
- ------------------------------------------------------------------- -------------- ------------- ---------
<S> <C> <C> <C>
Single Family...................................................... $59,184,816.08 97.72% 1,623
2-4 Units.......................................................... 711,023.39 1.17 15
Condominium........................................................ 388,856.19 0.64 9
Other.............................................................. 159,765.05 0.26 3
PUD................................................................ 109,488.05 0.18 2
Townhouse.......................................................... 11,242.33 0.02 1
-------------- ------------- ---------
Total.............................................................. $60,565,191.09 100.00% 1,653
-------------- ------------- ---------
-------------- ------------- ---------
</TABLE>
S-23
<PAGE>
GEOGRAPHICAL DISTRIBUTION(1)
<TABLE>
<CAPTION>
% OF FIXED
RATE GROUP BY
AGGREGATE AGGREGATE NUMBER OF
PRINCIPAL PRINCIPAL MORTGAGE
STATE BALANCE BALANCE LOANS
- ------------------------------------------------------------------- -------------- ------------- ---------
<S> <C> <C> <C>
Florida............................................................ $16,284,109.78 26.89% 449
South Carolina..................................................... 11,208,537.24 18.51 372
Tennessee.......................................................... 8,923,652.04 14.73 198
Georgia............................................................ 8,202,385.63 13.54 178
Illinois........................................................... 4,471,023.84 7.38 134
North Carolina..................................................... 4,417,179.74 7.29 138
Colorado........................................................... 3,358,692.76 5.55 98
Virginia........................................................... 1,592,640.34 2.63 48
California......................................................... 566,171.48 0.93 9
Arizona............................................................ 400,355.40 0.66 6
Indiana............................................................ 378,717.44 0.63 4
Missisippi......................................................... 173,750.00 0.29 3
Maryland........................................................... 135,348.85 0.22 4
Michigan........................................................... 113,000.00 0.19 1
District of Columbia............................................... 78,400.00 0.13 1
Missouri........................................................... 56,700.00 0.09 2
Kansas............................................................. 46,000.00 0.08 2
Texas.............................................................. 42,250.00 0.07 1
Oklahoma........................................................... 35,987.51 0.06 1
Louisiana.......................................................... 29,191.99 0.05 1
Utah............................................................... 20,000.00 0.03 1
Nevada............................................................. 18,723.25 0.03 1
New Mexico......................................................... 12,373.80 0.02 1
-------------- ------------- ---------
Total.............................................................. $60,565,191.09 100.00% 1,653
-------------- ------------- ---------
-------------- ------------- ---------
</TABLE>
- ------------------
(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.
CALENDAR YEAR OF ORIGINATION
<TABLE>
<CAPTION>
% OF FIXED
RATE GROUP BY
AGGREGATE AGGREGATE NUMBER OF
PRINCIPAL PRINCIPAL MORTGAGE
CALENDAR YEAR BALANCE BALANCE LOANS
- ------------------------------------------------------------------- -------------- ------------- ---------
<S> <C> <C> <C>
1992............................................................... $ 41,037.26 0.07% 1
1993............................................................... 167,375.51 0.28 3
1994............................................................... 129,248.52 0.21 2
1995............................................................... 992,084.85 1.64 22
1996............................................................... 59,074,184.95 97.54 1,623
1997............................................................... 161,260.00 0.27 2
-------------- ------------- ---------
Total.............................................................. $60,565,191.09 100.00% 1,653
-------------- ------------- ---------
-------------- ------------- ---------
</TABLE>
S-24
<PAGE>
COMBINED LOAN-TO-VALUE RATIOS
<TABLE>
<CAPTION>
% OF FIXED
RATE GROUP BY
AGGREGATE AGGREGATE NUMBER OF
RANGE OF COMBINED PRINCIPAL PRINCIPAL MORTGAGE
LOAN-TO-VALUE RATIOS BALANCE BALANCE LOANS
- ------------------------------------------------------------------- -------------- ------------- ---------
<S> <C> <C> <C>
10.0000%- 19.9999%.................................................... $ 85,332.20 0.14% 3
20.0000%- 29.9999%.................................................... 62,651.59 0.10 3
30.0000%- 39.9999%.................................................... 242,035.94 0.40 8
40.0000%- 49.9999%.................................................... 439,987.47 0.73 15
50.0000%- 59.9999%.................................................... 1,142,507.15 1.89 36
60.0000%- 69.9999%.................................................... 4,015,908.36 6.63 87
70.0000%- 74.9999%.................................................... 4,189,089.67 6.92 84
75.0000%- 79.9999%.................................................... 9,106,184.51 15.04 190
80.0000%- 84.9999%.................................................... 9,389,160.15 15.50 186
85.0000%- 89.9999%.................................................... 13,303,112.41 21.96 357
90.0000%- 94.9999%.................................................... 6,139,386.01 10.14 149
95.0000%- 99.9999%.................................................... 9,544,752.05 15.76 412
100.0000%-104.9999%.................................................... 1,005,307.07 1.66 46
105.0000%-109.9999%.................................................... 272,964.46 0.45 11
110.0000%-114.9999%.................................................... 326,600.95 0.54 14
115.0000%-119.9999%.................................................... 571,312.44 0.94 22
120.0000%-124.9999%.................................................... 642,300.66 1.06 26
125.0000%.............................................................. 86,598.00 0.14 4
-------------- ------------- ---------
Total............................................................ $60,565,191.09 100.00% 1,653
-------------- ------------- ---------
-------------- ------------- ---------
</TABLE>
S-25
<PAGE>
JUNIOR LOAN RATIOS
<TABLE>
<CAPTION>
% OF SECOND LIEN MORTGAGE
AGGREGATE LOANS IN THE FIXED NUMBER OF
PRINCIPAL RATE GROUP BY AGGREGATE MORTGAGE
JUNIOR LOAN RATIO BALANCE PRINCIPAL BALANCE LOANS
- ------------------------------------------------------- -------------- -------------------------- ---------
<S> <C> <C> <C>
Not available............................................. $ 50,550.00 0.20% 1
0.001%- 5.000%........................................... 4,454.84 0.02 1
5.001%-10.000%........................................... 408,157.66 1.64 30
10.001%-15.000%........................................... 2,080,744.85 8.39 132
15.001%-20.000%........................................... 4,206,656.87 16.95 240
20.001%-25.000%........................................... 5,182,764.03 20.89 221
25.001%-30.000%........................................... 4,195,903.23 16.91 169
30.001%-35.000%........................................... 2,847,620.08 11.48 101
35.001%-40.000%........................................... 2,371,152.89 9.56 75
40.001%-45.000%........................................... 752,464.16 3.03 25
45.001%-50.000%........................................... 1,162,412.01 4.68 28
50.001%-55.000%........................................... 376,088.75 1.52 10
55.001%-60.000%........................................... 456,443.36 1.84 10
60.001%-65.000%........................................... 169,420.46 0.68 4
65.001%-70.000%........................................... 221,018.63 0.89 4
75.001%-80.000%........................................... 43,219.98 0.17 1
80.001%-85.000%........................................... 211,643.60 0.85 3
90.001%-95.000%........................................... 37,388.25 0.15 1
95.001%-100.000%.......................................... 34,809.34 0.14 1
-------------- ------- ---------
Total................................................ $24,812,912.99 100.00% 1,057
-------------- ------- ---------
-------------- ------- ---------
</TABLE>
S-26
<PAGE>
MORTGAGE LOANS--ADJUSTABLE RATE GROUP
As of the Cut-off Date, the average Loan Balance of the Mortgage Loans in
the Adjustable Rate Group was $119,753.97; the Mortgage Rates ranged from 6.000%
per annum to 13.780% per annum; the weighted average Loan-to-Value Ratio was
81.76%; the weighted average Mortgage Rate was 9.72% per annum; the weighted
average remaining term to maturity was approximately 340 months; and the
weighted average original term to maturity was approximately 342 months. The
remaining terms to maturity as of the Cut-off Date of the Mortgage Loans in the
Adjustable Rate Group ranged from 169 months to 360 months. The minimum and
maximum Loan Balances of the Mortgage Loans in the Adjustable Rate Group as of
the Cut-off Date were $29,932.54 and $638,879.04, respectively. As of the
Cut-off Date, Mortgage Loans in the Adjustable Rate Group containing 'balloon'
payments represented not more than 9.59% of the Original Loan Balance of the
Adjustable Rate Group. No Mortgage Loan in the Adjustable Rate Group will mature
later than January 2027. As of the Cut-off Date, none of the Mortgage Loans in
the Adjustable Rate Group was more than 30 days delinquent.
All of the Mortgage Loans in the Adjustable Rate Group have maximum
Mortgage Rates. The weighted average maximum Mortgage Rate of the Mortgage Loans
in the Adjustable Rate Group was 16.444% per annum, with maximum Mortgage Rates
that range from 11.00% per annum to 20.07% per annum. The Mortgage Loans in the
Adjustable Rate Group have a weighted average gross margin as of the Cut-off
Date of 6.365% per annum. The gross margin for the Mortgage Loans in the
Adjustable Rate Group ranges from 2.000% per annum to 9.375% per annum.
The Mortgage Loans in the Adjustable Rate Group bear interest rates that
adjust based on either One-Month LIBOR, Six-Month LIBOR or One-Year CMT. All of
the Mortgage Loans in the Adjustable Rate Group have periodic rate adjustment
caps. 9.36% of the Original Loan Balance of the Mortgage Loans in the Adjustable
Rate Group have a rate adjustment cap of 3% per annum for the first adjustment
and 2% per annum thereafter. 2.04% of the Original Loan Balance of the
Adjustable Rate Group have a rate adjustment cap of 3.0% per annum for the first
adjustment and 1.5% per annum thereafter. The remaining Mortgage Loans in the
Adjustable Rate Group have periodic rate adjustment caps that range from 1% per
annum to 2% per annum. Notwithstanding the foregoing, the Mortgage Rates on
0.94% and 11.40% (based upon the Original Loan Balance) of the Mortgage Loans in
the Adjustable Rate Group will not adjust for two and three years, respectively,
following origination.
Set forth below is a description of certain additional characteristics of
the Mortgage Loans in the Adjustable Rate Group as of the Cut-off Date. The
percentages set forth in the table below may not always add to 100% due to
rounding.
S-27
<PAGE>
REMAINING PRINCIPAL BALANCES
<TABLE>
<CAPTION>
% OF ADJUSTABLE
RATE GROUP BY
AGGREGATE AGGREGATE NUMBER OF
PRINCIPAL PRINCIPAL MORTGAGE
RANGE OF PRINCIPAL BALANCES BALANCE BALANCE LOANS
- ------------------------------------------------------------------ -------------- --------------- ---------
<S> <C> <C> <C>
$ 20,000-$ 29,999.99.............................................. $ 29,932.54 0.07% 1
$ 30,000-$ 39,999.99.............................................. 316,200.48 0.74 9
$ 40,000-$ 49,999.99.............................................. 908,714.83 2.13 20
$ 50,000-$ 59,999.99.............................................. 1,374,213.60 3.22 25
$ 60,000-$ 69,999.99.............................................. 1,710,361.59 4.01 26
$ 70,000-$ 79,999.99.............................................. 2,320,207.59 5.44 31
$ 80,000-$ 89,999.99.............................................. 2,899,273.18 6.80 34
$ 90,000-$ 99,999.99.............................................. 3,031,168.18 7.11 32
$100,000-$109,999.99.............................................. 2,201,947.56 5.16 21
$110,000-$119,999.99.............................................. 2,656,740.49 6.23 23
$120,000-$129,999.99.............................................. 2,251,355.23 5.28 18
$130,000-$139,999.99.............................................. 2,714,647.01 6.37 20
$140,000-$149,999.99.............................................. 3,182,825.77 7.47 22
$150,000-$159,999.99.............................................. 1,406,826.04 3.30 9
$160,000-$169,999.99.............................................. 2,148,734.06 5.04 13
$170,000-$179,999.99.............................................. 1,225,338.47 2.87 7
$180,000-$189,999.99.............................................. 1,121,805.27 2.63 6
$190,000-$199,999.99.............................................. 193,518.82 0.45 1
$200,000-$224,999.99.............................................. 2,954,343.20 6.93 14
$225,000-$249,999.99.............................................. 2,407,129.81 5.65 10
$250,000-$274,999.99.............................................. 532,580.23 1.25 2
$275,000-$299,999.99.............................................. 874,264.60 2.05 3
$300,000-$324,999.99.............................................. 300,000.00 0.70 1
$325,000-$349,999.99.............................................. 325,851.50 0.76 1
$350,000-$374,999.99.............................................. 360,000.00 0.84 1
$375,000-$399,999.99.............................................. 385,000.00 0.90 1
$450,000-$474,999.99.............................................. 471,176.49 1.11 1
$475,000-$499,999.99.............................................. 492,000.00 1.15 1
$550,000-$574,999.99.............................................. 562,237.57 1.32 1
$625,000-$649,999.99.............................................. 1,274,020.44 2.99 2
-------------- ------- ---
Total........................................................ $42,632,414.55 100.00% 356
-------------- ------- ---
-------------- ------- ---
</TABLE>
S-28
<PAGE>
MORTGAGE RATES
<TABLE>
<CAPTION>
% OF ADJUSTABLE
RATE GROUP BY
AGGREGATE AGGREGATE NUMBER OF
RANGE OF MORTGAGE PRINCIPAL PRINCIPAL MORTGAGE
INTEREST RATES BALANCE BALANCE LOANS
- ------------------------------------------------------------------ -------------- --------------- ---------
<S> <C> <C> <C>
6.001%- 6.250%..................................................... $ 873,605.22 2.05% 2
6.501%- 6.750%..................................................... 165,967.61 0.39 1
6.751%- 7.000%..................................................... 148,767.18 0.35 1
7.001%- 7.250%..................................................... 86,764.86 0.20 1
7.251%- 7.500%..................................................... 102,957.00 0.24 1
7.501%- 7.750%..................................................... 250,356.47 0.59 2
7.751%- 8.000%..................................................... 186,965.52 0.44 1
8.001%- 8.250%..................................................... 815,639.42 1.91 7
8.251%- 8.500%..................................................... 1,044,264.25 2.45 8
8.501%- 8.750%..................................................... 1,501,655.01 3.52 9
8.751%- 9.000%..................................................... 2,158,386.77 5.06 17
9.001%- 9.250%..................................................... 4,172,948.23 9.79 29
9.251%- 9.500%..................................................... 4,289,529.42 10.06 33
9.501%- 9.750%..................................................... 4,822,491.99 11.31 40
9.751%-10.000%..................................................... 5,614,742.82 13.17 43
10.001%-10.250%..................................................... 2,220,432.23 5.21 24
10.251%-10.500%..................................................... 3,597,663.70 8.44 31
10.501%-10.750%..................................................... 3,102,478.70 7.28 29
10.751%-11.000%..................................................... 2,936,682.25 6.89 33
11.001%-11.250%..................................................... 1,326,609.07 3.11 11
11.251%-11.500%..................................................... 942,283.42 2.21 10
11.501%-11.750%..................................................... 902,253.95 2.12 8
11.751%-12.000%..................................................... 364,894.57 0.86 3
12.001%-12.250%..................................................... 221,863.35 0.52 3
12.251%-12.500%..................................................... 162,075.34 0.38 2
12.501%-12.750%..................................................... 184,500.00 0.43 2
12.751%-13.000%..................................................... 51,998.40 0.12 1
13.001%-13.250%..................................................... 328,217.80 0.77 3
13.751%-14.000%..................................................... 55,420.00 0.13 1
-------------- ------- ---
Total.......................................................... $42,632,414.55 100.00% 356
-------------- ------- ---
-------------- ------- ---
</TABLE>
S-29
<PAGE>
MONTHS REMAINING TO SCHEDULED MATURITY
<TABLE>
<CAPTION>
% OF ADJUSTABLE
RATE GROUP BY
RANGE OF MONTHS AGGREGATE AGGREGATE NUMBER OF
REMAINING TO PRINCIPAL PRINCIPAL MORTGAGE
SCHEDULED MATURITY BALANCE BALANCE LOANS
- ------------------------------------------------------------------ -------------- --------------- ---------
<S> <C> <C> <C>
169 to 179........................................................ $ 2,728,209.58 6.40% 28
180 to 239........................................................ 1,517,834.93 3.56 16
300 to 359........................................................ 31,147,645.27 73.06 260
360............................................................... 7,238,724.77 16.98 52
-------------- ------- ---
Total........................................................ $42,632,414.55 100.00% 356
-------------- ------- ---
-------------- ------- ---
</TABLE>
DISTRIBUTION OF
LOAN PURPOSE
<TABLE>
<CAPTION>
% OF ADJUSTABLE
RATE GROUP BY
AGGREGATE AGGREGATE NUMBER OF
PRINCIPAL PRINCIPAL MORTGAGE
LOAN PURPOSE BALANCE BALANCE LOANS
- -------------------------------------------------------------- --------------------- --------------- ---------
<S> <C> <C> <C>
Purchase...................................................... $ 28,909,927.81 67.81% 234
Refinance (Rate/Term)......................................... 11,379,637.24 26.69 100
Cashout....................................................... 2,274,515.96 5.34 21
Not available................................................. 68,333.54 0.16 1
--------------------- ------- ---
Total......................................................... $ 42,632,414.55 100.00% 356
--------------------- ------- ---
--------------------- ------- ---
</TABLE>
DISTRIBUTION OF OCCUPANCY STATUS
<TABLE>
<CAPTION>
% OF ADJUSTABLE
RATE GROUP BY
AGGREGATE AGGREGATE NUMBER OF
PRINCIPAL PRINCIPAL MORTGAGE
OWNER OCCUPANCY BALANCE BALANCE LOANS
- -------------------------------------------------------------- --------------------- --------------- ---------
<S> <C> <C> <C>
Owner Occupied................................................ $ 41,099,347.09 96.40% 340
Non-Owner Occupied............................................ 1,533,067.46 3.60 16
--------------------- ------- ---
Total......................................................... $ 42,632,414.55 100.00% 356
--------------------- ------- ---
--------------------- ------- ---
</TABLE>
DISTRIBUTION OF PROPERTY TYPES
<TABLE>
<CAPTION>
% OF ADJUSTABLE
RATE GROUP BY
AGGREGATE AGGREGATE NUMBER OF
PRINCIPAL PRINCIPAL MORTGAGE
PROPERTY TYPE BALANCE BALANCE LOANS
- -------------------------------------------------------------- --------------------- --------------- ---------
<S> <C> <C> <C>
Single Family................................................. $ 41,308,890.69 96.90% 342
PUD........................................................... 777,768.34 1.82 6
Condominium................................................... 302,859.97 0.71 5
2-4 Units..................................................... 242,895.55 0.57 3
--------------------- ------- ---
Total......................................................... $ 42,632,414.55 100.00% 356
--------------------- ------- ---
--------------------- ------- ---
</TABLE>
S-30
<PAGE>
GEOGRAPHICAL DISTRIBUTION(1)
<TABLE>
<CAPTION>
% OF ADJUSTABLE
RATE GROUP BY
AGGREGATE AGGREGATE NUMBER OF
PRINCIPAL PRINCIPAL MORTGAGE
STATE BALANCE BALANCE LOANS
- ------------------------------------------------------------------ -------------- --------------- ---------
<S> <C> <C> <C>
Georgia........................................................... $25,215,966.19 59.15% 213
Arizona........................................................... 3,803,740.92 8.92 27
Nevada............................................................ 2,558,197.37 6.00 13
Florida........................................................... 2,553,049.04 5.99 26
California........................................................ 1,847,082.12 4.33 12
South Carolina.................................................... 1,428,347.69 3.35 16
Tennessee......................................................... 1,179,753.86 2.77 11
North Carolina.................................................... 843,175.93 1.98 10
Texas............................................................. 807,604.40 1.89 8
Illinois.......................................................... 670,758.32 1.57 5
Colorado.......................................................... 651,051.64 1.53 6
Maryland.......................................................... 569,487.63 1.34 5
Utah.............................................................. 290,029.93 0.68 2
Washington........................................................ 133,200.00 0.31 1
Oregon............................................................ 80,969.51 0.19 1
-------------- ---------- ---
Total........................................................ $42,632,414.55 100.00% 356
-------------- ---------- ---
-------------- ---------- ---
</TABLE>
- ------------------
(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.
CALENDAR YEAR OF ORIGINATION
<TABLE>
<CAPTION>
% OF ADJUSTABLE
RATE GROUP BY
AGGREGATE AGGREGATE NUMBER OF
PRINCIPAL PRINCIPAL MORTGAGE
CALENDAR YEAR BALANCE BALANCE LOANS
- ------------------------------------------------------------------ -------------- --------------- ---------
<S> <C> <C> <C>
1996.............................................................. $42,632,414.55 100.00% 356
-------------- ------- ---
$42,632,414.55 100.00% 356
-------------- ------- ---
-------------- ------- ---
</TABLE>
LOAN-TO-VALUE RATIOS
<TABLE>
<CAPTION>
% OF ADJUSTABLE
RATE GROUP BY
AGGREGATE AGGREGATE NUMBER OF
PRINCIPAL PRINCIPAL MORTGAGE
RANGE OF LOAN-TO-VALUE RATIOS BALANCE BALANCE LOANS
- ------------------------------------------------------------------ -------------- --------------- ---------
<S> <C> <C> <C>
20.0000%-29.9999%..................................................... $ 29,932.54 0.07% 1
30.0000%-39.9999%..................................................... 160,658.15 0.38 3
40.0000%-49.9999%..................................................... 168,825.18 0.40 1
50.0000%-59.9999%..................................................... 652,745.10 1.53 9
60.0000%-69.9999%..................................................... 3,577,642.62 8.39 31
70.0000%-74.9999%..................................................... 6,059,849.36 14.21 42
75.0000%-79.9999%..................................................... 7,394,626.48 17.35 64
80.0000%-84.9999%..................................................... 6,601,744.13 15.49 56
85.0000%-89.9999%..................................................... 14,048,917.74 32.95 116
90.0000%-94.9999%..................................................... 3,937,473.25 9.24 33
-------------- ------- ---
Total............................................................ $42,632,414.55 100.00% 356
-------------- ------- ---
-------------- ------- ---
</TABLE>
S-31
<PAGE>
DISTRIBUTION OF MARGINS
<TABLE>
<CAPTION>
% OF ADJUSTABLE
RATE GROUP BY
AGGREGATE AGGREGATE NUMBER OF
PRINCIPAL PRINCIPAL MORTGAGE
MARGINS BALANCE BALANCE LOANS
- -------------------------------------------------------------- --------------------- --------------- ---------
<S> <C> <C> <C>
2.000%-2.499%................................................... $ 72,250.00 0.17% 1
4.000%-4.499%................................................... 635,748.95 1.49 6
4.500%-4.999%................................................... 1,196,843.69 2.81 8
5.000%-5.499%................................................... 3,656,056.63 8.58 29
5.500%-5.999%................................................... 9,955,487.47 23.35 75
6.000%-6.499%................................................... 8,243,411.67 19.34 68
6.500%-6.999%................................................... 8,392,562.68 19.69 75
7.000%-7.499%................................................... 5,411,639.20 12.69 41
7.500%-7.999%................................................... 3,501,918.90 8.21 35
8.000%-8.499%................................................... 1,184,457.20 2.78 12
8.500%-8.999%................................................... 257,189.10 0.60 4
9.000%-9.499%................................................... 124,849.06 0.29 2
--------------------- ------- ---
Total........................................................... $ 42,632,414.55 100.00% 356
--------------------- ------- ---
--------------------- ------- ---
</TABLE>
DISTRIBUTION OF MAXIMUM MORTGAGE RATES
<TABLE>
<CAPTION>
% OF ADJUSTABLE
RATE GROUP BY
AGGREGATE AGGREGATE NUMBER OF
MAXIMUM PRINCIPAL PRINCIPAL MORTGAGE
MORTGAGE RATES BALANCE BALANCE LOANS
- ------------------------------------------------------------------ -------------- --------------- ---------
<S> <C> <C> <C>
10.501%-11.000%..................................................... $ 873,605.22 2.05% 2
11.501%-12.000%..................................................... 72,250.00 0.17 1
12.001%-12.500%..................................................... 165,967.61 0.39 1
12.501%-13.000%..................................................... 235,532.04 0.55 2
13.001%-13.500%..................................................... 181,737.74 0.43 2
13.501%-14.000%..................................................... 677,046.00 1.59 4
14.001%-14.500%..................................................... 1,188,610.77 2.79 7
14.501%-15.000%..................................................... 1,808,336.13 4.24 15
15.001%-15.500%..................................................... 2,874,894.42 6.74 24
15.501%-16.000%..................................................... 5,356,228.43 12.56 38
16.001%-16.500%..................................................... 8,264,126.30 19.38 69
16.501%-17.000%..................................................... 7,778,971.94 18.25 64
17.001%-17.500%..................................................... 5,043,631.29 11.83 46
17.501%-18.000%..................................................... 4,312,953.13 10.12 44
18.001%-18.500%..................................................... 2,049,568.02 4.81 19
18.501%-19.000%..................................................... 792,840.14 1.86 7
19.001%-19.500%..................................................... 391,399.17 0.92 5
19.501%-20.000%..................................................... 405,323.58 0.95 4
20.001%-20.500%..................................................... 159,392.62 0.37 2
-------------- ------- ---
Total............................................................... $42,632,414.55 100.00% 356
-------------- ------- ---
-------------- ------- ---
</TABLE>
S-32
<PAGE>
DISTRIBUTION OF MORTGAGE RATES CHANGE DATE
<TABLE>
<CAPTION>
% OF ADJUSTABLE
RATE GROUP BY
NEXT AGGREGATE AGGREGATE NUMBER OF
MORTGAGE PRINCIPAL PRINCIPAL MORTGAGE
RATE CHANGE BALANCE BALANCE LOANS
- ------------------------------------------------------------------ -------------- --------------- ---------
<S> <C> <C> <C>
January, 1997..................................................... $ 306,598.06 0.72% 3
February, 1997.................................................... 523,226.54 1.23 6
March, 1997....................................................... 473,889.63 1.11 4
April, 1997....................................................... 1,097,606.70 2.57 8
May, 1997......................................................... 909,061.15 2.13 9
June, 1997........................................................ 3,752,678.48 8.80 27
July, 1997........................................................ 2,330,758.40 5.47 20
August, 1997...................................................... 2,127,967.72 4.99 18
September, 1997................................................... 4,579,366.50 10.74 43
October, 1997..................................................... 6,402,269.62 15.02 52
November, 1997.................................................... 7,516,621.85 17.63 62
December, 1997.................................................... 7,353,283.01 17.25 55
October, 1998..................................................... 68,449.57 0.16 1
November, 1998.................................................... 262,080.23 0.61 1
December, 1998.................................................... 68,400.00 0.16 1
April, 1999....................................................... 105,969.52 0.25 1
May, 1999......................................................... 660,456.87 1.55 8
June, 1999........................................................ 1,376,069.96 3.23 11
July, 1999........................................................ 854,936.10 2.01 6
August, 1999...................................................... 320,114.81 0.75 4
September, 1999................................................... 399,162.16 0.94 5
October, 1999..................................................... 276,239.49 0.65 2
November, 1999.................................................... 648,358.18 1.52 7
December, 1999.................................................... 218,850.00 0.51 2
-------------- ------- ---
$42,632,414.55 100.00% 356
-------------- ------- ---
-------------- ------- ---
</TABLE>
INTEREST PAYMENTS ON THE MORTGAGE LOANS
Most of the Mortgage Loans in the Fixed Rate Group are mortgage loans on
which interest is charged to the obligor (the 'Mortgagor') at the interest rate
on the outstanding principal balance calculated based on the number of days
elapsed between receipt of the Mortgagor's last payment through receipt of the
Mortgagor's most current payment (such Mortgage Loans, 'Simple Interest Loans').
Such interest is deducted from the Mortgagor's payment amount and the remainder,
if any, of the payment is applied as a reduction to the outstanding principal
balance of such Mortgage Note. Although the Mortgagors of these Simple Interest
Loans generally are required to remit equal monthly payments on a specified
monthly payment date that would reduce the outstanding principal balance of such
Mortgage Note to zero at such Mortgage Note's maturity date (or with respect to
Mortgage Loans containing 'balloon' payments, reduce the principal balance of
such Mortgage Loan to a pre-determined remaining principal balance) payments
that are made by the Mortgagors after the due date therefor would cause the
outstanding principal balance of such Mortgage Note not to be reduced to zero on
its maturity date. In such a case, the Mortgagor would be required to make an
additional principal payment at the maturity date for such Mortgage Note. If it
were assumed that all the Mortgagors on the Simple Interest Loans were to pay on
the latest date possible without the Simple Interest Loans being in default, the
amount of such additional principal payment would be a de minimis amount of the
aggregate Loan Balance of the Mortgage Loans. On the other hand, if a Mortgagor
makes a payment (other than a Prepayment) before the due date therefor, the
reduction in the outstanding principal balance of such Mortgage Note would occur
over a shorter period of time than would have occurred had it been based on the
schedule of amortization in effect on the Cut-
S-33
<PAGE>
off Date. Accordingly, the timing of principal payments to the Class A
Certificates may be affected by the fact that actual Mortgagor payments may not
be made on the due date therefor.
Most of the Mortgage Loans in the Adjustable Rate Group are not Simple
Interest Loans (such Mortgage Loans, the 'Actuarial Loans'). The Actuarial Loans
provide that interest is charged to the Mortgagors thereunder, and payments are
due from such Mortgagors, as of a scheduled day of each month which is fixed at
the time or origination. Scheduled monthly payments made by the Mortgagors on
the Actuarial Loans either earlier or later than the scheduled due dates thereof
will not affect the amortization schedule or the relative application of such
payments to principal and interest.
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
The rate of principal payments on the Class A Certificates, the aggregate
amount of each interest payment on the Class A Certificates and the yield to
maturity of the Class A 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 those discussed below. 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 Class A Certificateholders of amounts of principal which would
otherwise be distributed over the remaining terms of the Mortgage Loans in the
Trust Fund.
The Class R Optionholder may purchase from the Trust Fund, and the Trustee
has the obligation to conduct an auction for, all of the outstanding Mortgage
Loans, and thus effect the early retirement of the Class A Certificates,
following an Optional Termination Date. In addition, the Master Servicer may
purchase from the Trust Fund all of the outstanding Mortgage Loans, and thus
effect the early retirement of the Class A Certificates, after the aggregate
Loan Balance of the Mortgage Loans in the Trust Fund has declined to less than
5% of the Original Pool Principal Balance. See 'The Pooling and Servicing
Agreement--Termination; Retirement of the Certificates' and '--Termination
Auction' herein.
The actual rate of principal prepayments on pools of mortgage loans is
influenced by a variety of economic, tax, geographic, demographic, social, legal
and other factors and has fluctuated considerably in recent years. In addition,
the rate of principal prepayments may differ among pools of mortgage loans at
any time because of specific factors relating to the mortgage loans in the
particular pool, including, among other things, the age of the mortgage loans,
the geographic locations of the properties securing the loans and the extent of
the mortgagors' equity in such properties, and changes in the mortgagors'
housing needs, job transfers and unemployment.
As with fixed rate obligations generally, the rate of prepayment on a pool
of mortgage loans with fixed rates such as the Mortgage Loans in the Fixed Rate
Group 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. Certain of the Mortgage Loans in
the Fixed Rate Group provide for prepayment penalties during the first three
years following origination.
All of the Mortgage Loans in the Adjustable Rate Group will be
adjustable-rate mortgage loans. As is the case with conventional fixed-rate
mortgage loans, adjustable-rate mortgage loans may be subject to a greater rate
of principal prepayments in a declining interest rate environment. For example,
if prevailing interest rates fall significantly, adjustable-rate mortgage loans
could be subject to higher prepayment rates than if prevailing interest rates
remain constant, because the availability of fixed-rate mortgage loans at
competitive interest rates may encourage mortgagors to refinance their
adjustable-rate mortgage loan to 'lock in' a lower fixed interest rate. However,
no assurance can be given as to the level of prepayments that the Mortgage Loans
will experience. Certain of the Mortgage Loans in the Adjustable Rate Group
provide for prepayment penalties during the first three years following
origination.
S-34
<PAGE>
In addition to the foregoing factors affecting the weighted average life of
each Class of the Class A Certificates, the overcollateralization provisions of
the Trust Fund result in a limited acceleration of the Class A Certificates
relative to the amortization of the Mortgage Loans in early months of the
transaction. The accelerated amortization is achieved by the application of
certain excess interest and principal to the payment of the Class A Class
Certificate Balance. Once the required level of overcollateralization is
reached, the acceleration feature will cease, unless necessary to maintain the
required level of overcollateralization.
The Final Scheduled Distribution Dates for the Class A Certificates are as
follows:
<TABLE>
<CAPTION>
FINAL SCHEDULED
DISTRIBUTION DATE
-----------------
<S> <C>
Class A-1 Certificates......................................................
Class A-2 Certificates......................................................
Class A-3 Certificates......................................................
Class A-4 Certificates......................................................
</TABLE>
The Final Scheduled Distribution Date for each Class of Class A
Certificates is the date on which the Initial Class Certificate Balance set
forth on the cover page hereof for such Class would be reduced to zero on
account of distribution of principal, assuming that no Prepayments are received
on the Mortgage Loans, that monthly payments of principal and interest on each
of the Mortgage Loans are timely received in order to amortize such Mortgage
Loan in accordance with its terms, and that no Net Monthly Excess Cashflow will
be used to make accelerated payments of principal (i.e., Subordination Increase
Amounts) to the holders of the Class A Certificates.
The weighted average life of each Class of the Class A Certificates is
likely to be shorter than would be the case if payments actually made on the
Mortgage Loans conformed to the foregoing assumptions and the date on which the
final payment on any Class of Class A 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 or substituted from the Trust Fund under certain circumstances
described herein (iii) Net Monthly Excess Cash Flow may be used to make
accelerated payments of principal to holders of the Class A Certificates and
(iv) the Class R Optionholder, the Master Servicer or the Trustee may cause the
early termination of the Trust Fund on or after the date specified herein.
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
the Class A Certificates will be influenced by, among other factors, the rate at
which principal payments are made on the Mortgage Loans in the related Loan
Group.
Prepayments on Mortgage Loans are commonly measured relative to a
prepayment standard or model. The model for the Fixed Rate Loans 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 loan balance of the pool of mortgage loans for the life
of such mortgage loans. For the Fixed Rate Certificates, a 100% Prepayment
Assumption assumes a constant prepayment rate ('CPR') of 3% per annum of the
outstanding Loan Balance of the Mortgage Loans in the Fixed Rate Group in the
first month of the life of such Mortgage Loans, an additional 1.55% per annum
(precisely 17/11% per annum) in each month thereafter until the twelfth month
and beginning in the twelfth month and in each month thereafter during the life
of such Mortgage Loans, a CPR of 20% per annum. For the Adjustable Rate
Certificates, prepayments on the Adjustable Rate Mortage Loans are modeled
assuming a specified CPR percentage. As used in the table below, 0% Prepayment
Assumption assumes a prepayment rate equal to 0% of the Prepayment Assumption,
i.e., no prepayments. Correspondingly, 150% Prepayment Assumption assumes
prepayment rates equal to 150% 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 Class A 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
S-35
<PAGE>
assumed in preparing the tables. Any such discrepancy may have an effect upon
the percentages of the Class Certificate Balances outstanding and weighted
average lives of the Class A Certificates set forth in the tables. In addition,
since the actual Mortgage Loans in the Trust Fund will have characteristics
which differ from those assumed in preparing the tables set forth below,
distributions of principal on the Class A Certificates may be made earlier or
later than as indicated in the tables. For example, it is very unlikely that the
Mortgage Loans in the Fixed Rate group will prepay at the rates assumed by any
level of the Prepayment Assumption until maturity or that all of the Mortgage
Loans in the Adjustable Rate Group will prepay at a constant rate until
maturity. Moreover, the diverse remaining terms to maturity of the Mortgage
Loans could produce slower or faster principal distributions than indicated in
the tables relating to the percentage of the Initial Class Certificate Balance
outstanding for each of the Class A Certificates 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 Class Certificate Balances outstanding over
time and the weighted average lives of the Class A Certificates.
The tables set forth below have been prepared on the basis of certain
assumptions, including the assumptions that:
(i) the Mortgage Loans consist of synthetic mortgage loans having
the characteristics set forth in the second and third table
below,
(ii) the Closing Date is January , 1997,
(iii) distributions on the Certificates are made on the 25th day of
each month regardless of the day on which the Distribution Date
actually occurs, commencing in February 1997, in accordance
with the priorities described herein,
(iv) all prepayments are prepayments in full and include 30 days'
interest thereon,
(v) no early termination of the Trust Fund occurs, unless
specifically stated therein,
(vi) the 'Specified Subordinated Amounts' (as defined under 'Credit
Enhancement--Overcollateralization Provisions') are set
initially as specified by the Certificate Insurer, and
thereafter decrease as permitted by the Certificate Insurer,
(vii) no Mortgage Loan is ever delinquent,
(viii) the assumed levels of One-Month LIBOR, Six-Month LIBOR, and
One-Year CMT are % per annum, % per annum and
% per annum, respectively, and
(ix) the Fixed Rate Certificates have the respective Pass-Through
Rates set forth herein and the Adjustable Rate Certificates have
a Pass-Through Rate equal to % per annum throughout the life
of the Trust Fund, and each of the Class A Certificates have the
Initial Class Certificate Balances as set forth herein.
S-36
<PAGE>
PREPAYMENT SCENARIOS
<TABLE>
<CAPTION>
SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V SCENARIO VI SCENARIO VII
---------- ----------- ------------ ----------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed Rate Group(1) ... 0% 50% 100% 115% 150% 175% 200%
Adjustable Rate
Group(2)............. 0% 10% 20% 25% 30% 40% 50%
</TABLE>
- ------------------
(1) As a percentage of the Prepayment Assumption.
(2) CPR.
FIXED RATE GROUP
<TABLE>
<CAPTION>
PRINCIPAL MORTGAGE REMAINING ORIGINAL BALLOON
BALANCE RATE SEASONING TERM TERM TERM
- -------------- -------- --------- --------- -------- -------
<S> <C> <C> <C> <C> <C>
MORTGAGE LOANS AS OF THE CLOSING DATE
</TABLE>
ADJUSTABLE RATE GROUP
<TABLE>
<CAPTION>
GROSS
PRINCIPAL MORTGAGE REMAINING ORIGINAL BALLOON GROSS LIFETIME
BALANCE RATE SEASONING TERM TERM TERM INDEX MARGIN CAP
- -------------- -------- --------- --------- -------- ------- -------------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MORTGAGE LOANS AS OF THE CLOSING DATE
<CAPTION>
INITIAL
PERIODIC PERIODIC MONTHS TO
PRINCIPAL ADJUSTMENT ADJUSTMENT NEXT RATE RESET
BALANCE CAP CAP ADJUSTMENT FREQUENCY
- -------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
MORTGAGE LOANS AS OF THE CLOSING DATE
</TABLE>
The following tables set forth the percentages of the initial principal
amount of the Class A Certificates that would be outstanding after each of the
dates shown, based on prepayment scenarios described in the table entitled
'Prepayment Scenarios.' The percentages have been rounded to the nearest 1%.
S-37
<PAGE>
PERCENTAGE OF INITIAL CLASS A-1 CLASS CERTIFICATE BALANCE OUTSTANDING
<TABLE>
<CAPTION>
DATES SCENARIO 1 SCENARIO 2 SCENARIO 3 SCENARIO 4 SCENARIO 5 SCENARIO 6 SCENARIO 7
- ------------------------------ ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial....................... 100 100 100 100 100 100 100
01/25/1998....................
01/25/1999....................
01/25/2000....................
01/25/2001....................
01/25/2002....................
01/25/2003....................
01/25/2004....................
01/25/2005....................
01/25/2006....................
01/25/2007....................
01/25/2008....................
01/25/2009....................
01/25/2010....................
01/25/2011....................
01/25/2012....................
01/25/2013....................
01/25/2014....................
01/25/2015....................
01/25/2016....................
01/25/2017....................
01/25/2018....................
01/25/2019....................
01/25/2020....................
01/25/2021....................
01/25/2022....................
01/25/2023....................
01/25/2024....................
01/25/2025....................
Weighted Average Life
(years):(1).................
Weighted Average Life
(years):(2).................
</TABLE>
- ------------------
(1) To the Final Scheduled Distribution Date.
(2) This assumes that either the optional termination is exercised by the Class
R Optionholder or the termination auction is successfully completed
following the Optional Termination Date.
The weighted average life of each indicated Class of Class A Certificates
has been determined by (i) multiplying the amount of each principal payment by
the number of years from the date of issuance to the related Distribution Date,
(ii) adding the results and (iii) dividing the sum of the initial respective
Class Certificate Balance for the related Class A Certificates as of the Closing
Date.
S-38
<PAGE>
PERCENTAGE OF INITIAL CLASS A-2 CLASS CERTIFICATE BALANCE OUTSTANDING
<TABLE>
<CAPTION>
DATES SCENARIO 1 SCENARIO 2 SCENARIO 3 SCENARIO 4 SCENARIO 5 SCENARIO 6 SCENARIO 7
- ------------------------------ ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial....................... 100 100 100 100 100 100 100
01/25/1998....................
01/25/1999....................
01/25/2000....................
01/25/2001....................
01/25/2002....................
01/25/2003....................
01/25/2004....................
01/25/2005....................
01/25/2006....................
01/25/2007....................
01/25/2008....................
01/25/2009....................
01/25/2010....................
01/25/2011....................
01/25/2012....................
01/25/2013....................
01/25/2014....................
01/25/2015....................
01/25/2016....................
01/25/2017....................
01/25/2018....................
01/25/2019....................
01/25/2020....................
01/25/2021....................
01/25/2022....................
01/25/2023....................
01/25/2024....................
01/25/2025....................
01/25/2026....................
Weighted Average Life
(years):(1).................
Weighted Average Life
(years):(2).................
</TABLE>
- ------------------
(1) To the Final Scheduled Distribution Date.
(2) This assumes that either the optional termination is exercised by the Class
R Optionholder or the termination auction is successfully completed
following the Optional Termination Date.
The weighted average life of each indicated Class of Class A Certificates
has been determined by (i) multiplying the amount of each principal payment by
the number of years from the date of issuance to the related Distribution Date,
(ii) adding the results and (iii) dividing the sum of the initial respective
Class Certificate Balance for the related Class A Certificates as of the Closing
Date.
S-39
<PAGE>
PERCENTAGE OF INITIAL CLASS A-3 CLASS CERTIFICATE BALANCE OUTSTANDING
<TABLE>
<CAPTION>
DATES SCENARIO 1 SCENARIO 2 SCENARIO 3 SCENARIO 4 SCENARIO 5 SCENARIO 6 SCENARIO 7
- ------------------------------ ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial....................... 100 100 100 100 100 100 100
01/25/1998....................
01/25/1999....................
01/25/2000....................
01/25/2001....................
01/25/2002....................
01/25/2003....................
01/25/2004....................
01/25/2005....................
01/25/2006....................
01/25/2007....................
01/25/2008....................
01/25/2009....................
01/25/2010....................
01/25/2011....................
01/25/2012....................
01/25/2013....................
01/25/2014....................
01/25/2015....................
01/25/2016....................
01/25/2017....................
01/25/2018....................
01/25/2019....................
01/25/2020....................
01/25/2021....................
01/25/2022....................
01/25/2023....................
01/25/2024....................
01/25/2025....................
01/25/2026....................
Weighted Average Life
(years):(1).................
Weighted Average Life
(years):(2).................
</TABLE>
- ------------------
(1) To the Final Scheduled Distribution Date.
(2) This assumes that either the optional termination is exercised by the Class
R Optionholder or the termination auction is successfully completed
following the Optional Termination Date.
The weighted average life of each indicated Class of Class A Certificates
has been determined by (i) multiplying the amount of each principal payment by
the number of years from the date of issuance to the related Distribution Date,
(ii) adding the results and (iii) dividing the sum of the initial respective
Class Certificate Balance for the related Class A Certificates as of the Closing
Date.
S-40
<PAGE>
PERCENTAGE OF INITIAL CLASS A-4 CLASS CERTIFICATE BALANCE OUTSTANDING
<TABLE>
<CAPTION>
DATES SCENARIO 1 SCENARIO 2 SCENARIO 3 SCENARIO 4 SCENARIO 5 SCENARIO 6 SCENARIO 7
- ------------------------------ ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial....................... 100 100 100 100 100 100 100
01/25/1998....................
01/25/1999....................
01/25/2000....................
01/25/2001....................
01/25/2002....................
01/25/2003....................
01/25/2004....................
01/25/2005....................
01/25/2006....................
01/25/2007....................
01/25/2008....................
01/25/2009....................
01/25/2010....................
01/25/2011....................
01/25/2012....................
01/25/2013....................
01/25/2014....................
01/25/2015....................
01/25/2016....................
01/25/2017....................
01/25/2018....................
01/25/2019....................
01/25/2020....................
01/25/2021....................
01/25/2022....................
01/25/2023....................
01/25/2024....................
01/25/2025....................
01/25/2026....................
Weighted Average Life
(years):(1).................
Weighted Average Life
(years):(2).................
</TABLE>
- ------------------
(1) To the Final Scheduled Distribution Date.
(2) This assumes that either the optional termination is exercised by the Class
R Optionholder or the termination auction is successfully completed
following the Optional Termination Date.
The weighted average life of each indicated Class of Class A Certificates
has been determined by (i) multiplying the amount of each principal payment by
the number of years from the date of issuance to the related Distribution Date,
(ii) adding the results and (iii) dividing the sum of the initial respective
Class Certificate Balance for the related Class A Certificates as of the Closing
Date.
S-41
<PAGE>
THE DEPOSITOR, THE SELLER AND THE MASTER SERVICER
For a general discussion of the Depositor, the Seller and the Master
Servicer, see 'The Depositor,' 'The Seller' and 'The Master Servicer' in the
Prospectus.
NF INVESTMENTS, INC.
SERVICING PORTFOLIO
The Master Servicer does not presently service mortgage loans. Initially,
primary servicing of the Mortgage Loans will be provided by NF Investments, Inc.
('NFI'), as subservicer, pursuant to a subservicing agreement with the Master
Servicer. NFI is a Georgia corporation and a FNMA/FHLMC approved Seller/Servicer
which is actively engaged in the servicing of various financial instruments,
including first and second lien mortgage loans. NFI services several securitized
and whole loan portfolios comprised of single-family mortgage products. NFI's
corporate offices are located at 1815 North Expressway, Griffin, Georgia 30223.
NFI commenced mortgage servicing operations in 1987 and since then has managed
and serviced third-party mortgage loan portfolios.
DELINQUENCY AND LOSS EXPERIENCE
Historically, NFI has primarily serviced mortgage loans originated pursuant
to the first mortgage loan purchase programs of FNMA and FHLMC for investors. As
of November 30, 1996, NFI was servicing 7,124 mortgage loans with an aggregate
loan balance of $611,927,363. Because the servicing practices for these types of
mortgage loans differ from the servicing practices for lower credit quality
mortgage loans, including the Mortgage Loans in the Trust Fund, in the
Depositor's view, the historical delinquency and loan loss experience of NFI
would not provide meaningful information with respect to loan loss and
delinquencies which could be expected on the Mortgage Loans and therefore has
not been included herein.
FORMATION OF THE TRUST FUND AND TRUST PROPERTY
The Trust Fund will be created and established pursuant to the Pooling and
Servicing Agreement on the Closing Date. On such date, the Seller will convey
without recourse (except as otherwise provided herein) the Mortgage Loans to the
Depositor and the Depositor will convey without recourse the Mortgage Loans to
the Trust Fund and the Trust Fund will issue the Class A Certificates, the Class
X Certificates and the Class R Certificates.
The property of the Trust Fund will include (a) the Mortgage Loans together
with the related Mortgage Loan documents and the Seller's and Depositor's
interest in any Mortgaged Property which secures the Mortgage Loans and all
payments thereon and proceeds of the conversion, voluntary or involuntary, of
the foregoing, (b) such amounts as may be held by the Trustee in the
Distribution Account, together with investment earnings on such amount and such
amounts as may be held by the Master Servicer in the name of the Trustee in the
Collection Account, exclusive of investment earnings thereon (except as
otherwise provided) whether in the form of cash, instruments, securities or
other properties, (c) the Certificate Insurance Policies and (d) proceeds of all
the foregoing (including, but not by way of limitation, all proceeds of any
hazard insurance and title insurance policies relating to the Mortgage Loans,
cash proceeds, accounts, accounts receivables, notes, drafts, acceptances,
chattel paper, checks, deposit accounts, rights to payment of any and every
kind, and other forms of obligations and receivables which at any time
constitute all, part of or are included in the proceeds of, any of the
foregoing) to pay the Certificates as specified in the Pooling and Servicing
Agreement (collectively, the 'Trust Fund').
The Class A Certificates will not represent an interest in or an obligation
of, nor will the Mortgage Loans be guaranteed by, the Depositor, the Seller, the
Master Servicer or any of their affiliates.
For Federal income tax purposes, the Trust will include two segregated
asset pools, each of which will be treated as a separate REMIC. The assets of
the Subsidiary REMIC will generally consist of the Mortgage Loans.
S-42
<PAGE>
The assets of the Master REMIC will consist of uncertified regular interests
issued by the Subsidiary REMIC, which in the aggregate will correspond to the
Certificates.
Prior to its formation the Trust Fund will have had no assets or
obligations. Upon formation, the Trust Fund will not engage in any business
activity other than acquiring, holding, and collecting payments on the Mortgage
Loans and other property of the Trust Fund, issuing the Certificates and
distributing payments thereon. To the extent that borrowers make scheduled
payments under the Mortgage Loans, the Trust Fund will have sufficient liquidity
to make distributions on the Certificates. As the Trust Fund does not have any
operating history and will not engage in any business activity other than
issuing the Certificates and making distributions thereon, there has not been
included any historical or pro forma ratio of earnings to fixed charges with
respect to the Trust Fund.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Block Mortgage Finance Asset Backed Certificates, Series 1997-1 (the
'Certificates') will consist of (i) the Class A-1, Class A-2 and Class A-3
Certificates (the 'Fixed Rate Certificates'), (ii) the Class A-4 Certificates
(the 'Adjustable Rate Certificates'; the Adjustable Rate Certificates and the
Fixed Rate Certificates collectively are referred to as the 'Class A
Certificates'), (iii) the Class X-1 and Class X-2 Certificates (the 'Class X
Certificates') and (iv) the Class R Certificates (the 'Class R Certificates').
The Class X and Class R Certificates are referred to collectively as the
'Subordinate Certificates'. Only the Class A Certificates are offered hereby.
The following summary describes certain terms of the Class A Certificates
and the Pooling and Servicing Agreement. Reference is made to the accompanying
Prospectus for important additional information regarding the terms of the Class
A 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.
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 holders of the
Certificates (the 'Certificateholders') and the Certificate Insurer. The
Collection Account will be an Eligible Account. Amounts deposited in the
Collection Account may be invested in Permitted Investments 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 on the related Monthly
Remittance Date. 'Permitted Investments' are
(a) Direct general obligations of, or obligations fully and
unconditionally guaranteed as to the timely payment of principal and
interest by, the United States or any agency or instrumentality thereof,
provided such obligations are backed by the full faith and credit of the
United States, Federal Housing Administration debentures, FHLMC senior debt
obligations, and FNMA senior debt obligations, but excluding any of such
securities whose terms do not provide for payment of a fixed dollar amount
upon maturity or call for redemption;
(b) Federal Housing Administration debentures;
(c) Consolidated senior debt obligations of any Federal Home Loan
Banks;
(d) Federal funds, certificates of deposit, time deposits, and
bankers' acceptances (having original maturities of not more than 365 days)
of any domestic bank, the short-term debt obligations of which have been
rated A-1 or better by S&P and P-1 or better by Moody's;
(e) Deposits of any bank or savings and loan association (the
long-term deposit rating of which is Baa3 or better by Moody's and BBB or
better by S&P which has combined capital, surplus and undivided profits
S-43
<PAGE>
of at least $50,000,000 which deposits are insured by the FDIC and held up
to the limits insured by the FDIC;
(f) Investment agreements approved by the Certificate Insurer, subject
to the limitations set forth in the Pooling and Servicing Agreement;
(g) Repurchase agreements collateralized by securities described in
(a) above with any registered broker/dealer subject to the Securities
Investors Protection Corporation's jurisdiction and subject to applicable
limits therein promulgated by Securities Investors Protection Corporation
or any commercial bank, if such broker/dealer or bank has an uninsured,
unsecured and unguaranteed short-term or long-term obligation rated P-1 or
Aa2, respectively, or better by Moody's and A-1+ or AA, respectively, or
better by S&P, subject to the limitations set forth in the Pooling and
Servicing Agreement;
(h) Commercial paper (having original maturities of not more than 270
days) rated in the highest short-term rating categories of S&P and Moody's;
and
(i) Investments in no load money market funds rated AAAm or AAAm-G by
S&P and Aaa by Moody's;
provided that no instrument described above shall evidence either the right to
receive (a) only interest with respect to the obligations underlying such
instrument or (b) both principal and interest payments derived from obligations
underlying such instrument and the interest and principal payments with respect
to such instrument provided a yield to maturity at par greater than 120% of the
yield to maturity at par of the underlying obligations; and provided, further,
that all instruments described hereunder shall mature at par on or prior to the
next succeeding Distribution Date unless otherwise provided in the Pooling and
Servicing Agreement and that no instrument described hereunder may be purchased
at a price greater than par if such instrument may be prepaid or called at a
price less than its purchase price prior to stated maturity.
An 'Eligible Account' is an account that is (i) maintained with a federal
or state chartered depository institution or trust company whose short-term
unsecured debt obligations at the time of any deposit therein have the highest
short-term rating by the Rating Agencies, (ii) one or more accounts with a
depository institution or trust company 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 and the uninsured
deposits in which accounts are otherwise secured such that, as evidenced by an
opinion of counsel delivered to the Trustee, the Certificate Insurer and to each
Rating Agency, the holders of the Certificates have a claim with respect to the
funds in such account or a perfected first priority security interest against
any collateral (which shall be limited to Permitted Investments) securing such
funds that is superior to claims of any other depositors or creditors of the
depository institution or trust company in which such account is maintained,
(iii) a segregated trust account maintained with the Trustee or an affiliate of
the Trustee in its fiduciary capacity or (iv) otherwise acceptable to the
Certificate Insurer and each Rating Agency as evidenced by a letter from the
Certificate Insurer and each Rating Agency to the Trustee, without reduction or
withdrawal of their then current ratings of the Certificates.
DISTRIBUTION DATES
On each Distribution Date, the holders of each Class of the Class A
Certificates will be entitled to receive, from amounts then on deposit in the
distribution account established and maintained by the Trustee in accordance
with the Pooling and Servicing Agreement (the 'Distribution Account') and until
the Class Certificate Balance of such Class of Class A Certificates is reduced
to zero, the aggregate Class A Distribution Amount as of such Distribution Date,
allocated among the Classes of the Class A Certificates as described below.
Distributions will be made in immediately available funds to holders of Class A
Certificates by wire transfer or otherwise, as provided in the Pooling and
Servicing Agreement, to the account of such holders at a domestic bank or other
entity having appropriate facilities therefor, if such holders have so notified
the Trustee, or by check mailed to the address of the person entitled thereto as
it appears on the register (the 'Register') maintained by the Trustee as
registrar (the 'Registrar'). Beneficial Owners may experience some delay in the
receipt of their payments due to the operations of DTC.
The Pooling and Servicing Agreement will provide that a Certificateholder,
upon receiving the final distribution to such Certificateholder, will be
required to send such Certificate to the Trustee. The Pooling and
S-44
<PAGE>
Servicing Agreement additionally will provide that, in any event, any
Certificate as to which the final distribution thereon has been made shall be
deemed canceled for all purposes under or pursuant to the Pooling and Servicing
Agreement and the related Certificate Insurance Policies except to the extent of
a Reimbursement Amount on such Certificate, in which case the Certificate
Insurer will be subrogated to the rights of such Certificateholder and the
Certificate will not be deemed canceled.
Each holder of record of the related Class of the Class A Certificates will
be entitled to receive such holder's Percentage Interest in the amounts due such
Class on such Distribution Date. The 'Percentage Interest' of a Class A
Certificate as of any Distribution Date will be equal to the percentage obtained
by dividing the principal balance of such Certificate as of the related
Distribution Date (prior to giving effect to distribution of principal on such
date) by the Class Certificate Balance for the related Class of the Class A
Certificates as of the related Distribution Date (prior to giving effect to
distribution of principal on such date).
DISTRIBUTIONS
Upon receipt, the Trustee will be required to deposit into the Distribution
Account (i)(a) payments other than those specified in clauses (b) and (c) of
this paragraph collected or advanced on or prior to the related Determination
Date with respect to the related Due Period (b) any Prepayments collected during
the related Prepayment Period and (c) any Curtailments and Net Liquidation
Proceeds collected during the related Due Period, in each case, as remitted by
the Master Servicer on the Monthly Remittance Date, together with any
Substitution Adjustment and any Loan Purchase Price amount (the 'Monthly
Remittance'), (ii) any Insured Payment, and (iii) the proceeds of any
liquidation of the Trust Fund.
The Pooling and Servicing Agreement establishes a pass-through rate on each
Class of the Class A Certificates (each, a 'Pass-Through Rate') as set forth
herein.
On each Distribution Date, the Trustee is required to make the following
disbursements and transfers from moneys then on deposit in the Distribution
Account as specified below in the following order of priority of each such
transfer and disbursement:
(i) first, the Trustee shall allocate an amount equal to the sum of (x) the
Total Monthly Excess Spread with respect to such Loan Group and Distribution
Date plus (y) any Subordination Reduction Amount with respect to such Loan
Group and Distribution Date (such sum (net of the Trustee Fees with respect
to such Loan Group then payable under clause (iii)(C) below and the amounts
payable to the Certificate Insurer pursuant to the Pooling and Servicing
Agreement as the premium for the Certificate Insurance Policy for such Loan
Group (the 'Insurance Premium Amount' and the rate used to calculate such
amount, the 'Insurance Premium Rate') as described in clause (iii)(B) below)
being the 'Total Monthly Excess Cashflow' with respect to such Loan Group
and Distribution Date) in the following order of priority:
(A) first, such Total Monthly Excess Cashflow shall be allocated to
the payment of the Class A Distribution Amount pursuant to clauses
(iii)(A) and (C) below on such Distribution Date with respect to
the related Loan Group in an amount equal to the amount, if any,
by which (x) the Class A Distribution Amount with respect to the
related Loan Group (determined for this purpose only by reference
to clause (b) of the definition of Principal Distribution Amount
and without any Subordination Increase Amount) for such
Distribution Date exceeds (y) the Available Funds with respect to
such Loan Group for such Distribution Date (the amount of such
difference with respect to a Loan Group being an 'Available Funds
Shortfall' for such Loan Group);
(B) second, any portion of the Total Monthly Excess Cashflow with
respect to such Loan Group remaining after the application
described in clause (A) above shall be allocated against any
Available Funds Shortfall with respect to the other Loan Group;
(C) third, any portion of the Total Monthly Excess Cashflow with
respect to such Loan Group remaining after the allocations
described in clauses (A) and (B) above shall be paid to the
Certificate Insurer in respect of amounts owed on account of any
Reimbursement Amount owed to the Certificate Insurer with respect
to the related Loan Group; and
S-45
<PAGE>
(D) fourth, any portion of the Total Monthly Excess Cashflow with
respect to such Loan Group remaining after the allocations
described in clauses (A), (B) and (C) above shall be paid to the
Certificate Insurer in respect of any Reimbursement Amount with
respect to the other Loan Group.
(ii) second, the Trustee shall apply the amount, if any, of the Total
Monthly Excess Cashflow with respect to such Loan Group remaining
after the allocations described in clause (i) above (the 'Net Monthly
Excess Cashflow') with respect to such Loan Group for such
Distribution Date in the following order of priority:
(A) first, such Net Monthly Excess Cashflow shall be used to reduce to
zero, through the allocation of a Subordination Increase Amount to
the payment of the Class A Distribution Amount pursuant to clause
(iii) below, any Subordination Deficiency Amount (as defined in
the Pooling and Servicing Agreement) with respect to such Loan
Group as of such Distribution Date;
(B) second, any Net Monthly Excess Cashflow remaining after the
application described in clause (A) above shall be used to reduce
to zero, through the allocation of a Subordination Increase
Amount, the Subordination Deficiency Amount, if any, with respect
to the other Loan Group; and
(C) third, any Net Monthly Excess Cashflow remaining after the
application described in clauses (A) and (B) above shall be paid
to the Master Servicer to the extent of any unreimbursed P&I
Advances and unreimbursed Servicing Advances.
(iii) third, following the making by the Trustee of all allocations,
transfers and disbursements described above from amounts then on
deposit in the Distribution Account with respect to the related Loan
Group, the Trustee shall distribute:
(A) to the holders of the Class A Certificates of the related
Certificate Group, the related Current Interest, on a pro rata
basis without any priority among such Class A Certificates;
(B) to the Certificate Insurer, for the related Certificate Group, the
pro rated Insurance Premium Amount determined by the relative
Class Certificate Balance of the related Classes of Class A
Certificates for such Distribution Date;
(C) to the Trustee, the Trustee Fees (as set forth in the Pooling and
Servicing Agreement) with respect to such Loan Group then due;
(D) to the holders of the related Class of Class A Certificates, (I)
the Principal Distribution Amount applicable to the Fixed Rate
Group shall be distributed as follows: (a) first, to the holders
of the Class A-1 Certificates, until the Class Certificate Balance
thereof is reduced to zero; (b) second, to the holders of the
Class A-2 Certificates, until the Class Certificate Balance
thereof is reduced to zero; and (c) third, to the holders of the
Class A-3 Certificates, until the Class Certificate Balance
thereof is reduced to zero; and (II) the Principal Distribution
Amount applicable to the Adjustable Rate Group shall be
distributed to the holders of the Class A-4 Certificates, until
the Class Certificate Balance thereof is reduced to zero;
(E) to the Adjustable Rate Certificates, the Basis Risk Carryover
Amount outstanding on such Distribution Date;
(F) to the holders of the related Class of Class A Certificates, any
Net Prepayment Interest Shortfalls or the interest portion of
reductions due to the Relief Act incurred by such Class of
Certificates which remain outstanding on such Distribution Date,
on a pro rata basis among such Classes of Certificates; and
(G) to the holders of the Subordinate Certificates, all remaining
distributable amounts as specified in the Pooling and Servicing
Agreement;
provided however, that in the event of a Certificate Insurer Default, if there
is a Subordination Deficit with respect to the Fixed Rate Group, the Principal
Distribution Amount for the Fixed Rate Certificates will be distributed pro rata
to the holders of the Fixed Rate Certificates then outstanding.
S-46
<PAGE>
'Available Funds' as to any Loan Group and Distribution Date is the amount
on deposit in the Distribution Account with respect to such Loan Group on such
Distribution Date (net of Total Monthly Excess Cashflow and disregarding the
amounts of any Insured Payments with respect to such Loan Group to be made on
such Distribution Date).
'Total Available Funds' as to any Loan Group and Distribution Date is (x)
the amount on deposit in the Distribution Account with respect to such Loan
Group (net of Total Monthly Excess Cashflow with respect to such Loan Group) on
such Distribution Date plus (y) any amounts of Total Monthly Excess Cashflow
with respect to either Loan Group to be applied on such Distribution Date to
such Loan Group, disregarding, in either case, the amount of any Insured Payment
with respect to either Loan Group to be made on such Distribution Date.
The Trustee shall (i) receive as attorney-in-fact of each holder of Class A
Certificates any Insured Payment from the Certificate Insurer and (ii) disburse
the same to each holder of Class A Certificates. The Pooling and Servicing
Agreement will provide that to the extent the Certificate Insurer makes Insured
Payments, either directly or indirectly (as by paying through the Trustee), to
the holders of such Class A Certificates, if any, the Certificate Insurer will
be subrogated to the rights of such holders of Class A Certificates with respect
to such Insured Payments, and shall receive reimbursement for such Insured
Payments plus any amounts due and owing the Certificate Insurer pursuant to the
terms of the Pooling and Servicing Agreement (the 'Reimbursement Amount') to the
extent provided in the Pooling and Servicing Agreement, but only from the
sources and in the manner provided in the Pooling and Servicing Agreement for
the payment of the Class A Distribution Amount to holders of Class A
Certificates, if any; such subrogation and reimbursement will have no effect on
the Certificate Insurer's obligations under the related Certificate Insurance
Policies.
The Pooling and Servicing Agreement provides that the term 'Available
Funds' does not include Insured Payments and does not include any amounts that
cannot be distributed to the holders of the Class A Certificates, if any, by the
Trustee as a result of proceedings under the United States Bankruptcy Code.
Each holder of a Class A Certificate will be required promptly to notify
the Trustee in writing upon the receipt of a court order relating to a
Preference Amount and will be required to enclose a copy of such order with such
notice to the Trustee.
CALCULATION OF ONE-MONTH LIBOR
On the second LIBOR Business Day (as defined below) preceding the
commencement of each Accrual Period for the Adjustable Rate Certificates (each
such date, a 'LIBOR Determination Date'), the Trustee will determine the London
interbank offered rate for one-month United States dollar deposits ('One-Month
LIBOR') for such Accrual Period for the Adjustable Rate Certificates as
described under 'Description of the Certificates--Indices Applicable to Floating
Rate and Inverse Floating Rate Classes' in the Prospectus. As used herein,
'LIBOR Business Day' means any day other than (i) a Saturday or a Sunday, or
(ii) a day on which banking institutions in the City of New York, New York, or
the City of London, England are authorized or obligated by law or executive
order to be closed.
BOOK-ENTRY CERTIFICATES
The Class A Certificates will be book-entry Certificates (the 'Book-Entry
Certificates'). Persons acquiring beneficial ownership interests in the Class A
Certificates ('Certificate Owners') may elect to hold their Class A 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 each Class of Class A Certificates and will
initially be registered in the name of Cede & Co., the nominee of DTC. CEDEL and
Euroclear will hold omnibus positions on behalf of their participants through
customers' securities accounts in CEDEL's and Euroclear's names on the books of
their respective depositaries which in turn will hold such positions in
customers' securities accounts in the depositaries' names on the books of DTC.
Citibank will act as depositary for CEDEL and Chase will act as depositary for
Euroclear (in such capacities, individually the 'Relevant Depositary' and
collectively the 'European Depositaries'). Investors may hold such beneficial
interests in the Book-Entry Certificates in minimum denominations representing
S-47
<PAGE>
Class Certificate Balances of $25,000 and in multiples of $1,000 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 Class A Certificate (a 'Definitive Certificate'). Unless and
until Definitive Certificates are issued, it is anticipated that the only
'Certificateholder' of the Class A 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 the participating organizations that
utilize the services of DTC, including securities brokers and dealers, banks and
trust companies and clearing corporations and certain other organizations
('Participants') and DTC. See 'Description of the Certificates--Registration and
Transfer of the Certificates' in the Prospectus.
Definitive Certificates will be issued to beneficial owners of the
Book-Entry Certificates, or their nominees, rather than to DTC, only if (a) DTC
or the Depositor advises the Trustee in writing that DTC is no longer willing,
qualified or able to discharge properly its responsibilities as nominee and
depositary with respect to the Book-Entry Certificates and the Depositor or the
Trustee is unable to locate a qualified successor, (b) the Depositor at its sole
option, elects to terminate a book-entry system through DTC or (c) after the
occurrence of an Event of Default (as defined in the Pooling and Servicing
Agreement) beneficial owners having not less than 51% of the Voting Rights (as
defined in the Pooling and Servicing Agreement) evidenced by the Class A
Certificates advise the Trustee and DTC through the Participants in writing that
the continuation of a book-entry system through DTC (or a successor thereto) is
no longer in the best interests of beneficial owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all beneficial
owners of the occurrence of such event and the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Certificates and instructions for
re-registration, the Trustee will issue Definitive Certificates, and thereafter
the Trustee will recognize the holders of such Definitive Certificates as
holders of Class A Certificates under the Pooling and Servicing Agreement.
Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures
and those outlined in the Prospectus under 'Description of the
Certificates--Registration and Transfer of the Certificates', in order to
facilitate transfers of Certificates among participants of DTC, CEDEL and
Euroclear, they are under no obligation to perform or continue to perform such
procedures and such procedures may be discontinued at any time.
REPORTS TO CLASS A CERTIFICATEHOLDERS
On the Determination Date, the Master Servicer shall provide to the Trustee
such information as the Trustee will require, in a format as previously
specified by the Trustee, in order for the Trustee to prepare the statement
referred to below and to prepare a Notice for the Certificate Insurer, if
necessary, for the related Determination Date.
On each Distribution Date, the Trustee will forward to each Class A
Certificateholder and to the Certificate Insurer a statement generally setting
forth as to each Loan Group and as to the Trust Fund, as applicable:
(i) the amount of the related distribution to Class A
Certificateholders of such Class of Certificates allocable to principal,
separately identifying the aggregate amount of any Prepayments included
therein, any principal portion of any Carry Forward Amount included in such
distribution and any remaining principal portion of any Carry Forward
Amount after giving effect to such distribution;
(ii) the amount of such distribution to Class A Certificateholders of
such Class of Certificates allocable to interest, any Compensating
Interest, any interest portion of any Carry Forward Amount included in such
distribution, any remaining interest portion of any Carry Forward Amount
after giving effect to such distribution, any amount paid on account of any
outstanding Basis Risk Carryover Amount and any remaining Basis Risk
Carryover Amount after giving effect to such distribution;
(iii) the Class Certificate Balance of each Class of Class A
Certificates after giving effect to the distribution of principal on such
Distribution Date;
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<PAGE>
(iv) the aggregate Loan Balance of the Mortgage Loans in each Loan
Group for the following Distribution Date;
(v) the related amount of the Servicing Fees, Insurance Premium Amount
and Trustee Fee paid to or retained by the Master Servicer or paid to the
Certificate Insurer or the Trustee;
(vi) the Pass-Through Rate for such Class of Class A Certificates with
respect to the current Accrual Period;
(vii) the amount of P&I Advances and Servicing Advances, stated
separately, included in the distribution on such Distribution Date and the
aggregate amount of P&I Advances and Servicing Advances, stated separately,
outstanding as of the close of business on such Distribution Date;
(viii) the number and aggregate Loan Balance 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;
(ix) with respect to any Mortgage Loan that became an REO Property
during the preceding calendar month, the loan number and Loan 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;
(x) the total number and principal balance of any REO Properties as of
the close of business on the Determination Date preceding such Distribution
Date;
(xi) the amount of any Insured Payment included in the amounts
distributed to the holders of each Class of the Class A Certificates on
such Distribution Date;
(xii) the aggregate Loan Balance of all Mortgage Loans and the
aggregate Loan Balance of the Mortgage Loans in each Loan Group after
giving effect to any payment of principal on such Distribution Date;
(xiii) the Subordinated Amount and Subordination Deficit for each Loan
Group, if any, remaining after giving effect to all distributions and
transfers on such Distribution Date;
(xiv) based upon information furnished by the Master Servicer such
information as may be required by Section 6049(d)(7)(C) of the Code and the
regulations promulgated thereunder to assist the holders of the Class A
Certificates in computing their market discount;
(xv) the total of any Substitution Adjustment or Loan Purchase Price
amounts included in such distribution with respect to each Certificate
Group;
(xvi) the weighted average Mortgage Rate of the Mortgage Loans with
respect to each Loan Group;
(xvii) such other information as the Certificate Insurer may
reasonably request with respect to delinquent Mortgage Loans; and
(xviii) the largest Loan Balance outstanding.
Certain obligations of the Trustee to provide information to the Class A
Certificateholders and the Certificate Insurer are conditioned upon such
information being received from the Master Servicer.
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 and the Certificate Insurer 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.
S-49
<PAGE>
CREDIT ENHANCEMENT
CERTIFICATE INSURANCE POLICIES
The following information and the information under '--The Certificate
Insurer' herein have been supplied by MBIA Insurance Corporation (the 'Insurer')
for inclusion in this Prospectus Supplement. No representation is made by the
Underwriters, the Seller, the Master Servicer, the Depositor or any of their
affiliates as to the accuracy or completeness of such information. Terms defined
herein are exclusive to this section and '--The Certificate Insurer' herein.
The Insurer, in consideration of the payment of the premium and subject to
the terms of each of the Certificate Insurance Policies (each, a 'Policy'),
thereby unconditionally and irrevocably guarantees to any Owner (as defined
below) that an amount equal to each full and complete Insured Payment will be
received by the Trustee, or its successor, as trustee for the Owners (the
'Trustee') on behalf of the Owners from the Insurer, for distribution by the
Trustee to each Owner of each Owner's proportionate share of the Insured
Payment. The Insurer's obligations under the related Policy with respect to a
particular Insured Payment shall be discharged to the extent funds equal to the
applicable Insured Payment are received by the Trustee, whether or not such
funds are properly applied by the Trustee. Insured Payments shall be made only
at the time set forth in such Policy, and no accelerated Insured Payments shall
be made regardless of any acceleration of the Class A Certificates, unless such
acceleration is at the sole option of the Insurer.
Notwithstanding the foregoing paragraph, the Policies do not cover
shortfalls, if any, attributable to the liability of the Trust Fund, any REMIC
or the Trustee for withholding taxes, if any (including interest and penalties
in respect of any such liability).
The Insurer will pay any Insured Payment that is a Preference Amount on the
Business Day following receipt on a Business Day by the Fiscal Agent (as
described below) of (i) a certified copy of the order requiring the return of a
preference payment, (ii) an opinion of counsel satisfactory to the Insurer that
such order is final and not subject to appeal, (iii) an assignment in such form
as is reasonably required by the Insurer, irrevocably assigning to the Insurer
all rights and claims of the Owner relating to or arising under the Class A
Certificates against the debtor which made such preference payment or otherwise
with respect to such preference payment and (iv) appropriate instruments to
effect the appointment of the Insurer as agent for such Owner in any legal
proceeding related to such preference payment, such instruments being in a form
satisfactory to the Insurer, provided that if such documents are received after
12:00 noon New York City time on such Business Day, they will be deemed to be
received on the following Business Day. Such payments shall be disbursed to the
receiver or trustee in bankruptcy named in the final order of the court
exercising jurisdiction on behalf of the Owner and not to any Owner directly
unless such Owner has returned principal or interest paid on the Class A
Certificates to such receiver or trustee in bankruptcy, in which case such
payment shall be disbursed to such Owner.
The Insurer will pay any other amount payable under each Policy no later
than 12:00 noon, New York City time, on the later of the Distribution Date on
which the related Insured Payment is due or the second Business Day following
receipt in New York, New York on a Business Day by State Street Bank and Trust
Company, N.A., as the Insurer's fiscal agent or any successor fiscal agent
appointed by the Insurer (the 'Fiscal Agent') of a Notice (as described below);
provided that if such Notice is received after 12:00 noon, New York City time,
on such Business Day, it will be deemed to be received on the following Business
Day. If any such Notice received by the Fiscal Agent is not in proper form or is
otherwise insufficient for the purpose of making a claim under either Policy it
shall be deemed not to have been received by the Fiscal Agent for purposes of
this paragraph, and the Insurer or the Insurer's Fiscal Agent, as the case may
be, shall promptly so advise the Trustee and the Trustee may submit an amended
Notice.
Insured Payments due under a Policy unless otherwise stated therein will be
disbursed by the Fiscal Agent to the Trustee on behalf of the Owners by wire
transfer of immediately available funds in the amount of the Insured Payment
less, in respect of Insured Payments related to Preference Amounts, any amount
held by the Trustee for the payment of such Insured Payment and legally
available therefor.
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<PAGE>
The Fiscal Agent is the agent of the Insurer only and the Fiscal Agent
shall in no event be liable to Owners for any acts of the Fiscal Agent or any
failure of the Insurer to deposit, or cause to be deposited, sufficient funds to
make payments due under the Policies.
As used in the Insurance Policies, the following terms shall have the
following meanings:
'Agreement' means the Pooling and Servicing Agreement dated as of December
31, 1996, among the Depositor, the Seller, the Master Servicer, and the Trustee,
without regard to any amendment or supplement thereto unless such amendment or
supplement has been approved in writing by the Insurer.
'Business Day' means any day other than a Saturday, a Sunday or a day on
which the Insurer and banking institutions in New York City or in the city in
which the corporate trust office of the Trustee is located are authorized or
obligated by law or executive order to close.
'Insured Payment' means, with respect to the Related Loan Group and any
Distribution Date, without duplication, (A) the excess, if any, of (i) the sum
of (a) the aggregate amount of interest accrued at the related Pass-Through Rate
during the preceding Accrual Period on the Class A Certificate Principal
Balance of the related Class A Certificates (net of any Prepayment Interest
Shortfall and the interest portion of reductions due to the Relief Act), (b) the
Preference Amount as it relates to interest previously paid on each Class of the
related Class A Certificates prior to such Distribution Date, (c) the portion of
the Carry Forward Amount related to interest with respect to each Class of the
related Class A Certificates (net of any Prepayment Interest Shortfall and the
interest portion of reductions due to the Relief Act) and (d) the then existing
Subordination Deficit for the Related Loan Group, if any, over (ii) Total
Available Funds (net of the Insurance Premium Amount for Related Loan Group)
after taking into account any Principal Distribution Amount to be actually
distributed on such Distribution Date and (y) the cross-collateralization
provisions of the Trust Fund plus (B) an amount equal to the principal portion
of the Preference Amount with respect to the Related Loan Group.
'Notice' means the telephonic or telegraphic notice, promptly confirmed in
writing by telecopy substantially in the form of Exhibit A attached to each
Policy, the original of which is subsequently delivered by registered or
certified mail, from the Trustee specifying the Insured Payment which shall be
due and owing on the applicable Distribution Date.
'Owner' means each Certificateholder (as defined in the Agreement) of any
Class A Certificate who, on the applicable Distribution Date, is entitled under
the terms of the Class A Certificates to payment thereunder.
'Preference Amount' means any amount previously distributed to an Owner on
the Class A Certificates that is recoverable and sought to be recovered as a
voidable preference by a trustee in bankruptcy pursuant to the United States
Bankruptcy Code (11 U.S.C.), as amended from time to time in accordance with a
final nonappealable order of a court having competent jurisdiction.
'Related Loan Group' means the Fixed Rate Group or the Adjustable Rate
Group, as the case may be.
Capitalized terms used in each Policy and not otherwise defined in the
Policy shall have the respective meanings set forth in the Agreement as of the
date of execution of the Policy, without giving effect to any subsequent
amendment or modification to the Agreement unless such amendment or modification
has been approved in writing by the Insurer.
Any notice under each Policy or service of process on the Fiscal Agent may
be made at the address listed below for the Fiscal Agent or such other address
as the Insurer shall specify in writing to the Trustee.
The notice address of the Fiscal Agent is 61 Broadway, 15th Floor, New
York, New York, 10006, Attention: Municipal Registrar and Paying Agency, or such
other address as the Fiscal Agent shall specify in writing to the Trustee.
Each Policy is being issued under and pursuant to and shall be construed
under, the laws of the State of New York, without giving effect to the conflict
of laws principles thereof.
The insurance provided by each Policy is not covered by the
Property/Casualty Insurance Security Fund specified in Article 76 of the New
York Insurance Law.
Each Policy is not cancelable for any reason. The premium on each Policy is
not refundable for any reason including payment, or provision being made for
payment, prior to maturity of the Class A Certificates.
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<PAGE>
THE CERTIFICATE INSURER
The Insurer is the principal operating subsidiary of MBIA Inc., a New York
Stock Exchange listed company. MBIA Inc. is not obligated to pay the debts of or
claims against the Insurer. The Insurer is domiciled in the State of New York
and licensed to do business in and is subject to regulation under the laws of
all 50 states, the District of Columbia, the Commonwealth of Puerto Rico, the
Commonwealth of the Northern Mariana Islands, the Virgin Islands of the United
States and the Territory of Guam. The Insurer has two European branches, one in
the Republic of France and the other in the Kingdom of Spain. New York has laws
prescribing minimum capital requirements, limiting classes and concentrations of
investments and requiring approval of policy rates and forms. State laws also
regulate the amount of both the aggregate and individual risks that may be
insured, the payment of dividends by the Insurer, changes in control and
transactions among affiliates. Additionally, the Insurer is required to maintain
contingency reserves on its liabilities in certain amounts and for certain
periods of time.
The consolidated financial statements of the Insurer, a wholly owned
subsidiary of MBIA Inc., and the Insurer's subsidiaries as of December 31, 1995
and December 31, 1994 and for the three years ended December 31, 1995, prepared
in accordance with generally accepted accounting principles, included in the
Annual Report on Form 10-K of MBIA Inc. for the year ended December 31, 1995 and
the consolidated financial statements of the Insurer and its subsidiaries for
the nine months ended September 30, 1996 and for the periods ending September
30, 1996 and September 30, 1995 included in the Quarterly Report on Form 10-Q of
MBIA Inc. for the period ending September 30, 1996, are hereby incorporated by
reference into this Prospectus Supplement and shall be deemed to be a part
hereof. Any statement contained in a document incorporated by reference herein
shall be modified or superseded for purposes of this Prospectus Supplement to
the extent that a statement contained herein or in any other subsequently filed
document which also is incorporated by reference herein modifies or supersedes
such statement. Any statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus
Supplement.
All financial statements of the Insurer and its subsidiaries included in
documents filed by MBIA Inc. pursuant to Section 13(a), 13(c), 14 or 15(d) of
the Securities Exchange Act of 1934, as amended, subsequent to the date of this
Prospectus Supplement and prior to the termination of the offering of the Class
A Certificates shall be deemed to be incorporated by reference into this
Prospectus Supplement and to be a part hereof from the respective dates of
filing such documents.
The tables below present selected financial information of the Insurer
determined in accordance with statutory accounting practices prescribed or
permitted by insurance regulatory authorities ('SAP') and generally accepted
accounting principles ('GAAP').
<TABLE>
<CAPTION>
SAP
---------------------------------------
DECEMBER 31, 1995 SEPTEMBER 30, 1996
----------------- ------------------
(AUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
Admitted Assets............................................................ $ 3,814 $4,348
Liabilities................................................................ 2,540 2,911
Capital and Surplus........................................................ 1,274 1,437
<CAPTION>
GAAP
---------------------------------------
DECEMBER 31, 1995 SEPTEMBER 30, 1996
----------------- ------------------
(AUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
Assets..................................................................... $ 4,463 $4,861
Liabilities................................................................ 1,937 2,161
Shareholder's Equity....................................................... 2,526 2,700
</TABLE>
Copies of the financial statements of the Insurer incorporated by reference
herein and copies of the Insurer's 1995 year-end audited financial statements
prepared in accordance with statutory accounting practices are available,
without charge, from the Insurer. The address of the Insurer is 113 King Street,
Armonk, New York 10504. The telephone number of the Insurer is (914) 273-4545.
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<PAGE>
The Insurer does not accept any responsibility for the accuracy or
completeness of this Prospectus Supplement or any information or disclosure
contained herein, or omitted herefrom, other than with respect to the accuracy
of the information regarding the Policies and the Insurer set forth under
'Credit Enhancement-- Certificate Insurance Policies' and '--The Certificate
Insurer' herein. Additionally, the Insurer makes no representation regarding the
Class A Certificates or the advisability of investing in the Class A
Certificates.
Moody's rates the claims paying ability of the Insurer 'Aaa.'
S&P rates the claims paying ability of the Insurer 'AAA.'
Fitch Investors Service, L.P. rates the claims paying ability of the
Insurer 'AAA.'
Each rating of the Insurer should be evaluated independently. The ratings
reflect the respective rating agency's current assessment of the
creditworthiness of the Insurer and its ability to pay claims on its policies of
insurance. Any further explanation as to the significance of the above ratings
may be obtained only from the applicable rating agency.
The above ratings are not recommendations to buy, sell or hold the Class A
Certificates and such ratings may be subject to revision or withdrawal at any
time by the rating agencies. Any downward revision or withdrawal of any of the
above ratings may have an adverse effect on the market price of the Class A
Certificates. The Insurer does not guaranty the market price of the Class A
Certificates nor does it guaranty that the ratings on the Class A Certificates
will not be reversed or withdrawn.
OVERCOLLATERALIZATION PROVISIONS
Overcollateralization Resulting from Cash Flow Structure. The Pooling and
Servicing Agreement requires that, on each Distribution Date, Net Monthly Excess
Cashflow with respect to a Loan Group be applied on such Distribution Date as an
accelerated payment of principal on the related Classes of Class A Certificates
then entitled to receive distributions of principal but only to the limited
extent hereafter described. Net Monthly Excess Cashflow equals the excess of (i)
the excess, if any of (x) the interest which is collected on the Mortgage Loans
in such Loan Group prior to the related Determination Date for payments due
during the related Due Period or otherwise remitted in connection with any
Prepayment made during the related Prepayment Period or other interest portion
of any Liquidation Proceeds received during the related Due Period (net of the
Servicing Fee, the Trustee Fee and the Insurance Premium Amount with respect to
such Loan Group) plus the interest portion of any P&I Advances and any
Compensating Interest paid by the Master Servicer with respect to such Due
Period over (y) the sum of the interest which accrues on the related Classes of
Class A Certificates during the related Accrual Period (such difference, the
'Total Monthly Excess Spread' with respect to such Loan Group), over (ii) the
portion of the Total Monthly Excess Cashflow that is used to cover the amounts
described in subparagraph (ii) under 'Description of the
Certificates--Distributions.'
This has the effect of accelerating the amortization of the related Classes
of Class A Certificates then entitled to receive distributions of principal
relative to the amortization of the Mortgage Loans in the related Loan Group. To
the extent that any Net Monthly Excess Cashflow is not so used (and is not
required to satisfy requirements with respect to the other Loan Group), the
Pooling and Servicing Agreement provides that it will be used to reimburse the
Servicer with respect to any amounts owing to it, or paid to the holders of the
Subordinate Certificates.
Pursuant to the Pooling and Servicing Agreement, each Loan Group's Net
Monthly Excess Cashflow will be applied as an accelerated payment of principal
on the Classes of Class A Certificates then entitled to receive distributions of
principal until the Subordinated Amount has increased to the level required.
'Subordinated Amount' means, with respect to each Loan Group and Distribution
Date, the excess, if any, of (x) the aggregate Loan Balances of the Mortgage
Loans in such Loan Group as of the close of business on the last day of the
related Due Period (taking into account all payments of principal, other than
Prepayments, due during the related Due Period and received on or prior to the
related Determination Date or, in connection with Curtailments and Net
Liquidation Proceeds, collected during the related Due Period, together with all
Prepayments received on such Mortgage Loans in such Loan Group during
the related Prepayment Period) over (y) the related Class Certificate
Balance of the Class A Certificates as of such Distribution Date after
taking into account the payment of the Class A Distribution Amount
(except for any Subordination Deficit or Subordination Increase Amount
with respect to such Loan
S-53
<PAGE>
Group on such Distribution Date). With respect to each Loan Group, any amount of
Net Monthly Excess Cashflow actually applied as an accelerated payment of
principal is a 'Subordination Increase Amount.' The required level of the
Subordinated Amount for each Loan Group with respect to a Distribution Date is
the 'Specified Subordinated Amount.' The Pooling and Servicing Agreement
generally provides that the Specified Subordinated Amount may, over time,
decrease or increase, subject to certain floors, caps and triggers.
In the event that the required level of the Specified Subordinated Amount
with respect to a Loan Group is permitted to decrease or 'step down' on a
Distribution Date in the future, the Pooling and Servicing Agreement provides
that a portion of the principal which would otherwise be distributed to the
Class A Certificateholders on such Distribution Date may be distributed to the
holders of the Subordinate Certificates on such Distribution Date. This has the
effect of decelerating the amortization of Class A Certificates relative to the
amortization of the Mortgage Loans and of reducing the related Subordinated
Amount. With respect to any Loan Group and Distribution Date, the excess, if
any, of (x) the Subordinated Amount on such Distribution Date after taking into
account all distributions to be made on such Distribution Date (except for any
distributions of Subordination Reduction Amounts as described in this paragraph)
over (y) the Specified Subordinated Amount is the 'Excess Subordinated Amount'
for such Loan Group and Distribution Date. If, on any Distribution Date, the
Excess Subordinated Amount is, or, after taking into account all other
distributions to be made on such Distribution Date, would be, greater than zero
(i.e., the Subordinated Amount is or would be greater than the related Specified
Subordinated Amount), then any amounts relating to principal which would
otherwise be distributed to the holders of the related Class A Certificates on
such Distribution Date may instead be distributed to the holders of the
Subordinate Certificates (subject to certain other prior applications as
described below under '--Crosscollateralization Provisions') in an amount equal
to the lesser of (x) the Excess Subordinated Amount and (y) the amount available
for distribution on account of principal with respect to the Class A
Certificates relating to the applicable Loan Group on such Distribution Date;
such amount being the 'Subordination Reduction Amount' with respect to the
related Loan Group for such Distribution Date. As a result of the cash flow
structure of the Trust Fund, Subordination Reduction Amounts may result even
prior to the occurrence of any decrease or 'step down' in the Specified
Subordinated Amount. That is because the holders of the Class A Certificates
generally will, except for the provisions relating to the Subordination
Reduction Amount, be entitled to receive 100% of collected principal with
respect to the related Loan Group even though the Class A Class Certificate
Balance, following the accelerated amortization resulting from the application
of the Net Monthly Excess Cashflow, will be less than 100% of the related Loan
Group's aggregate loan balance. Accordingly, in the absence of the provisions
relating to Subordination Reduction Amounts, the Subordinated Amount would
increase above the Specified Subordinated Amount requirements even without the
further application of any Net Monthly Excess Cashflow.
The Pooling and Servicing Agreement provides generally that, on any
Distribution Date, all amounts collected on account of principal on or prior to
the related Determination Date (other than any such amount applied to the
payment of a Subordination Reduction Amount) with respect to payments due on the
Mortgage Loans in a Loan Group during the related Due Period, plus any
Curtailments and Liquidation Proceeds received during the related Due Period and
any Prepayments received during the related Prepayment Period, will be
distributed to the Class A Certificateholders then entitled to receive
distributions of principal on such Distribution Date. If any Mortgage Loan
became a Liquidated Mortgage Loan during such prior Due Period, the Net
Liquidation Proceeds related thereto and allocated to principal may be less than
the principal balance of the related Mortgage Loan; the amount of any such
insufficiency is a 'Realized Loss.' In addition, the Pooling and Servicing
Agreement provides that the Loan Balance of any Mortgage Loan which becomes a
Liquidated Mortgage Loan shall thenceforth equal zero. The Pooling and Servicing
Agreement does not contain any provisions which require that the amount of any
Realized Loss be distributed to the Class A Certificateholders on the
Distribution Date which immediately follows the event of loss; i.e., the Pooling
and Servicing Agreement does not require the current recovery of losses.
However, the occurrence of a Realized Loss will reduce the Subordinated Amount
with respect to the related Loan Group, which, to the extent that such reduction
causes the Subordinated Amount to be less than the Specified Subordinated Amount
applicable to the related Distribution Date, will require the payment of a
Subordination Increase Amount on such Distribution Date (or, if insufficient
funds are available on such Distribution Date, on subsequent Distribution Dates,
until the Subordinated Amount equals the related Specified Subordinated Amount).
The effect of the foregoing is to allocate losses to the holders
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<PAGE>
of the Subordinate Certificates by reducing, or eliminating entirely, payments
of Net Monthly Excess Cashflow and of Subordination Reduction Amounts which such
holders would otherwise receive.
Overcollateralization and the Certificate Insurance Policies. The Pooling
and Servicing Agreement defines a 'Subordination Deficit' with respect to a Loan
Group and Distribution Date to be the amount, if any, by which (x) the aggregate
of the Class Certificate Balances relating to such Loan Group after taking into
account all distributions to be made on such Distribution Date, exceeds (y) the
aggregate Loan Balances of the Mortgage Loans in the related Loan Group as of
the close of business on the last day of the related Due Period (taking into
account all payments of principal, other than Prepayments, due during the
related Due Period and received on or prior to the related Determination Date
or, in connection with Curtailments and Net Liquidation Proceeds, collected
during the related Due Period, together with all Prepayments received on such
Mortgage Loans in such Loan Group during the related Prepayment Period). The
Pooling and Servicing Agreement requires the Trustee to make a claim for
an Insured Payment under the related Certificate Insurance Policy not
later than the third Business Day prior to any Distribution Date as to
which the Trustee has determined that a Subordination Deficit will occur
for the purpose of applying the proceeds of such Insured Payment as a
payment of principal to the holders of the Class A Certificates entitled
to such Insured Payment on such Distribution Date. Each Certificate
Insurance Policy is similar to the overcollateralization provisions
described above insofar as each Certificate Insurance Policy guarantees
ultimate, rather than current, payment of the amounts of any Realized
Losses (to the extent of a Subordination Deficit) to the holders of the
Class A Certificates. Investors in the Class A Certificates should
realize that, under extreme loss or delinquency scenarios applicable to
the Mortgage Loans, they may temporarily receive no distributions of
principal when they would otherwise be entitled thereto under the
principal allocation provisions described herein. Nevertheless, the
exposure to risk of loss of principal of the holders of the Class A
Certificates depends in part on the ability of the Certificate Insurer
to satisfy its obligations under the relevant Certificate Insurance
Policy. In that respect and to the extent that the Certificate Insurer
satisfies such obligations, the holders of the Class A Certificates are
insulated from shortfalls in Available Funds (to the extent such
shortfall results in a Subordination Deficit) that may arise.
CROSSCOLLATERALIZATION PROVISIONS
In addition to the use of Total Monthly Excess Cashflow with respect to a
Loan Group to cover related Subordination Increase Amounts, Available Funds
Shortfalls and Subordination Deficits, such Total Monthly Excess Cashflow will
be available to cover such requirements for the other Loan Group as described
under the caption 'Description of the Certificates--Distributions' herein.
THE POOLING AND SERVICING AGREEMENT
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 such
other representations as are set forth in the Pooling and Servicing Agreement.
Pursuant to the Pooling and Servicing Agreement, upon the discovery by the
Depositor, Seller, the Master Servicer, the Certificate Insurer or the Trustee
that any representations and warranties with respect to the Mortgage Loans were
untrue in any material respect as of the Closing Date with the result that the
interests of the holders of the Certificates or of the Certificate Insurer are
materially and adversely affected, the party discovering such breach is required
to give prompt written notice to the other parties.
Upon the earliest to occur of the Seller's discovery or its receipt of
notice of breach from any of the other parties, the Seller will be required
promptly to cure such breach in all material respects or, on the second Monthly
Remittance Date next succeeding such discovery or receipt of notice, the Seller
shall (i) substitute in lieu of each Mortgage Loan which has given rise to the
requirement for action by the Seller a Qualified Replacement Mortgage Loan (as
such term is defined in the Pooling and Servicing Agreement) and deliver the
Substitution Adjustment to the Trustee on behalf of the Trust Fund on such
Monthly Remittance Date or (ii) purchase such Mortgage Loan from the Trust Fund
at a purchase price equal to the Loan Purchase Price (as defined below) thereof.
Notwithstanding any provision of the Pooling and Servicing Agreement to the
contrary, with respect to
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<PAGE>
any Mortgage Loan which is not in default or as to which no default is imminent,
no such repurchase or substitution will be made unless the Seller obtains for
the Trustee and the Certificate Insurer an opinion of counsel experienced in
federal income tax matters and acceptable to the Certificate Insurer to the
effect that such a repurchase or substitution would not give rise to a
Prohibited Transaction Tax for the Trust Fund or otherwise subject the Trust
Fund to tax and would not jeopardize the status of either the Master REMIC or
the Subsidiary REMIC as a REMIC (a 'REMIC Opinion') addressed to the Trustee and
the Certificate Insurer and acceptable to the Trustee and the Certificate
Insurer. Any Mortgage Loan as to which repurchase or substitution was delayed
pursuant to the Pooling and Servicing Agreement shall be repurchased or
substituted for (subject to compliance with the provisions of the Pooling and
Servicing Agreement) upon the earlier of (a) the occurrence of a default or
imminent default with respect to such Mortgage Loan and (b) receipt by the
Trustee and the Certificate Insurer of a REMIC Opinion. The obligation of the
Seller so to substitute or purchase any Mortgage Loan constitutes the sole
remedy respecting a discovery of any such statement which is untrue in any
material respect available to the holders of the Certificates, the Trustee and
the Certificate Insurer except as provided below.
Notwithstanding the foregoing, pursuant to the Pooling and Servicing
Agreement, the Seller agrees to indemnify the Trust Fund for any breach of a
representation or warranty relating to the legality of the Mortgage Loans
(including, without limitation, the origination of such Mortgage Loans) and the
mortgage loan documents thereto.
'Loan Purchase Price' means the outstanding Loan Balance of the related
Mortgage Loan on the Cut-off Date, less any principal amounts previously
distributed to the holders of the Certificates relating to such Mortgage Loan
(such amount, the 'Loan Balance' of such Mortgage Loan) as of the date of
purchase (assuming that the Master Servicer has already remitted to the Trustee
all amounts in the Collection Account on the related Monthly Remittance Date),
plus one month's interest at the related interest rate on such Mortgage Loan
together with the aggregate amount of all unreimbursed P&I Advances and
Servicing Advances theretofore made with respect to such Mortgage Loan, all P&I
Advances and Servicing Advances which the Master Servicer has theretofore failed
to remit with respect to such Mortgage Loan and all reimbursed P&I Advances to
the extent that the reimbursement is not made from the Mortgagor or from a
Liquidated Loan.
SALE AND ASSIGNMENT OF THE MORTGAGE LOANS
On the Closing Date, the Seller will, pursuant to the Pooling and Servicing
Agreement, sell and assign to the Depositor without recourse (except as
otherwise provided herein) its entire interest in and to the Mortgage Loans,
including the Mortgages on the Mortgaged Properties securing the Mortgage Loans
and the right to receive all payments on, and proceeds with respect to, the
Mortgage Loans after the Cut-off Date. On the Closing Date, simultaneously with
the sale from the Seller to the Depositor, the Depositor will, pursuant to the
Pooling and Servicing Agreement, sell and assign to the Trust Fund, without
recourse, its entire interest in and to the Mortgage Loans, including the
Mortgages on the Mortgaged Properties securing the Mortgage Loans and the right
to receive all payments on, or proceeds with respect to, the Mortgage Loans
after the Cut-Off Date. Each Mortgage Loan will be identified in a schedule
appearing as an exhibit to the Pooling and Servicing Agreement. The Trustee
will, concurrently with the sale and assignment of the Mortgage Loans as
described above, countersign and deliver the Certificates to or upon the order
of the Depositor.
Under the terms of the Pooling and Servicing Agreement, neither the Seller
nor the Depositor shall be required to record assignments of the Mortgages in
favor of the Trustee on the Closing Date. Thirty days following any of (i) the
occurrence and continuation of an Event of Default, (ii) the reduction of the
Master Servicer's short-term, commercial paper rating below P-1 by Moody's or
A-1 by S&P, (iii) the suspension, termination or withdrawal of the Master
Servicer's short-term, commercial paper rating by Moody's or S&P, (iv) the
Certificate Insurer having requested the recordation of the assignments of the
Mortgages, if in its reasonable judgment it deems such action necessary to
protect its interests or (v) the Master Servicer ceasing to be controlled by H&R
Block, Inc., the Depositor will be required to record assignments of Mortgages
in favor of the Trustee unless opinions of counsel satisfactory to the
Certificate Insurer and each Rating Agency are delivered to the Trustee and the
Certificate Insurer to the effect recordation of the assignments is not required
in the relevant jurisdictions to protect the interests of the Trustee in the
Mortgage Loans. All recording of assignments of Mortgages shall be at the
expense of the Master Servicer. Under the Pooling and Servicing Agreement, the
Trustee is appointed attorney-in-fact for
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the Depositor and the Seller with power to prepare, execute and record
assignments of the Mortgages in the event that the Depositor fails to do so on a
timely basis.
The Loan Files (as defined in the Pooling and Servicing Agreement) will be
delivered to the Trustee on the Closing Date. Thereafter the Trustee will review
the Loan Files and if any document required to be included in any Loan File is
found to be defective in any material respect and such defect is not cured
within 30 days following notification thereof to the Master Servicer by the
Trustee, the Seller will be required to repurchase or substitute the related
Mortgage Loan.
The Trustee is authorized to appoint a custodian, which custodian shall not
be an affiliate of the Master Servicer and shall meet certain other criteria set
forth in the Pooling and Servicing Agreement (the 'Custodian'), to maintain
possession of and review the douments with respect to the Mortgage Loans, as the
agent of the Trustee. Any such Custodian will be required to release the Loan
Files to the Master Servicer or to any subservicers in connection with its
servicing activities or for review by licensing authorities. Any such Custodial
Agreement will be on such terms as the Trustee, the Master Servicer and the
Custodian shall agree.
SERVICING AND SUB-SERVICING
The Master Servicer is required to service, either directly or through a
subservicer, the Mortgage Loans in accordance with the Pooling and Servicing
Agreement.
The Master Servicer is required to deposit to the Collection Account,
within one Business Day following receipt, all principal and interest
collections on the Mortgage Loans received after the Cut-Off Date, including any
Prepayments, the proceeds of any liquidation of a Mortgage Loan net of expenses
and unreimbursed P&I Advances ('Net Liquidation Proceeds') and any income from
REO Properties, but net of (i) the Servicing Fee with respect to each Mortgage
Loan and other servicing compensation, (ii) Net Liquidation Proceeds to the
extent that such Net Liquidation Proceeds exceed the sum of (I) the Loan Balance
of the related Mortgage Loan, plus (II) accrued and unpaid interest on such
Mortgage Loan (net of the Servicing Fee) to the date of such liquidation, (iii)
reimbursements for P&I Advances not otherwise reimbursed from Liquidation
Proceeds, and (iv) reimbursement for amounts deposited in the Collection Account
representing payments of principal and/or interest on a Mortgage Loan by a
Mortgagor which are subsequently returned by a depository institution as unpaid.
The Master Servicer may make withdrawals for its own account from the
amounts on deposit in the Collection Account with respect to each Loan Group,
for the following purposes:
(i) to withdraw investment earnings on amounts on deposit in the
Collection Account;
(ii) to withdraw amounts that have been deposited to the Collection
Account in error; and
(iii) to clear and terminate the Collection Account following the
termination of the Trust Fund.
The Master Servicer will remit to the Trustee for deposit in the
Distribution Account the Monthly Remittance Amount not later than the related
Monthly Remittance Date and Loan Purchase Prices and Substitution Adjustments
two Business Days following the related purchase or substitution, as the case
may be.
The Master Servicer may reimburse itself for any P&I Advances paid from the
Master Servicer's own funds, from collections on the Mortgage Loans with respect
to the related Loan Group or from Net Monthly Excess Cashflow. The Master
Servicer is only obligated to make a P&I Advance if it reasonably believes that
such P&I Advance will ultimately be recoverable from the related Mortgage
Loan.The Master Servicer shall give written notice of such determination to the
Trustee and the Certificate Insurer; the Trustee shall promptly furnish a copy
of such notice to the holders of the Certificates; provided, further, that the
Master Servicer shall be entitled to recover any unreimbursed P&I Advances from
the Liquidation Proceeds for the related Mortgage Loans.
The Master Servicer will be required to pay all 'out of pocket' costs and
expenses incurred in the performance of its servicing obligations, including,
but not limited to, (i) expenditures in connection with a foreclosed Mortgage
Loan prior to the liquidation thereof, including, without limitation,
expenditures for real estate property taxes, hazard insurance premiums, property
restoration or preservation ('Preservation Expenses'), (ii) the cost of any
enforcement or judicial proceedings, including foreclosures and (iii) the cost
of
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the management and liquidation of Mortgaged Property acquired in satisfaction of
the related Mortgage. Such costs will constitute 'Servicing Advances.' The
Master Servicer may reimburse itself for a Servicing Advance (x) to the extent
permitted by the Mortgage Loans or, if not theretofore recovered from the
Mortgagor on whose behalf such Servicing Advance was made, from Liquidation
Proceeds realized upon the liquidation of the related Mortgage Loan or (y) from
Net Monthly Excess Cashflow as specified in the Pooling and Servicing Agreement.
Subject to the terms of the Pooling and Servicing Agreement, the Master
Servicer, and in the absence of the exercise thereof by the Master Servicer, the
Certificate Insurer, will have the right and the option, but not the obligation,
to purchase for its own account any Mortgage Loan which becomes delinquent, in
whole or in part, as to four consecutive monthly installments or any Mortgage
Loan as to which enforcement proceedings have been brought by the Master
Servicer. The purchase price for any such Mortgage Loan is equal to the Loan
Purchase Price thereof, which purchase price shall be delivered to the Trustee.
The Master Servicer is required to cause to be liquidated any Mortgage Loan
relating to a Mortgaged Property as to which ownership has been effected in the
name of the Master Servicer or sub-servicer on behalf of the Trust Fund and
which has not been liquidated within 23 months of such effecting of ownership at
such price as the Master Servicer deems necessary to comply with this
requirement, or within such period of time as may, in the opinion of counsel
experienced in federal income tax matters, be permitted under the Code.
If so required by the terms of any Mortgage Loan, the Master Servicer will
be required to cause hazard insurance to be maintained with respect to the
related Mortgaged Property and to advance sums on account of the premiums
therefor if not paid by the Mortgagor if permitted by the terms of such Mortgage
Loan to the extent that such insurance is available at commercially reasonable
rates.
The Master Servicer will be permitted under the Pooling and Servicing
Agreement to enter into sub-servicing agreements for any servicing and
administration of Mortgage Loans with (i) any institution which is a FHLMC or
FNMA approved Seller-Servicer for mortgage loans and has equity of at least
$1,500,000, (ii) any institution which is an affiliate of the Master Servicer;
or (iii) NFI. The Master Servicer has initially entered into a subservicing
agreement with NFI for the servicing and administration of the Mortgage Loans.
The Certificate Insurer will have the right to remove a sub-servicer as and to
the extent provided in the subservicer agreement.
Notwithstanding any sub-servicing agreement, the Master Servicer will not
be relieved of its obligations under the Pooling and Servicing Agreement and the
Master Servicer will 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 shall be entitled to enter into any agreement with a
sub-servicer for indemnification of the Master Servicer by such sub-servicer and
nothing contained in such sub-servicing agreement shall be deemed to limit or
modify the Pooling and Servicing Agreement.
The Master Servicer will be required to deliver to the Trustee, the
Certificate Insurer, and the Rating Agencies: (1) on or before March 31 of each
year, commencing in 1998, an officers' certificate stating, as to each signer
thereof, that (i) a review of the activities of the Master Servicer during such
preceding calendar year and of performance under the Pooling and Servicing
Agreement has been made under such officers' supervision, and (ii) to the best
of such officers' knowledge, based on such review, the Master Servicer has
fulfilled all its obligations under the Pooling and Servicing Agreement for such
year, or, if there has been a default in the fulfillment of all such
obligations, specifying each such default known to such officers and the nature
and status thereof including the steps being taken by the Master Servicer to
remedy such default; and (2) on or before June 30 of any year commencing in
1997, a letter or letters of a firm of independent, nationally recognized
certified public accountants reasonably acceptable to the Certificate Insurer
dated and as of the date of the Master Servicer's fiscal audit stating that such
firm has examined the Master Servicer's overall servicing operations in
accordance with the requirements of the Uniform Single Attestation Program for
Mortgage Bankers, and stating such firm's conclusions relating thereto.
The Master Servicer will be entitled to receive a fee on each Mortgage Loan
for each Due Period (the 'Servicing Fee') equal to one twelfth of the product of
0.50% (the 'Servicing Fee Rate') and the Loan Balance of such Mortgage Loan as
of the beginning of such Due Period or, with respect to the first Due Period,
the principal balance for the Mortgage Loan as of the Cut-off Date. In addition,
the Master Servicer will retain any
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benefit from the investment of funds in the Collection Account and will collect
and retain, as additional servicing compensation, any late fees, penalty
charges, prepayment premiums, bad check fees, extension, modification or
extension fees and other administrative fees or similar charges allowed by
applicable laws with respect to the Mortgage Loans.
The 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 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 with respect to
distributions. 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.
When a borrower prepays a Mortgage Loan in full ('Prepayment') between due
dates, the borrower is required to pay interest on the amount prepaid only to
the date of prepayment and not thereafter. Prepayments by borrowers received
from the day after the prior Determination Date to, and including the
Determination Date in the month of a Distribution Date (the 'Prepayment Period')
will be distributed to holders of the Certificates on such Distribution Date.
Pursuant to the Pooling and Servicing Agreement, to the extent not otherwise
covered by amounts otherwise described in the Pooling and Servicing Agreement,
the Servicing Fee for any month will be reduced by an amount of not more than
one-half of the Servicing Fee with respect to any shortfall in an interest
payment which arises from such Prepayment (a 'Prepayment Interest Shortfall')
sufficient to pass through to holders of the Certificates the full amount of
interest to which they would be entitled in respect of such Mortgage Loan on the
related Distribution Date (such amount is herein referred to as 'Compensating
Interest'). To the extent the Compensating Interest does not cover a Prepayment
Interest Shortfall, such amount (a 'Net Prepayment Interest Shortfall') shall
not, unless covered by distributions discussed in 'Description of the
Certificates--Distributions', be paid to Certificateholders. If shortfalls in
interest as a result of prepayments in any month exceed the Compensating
Interest for such month, the amount of interest available to be distributed to
holders of the Certificates will be reduced by the amount of such excess.
REMOVAL AND RESIGNATION OF MASTER SERVICER
The Certificate Insurer or the holders of the Class A Certificates, with
the consent of the Certificate Insurer, will have the right pursuant to the
Pooling and Servicing Agreement, to remove the Master Servicer upon the
occurrence of: (a) certain acts of bankruptcy or insolvency on the part of the
Master Servicer; (b) certain failures on the part of the Master Servicer to
perform its obligations under the Pooling and Servicing Agreement; (c) the
failure to cure material breaches of the Master Servicer's representations in
the Pooling and Servicing Agreement or (d) the failure of the Seller, so long as
the Seller is the Master Servicer or an affiliate thereof, following the
breach of a represenation or warranty to either (i) substitute a Qualified
Replacement Mortgage Loan and deliver the Substitution Adjustment or (ii)
repurchase such Mortgage Loan, as discussed above under '--Representations and
Warranties of Seller.'
The Pooling and Servicing Agreement also provides that the Certificate
Insurer may remove the Master Servicer upon the occurrence of certain additional
events.
The Master Servicer is not permitted to resign from the obligations and
duties imposed on it under the Pooling and Servicing Agreement except upon
determination that its duties thereunder are no longer permissible under
applicable law or are in material conflict by reason of applicable law with any
other activities carried on by it, the other activities of the Master Servicer
so causing such conflict being of a type and nature carried on by the Master
Servicer on the date of the Pooling and Servicing Agreement. Any such
determination permitting the resignation of the Master Servicer is required to
be evidenced by an opinion of counsel to such effect which shall be delivered to
the Trustee and the Certificate Insurer.
Upon removal or resignation of the Master Servicer, the Trustee (x) may
solicit bids for a successor servicer and (y) pending the appointment of a
successor Master Servicer as a result of soliciting such bids, shall serve as
Master Servicer. The Trustee, it if is unable to obtain a qualifying bid and is
prevented by law from acting as Master Servicer, will be required to appoint, or
petition a court of competent jurisdiction to appoint, any housing
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and home finance institution, bank or mortgage servicing institution designated
as an approved seller-servicer by the Federal Home Loan Mortgage Corporation
('FHLMC') or the Federal National Mortgage Association ('FNMA') having equity of
not less than $1,500,000 and acceptable to the Certificate Insurer and the
holders of the Certificates (provided that if the Certificate Insurer and such
holders cannot agree as to the acceptability of such successor Master Servicer,
the decision of the Certificate Insurer shall control) as the successor to the
Master Servicer in the assumption of all or any part of the responsibilities,
duties or liabilities of the Master Servicer.
No removal or resignation of the Master Servicer will become effective
until the Trustee or a successor servicer shall have assumed the Master
Servicer's responsibilities and obligations in accordance with the Pooling and
Servicing Agreement.
AMENDMENT
The Pooling and Servicing Agreement may be amended from time to time by the
Depositor, the Seller, the Master Servicer and the Trustee with the consent of
the Certificate Insurer and without the consent of the holders of the
Certificates, 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 holder
of the Certificates. The Pooling and Servicing Agreement may also be amended by
the Depositor, the Seller, the Master Servicer and the Trustee, with the consent
of the holders of Certificates evidencing not less than a majority of the
aggregate Class Certificate Balance of the 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 or the terms of the Certificate Insurance Policies; 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, the Seller and the Trustee, with the
consent of the Certificate Insurer and without consent of the holders of the
Certificates, 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 REMIC, under the Code or avoid, or minimize the risk of, the imposition of
any tax on the Trust Fund under the Code that would be a claim against the Trust
Fund's assets, or (ii) prevent the Trust Fund from entering into any 'prohibited
transaction' as defined in the Code.
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 Fund to be disqualified as a REMIC, or subject the Trust to
'prohibited transaction' or 'prohibited contribution' taxes.
Class A Certificates held by either the 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 holders of the Certificates of record as of the most
recent Record Date. Upon written request by three or more holders of the Class A
Certificates who in the aggregate hold Certificates that evidence not less than
25% of the aggregate Class Certificate Balance of the Class A Certificates and
such request is accompanied by a copy of the communication that such holders
propose to transmit, the Trustee or the Certificate Registrar, at its
discretion, will either afford such holders access during business hours to the
current list of holders of the Class A Certificates for purposes of
communicating with other
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holders of the Class A Certificates with respect to their rights under the
Pooling and Servicing Agreement or the Trustee will disseminate such
communication to all holders of the Certificates.
The Pooling and Servicing Agreement will not provide for the holding of any
annual or other meetings of holders of the Certificates.
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 last Mortgage Loan remaining in the Trust Fund 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 Class R
Optionholder or the Master Servicer from the Trust Fund, or the sale pursuant to
an auction conducted by the Trustee, of all remaining Mortgage Loans and all
property acquired in respect of any Mortgage Loan remaining in the Trust Fund.
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 holder of a Certificate by the Trustee.
At its option, the Class R Optionholder or the Master Servicer may purchase
on any Distribution Date on which such a purchase is permitted as described
below, all (but not fewer than all) remaining Mortgage Loans, in whole only, and
other property acquired by foreclosure, deed in lieu of foreclosure, or
otherwise then constituting the Trust Fund on terms agreed upon between the
Certificate Insurer and such Class R Optionholder or the Master Servicer, as
applicable, but in no event less than at a price equal to the greater of (i) the
sum of 100% of the aggregate Loan Balance of the related Mortgage Loans as of
the day of purchase and any Reimbursement Amounts not otherwise paid to the
Certificate Insurer minus amounts remitted from the Collection Account to the
Distribution Account representing collections of principal on the Mortgage Loans
during the current Due Period, plus one month's interest on such amount computed
at the weighted average Mortgage Rate, plus all accrued and unpaid Servicing
Fees plus the aggregate amount of any unreimbursed P&I Advances and Servicing
Advances plus P&I Advances which the Master Servicer has theretofore failed to
remit and (ii) the aggregate Class Certificate Balances of the Class A
Certificates on such date of purchase, one month's interest at the Pass-Through
Rate for each of the outstanding Class A Certificates on the date of purchase
and any Reimbursement Amounts not otherwise paid to the Certificate Insurer. The
right of the Class R Optionholder 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 aggregate Loan Balance of the Mortgage Loans has declined
to less than 10% (the 'Optional Termination Date') for the Class R Optionholder
or 5% for the Master Servicer, respectively, of the sum of the Original Loan
Group Balances. The termination of the Trust Fund is required to be effected in
a manner consistent with applicable federal income tax regulations and its
status as a REMIC.
In addition to the foregoing, following a final determination by the
Internal Revenue Service or by a court of competent jurisdiction, in either case
from which no appeal is taken within the permitted time for such appeal, or if
any appeal is taken, following a final determination of such appeal from which
no further appeal can be taken, to the effect that either the Master REMIC or
the Subsidiary REMIC does not and will no longer qualify as a 'REMIC' pursuant
to Section 860D of the Code (the 'Final Determination'), at any time on or after
the date which is 30 calendar days following such Final Determination the
Certificate Insurer or the holders of a majority in Percentage Interests
represented by the Class A Certificates then outstanding with the consent of the
Certificate Insurer may direct the Trustee on behalf of the Trust to adopt a
plan of complete liquidation, as contemplated by Section 860F(a)(4) of the Code.
TERMINATION AUCTION
The Pooling and Servicing Agreement provides that within 90 days following
the Optional Termination Date, the Trustee shall solicit bids for the purchase
of the Mortgage Loans remaining in the Trust Fund. In the event that
satisfactory bids are received as described in the Pooling and Servicing
Agreement, the net sales proceeds will be distributed to holders of Certificates
in the same order of priority as collections received in
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respect of the Mortgage Loans. If satisfactory bids are not received, the
Trustee shall decline to sell the Mortgage Loans and shall not be under any
obligation to solicit any further bids or otherwise negotiate any further sale
of the Mortgage Loans. Under the Pooling and Servicing Agreement, a satisfactory
bid is one in which the purchase price of the Mortgage Loans then outstanding is
at least equal to the greater of (i) the sum of 100% of the aggregate Loan
Balance of the related Mortgage Loans as of the day of purchase and any
Reimbursement Amounts not otherwise paid to the Certificate Insurer minus
amounts remitted from the Collection Account to the Distribution Account
representing collections of principal on the Mortgage Loans during the current
Due Period, plus one month's interest on such amount computed at the weighted
average Mortgage Rate, plus all accrued and unpaid Servicing Fees plus the
aggregate amount of any unreimbursed P&I Advances and Servicing Advances plus
P&I Advances which the Master Servicer has theretofore failed to remit and (ii)
the aggregate Class Certificate Balances of the Class A Certificates on such
date of purchase, one month's interest at the Pass-Through Rate for each of the
outstanding Class A Certificates on the date of purchase and any Reimbursement
Amounts not otherwise paid to the Certificate Insurer. Such a bid must be made
in accordance with auction procedures set forth in the Pooling and Servicing
Agreement, which include a requirement that the Trustee receive good faith bids
for the Mortgage Loans by at least two prospective purchasers (at least one of
whom is not the Seller or an affiliate thereof) that are considered by the
Trustee, in its sole discretion, to be (i) competitive participants in the
market for like mortgage loans and (ii) willing and able purchasers of the
Mortgage Loans. Any sale and consequent termination of the Trust Fund pursuant
to a Termination Auction must constitute a 'qualified liquidation' of the Trust
Fund under Section 860F of the Code, including the requirement that the
qualified liquidation takes place over a period not to exceed 90 days.
THE TRUSTEE
Bankers Trust Company of California, N.A., a national banking association
organized under the laws of the United States with its principal place of
business in the State of California, 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 and 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 Master Servicer, the
Certificate Insurer and holders of the Certificates and shall resign in the
manner and with the effect specified in the Pooling and Servicing Agreement.
The Trustee may be removed upon the occurrence of any one of the following
events (whatever the reason for such event and whether it shall be voluntary or
involuntary or be effected by operation of law or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body) on the part of the Trustee: (1) failure to
make distributions of available amounts; (2) certain breaches of covenants and
representations by the Trustee; (3) certain acts of bankruptcy or insolvency on
the part of the Trustee; and (4) failure to meet the standards of Trustee
eligibility as set forth in the Pooling and Servicing Agreement.
If any such event occurs and is continuing, then and in every such case (i)
the Certficate Insurer or (ii) with the prior written consent of the Certificate
Insurer (which is required not to be unreasonably withheld) (x) the Master
Servicer or (y) the holders of a majority of the percentage interests
represented by the Class A Certificates or, if there are no Class A Certificates
then outstanding, by a majority of the percentage interests represented by the
Class X-1, Class X-2 and Class R Certificates, may appoint a successor trustee.
The Trustee, or any successor trustee or trustees, may resign at any time
by giving written notice to the Master Servicer and the Certificate Insurer.
Upon receiving notice of resignation, the Master Servicer is required to
promptly appoint a successor trustee or trustees, with the consent of the
Certificate Insurer, 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
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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.
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.
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.
FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes, the Trust Fund will include two segregated
asset pools (the 'Master REMIC' and the 'Subsidiary REMIC'), with respect to
which elections will be made to treat each as a separate REMIC. The Class A
Certificates and the Class X Certificates will constitute the regular interests
in the Master REMIC. The Class R Certificates will constitute the sole class of
'residual interest' in the Master REMIC and the sole class of 'residual
interest' in the Subsidiary REMIC.
The Class A Certificates generally will be treated as debt instruments
issued by the REMIC for federal income tax purposes. Income on the Class A
Certificates must be reported under an accrual method of accounting.
The Classes of Class A Certificates, depending on their respective issue
prices (as described in the Prospectus under '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 % 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 '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 accruals on such
Certificates.
A reasonable application of the principles of the OID Regulations to the
Class A-4 Certificates generally would be to report all income with respect to
such Certificates as original issue discount for each period, computing such
original issue discount (i) by assuming that the value of One-Month LIBOR will
remain constant for purposes of determining the original yield to maturity of
such Class of Certificates and projecting future distributions on such Class A-4
Certificates, thereby treating such Class A-4 Certificates as fixed rate
instruments to which the original issue discount computation rules described in
the Prospectus can be applied, and (ii) by accounting for any positive or
negative variation in the actual value of the applicable index in any period
from its assumed value as a current adjustment to original issue discount with
respect to such period.
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 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.
S-63
<PAGE>
If the holders of any Class A 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 'Federal Income Tax Consequences' in the
Prospectus, the Class A 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 Class A Certificates will represent qualifying
assets under Section 860G(a)(3) if acquired by a REMIC within the prescribed
time periods of the Code.
BACKUP WITHHOLDING
Certain holders of the Certificate may be subject to backup withholding at
the rate of 31% with respect to interest paid on the Class A Certificates if the
holders of the Certificate, upon issuance, fail to supply the Trustee or their
broker with their taxpayer identification number, furnish an incorrect taxpayer
identification number, fail to report interest, dividends, or other 'reportable
payments' (as defined in the Code) properly, or, under certain circumstances,
fail to provide the Trustee or their broker with a certified statement, under
penalty of perjury, that they are not subject to backup withholding.
The Trustee will be required to report annually to the IRS, and to each
holders of the Certificates of record, the amount of interest paid (and OID
accrued, if any) on the Certificates (and the amount of interest withheld for
Federal income taxes, if any) for each calendar year, except as to exempt
holders (generally, holders that are corporations, certain tax-exempt
organizations or nonresident aliens who provide certification as to their status
as nonresidents). As long as the only holder of the 'Class A Certificates' of
record is Cede, as nominee for DTC, holders of the Certificates and the IRS will
receive tax and other information including the amount of interest paid on such
Certificates owned from Participants and Indirect Participants rather than from
the Trustee. (The Trustee, however, will respond to requests for necessary
information to enable Participants, Indirect Participants and certain other
persons to complete their reports.) Each non-exempt holder of the Certificates
will be required to provide, under penalty of perjury, a certificate on IRS Form
W-9 containing his or her name, address, correct Federal taxpayer identification
number and a statement that he or she is not subject to backup withholding.
Should a nonexempt holder of the Certificates fail to provide the required
certification, the Participants or Indirect Participants (or the Paying Agent)
will be required to withhold 31% of the interest (and principal) otherwise
payable to the holder, and remit the withheld amount to the IRS as a credit
against the holder's federal income tax liability.
Such amounts will be deemed distributed to the affected holders of the
Certificates for all purposes of the Certificates, the Pooling and Servicing
Agreement and the Certificate Insurance Policies.
FEDERAL INCOME TAX CONSEQUENCES TO FOREIGN INVESTORS
The following information describes the United States federal income tax
treatment of holders that are not United States Persons ('Foreign Investors').
The term 'Foreign Investor' means any person other than (i) a citizen or
resident of the United States, (ii) a corporation, partnership or other entity
organized in or under the laws of the United States or any state or political
subdivision thereof, (iii) an estate the income of which is includible in gross
income for United States federal income tax purposes, regardless of its source
or (iv) a trust if a court within the United States is able to exercise primary
supervision over the administration of the trust and one or more United States
trustees have authority to control all substantial decisions of the trust.
The Code and Treasury regulations generally subject interest paid to a
Foreign Investor to a withholding tax at a rate of 30% (unless such rate were
changed by an applicable treaty). The withholding tax, however, is eliminated
with respect to certain 'portfolio debt investments' issued to Foreign
Investors. Portfolio debt investments include debt instruments issued in
registered form for which the United States payor receives a statement that the
beneficial owner of the instrument is a Foreign Investor. The Class A
Certificates will be issued in registered form, therefore if the information
required by the Code is furnished (as described below) and no other exceptions
to the withholding tax exemption are applicable, no withholding tax will apply
to the Certificates.
S-64
<PAGE>
For the Class A Certificates to constitute portfolio debt investments
exempt from the United States withholding tax, the withholding agent must
receive from the holder of a Certificate an executed IRS Form W-8 signed under
penalty of perjury by the holder of a Certificate stating that the holder of the
Certificate is a Foreign Investor and providing such holder's name and address.
The statement must be received by the withholding agent in the calendar year in
which the interest payment is made, or in either of the two preceding calendar
years.
A holder of a Certificate that is a nonresident alien or foreign
corporation will not be subject to United States federal income tax on gain
realized on the sale, exchange, or redemption of such Class A Certificate,
provided that (i) such gain is not effectively connected with a trade or
business carried on by the holder of a Certificate in the United States, (ii) in
the case of a holder of a Certificate that is an individual, such holder is not
present in the United States for 183 days or more during the taxable year in
which such sale, exchange or redemption occurs and (iii) in the case of gain
representing accrued interest, the conditions described in the immediately
preceding paragraph are satisfied.
STATE TAXES
The Depositor makes no representations regarding the tax consequences of
purchase, ownership or disposition of the Class A Certificates under the tax
laws of any state. Investors considering an investment in the Class A
Certificates should consult their own tax advisors regarding such tax
consequences.
All investors should consult their own tax advisors regarding the federal,
state, local or foreign income tax consequences of the purchase, ownership and
disposition of the Class A Certificates.
S-65
<PAGE>
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 Class A Certificates should consider, among
other factors, the extreme 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 Morgan Stanley & Co.,
Incorporated an administrative exemption (Prohibited Transaction Exemption
90-24, Exemption Application No. D-8019, 55 Fed. Reg. 20548 (1990)) (the
'Exemption') from certain of the prohibited transaction rules of ERISA and the
related excise tax provisions of Section 4975 of the Code with respect to the
initial purchase, the holding and the subsequent resale by Plans of certificates
in pass-through trusts that consist of certain receivables, loans and other
obligations that meet the conditions and requirements of the Exemption. The
Exemption applies to mortgage loans such as the Mortgage Loans in the Trust
Fund.
For a general description of the Exemption and the conditions that must be
satisfied for the Exemption to apply, see 'ERISA Considerations' in the
Prospectus.
It is expected that the Exemption will apply to the acquisition and holding
by Plans of the 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.
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 Class
A Certificates. Moreover, each Plan fiduciary should determine whether under the
general fiduciary standards of investment prudence and diversification, an
investment in any of the Class A Certificates is appropriate for the Plan,
taking into account the overall investment policy of the Plan and the
composition of the Plan's investment portfolio.
LEGAL INVESTMENT CONSIDERATIONS
Although upon their initial issuance all Classes of Class A Certificates
are expected to be rated AAA by S&P and Aaa by Moody's, no Class of the Class A
Certificates will constitute 'mortgage related securities' for purposes of
SMMEA.
S-66
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting agreement
with the Depositor and the Seller (the 'Underwriting Agreement') the
Underwriters have severally agreed to purchase the respective aggregate
principal amount of each Class of Class A Certificates, in each case as set
forth opposite its name below:
<TABLE>
<CAPTION>
CLASS A-1 CLASS A-2 CLASS A-3 CLASS A-4
UNDERWITER CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES
- --------------------------------------------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Morgan Stanley & Co. Incorporated.............................. $ $ $ $
Salomon Brothers Inc........................................... $ $ $ $
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters to pay for and accept delivery of the Class A Certificates are
subject to the approval of certain legal matters by their counsel and to certain
other conditions. The Underwriters are obligated to take and pay for all of the
Class A Certificates to be purchased by them if any are taken.
The Underwriters initially propose to offer all or part of the Class A
Certificates directly to the public at the public offering prices for each
series set forth on the cover page of this Propsectus Supplement and may offer a
portion of the Class A Certificates to dealers at a price which represents a
concession not in excess of the amounts set forth below for the respective Class
of the Class A Certificates. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of the amounts set forth below for the
respective Class of the Class A Certificates for certain dealers. After the
intial public offering, the public offering prices and such concessions may from
time to time be varied by the Underwriters.
<TABLE>
<CAPTION>
CONCESSION TO REALLOWANCE
DEALERS CONCESSION
------------- -----------
<S> <C> <C>
Class A-1...............................................
Class A-2...............................................
Class A-3...............................................
Class A-4...............................................
</TABLE>
Block Financial Corporation has agreed to indemnify the Underwriters
against certain liabilities including liabilities under the Securities Act of
1933, as amended.
The Underwriters intend to make a secondary market in the Class A
Certificates, but neither has any obligation to do so. There can be no assurance
that a secondary market for the Class A Certificates will develop or, if it does
develop, that it will continue or that it will provide holders of the Class A
Certificates with a sufficient level of liquidity of, or trading markets for,
the Class A Certificates.
USE OF PROCEEDS
The Depositor will apply the net proceeds of the sale of the Class A
Certificates to purchase the Mortgage Loans.
REPORT OF EXPERTS
The consolidated financial statements of MBIA Insurance Corporation as of
December 31, 1995 and 1994 and for the three years ended December 31, 1995
incorporated by reference into this Prospectus Supplement have been audited by
Coopers & Lybrand L.L.P., independent accountants, as set forth in their report
thereon incorporated by reference herein in reliance upon the authority of such
firm as experts in accounting and auditing.
LEGAL MATTERS
The validity of the Certificates will be passed upon for the Depositor by
Morrison & Hecker L.L.P., Kansas City, Missouri. Brown & Wood LLP will pass upon
certain legal matters, including certain federal income tax consequences with
respect thereto, on behalf of the Underwriters.
S-67
<PAGE>
RATINGS
It is a condition to the issuance of the Class A Certificates that they be
rated AAA by S&P and Aaa by Moody's.
The ratings assigned by Moody's 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. Moody'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. Moody's ratings on such certificates do
not, however, constitute a statement regarding frequency of payments of the
mortgage loans.
The ratings assigned by S&P 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&P'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&P'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 (i) the possibility that,
as a result of principal prepayments, Certificateholders may receive a lower
than anticipated yield or (ii) the ability of the Trust Fund to pay any Basis
Risk Carryover Amount.
The security ratings assigned to the Class A 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 Class A 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 Class A
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 Class A
Certificates could be lower than the respective ratings assigned by the Rating
Agencies.
S-68
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or certification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED JANUARY 21, 1997
PROSPECTUS
BLOCK MORTGAGE FINANCE, INC.
DEPOSITOR
ASSET BACKED CERTIFICATES
(ISSUABLE IN SERIES)
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'); AND/OR (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 TOGETHER WITH THE SINGLE
FAMILY LOANS, THE 'PRIMARY ASSETS'), (II) MONIES DUE OR RECEIVED ON
THE PRIMARY ASSETS AFTER THE RELATED CUT-OFF DATE TO THE EXTENT
PROVIDED IN THE RELATED PROSPECTUS SUPPLEMENT, 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 TWENTY-FIVE
PERCENT (25%) OF THE AGGREGATE PRINCIPAL AMOUNT OF SUCH
SERIES OF CERTIFICATES. THE PRIMARY ASSETS WILL BE
ACQUIRED BY BLOCK MORTGAGE FINANCE, INC. (THE
'DEPOSITOR') FROM COMPANION MORTGAGE CORPORATION
(THE 'SELLER') AND/OR OTHER INSTITUTIONS AS SET
FORTH IN THE RELATED PROSPECTUS SUPPLEMENT 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 WILL BE ISSUABLE IN ONE OR MORE CLASSES (EACH, A
'CLASS'), EACH OF WHICH WILL 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.
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 OR THE RELATED
PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
PROSPECTIVE INVESTORS SHOULD CONSIDER THE RISK FACTORS SET FORTH UNDER 'RISK
FACTORS' COMMENCING ON PAGE 12 HEREIN AND IN THE RELATED PROSPECTUS SUPPLEMENT.
Prospective investors should refer to the 'Index of Definitions' on page 89
herein for the location of the definitions of capitalized terms that appear in
this Prospectus.
(Continued on following page)
January , 1997
<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
'Plan 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 '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.gov.
REPORTS TO HOLDERS
Periodic reports in such frequency as set forth in the related Prospectus
Supplement 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 for the listing of the types of
information that will be included in such report. 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 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.
2
<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 Definitions included in this
Prospectus on page 89 hereof sets forth the pages on which the definitions of
capitalized terms appear.
<TABLE>
<S> <C>
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 and/or other
institutions as set forth in the related Prospectus Supplement.
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 or received 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
Supplement. A Class of Certificates of a Series entitled to payments of
interest may receive interest at a specified rate (a 'Pass-Through 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
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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....................... 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 Pass-Through Rate for such Class specified in the related
Prospectus Supplement. Interest accrued on each Class of Certificates at
the applicable Pass-Through 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 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
Pass-Through 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 or advanced 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
individual Certificate of a Class of Certificates will represent a
percentage interest (a 'Percentage Interest') in the related Class
determined by dividing the original principal balance (or original
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Notional Principal Amount, in the case of Certificates entitled to
interest only and assigned a Notional Principal Amount) represented by
such individual Certificate by the original aggregate principal balance of
all Certificates 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.
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 ('Book-
Entry 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 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 and in the Prospectus Supplement 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 Single Family Loans
and/or Contracts, 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. All of the Primary Assets
will have been purchased by the Depositor from the Seller and/or from
other institutions as set forth in the related Prospectus Supplement.
A. Single Family Loans............. Single Family Loans will be secured by first, second or more junior liens
on residential properties. 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 may include (i) closed-end home equity
loans ('Home Equity Loans') and/or (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.
B. Contracts....................... Contracts will consist of first lien or 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. Terms of the Primary Assets..... The payment terms of the Primary Assets to be included in a Trust will be
described in the related Prospectus Supplement and may include any
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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 (the 'Mortgage
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 Primary
Assets may provide for the payment of interest at a rate lower than
the specified Mortgage 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 Primary Asset 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 Primary Asset.
(c) Monthly payments of principal and interest on the Primary Assets (the
'Monthly Payments') may be fixed for the life of the loan, may
increase over a specified period of time or may change from period to
period. Primary Assets 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 Primary Asset or may decline over time,
and may be prohibited for the life of the Primary Asset or for
certain periods ('lockout periods'). Certain Primary Assets 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 Primary Assets may permit
prepayments without payment of a fee unless the prepayment occurs
during specified time periods. The Primary Assets may include
'due-on-sale' clauses which permit the mortgagee to demand payment of
the entire Primary Asset in connection with the sale or certain
transfers of the related Mortgaged Property. Other Primary Assets may
be assumable by persons meeting the then applicable underwriting
standards for such Primary Asset.
(e) The real property constituting security for repayment of a Primary
Asset (the 'Mortgaged Property') 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. The Primary Assets will be
required to be covered by standard hazard insurance policies insuring
against losses due to fire and various other causes as discussed
herein and, to the extent not covered herein, in the related
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Prospectus Supplement. The Primary Assets 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 Primary Assets initially
deposited into the related Trust including, without limitation, the
aggregate original principal balance of the Primary Assets initially
deposited into the related Trust, the respective percentages of such
Primary Assets which are secured by first mortgages, second mortgages and
more junior mortgages, the minimum and maximum outstanding principal
balances of such Primary Assets, the Mortgage Rate (fixed or adjustable)
together with, with respect to such adjustable rate Primary Assets
initially deposited into the related Trust, the index upon which the
interest rate is based, the weighted average original term to maturity,
the weighted average remaining term to maturity, the 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 Primary Assets to be included in the
related Trust, in which case the final information, to the extent of any
variances, will be contained in the Form 8-K referred to below. Unless so
specified in the related Prospectus Supplement, no Form 8-K will be filed
with respect to additional Primary Assets acquired by a Trust with funds
from a Prefunding Account or similar account. 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
Commission within fifteen days after the related Closing Date.
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 will be disclosed 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 six months, shall be used in the manner set
forth in related Prospectus Supplement, including being 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 twenty-five percent
(25%) of the aggregate principal amount of such Series of Certificates.
Optional Termination................. The Master Servicer, 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 Pooling and Servicing
Agreement--Termination; Retirement of the Certificates' in the related
Prospectus Supplement.
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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.
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
for Classes receiving disproportionate allocations of principal and
interest based upon an assumed rate or range of prepayment assumptions on
the related Primary Assets. 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 investment. See
'Certain Yield and Prepayment Considerations' herein and in the related
Prospectus Supplement.
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 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
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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
Pass-Through 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............................. If so specified in the related Prospectus Supplement, 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 Primary Asset. 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 Primary Assets relating to any
Series of Certificates, which shall be limited in scope, covering defaults
on the related Primary Assets in an amount equal to a specified percentage
of the aggregate principal balance of all Primary Assets included in the
Trust.
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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 other Classes of 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.
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 each case in respect of (A) interest
on the Primary Assets due during the related Due Period but uncollected as
of the related Determination Date (net of the Servicing Fee) and/or (B)
principal on the Primary Assets scheduled to be paid during the related
Due Period but uncollected as of the related Determination Date, other
than a balloon payment. See 'The Trusts-- 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 offered pursuant to this
Prospectus and the related Prospectus Supplement 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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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 Pass-Through Securities or Stripped Securities. The
related Prospectus Supplement will specify whether a REMIC election will
be made.
See 'Federal Income Tax Consequences' herein and in the related Prospectus
Supplement.
Legal Investment..................... Unless otherwise specified in the related Prospectus Supplement, no Class
of Certificates will constitute 'mortgage related securities' for purposes
of the Secondary Mortgage Market Enhancement Act of 1984 ('SMMEA')
because, among other things, the related Trust will include Primary Assets
that are secured by second mortgages. Investors should consult their own
legal advisors in determining whether and to what extent a Class of
Certificates constitutes legal investments for such investors. See 'Legal
Investment Matters' herein.
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 the following material risks in connection with
the purchase of Certificates:
LIMITED LIQUIDITY. There will be no market for the Certificates of any
Series prior to the issuance thereof, and there is no assurance that a secondary
market for any of the Certificates will develop or, if one does develop, that it
will provide Certificateholders with liquidity of investment or that it will
continue for the life of such Certificates.
LIMITED SOURCE OF PAYMENTS, LIMITED OBLIGATIONS OF SELLER, DEPOSITOR OR
MASTER SERVICER. 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, Certificateholders of 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 has a repurchase obligation as a
result of a breach of a representation or warranty, 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.
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, repurchases due to defective documentation and breaches of
representations and warranties or early termination of the Trust. 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 Primary Assets, which may fluctuate
significantly from time to time. Generally, mortgage loans with rates which are
higher, and especially if they are significantly higher, than prevailing
mortgage market interest rates will prepay faster than mortgage loans which have
rates set closer to the then prevailing mortgage market interest rates.
Therefore, in a declining interest rate environment, Primary Assets with higher
Mortgage Rates may prepay faster than anticipated. 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 a 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.
LOWER CREDIT QUALITY PRIMARY ASSETS. Certain of the Primary Assets
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 Rate on Primary
Assets 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 of borrowers is likely to be different
(i.e., greater likelihood of late payments or defaults, less likelihood of
prepayments) 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. See 'Description of the Primary Assets'
herein and 'Description of the Mortgage Pool' in the related Prospectus
Supplement.
NATURE OF SECURITY. Certain of the Primary Assets 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
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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 Primary Assets 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 Primary Asset. 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, and third to satisfaction of all
principal, interest, prepayment or acceleration penalties, if any, and any other
sums due and owing to the holder of the Senior Lien. The claims of the holder of
the Senior Lien will be satisfied in full out of proceeds of the liquidation of
the Primary Asset, if such proceeds are sufficient, before the related Trust, as
holder of the junior Mortgage, receives any payments in respect of such Primary
Asset. If the Master Servicer were to foreclose on any Primary Asset which is a
junior mortgage loan, it would do so subject to any related Senior Lien. The
debt related to such Primary Asset would not be paid in full at such sale unless
a bidder at the foreclosure sale of such Primary Asset bids an amount sufficient
to pay off all sums due under such Primary Asset and the Senior Lien or
purchases the Mortgaged Property subject to the Senior Lien. If such 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 Primary Asset 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 Primary Assets are subject and
subordinate to any Senior Liens affecting the related Mortgaged Property.
In addition to the foregoing, certain of the Primary Assets underlying the
Certificates of a Series may have Loan-to-Value Ratios or Combined Loan-to-Value
Ratios in excess of 100%. As a result, the Mortgaged Property may not provide
adequate security for the related Primary Asset. In the event the Mortgaged
Property fails to provide adequate security for the related Primary Asset, the
Certificateholders of the related Trust could, absent credit enhancement
features, experience a loss.
BALLOON PAYMENTS. Certain of the Primary Assets underlying a Series of
Certificates may provide for the payment of the unamortized principal balance of
the Primary Asset in a single payment at the maturity of the Primary Asset 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 the Primary Asset upon maturity frequently depends
upon, among other things, the Mortgagor's ability to refinance the Primary
Asset, 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 Primary Asset. 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.
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
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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 additional 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. Although such additional
Primary Assets must satisfy the characteristics described in the related
Prospectus Supplement, such Primary Assets may have certain different
characteristics, including, without limitation, a more recent origination date
than the Primary Assets originally transferred to the Trust or a lesser credit
quality. As a result, the addition of such additional Primary Assets pursuant to
the Prefunding Account may adversely affect the performance of the related
Certificates.
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.
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 Pass-Through Rates
that are variable rates based on different indexes and which may adjust at
different periods. Consequently, the weighted average rate on the Primary Assets
may not equal the weighted average of the Pass-Through Rates on the
Certificates. The difference between the interest rates on the Primary Assets
and the Pass-Through Rates may limit the Pass-Through Rates and the amount paid
to Certificateholders accordingly.
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
Primary Asset (a 'Mortgagor'), it is possible that the holders of the related
Certificates could experience a loss with respect to such Mortgagor's Primary
Asset. 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 Primary Asset, thus delaying or reducing the amount
received by the holders of the related Certificates with respect to such Primary
Asset. Moreover, if a bankruptcy court prevents or avoids the transfer of the
related Mortgaged Property to the related Trust, any remaining balance on such
Primary Asset 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 Primary Asset. If the residential real estate market
should experience an overall decline in property values such that the
outstanding balances of the Primary Assets, 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 Primary Assets
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 the related
Prospectus Supplement for
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further information regarding the geographic concentration of the Primary Assets
underlying the Certificates of any Series.
DELAYS IN LIQUIDATING DEFAULTED PRIMARY ASSETS. Even assuming that the
Mortgaged Properties provide adequate security for the Primary Assets underlying
a Series of Certificates, substantial delays could be encountered in connection
with the liquidation of defaulted Primary Assets 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 Primary Asset 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 Primary Assets. In addition, the Master
Servicer will be entitled to deduct from the Collection Account to the extent
specified in the related Prospectus Supplement all previously made Advances for
all expenses reasonably incurred in attempting to recover amounts due and not
yet repaid on Liquidated Primary Assets, 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 Primary Assets--Foreclosure
of Single Family Loans' and '--Rights of Redemption' herein.
LIKELIHOOD OF DISPROPORTIONATE LIQUIDATION EXPENSES. Liquidation expenses
with respect to defaulted Primary Assets 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 Primary Asset having a small remaining principal balance as it would
in the case of a defaulted Primary Asset 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 Primary Asset
having a small remaining principal balance than would be the case with the
defaulted Primary Asset having a large remaining principal balance. Because the
average outstanding principal balance of the Primary Assets 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 Primary Assets may also be smaller as a
percentage of the principal balance of a Primary Asset than would be the case in
a typical pool consisting only of conventional purchase-money mortgage loans.
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 certain Primary Assets. 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 Primary Assets.
The Primary Assets 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 Primary Assets; (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. See 'Certain Legal Aspects of the
Primary Assets--The Contracts' herein.
Certain of the Primary Assets may be subject to the Riegle Community
Development and Regulatory Improvement Act of 1994 (the 'Riegle Act'), which
incorporates the Home Ownership and Equity Protection Act of 1994. These
provisions impose additional disclosure and other requirements on creditors with
respect to non-purchase money mortgage loans with high interest rates or high
up-front fees and charges. The provisions of the Riegle Act apply on a mandatory
basis to all mortgage loans originated on or after October 1, 1995. These
provisions can impose specific statutory liabilities upon creditors who fail to
comply with their provisions and
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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.
The application of State and Federal consumer protection laws to particular
circumstances is not always certain and in some cases courts and regulatory
authorities have shown a willingness to adopt novel interpretations of these
laws. 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 an assignee (including a Trust) to collect all or part
of the principal of or interest on the Primary Assets, may entitle the Mortgagor
to a refund of amounts previously paid and, in addition, could subject the
assignee to damages and administrative sanctions. In some instances,
particularly in actions involving fraud or deceptive practices, damage awards
have been large. If a Trust were obligated to pay any such damages, its assets
would be reduced, resulting in a possible loss to Certificateholders. See
'Certain Legal Aspects of the Primary Assets' herein.
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 Primary Asset (including a Mortgagor
who is a member of the National Guard or is in reserve status at the time of the
origination of the Primary Asset 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 Primary
Assets 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 Primary Asset during the Mortgagor's period of active duty
status. Thus, in the event that such a Primary Asset goes into default, there
may be delays and losses occasioned by the inability to realize upon the related
Mortgaged Property in a timely fashion.
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 Primary
Assets--Environmental Legislation' herein.
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 Pooling and
Servicing 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 if 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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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 'Federal Income Tax Consequences--Original Issue Discount' herein
and, if applicable, in the related Prospectus Supplement.
ERISA CONSIDERATIONS. An investment in a Class of Certificates of any
Series by an employee benefit plan or other plan or arrangement subject to ERISA
or Section 4975 of the Code (a 'Plan') 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 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.
RATINGS NOT A RECOMMENDATION. It is a condition to the issuance of the
Certificates offered pursuant to this Prospectus and the related Prospectus
Supplement that each such 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.
BOOK-ENTRY CERTIFICATES. 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.
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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 or received on or prior to such date,
as 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; (iii) if
specified in the Prospectus Supplement, reinvestment income on such payments;
(iv) all property acquired by foreclosure or deed in lieu of foreclosure with
respect to any such Primary Asset; (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').
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 may, in certain
instances as set forth in the related Prospectus Supplement, be set forth in a
report on Form 8-K to be filed with the 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 office of
the Trustee specified in the related Prospectus Supplement. Unless so specified
in the related Prospectus Supplement, no Form 8-K will be filed with respect to
additional Primary Assets acquired by a Trust with funds from a Prefunding
Account. 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 lien in one- to four-family residential
properties (the 'Mortgaged Properties'). If specified in the Prospectus
Supplement, the Primary Assets 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, vacation and second homes and leasehold
interests. 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. In the case of leasehold interests, the term of the
leasehold will exceed the scheduled maturity of the Primary Asset by at least
five years, unless a shorter period is specified in the related Prospectus
Supplement.
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
'Description of the Primary Assets--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 '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.
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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 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 Rate or may not be amortized during all or a portion of the
original term. Payment of all or a substantial portion of the principal may
be due on maturity ('balloon payment'). Principal may include interest that
has been deferred and added to the principal balance of the 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 Mortgaged
Property. Other Single Family Loans may be assumable by persons meeting the
then applicable underwriting standards of the Seller.
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 generally 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 Section 5402(6) of title 42 of the United States
Code 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
[Chapter 70 of title 42 of the United States Code].' Moreover, if an election is
made to treat the Trust as a
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REMIC as described in 'Federal Income Tax Consequences' herein, Manufactured
Homes will have a minimum of 400 square feet of living space and a minimum width
in excess of 102 inches.
Certain of the Single Family Loans or Contracts contained in a Trust may be
loans insured under the FHA Title I credit insurance program created pursuant to
Sections 1 and 2(a) of the National Housing Act of 1934 (the 'Title I Program').
Under the Title I Program, the FHA is authorized and empowered to insure
qualified lending institutions against losses on eligible loans. The Title I
Program operates as a coinsurance program in which the FHA insures up to 90% of
certain losses incurred on an individual insured loan, including the unpaid
principal balance of the loan, but only to the extent of the insurance coverage
available in the lender's FHA insurance coverage reserve account. The owner of
the loan bears the uninsured loss on each loan. The types of loans which are
eligible for insurance by the FHA under the Title I Program include property
improvement loans ('Title I Loans'). Title I Loan means a loan made to finance
actions or items that substantially protect or improve the basic livability or
utility of a property and includes: (1) single family, multifamily and
nonresidential property improvement loans; (2) manufactured home improvement
loans, where the home is classified as personalty; (3) historic preservation
loans; and (4) fire safety equipment loans in existing health care facilities.
CERTAIN CHARACTERISTICS OF THE PRIMARY ASSETS
The related Prospectus Supplement will describe certain characteristics of
the related Primary Assets initially included in the Trust, which may include,
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 Rates, the weighted average
Mortgage Rate and, with respect to adjustable-rate Primary Assets, the index
upon which the Mortgage Rate is based, (iv) the range of principal balances
outstanding and the weighted average outstanding principal balance, (v) the
percentages of Primary Assets secured by first Mortgages, second Mortgages and
more junior Mortgages, respectively, (vi) the range of Combined Loan-to-Value
Ratios at origination, the weighted average Combined Loan-to-Value Ratio, the
range of Loan-to-Value Ratios at origination and the weighted average
Loan-to-Value Ratio, (vii) the percentage of Primary Assets secured by fee
simple interests in single-family dwelling units, investor properties, units in
planned unit developments and condominiums, respectively, the percentage of
Primary Assets secured by leasehold interests and the percentage of Primary
Assets secured by units in Cooperatives, (viii) the percentage of Primary Assets
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) the percentage of Primary Assets that are
Contracts, (x) certain summary information relating to the geographic
concentration of the Mortgaged Properties securing the Primary Assets, (xi) the
percentage of Primary Assets which are Balloon Loans, and (xii) the percentage
of Primary Assets which are Bankruptcy Loans, the percentage of Bankruptcy Loans
which are 30 days or more contractually delinquent and the percentages of
Primary Assets 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 Primary Assets may be
approximate, based on the expected characteristics of the Primary Assets to be
included in the related Trust and any significant variations therefrom will be
provided on the related Form 8-K.
For purposes of the foregoing, the 'Combined Loan-to-Value Ratio' of any
Primary Asset is the ratio (expressed as a percentage) of (i) the sum of (a) the
original principal balance of such Primary Asset 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 Primary Asset and (b) the
purchase price of the Mortgaged Property if the Primary Asset proceeds were used
to purchase the Mortgaged Property. See 'The Primary Asset Program--Underwriting
Procedures' herein. The 'Loan-to-Value Ratio' of any Primary Asset is the ratio
(expressed as a percentage) of (i) the original principal balance of such
Primary Asset 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 Primary Asset and (b) the purchase price of the
Mortgaged Property if the Primary Asset proceeds were used to purchase the
Mortgaged Property. 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
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Manufactured Home and the quality and condition of the community in which it is
situated, if applicable. For Primary Assets secured by a first Mortgage, the
Combined Loan-to-Value Ratio and the Loan-to-Value Ratio will be the same.
In the event that title to any Primary Asset is acquired in foreclosure or
by deed in lieu of foreclosure (or, in the case of Contracts in certain states,
by repossession of the related Manufactured Home), the deed or certificate of
sale will be issued to the Trustee or to its nominee on behalf of
Certificateholders. Notwithstanding any such acquisition of title and
cancellation of the related Primary Asset, such Primary Asset (an 'REO
Property') will be considered for most purposes to be an outstanding Primary
Asset held in the Trust until such time as the Primary Asset is sold and all
recoverable proceeds have been received with respect to such defaulted Primary
Asset.
A 'Bankruptcy Loan' is a Primary Asset 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 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.
PAYMENTS ON THE PRIMARY ASSETS
The Primary Asset underlying a Series of Certificates will provide for
payments that are allocated to principal and interest according to either the
actuarial method (an 'Actuarial Primary Asset'), the simple interest method (a
'Simple Interest Primary Asset') or the 'Rule of 78s' method (a 'Rule of 78s
Primary Asset'), as set forth in the related Prospectus Supplement. The related
Prospectus Supplement will set forth whether any of the Primary Assets will
provide for deferred interest or negative amortization.
An Actuarial Primary Asset provides for payments in level monthly
installments (except, in the case of a Balloon Loan, the final payment)
consisting of interest equal to one-twelfth of the applicable Mortgage Rate
times the unpaid principal balance, with the remainder of such payment applied
to principal.
A Simple Interest Primary Asset provides for the amortization of the amount
financed under such Primary Asset 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 Primary Asset being multiplied by the
stated Mortgage 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 Primary Asset. As payments are
received under a Simple Interest Primary Asset, 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 Primary Asset 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 Primary
Asset is made on or prior to its scheduled due date, the principal balance of
the Primary Asset will amortize in the manner described in the preceding
paragraph. However, if the borrower consistently makes scheduled payments after
the scheduled due date, the Primary Asset will amortize more slowly than
scheduled. If a Simple Interest Primary Asset is prepaid, the borrower is
required to pay interest only to the date of prepayment.
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A Rule of 78s Primary Asset 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
Primary Asset. 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 Primary Asset, 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 Primary Asset 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 Primary Asset 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 Primary Asset. For
example, for a Primary Asset 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, in the case of such Primary
Asset, 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 Primary
Asset 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 Primary Asset is somewhat higher than the interest
computed for a Primary Asset computed on an actuarial basis, and the rate at
which interest is earned at the end of a Rule of 78s Primary Asset is somewhat
less than that computed for a Primary Asset under an actuarial basis.
Payments to holders of the related Certificates and the Servicing Fee with
respect to Rule of 78s Primary Assets will be computed as if such Primary Assets
were Simple Interest Primary Assets. Unless otherwise specified in the related
Prospectus Supplement, amounts received upon prepayment in full of a Rule of 78s
Primary Asset in excess of (i) the then outstanding principal balance of such
Primary Asset (computed on a daily simple interest amortization basis) and (ii)
accrued interest computed on a daily simple interest basis at the Mortgage 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 Primary Asset, under the terms of such Primary Asset the entire
remaining amount of payments will be due but a 'refund' or 'rebate' will be made
to the Mortgagor of the portion of the total amount of the scheduled payments
remaining under such Primary Asset 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
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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.
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 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 Rate for a Primary Asset, Mortgagors
may have an increased incentive to refinance such Primary Asset. 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 Primary Assets
underlying any Series of Certificates, as to the relative importance of such
factors, as to the percentage of the principal balance of the Primary Assets
that will be paid as of any date or as to the overall rate of prepayment on the
related Primary Assets.
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 may 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 Primary Assets,
including final payments made upon the maturity of Balloon Loans.
THE TRUSTS
GENERAL
Each Trust will be formed under a pooling and servicing agreement among the
Depositor, the Master Servicer and the Trustee named therein (a 'Trustee') or
another agreement to be specified in the related Prospectus Supplement (a
'Pooling and Servicing Agreement'). 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 the Prospectus
Supplement, to certain exclusions) in respect of such Primary Assets; (iii) if
specified in the Prospectus Supplement, reinvestment income on such payments;
(iv) all property acquired by foreclosure or deed in lieu of foreclosure with
respect to any such Primary Assets; (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
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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,
including all security interests created thereby and any related mortgages or
deeds of trust, together with principal and interest due or received on or after
the Cut-off Date, as specified in the related Prospectus Supplement. 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 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 cause to be
delivered 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 Mortgage Note, 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 upon demand by the Trustee.
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 either 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, (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, (d) leases and subleases pertaining to such Mortgaged Property and (e)
any existing Senior Lien), 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 Cut-off Date, 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
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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 holders
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 or received on or after the Cut-off Date, as specified in the related
Prospectus Supplement. 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 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 Primary Assets' herein.
The Seller will provide representations and warranties to the Depositor
concerning the Contracts. Such representations and warranties generally will
include the same types of representations and warranties made with respect to
Single Family Loans, plus the following additional representations and
warranties: (i) 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 or from the Depositor to the Trustee pursuant to the
related Pooling and Servicing Agreement unlawful; (ii) 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; (iii) each Contract creates a valid and enforceable
security interest in favor of the Seller in the Manufactured Home and real
estate covered thereby and the lien created thereby has been recorded and such
security interest or lien has been assigned by the Seller to the Depositor; (iv)
the related Manufactured Home is a 'manufactured home' within the meaning of 42
United States Code, Section 5402(6); and (v) 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. 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 holders of the Certificates of such Series.
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'). The amount intially deposited into
a Prefunding Account for a Series of Certificates will not exceed twenty-five
percent (25%) of the aggregate principal amount of such Series of Certificates.
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. 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, which in no
event shall exceed six months from the initial deposit of funds into the
Prefunding Account. 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 used in the manner set forth in the related Prospectus
Supplement, including being treated as a principal prepayment and applied in the
manner set forth in such Prospectus Supplement.
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Repurchase or Substitution of Primary Assets. The Trustee will review the
documents delivered to it with respect to the Primary Assets 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
Primary Asset then, if the failure to deliver such document or to cure such
defect materially and adversely affects the interest of the Owners of the
Certificates in a Primary Asset, 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 Primary Asset from the Trust and substitute one or more other Primary
Assets therefor or (b) repurchase the Primary Asset from the Trustee for a price
equal to 100% of its principal balance of such repurchased Mortgage Loan plus
all accrued and unpaid interest thereon together with all Servicing Advances, as
set forth in the related Pooling and Servicing Agreement. 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 Primary Asset.
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 holders of the Certificates in a
Primary Asset (each, a 'Defective Primary Asset') 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 Primary Asset 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 all accrued and unpaid
interest thereon together with all Servicing Advances, as set forth in the
related Pooling and Servicing Agreement, or (c) if so specified in the
Prospectus Supplement, remove the affected Primary Asset from the Trust, and
substitute one or more other Primary Assets 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
Primary Assets, which limitations will be disclosed in the applicable Prospectus
Supplement.
PAYMENTS ON THE PRIMARY ASSETS
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', but which may
have such designation as is set forth in the related Prospectus Supplement) at
an institution 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 Primary Assets,
as more fully described below. All funds in the Collection Account are required
to be held (i) uninvested or (ii) invested in certain permitted investments,
which will include, but will not be limited to, United States government
securities, Federal funds, certificates of deposits and bankers' acceptance of
domestic banks with acceptable credit ratings, commercial paper with original
maturities of not more than 270 days rated in the highest short term rating
categories and other high-quality investments and repurchase agreements or
similar arrangements with respect to such investments (collectively, 'Permitted
Investments'). Any investment earnings on funds held in the Collection Account
will be for the account of the Master Servicer.
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 (other than amounts received after the Cut-off Date in
respect of interest accrued, or principal due, on the Primary Assets prior to
the Cut-off Date, unless the related Prospectus Supplement provides that such
amounts are part of the Trust) and all Principal Prepayments and Curtailments
collected after the Cut-off Date (net of the Servicing Fee with respect to each
Primary Asset 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 Primary Asset, the amount of any deposit
made by the Seller when substituting a Defective Primary Asset in order to equal
the balance of the deleted Primary Asset (a
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'Substitution Adjustment'), the amount of any losses incurred in connection with
investments in Permitted Investments 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.
The Master Servicer may make withdrawals from the Collection Account 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 unreimbursed Advances. The Master
Servicer's right to reimburse itself for unreimbursed Advances will be
limited to collections on the related Primary Asset, 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 related Mortgagor or otherwise relating to the Primary
Asset in respect of which such unreimbursed amounts are owed;
(iii) to withdraw any amount received from a Mortgagor that is
recoverable and sought to be recovered as a voidable preference 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 Investments and to pay itself
interest or other income earned in respect of Permitted Investments 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 accrued unpaid 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 Advances out of excess amounts on deposit in the
Collection Account and held for future distribution, 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.
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) due
during the related Due Period, but uncollected as of the close of business on
the related Determination Date and/or (y) the 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
Primary Assets 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 full or partial satisfaction of the related
Primary
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Asset. To the extent provided in the related Pooling and Servicing Agreement,
the Master Servicer may pay all or 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.
The Master Servicer may recover Advances to the extent permitted by the
Pooling and Servicing Agreement or, if not theretofore recovered from the
Mortgagor on whose behalf such Advance was made, from collections on the related
Primary Asset, 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
Primary Asset. 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,
Liquidation Proceeds, Released Mortgaged Property Proceeds, Insurance Proceeds
or otherwise on the related Primary Assets ('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 on or with respect
to Primary Assets 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 Investments and other investments 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 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.
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, for 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 Primary Assets due during the related Due Period, net of
the Servicing Fee paid to the Master Servicer for the
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related Due Period and reimbursements for accrued unpaid Servicing Fees and
other servicing compensation, unreimbursed Advances and for certain expenses
paid by the Master Servicer, plus (b) the amount of Advances, if any.
'Realized Losses' means, for Primary Assets that become Liquidated Primary
Assets during the related Due Period, the amount, if any, by which (i) the sum
of the outstanding principal balance of each such Primary Asset (determined
immediately before such Primary Asset became a Liquidated Primary Asset) and
accrued and unpaid interest thereon at the Mortgage Rate to the date on which
such Primary Asset became a Liquidated Primary Asset exceeds (ii) the Net
Liquidation Proceeds received during such Due Period in connection with the
liquidation of such Primary Asset which have not theretofore been used to reduce
the principal balance of such Primary Asset.
'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 such Series of Certificates declines to the percentage of
the original principal balance of such Series specified in the related
Prospectus Supplement or at such other time as is 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, which price will be sufficient to pay all accrued but
unpaid interest on the Certificates, the outstanding Certificate Balance of the
Certificate, any outstanding Advances plus all expenses of the Trust Fund
incurred in connection with such sale. Any such sale will be made without
recourse to the Trust or the Certificateholders. The proceeds of any such sale
will be distributed to Certificateholders on the Distribution Date next
following the date of disposition or at such other time as set forth in the
related Prospectus Supplement.
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. The Master Servicer and any Underwriter
will be permitted to submit bids unless the Prospectus Supplement specifically
states otherwise. 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, which price will be sufficient to pay all accrued but unpaid
interest on the Certificates, the outstanding Certificate Balance of the
Certificate, any outstanding Advances plus all expenses of the Trust Fund
incurred in connection with such sale. 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. Any such sale will be made without recourse to the Trust or the
Certificateholders.
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. 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. The 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.
If so specified in the related Prospectus Supplement, the term "Seller" may
include another or additional institutions. The Seller will sell and assign the
Primary Assets to the Depositor pursuant to the Pooling and Servicing Agreement.
Each Primary Asset 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 of any Series.
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 Primary Assets, (ii) to repay indebtedness
which has been incurred to obtain funds to acquire such Primary Assets, (iii) to
establish a Reserve Account 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 Primary Assets for a Series may be
effected in whole or in part by an exchange of Certificates with the Seller for
such Primary Assets.
THE PRIMARY ASSET PROGRAM
The Seller will acquire, directly or indirectly, the Primary Assets either
(i) 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 or (ii) from other mortgage loan originators as
set forth in the related Prospectus Supplement. The Master Servicer has an
option to acquire 40% of the equity interest of 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 January 1996 underwriting, processing and purchasing mortgage loans
originated by mortgage loan companies owned by franchisees of HRB Tax Services.
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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. As of November, 1996, NCS
acquires mortgage loans through the following means:
o 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.
o Correspondent lender programs through approximately 20 lenders
located in 6 states.
o Retail originations through mortgage loan companies owned by
franchisees of HRB Tax Services.
o 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 prominent 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. As of
November, 1996, 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.
PRIMARY ASSETS
The Primary Assets consist primarily of purchase money loans, refinancings
and home equity borrowings. The Primary Assets are originated through retail,
wholesale and correspondent lending programs conducted through NCS, NFI and BMC.
Primary Assets 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. Primary Assets originated through wholesale
programs ('Wholesale Loans') are generally originated through mortgage brokers
eligible to refer Primary Asset 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 name. Primary Assets 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 Primary Assets evaluate the
prospective mortgagor's credit standing and ability to repay the Primary Asset,
as well as the value and adequacy of the underlying Mortgaged Property that
serves as collateral for the Primary Asset.
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All Primary Asset applications received by NCS or NFI (NCS and NFI may
hereinafter be referred to as a 'Primary Asset Underwriter') are subject to a
credit investigation. As part of such investigation, the Primary Asset
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 Primary Asset, the Primary Asset 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 Primary Asset 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 association 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 Primary Assets when
the Combined Loan-to-Value Ratio exceeded 90% and generally has not acquired
junior Primary Assets when the Combined Loan-to-Value Ratio has exceeded 90%,
except in connection with its 'High LTV' program, under which the Seller has
acquired Primary Assets 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 Primary Assets 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 Primary
Assets 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
Primary Asset Underwriter's determination of an acceptable Combined
Loan-to-Value Ratio for a particular Primary Asset 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 generally will not exceed 80%.
Certain Primary Assets 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.
An appraisal satisfying either FNMA/FHLMC or state guidelines is required
for all Primary Assets acquired by the Seller, except for the High LTV program
where the stronger credit quality of the borrowers warrants a more limited
appraisal. In addition to the appraisal evaluation which each Mortgaged Property
undergoes, the Primary Asset Underwriter has established a system for conducting
periodic reviews of each appraiser using internal and third party appraisers.
TERMS
The Primary Assets include fixed- and variable-rate, closed-end Single
Family Loans and Contracts. The fixed-rate Primary Assets are predominantly
Simple Interest Primary Assets that provide for the amortization of the amount
financed under the Primary Asset over a series of equal Monthly Payments. The
fixed-rate Primary Assets acquired by the Seller typically have original terms
to maturity ranging from 180 to 360 months and, except for Balloon Loans,
provide for Monthly Payments of principal and interest in substantially equal
installments for the contractual term of the related Mortgage Note in sufficient
amounts to fully amortize the principal thereof by maturity. Generally, the
fixed-rate Balloon Loans will have an amortization schedule based upon a
360-month term and have a term to maturity of 180 months.
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The variable-rate Primary Assets are either Simple Interest Primary Assets
which amortize over 180 to 360 months as explained above, or are Actuarial
Primary Assets or Rule of 78s Primary Assets which 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 Primary Assets are indexed to short term base rates (such as 30
day LIBOR) and may adjust every six to 12 months.
Payments on the Primary Assets in the form of late payment charges,
prepayment premiums or other miscellaneous administrative charges, to the extent
collected from Mortgagors, will be retained by the Master Servicer as additional
servicing compensation.
Unless specified in the related Prospectus Supplement, none of the Primary
Assets will be insured by the FHA, guaranteed by the VA 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 Mortgagor).
SERVICING
The Master Servicer has established policies for servicing Primary Assets.
The Master Servicer retains the right to service the Primary Assets 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 Properties.
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 for both fixed-rate and adjustable-rate loans. The servicing
standards applied by 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 Agreement for a Series of Certificates, which
will govern the distribution of cash flows within the related Trust, may require
that the Servicer advance interest and principal on any delinquent Primary Asset
until satisfaction of the Mortgage Note, liquidation of the Mortgaged Property
or charge-off of the Primary Asset to the extent the Servicer deems such
Advances of interest and/or principal to be ultimately recoverable. Realized
losses on Primary Assets are paid out of the related credit enhancement 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 Primary Asset becomes 30 days delinquent, the Servicer will take
additional steps to evaluate the Mortgagor's ability to repay the Primary Asset
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 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 or 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 Mortgagor.
DELINQUENCY AND LOSS EXPERIENCE
The related Prospectus Supplement will set forth certain information
relating to the delinquency and loan loss experience for mortgage loans or
subservicers in the related Prospectus Supplement. The data presented is
unlikely to be indicative of the delinquency and loss experience that will be
experienced on the Primary Assets in
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a specific Trust, in light of the fact that such portfolio may include Primary
Assets which were originated by different originators under different
underwriting standards and which have a different geographic distribution from
the Primary Assets for a specific Trust. There is no assurance that future
delinquency or loss experience of the related Primary Assets 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 'Pass-Through 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 Rate on the related
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 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 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.
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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 and
Transfer of Certificates' herein.
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, as further described in the related Prospectus Supplement.
INTEREST
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 Pass-Through Rate for such Class specified in the related Prospectus
Supplement. Interest accrued on each Class of Certificates at the applicable
Pass-Through 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 Pass-Through 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.
INDICES APPLICABLE TO FLOATING RATE AND INVERSE FLOATING RATE CLASSES
LIBOR
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 Telerate Screen Page 3750 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 Telerate
Screen Page, the Calculation Agent will request each of the Reference Banks to
provide such offered quotations at such time.
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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 Accrual Period shall be LIBOR as
determined on the preceding LIBOR Determination Date, or, in the case of
the first LIBOR Determination Date, LIBOR shall be deemed to be the
per annum rate specified as such in the related Prospectus Supplement.
Each Reference Bank (i) shall be a leading bank engaged in transactions in
Eurodollar deposits in the international Eurocurrency market; (ii) shall not
control, be controlled by, or be under common control with the Calculation
Agent; and (iii) shall have an established place of business in London. If any
such Reference Bank should be unwilling or unable to act as such or if
appointment of any such Reference Bank is terminated, another leading bank
meeting the criteria specified above will be appointed.
The establishment of LIBOR on each LIBOR Determination Date by the
Calculation Agent and its calculation of the rate of interest for the applicable
classes for the related 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
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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 is 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 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.
If on the tenth day of the month in which any 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 Accrual Period and for each succeeding 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 Accrual
Period and each succeeding 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 Accrual Period
shall (in the absence of manifest error) be final and binding.
TREASURY INDEX
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
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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 Accrual Period shall (in the absence
of manifest error) be final and binding.
PRIME RATE
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 Accrual Period. Unless otherwise specified in the related
Prospectus Supplement, the 'Prime Rate' for an 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
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
Primary Assets due 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. Such principal payments will generally include to the extent of funds
available (i) the principal portion of all Monthly Payments on the related
Primary Assets which are received or advanced, (ii) any principal prepayments of
any such Primary Assets 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 received during the related Due Period or such other
period as specified in the related Prospectus Supplement of (A) the proceeds of
any insurance policy relating to a Primary Asset, 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 Primary Assets or REO Properties ('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
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Property Proceeds'), (iv) the principal portion of all amounts paid by the
Seller in connection with the purchase of a Primary Asset as to which there is
defective documentation or a breach of a representation or warranty contained in
the related Pooling and Servicing Agreement that materially and adversely
affects the interests of the Certificateholders and (v) the principal portion of
amounts received on each defaulted Primary Asset or REO Property as to which the
Master Servicer has determined that all amounts expected to be recovered have
been recovered (each, a 'Liquidated Primary Asset'), 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:
(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
Realized 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 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 Investments 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 prior to the related Determination Date or during the
related Due Period, as specified in the related Prospectus Supplement and
Realized Losses incurred during the related Due Period and the ratio of the
Pool Principal Balance to the Original Pool Principal Balance. As of
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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
Realized Losses, at the end of the related Due Period;
(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. 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, as provided in the related Prospectus
Supplement.
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 filed with the
related Form 8-K.
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.
A Certificate Insurance Policy will be described in the related Prospectus
Supplement and will generally 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 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. The Insurer will, to the extent
described in the related
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Prospectus Supplement, 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. Each Letter of Credit will be described in the
related Prospectus Supplement and will generally 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. 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 Primary Assets 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 Investments 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 the interest accrued on the Primary Assets
in excess of that accrued on the related Certificates ('Excess Spread'). If so
specified in the related Prospectus Supplement, a Reserve 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 Investments. 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, Prefunding Account or Reserve Account may also require the
establishment of an account (a 'Yield Supplement Account') to cover interest
shortfalls, as more fully described in the related Prospectus Supplement. Funds
on deposit in the
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Yield Supplement Account for any Series may be applied to supplement interest
payable on the related Primary Assets if necessary to pay interest to holders of
one or more Classes of Certificates of such Series at the applicable
Pass-Through 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
Pospectus 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 Primary Assets and losses on
defaulted Primary Assets 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 Subordinated 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
Subordinated Certificates that will be allocated losses prior to any losses
being allocated to Classes of Subordinated Certificates designated as being
senior thereto. The aggregate losses in respect of defaulted Primary Assets
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.
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.
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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
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.
Each Pooling and Servicing Agreement will set forth the terms of 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, either
from amounts on deposit in the Distribution Account or as otherwise described
therein.
SERVICING COMPENSATION
As compensation for servicing and administering the Primary Assets, 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, prepayment premiums, late payment fees and
similar fees), the excess of any Net Liquidation Proceeds over the outstanding
principal balance of a Liquidated Primary Asset, 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
Primary Assets in accordance with the Pooling and Servicing Agreement, and, in
servicing and administering the Primary Assets, 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
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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
that of the standard form of fire insurance policy with extended coverage
customary in the state in which the property is located. Such coverage generally
will be in an amount equal to the lesser of the principal balance of such
Primary Asset or 100% of the insurable value of the improvements securing the
Primary Asset. 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 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 Mortgagor in accordance with the related Mortgage 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.
If the Master Servicer obtains and maintains a blanket policy or master
forced placed insurance policy insuring all of the Primary Assets 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 Primary Assets 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 Primary Assets 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 Primary Assets or the
Pooling and Servicing Agreement.
The Mortgagors under some of the Primary Assets may obtain credit life or
disability insurance policies. Such policies require the insurers to make
payments on the related Primary Assets 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 Primary Asset 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
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accelerate the maturity of the related Primary Asset 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 Primary Asset. See 'Certain
Legal Aspects of the Primary Assets--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 Primary Assets. 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, 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 Primary Asset 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 Primary Assets.
Consistent with the foregoing, the Master Servicer may, based upon its
reasonable determination of what is necessary or desirable, waive any late
payment charge, prepayment premiums, assumption fee or any penalty interest in
connection with the prepayment of a Primary Asset or any other fee or charge
which the Master Servicer would be entitled to retain as servicing compensation.
The Pooling and Servicing Agreement for each Series will provide the Master
Servicer with the discretion to modify, waive or amend certain of the terms of
any Primary Asset without the consent of the Trustee or any Certificateholder
subject to certain conditions set forth therein, including the condition that
such modification, waiver or amendment will not result in such Primary Asset
ceasing to be a 'qualified mortgage' under the REMIC Regulations.
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 Primary Assets with any institution (each, a
'Subservicer') which meets the requirements set forth in the related Pooling and
Servicing Agreements. Such Subservicer shall have all the rights and powers of
the Master Servicer with respect to such Primary Assets under the Pooling and
Servicing 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 Primary Assets.
Notwithstanding any Subservicing Agreement, 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 Primary
Assets. 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
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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, 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-servicers, upon comparable reports of firms of independent
public accountants rendered on the basis of examinations conducted in accordance
with the same standards (rendered within one year of such report) with respect
to those sub-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. In such event, the legal expenses and costs of such action
and any liability resulting therefrom will be expenses, costs and liabilities of
the related Trust and the Master Servicer will be entitled to reimbursement
therefor out of funds otherwise distributable to the Certificateholders. The
Pooling and Servicing Agreement for each Series will also provide that none of
the Depositor, the Master Servicer, the Seller or any director, officer,
employee or agent of the Depositor, the Master Servicer or the Seller will be
under any liability to the Trust Fund or the Certificateholders for any action
taken, or for refraining from the taking of any action, in good faith pursuant
to the the Pooling and Servicing Agreement, or for errors in judgment; provided,
however, that neither the Depositor, the Master Servicer, the Seller nor any
such person will be protected against any liability for a breach of any
representations or warranties under the Pooling and Servicing Agreement or that
would otherwise be imposed by reason of willful misfeasance, bad faith or
negligence (or, in the case of the Master Servicer a breach of the servicing
standards set forth in the Pooling and Servicing Agreement) in the performance
of its duties or by reason of negligent disregard of its obligations and duties
thereunder. The Pooling and Servicing Agreement will further provide that the
Depositor, the Master Servicer, the Seller and any director, officer, employee
or agent of the Depositor, the Master Servicer, the Seller will be entitled to
indemnification by the Trust Fund for any loss, liability or expense incurred in
connection with any legal action relating to the Pooling and Servicing Agreement
or the Certificates, other than any loss, liability or expense incurred by
reason of its respective willful misfeasance, bad faith, fraud or negligence
(or, in the case of the Master Servicer a breach of the servicing standard set
forth in the Pooling and Servicing Agreement) in the performance of duties
thereunder or by reason of negligent disregard of its respective obligations and
duties thereunder. Any loss resulting from such indemnification will reduce
amounts distributable to Certificateholders. The Prospectus Supplement will
specify any variations to the foregoing required by the Rating Agencies rating
Certificates of a Series. Additional information with respect to the limitation
on liabilities of the Master Servicer will be provided in the related Prospectus
Supplement.
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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 of the Seller, so long as it is an affiliate of the
Master Servicer, to repurchase or substitute a Primary Asset pursuant to
the terms of the related Pooling and Servicing Agreement; or
(iii) 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
(iv) 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 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
(v) 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.
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.
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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'). Unless otherwise provided in the Prospectus
Supplement, 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, the Trustee
may appoint, or petition a court of competent jurisdiction to appoint, any
housing and home finance institution, bank or mortgage servicing institution
which has been designated as an approved Seller-servicer by FNMA or FHLMC for
first and second mortgage loans and having equity of not less than the amount
set forth in the related Pooling and Servicing Agreement 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 registrar identified
in the related Prospectus Supplement. The related Prospectus Supplement will set
forth whether a service charge will be made for any such registration or
transfer of such Certificates. Whether or not there is a service charge, 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
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DTC. For information with respect to tax documentation procedures relating to
the Certificates, see 'Federal Income Tax Consequences' 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, 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.
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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 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
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions 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 'Federal Income Tax Consequences.'
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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 PRIMARY ASSETS
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, Primary Assets 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 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
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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 Primary Assets,
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 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
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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 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 of Single
Family Loans' 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 or 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--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.
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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
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.
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 a 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 Primary Assets.
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ENFORCEABILITY OF CERTAIN PROVISIONS
The Primary Assets will generally 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 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.
The Primary Assets will generally contain due-on-sale clauses, which permit
the lender to accelerate the maturity of the Primary Asset 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 Primary Assets 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 Primary Asset.
APPLICABILITY OF CERTAIN REGULATORY REQUIREMENTS
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.
Applicable state laws generally regulate interest rates and other charges,
require certain disclosures and, unless an exemption is available, require
certain disclosures and, unless an exemption is available, require licensing of
the originators of certain Primary Assets. 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 Primary Assets.
The Primary Assets 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
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regarding the terms of the Primary Assets; (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.
Certain of the Primary Assets may be subject to the Riegle Community
Development and Regulatory Improvement Act of 1994 (the 'Riegle Act'), which
incorporates the Home Ownership and Equity Protection Act of 1994. These
provisions impose additional disclosure and other requirements on creditors with
respect of 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 orginated 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.
The application of State and Federal consumer protection laws to particular
circumstances is not always certain and in some cases courts and regulatory
authorities have shown a willingness to adopt novel interpretations of these
laws. 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 an assignee (including a Trust) to collect all or part
of the principal of or interest on the Primary Assets, may entitle the Mortgagor
to a refund of amounts previously paid and, in addition, could subject the
assignee to damages and administrative sanctions. In some instances,
particularly in actions involving fraud or deceptive practices, damage awards
have been large. If a Trust were obligated to pay any such damages, its assets
would be reduced, resulting in a possible loss to Certificateholders.
The Seller will represent and warrant in the related Pooling and Servicing
Agreement that each related Primary Asset 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 Primary Asset is acquired by a Trust and 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 Primary Assets.
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
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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 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
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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 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 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 Pooling and Servicing 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.
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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
Unless otherwise specified in the related Prospectus Supplement, no Class
of Certificates will constitute 'mortgage related securities' for purposes of
the Secondary Mortgage Market Enhancement Act of 1984 ('SMMEA') because, among
other things, the related Trust will include Primary Assets that are secured by
second mortgages. Investors should consult their own legal advisors in
determining whether and to what extent a Class of Certificates constitutes legal
investments for such investors.
FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a summary of the anticipated material federal income tax
consequences of the purchase, ownership and disposition of the 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
The special tax counsel to the Depositor identified in the related
Prospectus Supplement ('Tax Counsel') shall file with the Commission on the
related Form 8-K prior to the Closing Date for each Series an opinion with
respect to the validity of the information set forth under 'Federal Income Tax
Consequences' herein and in the related Prospectus Supplement. In the opinion of
Tax Counsel, 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
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'regular interests' ('REMIC Regular Certificates') or 'residual interests'
('REMIC Residual Certificates') in that REMIC within the meaning of the REMIC
Provisions.
If an entity electing to be treated as a REMIC fails to comply with one or
more of the ongoing requirements of the Code for 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 the opinion of Tax Counsel, the REMIC Certificates will be '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 Section
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 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.
Solely for purposes of determining whether the REMIC Certificates will be
'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
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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 Primary Assets 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 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
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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
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 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), or such other 'accrued period' as
defined in the related Prospectus Supplement, 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
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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 Primary Assets 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.
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 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.
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 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
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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.
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.
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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 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
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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 the rules relating to
'excess inclusions,' and 'noneconomic' residual interests discussed below. The
fact that the tax liability associated with the income allocated to REMIC
Residual Certificateholders may exceed the cash distributions received by 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 Primary Assets, 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 Primary Assets 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 Primary Assets
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
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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 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
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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 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 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.
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The Small Business Job Protection Act of 1996 has eliminated the special
rule permitting Section 593 institutions ('thrift institutions') to use net
operating losses and other allowable deductions to offset their excess inclusion
income from REMIC residual certificates that have 'significant value' within the
meaning of the REMIC Regulations, effective for taxable years beginning after
December 31, 1995, except with respect to residual certificates continuously
held by a thrift institution since November 1, 1995.
In addition, the Small Business Job Protection Act of 1996 provides three
rules for determining the effect on excess inclusions on the alternative minimum
taxable income of a residual holder. First, alternative minimum taxable income
for such residual holder is determined without regard to the special rule that
taxable income cannot be less than excess inclusions. Second, a residual
holder's alternative minimum taxable income for a tax year cannot be less than
excess inclusions for the year. Third, the amount of any alternative minimum tax
net operating loss deductions must be computed without regard to any excess
inclusions. These rules are effective for tax years beginning after December 31,
1986, unless a residual holder elects to have such rules apply only to tax years
beginning after August 20, 1996.
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.
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
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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.
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-
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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 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 Primary Asset, the receipt of income from a source other than a
Primary Asset 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 Primary Assets 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.
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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 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
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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.
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
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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.
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, an estate 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 or a trust if a court within the United States is able
to exercise primary supervision over the administration of the trust and one or
more United States trustees have authority to control all substantial decisions
of the trust. 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.
Transfers of REMIC Residual Certificates to investors that are not United
States persons will be prohibited under the related Pooling and Servicing
Agreement unless specific exclusions are set forth in the related Prospectus
Supplement.
TAX STATUS AS A GRANTOR TRUST
General. As specified in the related Prospectus Supplement if a REMIC
election is not made, in the opinion of the Tax Counsel the Trust will be
classified for federal income tax purposes as a grantor trust under Subpart E,
Part I of the Subchapter J of the Code and not as an association taxable as a
corporation (securities in the Trust shall hereinafter be referred as the
'Pass-Through Securities'). In some Series there will be no separation of the
principal and interest payments on the Primary Assets. In such circumstances, a
holder of such securities (the 'Holder') will be considered to have purchased a
pro rata undivided interest in each of the Loans.
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In other cases ('Stripped Securities'), sale of the securities (the
'Securities') will produce a separation in the ownership of all or a portion of
the principal payments from all or a portion of the interest payments on the
Primary Assets.
Each Holder must report on its federal income tax return its share of the
gross income derived from the Primary Assets (not reduced by the amount payable
as fees to the Trustee and the Master Servicer and similar fees (collectively,
the 'Servicing Fee')), at the same time and in the same manner as such items
would have been reported under the Holder's tax accounting method had it held
its interest in the Primary Assets directly, received directly its share of the
amounts received with respect to the Primary Assets, and paid directly its share
of the Servicing Fees. In the case of Pass-Through Securities other than
Stripped Securities, such income will consist of a pro rata share of all of the
income derived from all of the Primary Assets and, in the case of Stripped
Securities, such income will consist of a pro rata share of the income derived
from each stripped bond or stripped coupon in which the Holder owns an interest.
The holder of a Pass-Through Security will generally be entitled to deduct such
Servicing Fees under Section 162 or Section 212 of the Code to the extent that
such Servicing Fees represent 'reasonable' compensation for the services
rendered by the Trustee and the Master Servicer (or third parties that are
compensated for the performance of services). In the case of a noncorporate
holder, however, Servicing Fees (to the extent not otherwise disallowed, e.g.,
because they exceed reasonable compensation) will be deductible in computing
such holder's regular tax liability only to the extent that such fees, when
added to other miscellaneous itemized deductions, exceed 2% of adjusted gross
income and may not be deductible to any extent in computing such holder's
alternative minimum tax liability. In addition, the amount of itemized
deductions otherwise allowable for the taxable year for an individual whose
adjusted gross income exceeds the applicable amount (which amount will be
adjusted for inflation) will be reduced by the lesser of (i) 3% of the excess of
adjusted gross income over the applicable amount or (ii) 80% of the amount of
itemized deductions otherwise allowable for such taxable year.
Discount or Premium on Pass-Through Securities. The holder's purchase
price of a Pass-Through Security is to be allocated among the Primary Assets in
proportion to their fair market values, determined as of the time of purchase of
the Securities. In the typical case, the Trustee (to the extent necessary to
fulfill its reporting obligations) will treat each Primary Assets as having a
fair market value proportional to the share of the aggregated principal balances
of all of the Primary Assets that it represents, since the Securities, unless
otherwise specified in the related Prospectus Supplement, will have a relatively
uniform interest rate and other common characteristics. To the extent that the
portion of the purchase price of a Pass-Through Security allocated to a Primary
Assets (other than to a right to receive any accrued interest thereon and any
undistributed principal payments) is less than or greater than the portion of
the principal balance of the Primary Assets allocable to the Security, the
interest in the Primary Assets allocable to the Pass-Through Security will be
deemed to have been acquired at a discount or premium, respectively.
The treatment of any discount will depend on whether the discount
represents OID or market discount. In the case of a Primary Assets with OID in
excess of a prescribed de minimis amount or a Stripped Security, a holder of a
Security will be required to report as interest income in each taxable year its
share of the amount of OID that accrues during that year in the manner described
above. OID with respect to a Primary Assets could arise, for example, by virtue
of the financing of points by the originator of the Loan, or by virtue of the
charging of points by the originator of the Primary Assets in an amount greater
than a statutory de minimis exception, in circumstances under which the points
are not currently deductible pursuant to applicable Code provisions. Any market
discount or premium on a Loan will be includible in income, generally in the
manner described above, except that in the case of Pass-Through Securities,
market discount is calculated with respect to the Primary Assets underlying the
Certificate, rather than with respect to the Security. A Holder that acquires an
interest in a Loan originated after July 18, 1984 with more than a de minimis
amount of market discount (generally, the excess of the principal amount of the
Primary Assets over the purchaser's allocable purchase price) will be required
to include accrued market discount in income in the manner set forth above. See
'--Taxation of Owners of REMIC Regular Certificates; Market Discount' and
'--Premium' above.
In the case of market discount on a Pass-Through Security attributable to
Primary Assets originated on or before July 18, 1984, the holder generally will
be required to allocate the portion of such discount that is allocable to a loan
among the principal payments on the Primary Assets and to include the discount
allocable to each principal payment in ordinary income at the time such
principal payment is made. Such treatment would
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generally result in discount being included in income at a slower rate than
discount would be required to be included in income using the method described
in the preceding paragraph.
Stripped Securities. A Stripped Security may represent a right to receive
only a portion of the interest payments on the Primary Assets, a right to
receive only principal payments on the Primary Assets, or a right to receive
certain payments of both interest and principal. Certain Stripped Securities
('Ratio Strip Securities') may represent a right to receive differing
percentages of both the interest and principal on the Primary Assets. Pursuant
to Section 1286 of the Code, the separation of ownership of the right to receive
some or all of the interest payments on an obligation from ownership of the
right to receive some or all of the principal payments results in the creation
of 'stripped bonds' with respect to principal payments and 'stripped coupons'
with respect to interest payments. Section 1286 of the Code applies the OID
rules to stripped bonds and stripped coupons. For purposes of computing original
issue discount, a stripped bond or a stripped coupon is treated as a debt
instrument issued on the date that such stripped interest is purchased with an
issue price equal to its purchase price or, if more than one stripped interest
is purchased, the ratable share of the purchase price allocable to such stripped
interest.
Servicing fees in excess of reasonable servicing fees ('excess servicing')
will be treated under the stripped bond rules. If the excess servicing fee is
less than 100 basis points (i.e., 1% interest on the Primary Assets principal
balance) or the Securities are initially sold with a de minimis discount
(assuming no prepayment assumption is required), any non-de minimis discount
arising from a subsequent transfer of the Securities should be treated as market
discount. The IRS appears to require that reasonable servicing fees be
calculated on a Primary Asset by Primary Asset basis, which could result in some
Primary Assets being treated as having more than 100 basis points of interest
stripped off.
The Code, OID Regulations and judicial decisions provide no direct guidance
as to how the interest and original issue discount rules are to apply to
Stripped Securities and other Pass-Through Securities. Under the method
described above for Pass-Through Securities (the 'Cash Flow Bond Method'), a
prepayment assumption is used and periodic recalculations are made which take
into account with respect to each accrual period the effect of prepayments
during such period. However, the 1986 Act does not, absent Treasury regulations,
appear specifically to cover instruments such as the Stripped Securities which
technically represent ownership interests in the underlying Primary Assets,
rather than being debt instruments 'secured by' those loans. Nevertheless, it is
believed that the Cash Flow Bond Method is a reasonable method of reporting
income for such Securities, and it is expected that OID will be reported on that
basis unless otherwise specified in the related Prospectus Supplement. In
applying the calculation to Pass-Through Securities, the Trustee will treat all
payments to be received by a holder with respect to the underlying Primary
Assets as payments on a single installment obligation. The IRS could, however,
assert that original issue discount must be calculated separately for each
Primary Asset underlying a Security.
Under certain circumstances, if the Primary Assets prepay at a rate faster
than the Prepayment Assumption, the use of the Cash Flow Bond Method may
accelerate a Holder's recognition of income. If, however, the Primary Assets
prepay at a rate slower than the Prepayment Assumption, in some circumstances
the use of this method may decelerate a Holder's recognition of income.
Character as Qualifying Loans. In the case of Stripped Securities, there
is no specific legal authority existing regarding whether the character of the
Securities, for federal income tax purposes, will be the same as the Loans. The
IRS could take the position that the Primary Assets' character is not carried
over to the Securities in such circumstances. Pass-Through Securities will be,
and, although the matter is not free from doubt, Stripped Securities should be
considered to represent 'real estate assets' within the meaning of Section
856(c)(6)(B) of the Code and 'loans secured by an interest in real property'
within the meaning of Section 7701(a)(19)(C)(v) of the Code; and interest income
attributable to the Securities should be considered to represent 'interest on
obligations secured by mortgages on real property or on interests in real
property', within the meaning of Section 856(c)(3)(B) of the Code. Reserves or
funds underlying the Securities may cause a proportionate reduction in the
above-described qualifying status categories of Securities.
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SALE OR EXCHANGE
Subject to the discussion below with respect to a Trust as to which a
partnership election is made, a Holder's tax basis in its Security is the price
such holder pays for a Security, plus amounts of original issue or market
discount included in income and reduced by any payments received (other than
qualified stated interest payments) and any amortized premium. Gain or loss
recognized on a sale, exchange, or redemption of a Security, measured by the
difference between the amount realized and the Security's basis as so adjusted,
will generally be capital gain or loss, assuming that the Security is held as a
capital asset. In the case of a Security held by a bank, thrift, or similar
institution described in Section 582 of the Code, however, gain or loss realized
on the sale or exchange of a Security will be taxable as ordinary income or
loss. In addition, gain from the disposition of a Security that might otherwise
be capital gain will be treated as ordinary income to the extent of the excess,
if any, of (i) the amount that would have been includible in the holder's income
if the yield on such Security had equaled 110% of the applicable federal rate as
of the beginning of such holder's holding period, over the amount of ordinary
income actually recognized by the holder with respect to such Security. For
taxable years beginning after December 31, 1993, the maximum tax rate on
ordinary income for individual taxpayers is 39.6% and the maximum tax rate on
long-term capital gains reported after December 31, 1990 for such taxpayers is
28%. The maximum tax rate on both ordinary income and long-term capital gains of
corporate taxpayers is 35%.
MISCELLANEOUS TAX ASPECTS
Backup Withholding. Subject to the discussion below with respect to a
Trust as to which a partnership election is made, a Holder, other than a holder
or a REMIC Residual Certificate, may, under certain circumstances, be subject to
'backup withholding' at a rate of 31% with respect to distributions or the
proceeds of a sale of certificates to or through brokers that represent interest
or original issue discount on the Securities. This withholding generally applies
if the holder of a Security (i) fails to furnish the Trustee with its taxpayer
identification number ('TIN'); (ii) furnishes the Trustee an incorrect TIN;
(iii) fails to report properly interest, dividends or other 'reportable
payments' as defined in the Code; or (iv) under certain circumstances, fails to
provide the Trustee or such holder's securities broker with a certified
statement, signed under penalty of perjury, that the TIN provided is its correct
number and that the holder is not subject to backup withholding. Backup
withholding will not apply, however, with respect to certain payments made to
Holders, including payments to certain exempt recipients (such as exempt
organizations) and to certain Nonresidents (as defined below). Holders should
consult their tax advisers as to their qualification for exemption from backup
withholding and the procedure for obtaining the exemption.
The Trustee will report to the Holders and to the Master Servicer for each
calendar year the amount of any 'reportable payments' during such year and the
amount of tax withheld, if any, with respect to payments on the Securities.
TAX TREATMENT OF FOREIGN INVESTORS
Subject to the discussion below with respect to a Trust as to which a
partnership election is made, under the Code, unless interest (including OID)
paid on a Security (other than a REMIC Residual Certificate) is considered to be
'effectively connected' with a trade or business conducted in the United States
by a nonresident alien individual, foreign partnership or foreign corporation
('Nonresidents'), such interest will normally qualify as portfolio interest
(except where (i) the recipient is a holder, directly or by attribution, of 10%
or more of the capital or profits interest in the issuer, or (ii) the recipient
is a controlled foreign corporation to which the issuer is a related person) and
will be exempt from federal income tax. Upon receipt of appropriate ownership
statements, the issuer normally will be relieved of obligations to withhold tax
from such interest payments. These provisions supersede the generally applicable
provisions of the United States law that would otherwise require the issuer to
withhold at a 30% rate (unless such rate were reduced or eliminated by an
applicable tax treaty) on, among other things, interest and other fixed or
determinable, annual or periodic income paid to Nonresidents. Holders of Pass-
Through Securities and Stripped Securities, including Ratio Strip Securities,
however, may be subject to withholding to the extent that the Primary Assets
were originated on or before July 18, 1984.
Interest and OID Holders who are foreign persons are not subject to
withholding if they are effectively connected with a United States business
conducted by the Holder. They will, however, generally be subject to the regular
United States income tax.
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STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in 'Federal
Income Tax Consequences,' potential investors should consider the state and
local tax consequences of the acquisition, ownership, and disposition of the
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 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 Primary Assets
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
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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 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 Primary Assets 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.
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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 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 Primary Assets
constituting more than 5% of the aggregate unamortized principal balance of the
Primary Assets 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 Primary Assets 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.
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
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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 '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.
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
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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 offered pursuant hereto 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 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.
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INDEX OF DEFINITIONS
<TABLE>
<CAPTION>
TERM PAGE
- ------------------------------------------------------------------------------------------------- --------------
<S> <C>
Accrual Certificates............................................................................. 4, 35
Accrual Period................................................................................... 4, 35
Actuarial Primary Asset.......................................................................... 21
Advances......................................................................................... 27
assets of a Plan................................................................................. 80
Available Payment Amount......................................................................... 28
Balloon Loans.................................................................................... 13
balloon payment.................................................................................. 19
balloon payments................................................................................. 6
Bankruptcy Bond.................................................................................. 9
Bankruptcy Loan.................................................................................. 21
Bankruptcy Plan.................................................................................. 21
Bay Colony....................................................................................... 31
Block............................................................................................ 30
BMC.............................................................................................. 30
Book-Entry Certificates.......................................................................... 5, 35, 48
Calculation Agent................................................................................ 35
Cash Collateral Account.......................................................................... 42
Cash Collateral Lender........................................................................... 42
Cash Flow Bond Method............................................................................ 77
Cede............................................................................................. 5, 35
CEDEL............................................................................................ 50
CEDEL Participants............................................................................... 50
Certificateholder................................................................................ 60
Certificate Insurance Policy..................................................................... 40
Certificates..................................................................................... 1, 3
Chase............................................................................................ 48
Citibank......................................................................................... 48
Class............................................................................................ 1, 3
Closing Date..................................................................................... 3, 62
Code............................................................................................. 11, 60
COFI Certificates................................................................................ 37
Collection Account............................................................................... 26
Combined Loan-to-Value Ratio..................................................................... 20
Commission....................................................................................... 2
Committee Report................................................................................. 65
Contingent Regulations........................................................................... 64
Contract......................................................................................... 1
Contract Loan Schedule........................................................................... 25
Contributions Tax................................................................................ 72
Cooperative...................................................................................... 50
Cooperative Loans................................................................................ 18, 51
Correspondent Loans.............................................................................. 31
Credit Provider.................................................................................. 40
Curtailments..................................................................................... 38
Cut-off Date..................................................................................... 3
D&P.............................................................................................. 10
debt............................................................................................. 32
Defective Primary Asset.......................................................................... 26
Definitive Certificates.......................................................................... 49
Deposit Date..................................................................................... 26
Depositaries..................................................................................... 48
Depositor........................................................................................ 1, 3
Determination Date............................................................................... 4
Distribution Account............................................................................. 28
</TABLE>
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<TABLE>
<CAPTION>
TERM PAGE
- ------------------------------------------------------------------------------------------------- --------------
<S> <C>
Distribution Date................................................................................ 4, 29
DOL.............................................................................................. 79
DOL Regulation................................................................................... 79
DTC.............................................................................................. 5, 35, 48
due on sale...................................................................................... 6, 19
Due Period....................................................................................... 4, 38
Eleventh District................................................................................ 36
Eligible Account................................................................................. 26
ERISA............................................................................................ 11, 79
ERISA Plans...................................................................................... 49
Euroclear........................................................................................ 50
Euroclear Operator............................................................................... 50
Euroclear Participants........................................................................... 50
Event of Nonpayment.............................................................................. 47
excess inclusions................................................................................ 69, 82
excess servicing................................................................................. 77
Excess Spread.................................................................................... 41
Excluded Plan.................................................................................... 81
Exemption........................................................................................ 80
fair consideration............................................................................... 52
FHA.............................................................................................. 5, 18
FHLBSF........................................................................................... 36
FHLMC............................................................................................ 45
Fitch............................................................................................ 10
FNMA............................................................................................. 45
Form 8-K......................................................................................... 7
High LTV......................................................................................... 32
Holder........................................................................................... 75
holders.......................................................................................... 5, 35, 60
Home Equity Loans................................................................................ 5, 18
HRB Tax Services................................................................................. 30
income........................................................................................... 32
Index of Definitions............................................................................. 84
Indirect Participants............................................................................ 5, 35, 49
Insurance Proceeds............................................................................... 38
Insurer.......................................................................................... 40
IRAs............................................................................................. 79
IRS.............................................................................................. 64
Issue Premium.................................................................................... 68
Letter of Credit................................................................................. 41
Letter of Credit Issuer.......................................................................... 41
Liquidated Primary Asset......................................................................... 39
Liquidation Proceeds............................................................................. 38
Loan-to-Value Ratio.............................................................................. 20
lockout periods.................................................................................. 6, 19
Majority in Aggregate Voting Interest............................................................ 47
Manufactured Homes............................................................................... 19
manufactured home................................................................................ 19, 25
manufactured housing............................................................................. 25
Mark-to-Market Regulations....................................................................... 71
Master Servicer.................................................................................. 1, 3
Master Servicer Termination Event................................................................ 47
Monthly Payments................................................................................. 6
Moody's.......................................................................................... 10
Mortgage......................................................................................... 18
Mortgage Note.................................................................................... 18
Mortgage Rate.................................................................................... 6
</TABLE>
85
<PAGE>
<TABLE>
<CAPTION>
TERM PAGE
- ------------------------------------------------------------------------------------------------- --------------
<S> <C>
mortgage related securities...................................................................... 11
Mortgaged Properties............................................................................. 18
Mortgaged Property............................................................................... 6
Mortgagor........................................................................................ 14
National Cost of Funds Index..................................................................... 37
NCS.............................................................................................. 30
Net Liquidation Proceeds......................................................................... 38
NFI.............................................................................................. 30
NIV.............................................................................................. 32
Nonrecoverable Advances.......................................................................... 28
Nonresidents..................................................................................... 78
Notional Principal Amount........................................................................ 5
OID Regulations.................................................................................. 60, 64
Original Pool Principal Balance.................................................................. 18
OTS.............................................................................................. 37
Owners........................................................................................... 35, 49
P&I Advance...................................................................................... 10, 27
Participants..................................................................................... 5, 35, 49
Pass-Through Rate................................................................................ 3, 34
Pass-Through Securities.......................................................................... 75
Percentage Interest.............................................................................. 4, 34
Permitted Investments............................................................................ 26
Plan............................................................................................. 17
plan assets...................................................................................... 17, 79
Plan Assets...................................................................................... 80
Plans............................................................................................ 79
Pool Insurance Policy............................................................................ 9, 41
Pool Insurer..................................................................................... 41
Pool Principal Balance........................................................................... 40
Pooling and Servicing Agreement.................................................................. 23
Prefunding Account............................................................................... 7, 25
Prepayment Assumption............................................................................ 62
Prepayment Period................................................................................ 38
Primary Assets................................................................................... 1, 5
Primary Asset Underwriter........................................................................ 32
Prime Rate....................................................................................... 38
Principal Prepayments............................................................................ 38
Prohibited Transactions Tax...................................................................... 72
PTCE 83-1........................................................................................ 82
qualified mortgage............................................................................... 25
Qualified Plans.................................................................................. 79
Qualified stated interest........................................................................ 62
Rating Agency.................................................................................... 10
Ratio Strip Securities........................................................................... 77
Realized Losses.................................................................................. 29
Record Date...................................................................................... 4
Reference Banks.................................................................................. 35
Released Mortgaged Property Proceeds............................................................. 38, 39
Relief Act....................................................................................... 16
REMIC............................................................................................ 2, 11
REMIC Certificates............................................................................... 60
REMIC Provisions................................................................................. 60
REMIC Regular Certificates....................................................................... 61
REMIC Regulations................................................................................ 60
REMIC Residual Certificates...................................................................... 61
REO Property..................................................................................... 21
Reserve Account.................................................................................. 9, 41
Reserve Interest Rate............................................................................ 36
</TABLE>
86
<PAGE>
<TABLE>
<CAPTION>
TERM PAGE
- ------------------------------------------------------------------------------------------------- --------------
<S> <C>
Restricted Group................................................................................. 81
Retail Loans..................................................................................... 31
RICO............................................................................................. 56
Riegle Act....................................................................................... 15, 56
Rule of 78s...................................................................................... 18, 21
Rule of 78s Primary Asset........................................................................ 21
Rules............................................................................................ 49
S&P.............................................................................................. 10
Securities....................................................................................... 76
Seller........................................................................................... 1, 3
Senior Certificates.............................................................................. 42
Senior Liens..................................................................................... 12
Series........................................................................................... 1
Servicer......................................................................................... 33
Servicing Advances............................................................................... 27
Servicing Fee.................................................................................... 10, 43, 76
Simple Interest Primary Asset.................................................................... 21
Single Family Loan............................................................................... 1
SMMEA............................................................................................ 11, 60
Special Hazard Policy............................................................................ 9, 41
Spread Account................................................................................... 41
standard hazard insurance........................................................................ 44
Stripped Securities.............................................................................. 76
Subordinated Certificates........................................................................ 42
Subservicer...................................................................................... 45
Subservicing Agreements.......................................................................... 45
Substitution Adjustment.......................................................................... 26
Successor Master Servicer........................................................................ 48
Tax Counsel...................................................................................... 60, 83
Tax Exempt Investor.............................................................................. 82
Tax Favored Plans................................................................................ 79
Terms and Conditions............................................................................. 50
thrift institutions.............................................................................. 70
Tiered REMICs.................................................................................... 61
TIN.............................................................................................. 78
Title I Program.................................................................................. 20
Title I Loans.................................................................................... 20
Title V.......................................................................................... 55
Trust............................................................................................ 1
Trust Assets..................................................................................... 1, 18, 24
Trustee.......................................................................................... 3, 23
UBTI............................................................................................. 82
Underwriter...................................................................................... 80
United States person............................................................................. 75
VA............................................................................................... 5, 18
value............................................................................................ 20
weighted average life............................................................................ 23
Wholesale Loans.................................................................................. 31
Yield Supplement Account......................................................................... 41
</TABLE>
87
<PAGE>
[Logo]
<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:
<TABLE>
<S> <C>
SEC registration fee....................................... $303,030.33*
Legal fees and expenses.................................... 80,000.00**
Accounting fees and expenses............................... 7,500.00**
Blue sky fees and expenses................................. 5,000.00**
Rating agency fees......................................... 60,000.00**
Trustees' fees and expenses................................ 10,000.00**
Printing................................................... 40,000.00**
Miscellaneous.............................................. 5,000.00**
-----------
Total................................................. $510,530.33**
-----------
-----------
</TABLE>
- ------------------
* Of this amount, $303.03 has previously been paid.
** All amounts except the SEC Registration Fee are estimates of expenses
incurred or to be incurred in connection with the issuance and distribution
of a series of Certificates in an aggregate principal amount assumed for
these purposes to be one-tenth of the $1,000,000,000 of Certificates
registered hereby. Accordingly, one-tenth of the SEC Registration Fee paid
upon the filing of this Registration Statement is included in the table
above.
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.
ITEM 16. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ---------- --------------------------------------------------------------------------------
<S> <C> <C>
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 Morrison & Hecker LLP with respect to legality
8.1 -- Opinion of Brown & Wood LLP with respect to tax matters
23.1 -- Consent of Morrison & Hecker LLP (included in Exhibit 5.1)
23.2 -- Consent of Brown & Wood LLP (included in Exhibit 8.1)
23.3 -- Consent of Coopers & Lybrand LLP
*24.1 -- Power of Attorney (included on Page II-5)
</TABLE>
(Footnotes on next page)
II-1
<PAGE>
(Footnotes from previous page)
- ------------------
* Previously filed.
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 Securities 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 denominations 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, 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.
(e) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospecuts filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
a form of the prospectus filed by the registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus 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.
II-2
<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 this Amendment
No. 2 to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Kansas City, the State of
Missouri on the 21st day of January, 1997.
BLOCK MORTGAGE FINANCE, INC.
By: /s/ BRET G. WILSON
---------------------------------
Name: Bret G. Wilson
Title: Vice President, Secretary
and Director
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- -------------------------------------------- -------------------------------------------- -----------------
<S> <C> <C>
* President January 21, 1997
------------------------------------------ (Principal Executive Officer)
William P. Anderson and Director
* Vice President, Treasurer January 21, 1997
------------------------------------------ (Principal Financial and
Clifford A. Davis Accounting Officer)
and Director
/s/ BRET G. WILSON* Vice President, Secretary January 21, 1997
------------------------------------------ and Director
Bret G. Wilson
* Director January 21, 1997
------------------------------------------
Richard E. Skaggs
/s/ BRET G. WILSON*
------------------------------------------
*By Bret G. Wilson
Attorney-in-Fact
</TABLE>
II-3
<PAGE>
REGISTRATION NO. 333-14041
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
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
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- ---------- -------------------------------------------------------------------------------------------- -----------
<S> <C> <C> <C>
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 Morrison & Hecker, LLP with respect to legality
8.1 -- Opinion of Brown & Wood LLP with respect to tax matters
23.1 -- Consent of Morrison & Hecker, LLP (included in Exhibit 5.1)
23.2 -- Consent of Brown & Wood LLP (included in Exhibit 8.1)
23.3 -- Consent of Coopers & Lybrand LLP
*24.1 -- Power of Attorney (included on Page II-5)
</TABLE>
- ------------------
* Previously filed.
<PAGE>
B&W Draft 1/19/97
$
BLOCK MORTGAGE FINANCE, INC.
Block Mortgage Finance
Asset-Backed Certificates, Series 1997-1,
Class A-1
Class A-2
Class A-3
Class A-4
UNDERWRITING AGREEMENT
January __, 1997
Morgan Stanley & Co. Incorporated
c/o Morgan Stanley & Co. Incorporated
as Representative of the Several
Underwriters listed herein
1585 Broadway
New York, New York 10036
Dear Sirs:
Block Mortgage Finance, Inc. (the "Depositor"), a wholly-owned, special
purpose subsidiary of Companion Mortgage Corporation (the "Seller" or
"Companion"), has authorized the issuance and sale of Block Mortgage Finance
Asset-Backed Certificates, Series 1997-1, Class A-1, Class A-2 and Class A-3
Certificates (collectively, the "Fixed Rate Certificates") and Class A-4
Certificates (the "Adjustable Rate Certificates" and together with the Fixed
Rate Certificates, the "Class A Certificates"), Class X-1 and Class X-2
Certificates (the "Class X Certificates") and the Class R Certificates (the
"Class R Certificates" and together with the Class X Certificates, the "Private
Certificates"). As used herein, the Class A Certificates, Class X Certificates
and Class R Certificates are herein collectively referred to as the
"Certificates." The Certificates evidence in the aggregate the beneficial
interest in a pool of fixed and adjustable rate mortgage loans (the "Mortgage
Loans"). The Fixed Rate Certificates will represent an undivided ownership
interest in the group of Mortgage Loans (the "Fixed Rate Group") which are
secured by fixed-rate first and second mortgages primarily on one- to
four-family residential dwellings. The Adjustable Rate Certificates will
represent an undivided ownership interest in the group of Mortgage Loans (the
"Adjustable Rate Group" and together with the Fixed Rate Group, the "Loan
Groups")
<PAGE>
which are secured by adjustable-rate first mortgages primarily on one- to
four-family residential dwellings.
Only the Class A Certificates are being purchased by the several
underwriters named in Schedule B hereto (collectively, the "Underwriters"), at
the price set forth in Schedule A.
The Certificates will be issued under a pooling and servicing agreement
(the "Pooling and Servicing Agreement"), dated as of January 1, 1997 among the
Depositor, the Seller, Block Financial Corporation, as master servicer (the
"Master Servicer"), and Bankers Trust Company of California N.A., as trustee
(the "Trustee"). The Seller, pursuant to the terms of the Pooling and Servicing
Agreement, will transfer to the Depositor all of its right, title and interest
in and to the Mortgage Loans as of the Cut-Off Date and the collateral securing
each Mortgage Loan. The Certificates will evidence fractional undivided
interests in the property held in trust for the holders of such Certificates
(the "Trust"). The assets of the Trust will include, among other things: the
Mortgage Loans conveyed to the Trust on January __, 1997 (the "Mortgage Loans")
and such amounts as may be held by the Trustee in the Certificate Account,
Distribution Account and any other accounts held by the Trustee for the Trust.
The aggregate undivided interest in the Trust represented by the Class A
Certificates initially will be equal to $[___________] of principal, which
represents 100% of the outstanding principal balances of the Mortgage Loans as
of [_____________] (the "Cut-Off Date") and the amount on deposit in the
Pre-Funding Account on the Closing Date. The Class A Certificates will have the
benefit of two financial guaranty insurance policies (each, a "Policy") issued
by MBIA Insurance Corporation, (the "Certificate Insurer") a principal
operating subsidiary of MBIA Inc., a New York Stock Exchange listed company,
pursuant to an Insurance Agreement (the "Insurance Agreement") dated as of
[_____________] among the Seller, the Master Servicer, the Depositor, H&R Block
Corporation, as guarantor, NF Investments Inc., as servicer and the Certificate
Insurer. Forms of the Pooling and Servicing Agreement have been filed as
exhibits to the Registration Statement (hereinafter defined).
An election will be made to treat the assets of the Trust as a "real
estate mortgage investment conduit" (the "REMIC") for federal income tax
purposes. The Class A Certificates and the Class X Certificates will represent
beneficial ownership of "regular interests" in the Master REMIC and the Class R
Certificates will represent beneficial ownership of "residual interests" in
each of the Subsidiary REMIC and the Master REMIC.
The Class A Certificates are more fully described in a Registration
Statement which the Depositor has furnished to the Underwriters. Capitalized
terms used but not defined herein shall have the meanings given to them in the
Pooling and Servicing Agreement.
2
<PAGE>
This Underwriting Agreement, the Pooling and Servicing Agreement, the
Insurance Agreement and the Indemnification Agreement are referred to
collectively herein as the "Agreements".
The Depositor understands that the Underwriters propose to make a public
offering of the Class A Certificates as soon as the Underwriters deem advisable
after the date hereof.
The Depositor and the Trust have filed with the Securities and Exchange
Commission (the "Commission") on October 15, 1996 a registration statement on
Form S-3, including a form of prospectus relating to the Class A Certificates
(Nos. 333-14041) and have filed such amendments thereto as may have been
required to the date hereof, and pursuant to the provisions hereof shall file
such post-effective amendments thereto as may hereafter be required pursuant to
the Securities Act of 1933, as amended (the "1933 Act"), and the rules and
regulations of the Commission thereunder (the "Rules and Regulations"). Such
registration statement (as amended, if applicable) and the prospectus and
prospectus supplement relating to the offering of the Class A Certificates
constituting a part thereof filed by the Depositor are referred to herein as
the "Registration Statement" and the "Prospectus," respectively; and any
reference herein to any amendment or supplement with respect to the
Registration Statement or the Prospectus shall be deemed to refer to and
include any information deemed to be a part thereof pursuant to Rule 430A under
the 1933 Act.
SECTION 1. Representations and Warranties of the Depositor and the Seller.
Each of the Seller and the Depositor, each as to itself, represents and
warrants to, and agrees with the Underwriters that:
(a) The Registration Statement has become effective under the 1933 Act.
The Registration Statement complies, and any amendment to the Registration
Statement at the time such amended Registration Statement becomes effective
will comply, in all material respects with the requirements of the 1933 Act and
the Rules and Regulations. The Registration Statement at the time such
Registration Statement became effective did not, and any amendment to the
Registration Statement at the time such amended Registration Statement becomes
effective will not, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading. The Prospectus as of its date did not, and
the Prospectus as amended or supplemented as of the Closing Time (as defined
herein) will not, contain any untrue statement of a material fact or omit to
state a material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading;
provided, however, that the representations and warranties in this subsection
shall not apply to omissions of information from the Registration Statement or
Prospectus that are solely included in the Computational Materials distributed
by an Underwriter in violation of Section
3
<PAGE>
2(a) hereof or statements in, or omissions from, the Registration Statement or
Prospectus made in reliance upon and in conformity with information furnished to
the Depositor in writing by the Underwriters or the Certificate Insurer
expressly for use in the Registration Statement or Prospectus. Assuming
compliance by each Underwriter with Section 2(a) hereof, the conditions to the
use by the Depositor of a registration statement on Form S-3 under the 1933 Act,
as set forth in the General Instructions to Form S-3, have been satisfied with
respect to the Registration Statement and the Prospectus. There are no contracts
or documents of the Depositor that are required to be filed as exhibits to the
Registration Statement pursuant to the 1933 Act or the Rules and Regulations
that have not been so filed on or prior to the effective date of the
Registration Statement.
(b) Since the respective dates as of which information is given in the
Prospectus, or the Prospectus as amended and supplemented at the Closing Time,
there has not been any material adverse change in the general affairs,
management, financial condition, or results of operations of any of the
Servicer, the Master Servicer, the Seller or the Depositor or of their
subsidiaries, otherwise than as set forth in the Prospectus or the Prospectus
as amended and supplemented at the Closing Time.
(c) Each of the Servicer, the Master Servicer, the Seller and the
Depositor has been duly incorporated and is validly existing as a corporation
in good standing under the laws of its respective jurisdiction of
incorporation, with the full right, power and authority (corporate and other)
to own, lease and operate its properties and conduct its business as described
in the Prospectus and to enter into and perform its obligations under this
Agreement, the Pooling and Servicing Agreement, the Insurance Agreement and the
Indemnification Agreement, as applicable, and to cause the Certificates to be
issued; each of the Servicer, the Master Servicer and the Seller is duly
qualified as a foreign corporation to transact business and is in good standing
in each jurisdiction which requires such qualification, except where failure to
be so qualified would not have a material adverse effect on the business or
financial condition of any of the Servicer, the Master Servicer or the Seller;
and [the Master Servicer and the Servicer are each duly authorized under the
statutes that regulate the business of making first and junior lien mortgage
loans or of financing the sale of goods (commonly called "small loan laws,"
"consumer finance laws," or "sales finance laws"),] or are permitted under the
general interest statutes and related laws and court decisions, to conduct in
the various jurisdictions in which any of them do business the businesses as
currently conducted therein by any of them.
(d) There are no legal or governmental proceedings pending to which the
Master Servicer, the Servicer, the Seller or the Depositor is a party or of
which any property of the Master Servicer, the Servicer, the Seller or the
Depositor is the subject, which if determined adversely to the Master Servicer,
the Servicer,
4
<PAGE>
the Seller or the Depositor would individually or in the aggregate have a
material adverse effect on the financial position, shareholders' equity or
results of operations of the Master Servicer, the Servicer, the Seller or the
Depositor; and to the best knowledge of the Depositor and the Seller, no such
proceedings are threatened or contemplated by governmental authorities or
threatened by others.
(e) This Agreement has been duly authorized, executed and delivered by the
Seller and the Depositor, and the Pooling and Servicing Agreement, the
Insurance Agreement and the Indemnification Agreement, when executed and
delivered as contemplated hereby and thereby, will have been duly authorized,
executed and delivered by the Seller, the Depositor, the Master Servicer, the
Servicer, the Trustee, the Underwriter and the Certificate Insurer, as
appropriate, and this Agreement constitutes, and the Pooling and Servicing
Agreement, the Insurance Agreement and the Indemnification Agreement when
executed and delivered as contemplated herein and therein will constitute,
legal, valid and binding instruments enforceable against the Seller, the
Depositor, the Master Servicer or the Servicer, as applicable, in accordance
with their respective terms, subject as to enforceability (i) to applicable
bankruptcy, reorganization, insolvency, moratorium or other similar laws
affecting creditors' rights generally, (ii) to general principles of equity
(regardless of whether enforcement is sought in a proceeding in equity or at
law) and (iii) with respect to rights of indemnity under this Agreement and the
Indemnification Agreement, to limitations of public policy under applicable
securities laws.
(f) The issuance and delivery of the Certificates, the consummation of any
other of the transactions contemplated herein or in the Pooling and Servicing
Agreement, the Insurance Agreement and the Indemnification Agreement, and the
fulfillment of the terms of this Agreement, the Pooling and Servicing
Agreement, the Insurance Agreement and the Indemnification Agreement, do not
and will not conflict with or violate any term or provision of the Certificate
or Articles of Incorporation or Bylaws of the Master Servicer, the Servicer,
the Depositor or the Seller; any statute, order or regulation applicable to the
Master Servicer, the Servicer, the Depositor or the Seller of any court,
regulatory body, administrative agency or governmental body having jurisdiction
over the Master Servicer, the Servicer, the Depositor or the Seller; and do not
and will not conflict with, result in a breach or violation or the acceleration
of, or constitute a default under, or result in the creation or imposition of
any lien, charge or encumbrance upon any of the property or assets of the
Master Servicer, the Servicer, the Depositor or the Seller pursuant to the
terms of, any indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument to which the Master Servicer, the Servicer, the
Depositor or the Seller is a party or by which the Master Servicer, the
Servicer, the Depositor or the Seller may be bound or to which any of the
property or assets of the Master Servicer, the Servicer, the Depositor or the
Seller may be subject,
5
<PAGE>
except for conflicts, violations, breaches, accelerations and defaults which
would not, individually or in the aggregate, be materially adverse to the Master
Servicer, the Depositor, the Servicer or the Seller or materially adverse to the
transactions contemplated by this Agreement.
(g) Deloitte & Touche LLP is an independent public accountant with respect
to the Master Servicer, the Servicer, the Depositor and the Seller as required
by the 1933 Act and the Rules and Regulations.
(h) The direction by the Depositor to the Trustee to execute, countersign,
issue and deliver the Certificates has been duly authorized by the Depositor,
and assuming the Trustee has been duly authorized to do so, when executed,
countersigned, issued and delivered by the Trustee in accordance with the
Pooling and Servicing Agreement, the Certificates will be validly issued and
outstanding and will be entitled to the benefits provided by the Pooling and
Servicing Agreement.
(i) No consent, approval, authorization, order, registration or
qualification of or with any court or governmental agency or body of the United
States is required for the issuance or sale of the Class A Certificates, or the
consummation by the Master Servicer, the Servicer, the Depositor or the Seller
of the other transactions contemplated by this Agreement, the Pooling and
Servicing Agreement, the Insurance Agreement or the Indemnification Agreement,
as applicable except the registration under the 1933 Act of the Class A
Certificates and such consents, approvals, authorizations, registrations or
qualifications as may be required under state securities or Blue Sky laws in
connection with the issuance of the Class A Certificates and the purchase and
distribution of the Class A Certificates by the Underwriters or as have been
obtained.
(j) The Master Servicer, the Servicer, the Depositor and the Seller
possesses all material licenses, certificates, authorities or permits issued by
the appropriate state, federal or foreign regulatory agencies or bodies
necessary to conduct the business now conducted by it and as described in the
Prospectus, and none of the Master Servicer, the Servicer, the Depositor or the
Seller has received notice of proceedings relating to the revocation or
modification of any such license, certificate, authority or permit which,
singly or in the aggregate, if the subject of an unfavorable decision, ruling
or finding, would materially and adversely affect the conduct of its business,
operations or financial condition.
(k) At the time of execution and delivery of the Pooling and Servicing
Agreement, with respect to the Initial Mortgage Loans, and, with respect to the
Subsequent Mortgage Loans and Eligible Substitute Mortgage Loans, as of the
date on which such Mortgage Loan is transferred to the Trust (each, a "Transfer
Date"), the Seller (i) will have good and marketable title to the Trust Balance
of each such Mortgage Loan being transferred by it to the Depositor
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and to the Transferred Assets being transferred by it to the Trustee, free and
clear of any lien, mortgage pledge, charge, encumbrance, adverse claim or other
security interest (collectively "Liens"), other than, with respect to a second
or more junior lien Mortgage Loan, the Lien of the related Senior Lien, (ii)
will not have assigned to any person any of its right, title or interest in or
to such Trust Balances or Transferred Assets and (iii) will have the power and
authority to sell such Trust Balances to the Depositor and to assign the
Transferred Assets to the Trustee; and upon the consummation of the sale and the
assignment provided for pursuant to the terms of the Receivables Purchase
Agreement and the Transfer Agreement, respectively, the Seller and the Trustee
will have acquired beneficial ownership of all the related Subservicer's right,
title and interest in and to the Trust Balances and Transferred Assets,
respectively, other than the right or obligation to fund additional draws.
(l) At the time of execution and delivery of the Pooling and Servicing
Agreement, with respect to the Initial Mortgage Loans, and as of the applicable
Transfer Date, with respect to the Additional Mortgage Loans, the Depositor (i)
will have good and marketable title to the Trust Balance of each such Mortgage
Loan being transferred by it to the Trustee pursuant to the Pooling and
Servicing Agreement, free and clear of and Liens other than, with respect to a
second or more junior lien Mortgage Loan, the Lien of the related Senior Lien,
(ii) will not have assigned to any person any of its right, title or interest
in or to such Trust Balances or under the Pooling and Servicing Agreement or
the Certificates being issued pursuant thereto and (iii) will have the power
and authority to sell such Trust Balances to the Trustee and to sell the Class
A Certificates to the Underwriters, and upon execution and delivery of the
Pooling and Servicing Agreement by the Trustee, the Trustee will have acquired
beneficial ownership of all of the Depositor's right, title and interest in and
to the Mortgage Loans, other than the right or obligation to fund additional
draws, and upon delivery to the Underwriters of the Class A Certificates, the
Underwriters will have good and marketable title to the Class A Certificates,
in each case free of Liens except, in the case of the Mortgage Loans, to the
extent disclosed in the Prospectus.
(m) As of the Cut-Off Date for the Initial Mortgage Loans, each of the
Initial Mortgage Loans will meet the eligibility criteria described in the
Prospectus and the Pooling and Servicing Agreement and as of the Subsequent
Cut-Off Date for the Additional or Subsequent Mortgage Loans and any Eligible
Substitute Mortgage Loans and each of the Additional Mortgage Loans, as
applicable, will meet the eligibility criteria applicable thereto described in
the Pooling and Servicing Agreement.
(n) Neither the Master Servicer, the Servicer, the Seller, the Depositor
nor the Trust created by the Pooling and Servicing Agreement will conduct their
operations while any of the Class A Certificates are outstanding in a manner
that would require the Master Servicer, the Seller, the Servicer, the Depositor
or the
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Trust to be registered as an "investment company" under the Investment Company
Act of 1940, as amended (the "1940 Act"), as in effect on the date hereof or
require the Trust to be registered under the Trust Indenture Act of 1939, as
amended (the "Trust Indenture Act") as in effect on the date hereof.
(o) At the Closing Time, the Certificates and the Pooling and Servicing
Agreement will conform in all material respects to the descriptions thereof
contained in the Prospectus.
(p) At the Closing Time, the Class A Certificates shall have been rated in
the highest rating category by at least two nationally recognized rating
agencies.
(q) Any taxes, fees and other governmental charges in connection with the
execution, delivery and issuance of this Agreement, the Pooling and Servicing
Agreement, the Insurance Agreement and the Certificates have been paid or will
be paid at or prior to the Closing Time.
(r) At the Closing Time, each of the representations and warranties of the
Seller and the Depositor with respect to the Initial Mortgage Loans set forth
in the Pooling and Servicing Agreement and the Insurance Agreement will be true
and correct in all material respects.
Any certificate signed by an officer of the Master Servicer, the
Depositor, the Servicer or the Seller and delivered to you or counsel for the
Underwriters in connection with an offering of the Class A Certificates shall
be deemed, and shall state that it is, a representation and warranty as to the
matters covered thereby to each person to whom the representations and
warranties in this Section 1 are made.
SECTION 2. Representations and Warranties of the Underwriters. Each
Underwriter severally, and not jointly, represents and warrants to, and agrees
with the other Underwriter, the Master Servicer, the Seller and the Depositor
that:
(a) During the period commencing on the effective date of the Registration
Statement and ending on the date the Prospectus is delivered to a prospective
investor, such Underwriter has not furnished and will not furnish, in writing
or by electronic transmission, Computational Materials relating to the Class A
Certificates to any such prospective investor except as otherwise contained in
the Preliminary Prospectus dated January __, 1997 relating to the Class A
Certificates. For purposes of this Underwriting Agreement, "Computational
Materials" shall mean any "written ABS Term Sheet" or "computational materials"
as such terms are defined in the letter dated February 17, 1995 of the Office
of Chief Counsel, Division of Corporation Finance of the Securities and
Exchange Commission to the Public Securities Association (including computer
generated tables displaying information relating to the yield, average life,
duration, expected maturity,
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interest rate sensitivity or cash flow characteristics of the Class A
Certificates under a variety of possible prepayment scenarios, certain factual
information regarding the financial terms of the offering, including the
anticipated ratings for each class of Certificates, as well as background
information concerning the Mortgage Loans, or any descriptive data about the
underlying Mortgage Loans, such as their individual and weighted average
coupons, maturities and loan-to-value ratios or geographical distribution of the
Mortgage Properties related thereto, and the proposed structure of the Class A
Certificates); provided, however, that Computational Materials shall not be
deemed to include any materials which do not otherwise constitute a prospectus
within the meaning of Section 2(10) under the 1933 Act or which are permitted by
the Rules and Regulations, including, but not limited to, Rule 134 and Rule 139
thereunder.
(b) Each Underwriter acknowledges that the Master Servicer, the Seller and
the Depositor will not be deemed to have breached any representation and
warranty or to have failed to satisfy any other agreement contained herein, to
the extent any such breach or failure on the part of such party resulted solely
from an Underwriter's breach of the representation and warranty set forth in
clause (a) above; provided, however, that the rights and obligations otherwise
available pursuant to Sections 9 and 10 hereof are not limited solely as a
result of an Underwriter's breach of the representation and warranty set forth
in clause (a) above.
SECTION 3. Purchase and Sale. The commitment of the Underwriters to
purchase the Class A Certificates pursuant to this Agreement shall be deemed to
have been made on the basis of the representations and warranties of the Master
Servicer, the Depositor and the Seller herein contained and shall be subject to
the terms and conditions herein set forth. The Depositor agrees to instruct the
Trustee to issue, and agrees to sell to the Underwriters, and the Underwriters
agree, severally and not jointly (except as provided in Section 13 hereof), to
purchase from the Depositor, at the purchase price for each Class A Certificate
set forth on Schedule A hereto, the respective principal amount of Class A
Certificates set forth opposite the name of such Underwriter on Schedule A
hereto.
SECTION 4. Delivery and Payment. Payment of the purchase price for, and
delivery of, any Class A Certificates to be purchased by the Underwriters shall
be made at the office of Brown & Wood LLP, One World Trade Center, New York,
New York, or at such other place as shall be agreed upon by you, the Depositor,
the Seller and the Master Servicer, at 10:00 a.m. New York City time on January
__, 1997 or at such other time or date as shall be agreed upon in writing by
you, the Depositor, the Seller and the Master Servicer (the "Closing Date").
The Class A Certificates will be delivered in book-entry form through the
facilities of The Depository Trust Company, CEDEL S.A. and the Euroclear
System. Payment shall be made to the Depositor by wire transfer of same day
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funds payable to the account of the Depositor. Delivery of the Class A
Certificates shall be made to you for the respective accounts of the
Underwriters against payment of the purchase price thereof. Such Class A
Certificates shall be in such denominations and registered in such names as you
may request in writing at least one business day prior to the Closing Date.
Such Class A Certificates, which may be in temporary form, will be made
available for examination and packaging by you no later than 3:00 p.m. New York
City time on the first business day prior to the Closing Date.
SECTION 5. Offering by the Underwriters. It is understood that the
Underwriters propose to offer the Class A Certificates for sale to the public
as set forth in the Prospectus.
SECTION 6. Covenants of the Seller, the Depositor and the Master Servicer.
The Seller, the Depositor and the Master Servicer covenant with each of the
Underwriters as follows:
(a) If at any time when the Prospectus as amended or supplemented is
required by the 1933 Act to be delivered in connection with sales of the Class
A Certificates by the Underwriters, any event shall occur or condition exist as
a result of which it is necessary, in the opinion of your counsel or counsel
for the Depositor, to further amend or supplement the Prospectus as then
amended or supplemented in order that the Prospectus as amended or supplemented
will not include an untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, or if it shall be
necessary, in the opinion of any such counsel at any such time to amend or
supplement the Registration Statement or the Prospectus as then amended or
supplemented in order to comply with the requirements of the 1933 Act or the
Rules and Regulations thereunder, or if required by such Rules and Regulations,
including Rule 430A thereunder, to file a post-effective amendment to such
Registration Statement (including an amended Prospectus), the Depositor will
promptly prepare and file with the Commission such amendment or supplement as
may be necessary to correct such untrue statement or omission or to make the
Registration Statement comply with such requirements, and within two business
days will furnish to the Underwriters as many copies of the Prospectus, as
amended or supplemented, as you shall reasonably request; provided, however,
that the Depositor shall not be required to amend or supplement the
Registration Statement or the Prospectus as a result of any Underwriter's
breach of the representation and warranty set forth in Section 2(a) hereof.
(b) The Depositor will give you reasonable notice of its intention to file
any amendment to the Registration Statement, the Prospectus or the Prospectus
as amended or supplemented, pursuant to the 1933 Act, will furnish you with
copies of any such amendment or supplement proposed to be filed a reasonable
time in advance of filing, and will not file any such amendment or supplement
to which you or your counsel shall object.
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(c) The Depositor will notify you immediately, and confirm the notice in
writing, (i) of the effectiveness of any amendment to the Registration
Statement, (ii) of the mailing or the delivery to the Commission for filing of
any supplement to the Prospectus or the Prospectus as amended or supplemented,
(iii) of the receipt of any comments from the Commission with respect to the
Registration Statement or the Prospectus or the Prospectus as amended or
supplemented, (iv) of any request by the Commission for any amendment to the
Registration Statement or any amendment or supplement to the Prospectus or for
additional information and (v) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement or the
initiation of any proceedings for that purpose. The Depositor will make every
reasonable effort to prevent the issuance of any stop order and, if any stop
order is issued, to obtain the lifting thereof at the earliest possible moment.
(d) The Depositor will deliver to you as many signed and as many conformed
copies of the Registration Statement (as originally filed) and of each
amendment thereto (including exhibits filed therewith or incorporated by
reference therein and documents incorporated by reference in the Prospectus) as
you may reasonably request.
(e) The Depositor will make generally available to holders of the Class A
Certificates as soon as practicable, but in any event not later than 120 days
after the close of the period covered thereby, an earnings statement of the
Trust (which need not be audited) complying with Section 11(a) of the 1933 Act
and the Rules and Regulations (including, at the option of the Seller, Rule
158) and covering a period of at least twelve consecutive months beginning not
later than the first day of the first fiscal quarter following the Closing
Date.
(f) The Depositor will endeavor, in cooperation with you, to qualify the
Class A Certificates for offering and sale under the applicable securities laws
of such states and other jurisdictions of the United States as you may
designate, and will maintain or cause to be maintained such qualifications in
effect for as long as may be required for the distribution of the Class A
Certificates. The Depositor will file or cause the filing of such statements
and reports as may be required by the laws of each jurisdiction in which the
Class A Certificates have been qualified as above provided.
(g) Neither the Depositor nor the Master Servicer will, without your prior
written consent, publicly offer or sell or contract to sell any mortgage
pass-through certificates, mortgage pass-through notes or collateralized
mortgage obligations or other similar securities representing interests in or
secured by other mortgage-related assets originated or owned by the Depositor
or the Master Servicer for a period of five days following the commencement of
the offering of the Class A Certificates to the public.
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(h) So long as the Class A Certificates shall be outstanding, the
Depositor will deliver to the Underwriters the annual statement as to
compliance delivered to the Trustee pursuant to Section ___ of the Pooling and
Servicing Agreement and the annual statement of a firm of independent public
accountants furnished to the Trustee pursuant to Section ____ of the Pooling
and Servicing Agreement, as soon as such statements are furnished to the
Trustee.
(i) The Depositor will apply the net proceeds from the sale of the Class A
Certificates in the manner set forth in the Prospectus.
(j) If, between the date hereof and the Closing Date, to the knowledge of
the Master Servicer, the Seller or the Depositor there are any legal or
governmental proceedings instituted or threatened against the Master Servicer,
the Seller or the Depositor which, if determined adversely to the Master
Servicer, the Seller or the Depositor, would individually or in the aggregate
have a material adverse effect on the financial condition, shareholders' equity
or results of operations of the Master Servicer, the Seller or the Depositor,
the Master Servicer, the Seller and the Depositor, as applicable, will give
prompt written notice thereof to the Underwriters.
SECTION 7. Conditions to the Underwriters' Obligations. The obligations of
the Underwriters to purchase the Class A Certificates pursuant to this
Agreement are subject to the accuracy on and as of the Closing Date of the
representations and warranties on the part of the Master Servicer, the
Depositor and the Seller herein contained, to the material accuracy of the
statements of officers of the Seller, the Depositor and the Master Servicer,
respectively, made pursuant hereto, to the performance by the Seller, the
Depositor and the Master Servicer of all of their respective obligations
hereunder and to the following conditions at the Closing Date:
(a)(i) The Registration Statement shall have been declared effective under
the 1933 Act and no stop order suspending the effectiveness of the Registration
Statement shall have been issued under the 1933 Act or proceedings therefor
initiated or threatened by the Commission, any price-related information
previously omitted from the effective Registration Statement pursuant to Rule
430A under the 1933 Act shall have been transmitted to the Commission for
filing pursuant to Rule 424(b) under the 1933 Act within the prescribed time
period, and the Depositor shall have provided evidence satisfactory to the
Underwriters of such timely filing, or a post-effective amendment to the
Registration Statement providing such information shall have been promptly
filed with the Commission and declared effective in accordance with the
requirements of Rule 430A under the 1933 Act, and prior to the Closing Date the
Depositor shall have provided evidence satisfactory to the Underwriters of such
effectiveness and (ii)there shall not have come to your attention any facts
that would cause you to believe that the Prospectus, at the time it was
required to be delivered to
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a purchaser of the Class A Certificates, contained an untrue statement of a
material fact or omitted to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
(b) The Underwriters shall have received the favorable opinion, dated the
date of the Closing Date, of _________________, L.L.P., as special counsel to
the Depositor and the Master Servicer, in the form attached hereto as Exhibit
A.
(c) The Underwriters shall have received the favorable opinion, dated the
date of the Closing Date, of the Master Servicer, in form and substance
satisfactory to the Underwriters, to the effect that:
(i) the Master Servicer has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of
Delaware, with corporate power to own its properties, to conduct its
business as described in the Prospectus and to enter into and perform its
obligations under this Agreement, the Pooling and Servicing Agreement and
the Insurance Agreement.
(ii) The Depositor has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the State of Delaware,
with corporate power to own its properties, to conduct its business as
described in the Prospectus and to enter into and perform its obligations
under this Agreement, the Pooling and Servicing Agreement and the
Insurance Agreement.
(iii) the Master Servicer has full corporate power and authority to
serve in the capacity of master servicer of the Mortgage Loans as
contemplated in the Pooling and Servicing Agreement.
(iv) The Depositor and the Master Servicer is duly authorized under
relevant statutes, laws and court decisions, to conduct in the various
jurisdictions in which they do business the respective businesses therein
currently conducted by them, except where failure to be so permitted or
failure to be so authorized will not have a material adverse effect on the
business or financial condition of the Depositor or the Master Servicer,
and the Master Servicer is duly authorized under the statutes which
regulate the business of making loans or of financing the sale of goods
(commonly called "small loan laws," "consumer finance laws" or "sales
finance laws"), or are permitted under the general interest statutes and
related laws and court decisions, to conduct in the various jurisdictions
in which it does business the businesses as currently conducted therein by
it.
(v) Neither the Depositor nor the Master Servicer is in violation of
its Certificate or Articles of Incorporation or
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Bylaws or, to the best of such counsel's knowledge, in default in the
performance or observance of any material obligation, agreement, covenant
or condition contained in any contract, indenture, mortgage, loan
agreement, note, lease or other instrument known to such counsel to which
the Depositor or Master Servicer is a party or by which it or its
properties may be bound, which default might result in any material adverse
changes in the financial condition, earnings, affairs or business of the
Depositor or the Master Servicer or which might materially and adversely
affect the properties or assets, taken as a whole, of the Depositor or of
the Master Servicer.
(vi) This Agreement, the Pooling and Servicing Agreement and the
Insurance Agreement have been duly authorized, executed and delivered by
the Seller, the Depositor, and the Master Servicer and, assuming the due
authorization, execution and delivery of such agreements by the other
parties thereto, such agreements constitute the valid and binding
obligation of each of the Seller, the Depositor and the Master Servicer
and, enforceable against each of the Seller, the Depositor and the Master
Servicer, in accordance with their respective terms, and in accordance
with their terms, except that in each case as to enforceability (A) such
enforcement may be subject to bankruptcy, insolvency, reorganization,
moratorium or other similar laws now or hereafter in effect relating to
creditors' rights generally, (B) the remedy of specific performance and
injunctive and other forms of equitable relief may be subject to equitable
defenses and to the discretion of the court before which any proceeding
therefor may be brought and (C) the enforceability as to rights to
indemnification under this Agreement and the Insurance Agreement (to the
extent indemnification under such Agreements relates to liability under
the 1933 Act) may be subject to limitations of public policy under
applicable securities laws.
(vii) The issuance and delivery of the Certificates, the consummation
of any other of the transactions contemplated herein or in the Pooling and
Servicing Agreement or the Insurance Agreement, or the fulfillment of the
terms of this Agreement, the Pooling and Servicing Agreement or the
Insurance Agreement do not and will not conflict with or violate any term
or provision of the Certificate or Articles of Incorporation or Bylaws of
the Depositor or, to the best of such counsel's knowledge, any statute,
order or regulation applicable to the Depositor of any court, regulatory
body, administrative agency or governmental body having jurisdiction over
the Depositor and do not and will not conflict with, result in a breach or
violation or the acceleration of, or constitute a default under, or result
in the creation or imposition of any lien, charge or encumbrance upon any
of the property or assets of the Depositor pursuant to the terms of, any
indenture, mortgage, deed of trust, loan agreement or other agreement or
instrument known to such counsel to which
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the Depositor is a party or by which the Depositor may be bound or to which
any of the property or assets of the Depositor may be subject except for
conflicts, violations, breaches, accelerations and defaults which would
not, individually or in the aggregate, be materially adverse to the
Depositor or materially adverse to the transactions contemplated by this
Agreement.
(viii) The consummation of any of the transactions contemplated
herein or in the Pooling and Servicing Agreement or the Insurance
Agreement, or the fulfillment of the terms of this Agreement or the
Pooling and Servicing Agreement or the Insurance Agreement, do not and
will not conflict with or violate any term or provision of the Certificate
or Articles of Incorporation or Bylaws of the Master Servicer or, to the
best of such counsel's knowledge, any statute, order or regulation
applicable to the Master Servicer, and do not and will not conflict with,
result in a breach or violation or the acceleration of, or constitute a
default under, or result in the creation or imposition of any lien, charge
or encumbrance upon any of the property or assets of the Master Servicer
pursuant to the terms of, any indenture, mortgage, deed of trust, loan
agreement or other agreement or instrument known to such counsel to which
the Master Servicer is a party or by which the Master Servicer may be
bound or to which any of the property or assets of the Master Servicer may
be subject except for conflicts, violations, breaches, accelerations and
defaults which would not, individually or in the aggregate, be materially
adverse to the Master Servicer or materially adverse to the transactions
contemplated by this Agreement.
(ix) The direction by the Depositor to the Trustee to execute, issue,
countersign and deliver the Certificates has been duly authorized by the
Depositor and, assuming that the Trustee has been duly authorized to do so
and when executed and countersigned and delivered by the Trustee against
payment of the agreed upon consideration therefor in accordance with the
Pooling and Servicing Agreement, the Certificates will be validly issued
and outstanding and will be entitled to the benefits of the Pooling and
Servicing Agreement.
(x) To the best of such counsel's knowledge, no consent, approval,
authorization, order, registration or qualification of or with any court
or governmental agency or body of the United States is required for the
issuance of the Class A Certificates and the sale of the Class A
Certificates to the Underwriters, or the consummation by the Seller, the
Depositor and the Master Servicer of the other transactions contemplated
by this Agreement, the Pooling and Servicing Agreement and the Insurance
Agreement, except the registration under the 1933 Act of the Class A
Certificates and such consents, approvals, authorizations, registrations
or qualifications as may be required under State securities or Blue Sky
laws in connection with the issuance of the Class A Certificates and the
purchase
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and distribution of the Class A Certificates by the Underwriters or as have
been obtained.
(xi) The Registration Statement is effective under the 1933 Act and
to the best of such counsel's knowledge and information, no stop order
suspending the effectiveness of the Registration Statement has been issued
under the 1933 Act or proceedings therefor initiated or threatened by the
Commission.
(xii) The conditions to the use by the Depositor of a registration
statement on Form S-3 under the 1933 Act, as set forth in the General
Instructions to Form S-3, have been satisfied with respect to the
Registration Statement and the Prospectus. To the best of such counsel's
knowledge, there are no contracts or documents of the Depositor which are
required to be filed as exhibits to the Registration Statement pursuant to
the 1933 Act or the Rules and Regulations thereunder which have not been
so filed. The statements in the Prospectus under the caption "Risk
Factors--Legal Considerations" and under the caption "Certain Legal
Aspects of the Primary Assets", to the extent that statements in such
sections constitute matters of law or legal conclusions with respect
thereto, have been reviewed by attorneys under such counsel's supervision
and are complete and correct in all material respects.
(xiii) There are no actions, proceedings or investigations pending
before or, to the best knowledge of such counsel, threatened by any court,
administrative agency or other tribunal to which the Master Servicer, the
Depositor or the Seller is a party or of which any of their respective
properties is the subject (A) which if determined adversely to the Master
Servicer, the Depositor or the Seller would have a material adverse effect
on the business or financial condition of the Master Servicer, the
Depositor or the Seller, (B) asserting the invalidity of the Pooling and
Servicing Agreement and the Insurance Agreement, or the Certificates, (C)
seeking to prevent the issuance of the Certificates or the consummation by
the Master Servicer, the Depositor or the Seller of any of the
transactions contemplated by the Pooling and Servicing Agreement, the
Insurance Agreement and this Agreement, as the case may be, or (D) which
might materially and adversely affect the performance by the Master
Servicer, the Depositor or the Seller of their respective obligations
under, or the validity or enforceability of, the Pooling and Servicing
Agreement, the Insurance Agreement, this Agreement, or the Certificates.
(xiv) The Registration Statement at the time it became effective, and
any amendment thereto at the time such amendment becomes effective (other
than the information set forth under "Credit Enhancement--Description of
the Certificate Insurer," "Experts" and financial statements and
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other financial and statistical information contained therein, as to which
such counsel need express no opinion), complied as to form in all material
respects with the applicable requirements of the 1933 Act and the Rules and
Regulations thereunder.
(xv) Such counsel has no reason to believe that (A) the Registration
Statement and the Prospectus, as of the date the Registration Statement
became effective, or the Registration Statement (excluding the exhibits
thereto) as of the date that the most recent post-effective amendment
thereto became effective, contained or contains any untrue statement of a
material fact or omitted or omits to state any material fact required to
be stated therein or necessary in order to make the statements therein not
misleading or (B) the Prospectus, as of its date and the date of such
opinion, contained or contains any untrue statement of a material fact or
omitted or omits to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they
were made, not misleading (it being understood that such counsel need
express no opinion as to information set forth under the caption "Credit
Enhancement--Description of the Certificate Insurer," "Experts" and the
financial statements or other financial and statistical data contained or
incorporated by reference in the Registration Statement).
Such opinion may express its reliance as to factual matters on the
representations and warranties made by the parties hereto, and on certificates
or other documents furnished by officers of such parties to the instruments and
documents referred to therein. Such opinion may be qualified, insofar as it
concerns the enforceability of the documents referred to therein, to the extent
that such enforceability may be limited by bankruptcy, insolvency,
reorganization or other similar laws affecting the enforcement of creditors'
rights in general, or by general principles of equity (regardless of whether
such enforcement is considered in a proceeding in equity or at law) and no
opinion need be given as to the enforceability of Section 9 of this Agreement.
(d) The Underwriters shall have received the favorable opinion of counsel
to the Trustee, dated the date of the Closing Date, addressed to the
Underwriters and in form and scope satisfactory to counsel to the Underwriters,
to the effect that:
(i) The Trustee has duly authorized, executed and delivered the
Pooling and Servicing Agreement, and the Insurance Agreement, which
constitute the valid and legally binding agreements of the Trustee, are
enforceable against the Trustee in accordance with their terms, subject,
as to enforcement of remedies, (A) to applicable bankruptcy, insolvency,
reorganization, and other similar laws affecting the rights of creditors
generally and (B) to general principles of equity (regardless of whether
such
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enforceability is considered in a proceeding in equity or at law).
(ii) The Trustee has duly executed and countersigned the Certificates
issued on the date thereof on behalf of the Trust.
(iii) The execution and delivery by the Trustee of the Pooling and
Servicing Agreement, and the Insurance Agreement and the performance by
the Trustee of its obligations thereunder do not conflict with or result
in a violation of the Organization Certificate or Bylaws of the Trustee.
(iv) The Trustee has full power and authority to execute and deliver
the Pooling and Servicing Agreement, and the Insurance Agreement and to
perform its obligations thereunder.
(v) To the best of such counsel's knowledge, there are no actions,
proceedings or investigations pending or threatened against or affecting
the Trustee before or by any court, arbitrator, administrative agency or
other governmental authority which, if adversely decided, would materially
and adversely affect the ability of the Trustee to carry out the
transactions contemplated in the Pooling and Servicing Agreement, and the
Insurance Agreement.
(vi) No consent, approval or authorization of, or registration,
declaration or filing with, any court or governmental agency or body of
the United States of America or any state thereof is required for the
execution, delivery or performance by the Trustee of the Pooling and
Servicing Agreement, and the Insurance Agreement.
(e) The Underwriters shall have received the favorable opinion or
opinions, dated the date of the Closing Date, of Brown & Wood LLP, as counsel
for the Underwriters, with respect to the issuance of the Class A Certificates
and the sale of the Class A Certificates to the Underwriters, the Registration
Statement, this Agreement, the Prospectus and such other related matters as the
Underwriters may require.
(f) The Underwriters shall have received the favorable opinion, dated the
date of the Closing Date, of Kutak Rock, special counsel for the Certificate
Insurer, in form and scope satisfactory to counsel for the Underwriters, to the
effect that:
(i) The Certificate Insurer is duly incorporated, validly existing
and in good standing under the laws of the State of New York.
(ii) The Certificate Insurer has the corporate power to execute and
deliver, and to take all action required of it under, the Insurance
Agreement, the Insurance Indemnification Agreement (as defined herein) and
the Policy.
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<PAGE>
(iii) The execution, delivery and performance by the Certificate
Insurer of the Insurance Agreement, the Insurance Indemnification
Agreement and the Policy do not require the consent or approval of, the
giving of notice to, the prior registration with, or the taking of any
other action in respect of, any state or other governmental agency or
authority that has not previously been obtained or effected.
(iv) The Policy, the Insurance Agreement and the Insurance
Indemnification Agreement have been duly authorized, executed and
delivered by the Certificate Insurer and, assuming due authorization,
execution and delivery of the Insurance Agreement and the Insurance
Indemnification Agreement by the parties thereto (other than the
Certificate Insurer), each of the Policy, the Insurance Agreement and the
Insurance Indemnification Agreement constitutes the legally valid and
binding obligation of the Certificate Insurer, enforceable in accordance
with its respective terms subject, as to enforcement, to (A) bankruptcy,
reorganization, insolvency, moratorium and other similar laws relating to
or affecting the enforcement of creditors' rights generally, including,
without limitation, laws relating to fraudulent transfers or conveyances,
preferential transfers and equitable subordination, presently or from time
to time in effect, and general principles of equity (regardless of whether
such enforcement is considered in a proceeding in equity or at law), as
such laws may be applied in any such proceeding with respect to the
Certificate Insurer, (B) the qualification that the remedy of specific
performance may be subject to equitable defenses and to the discretion of
the court before which any proceedings with respect thereto may be brought
and (C) the enforceability of rights to indemnification under the
Insurance Indemnification Agreement may be subject to limitations of
public policy under applicable securities laws.
(v) The Policy is not required to be registered under
the 1933 Act.
(g) The Underwriters shall have received an opinion, dated the date of the
Closing Date, of Morrison & Hecker, L.L.P. as special counsel to the Seller,
the Depositor and the Master Servicer, addressed to the Seller, the Depositor
and satisfactory to the Certificate Insurer, Standard & Poor's Ratings Services
and Moody's Investors Service, Inc., relating to the sale of the Mortgage Loans
by the Seller to the Depositor and by the Depositor to the Trust and such
counsel shall have consented to reliance by the Certificate Insurer, Standard &
Poor's Ratings Services and Moody's Investors Service, Inc. and the
Underwriters on such opinion as though such opinion had been addressed to each
such party.
(h) Each of the Seller, the Depositor and the Master Servicer shall have
furnished to the Underwriters a certificate signed on behalf of the Seller, the
Depositor and the Master Servicer by an
19
<PAGE>
accounting or financial officer thereof, dated the date of the Closing Date, as
to (i) the accuracy of the representations and warranties of the Master
Servicer, the Depositor and the Seller herein at and as of the Closing Date,
(ii) there being no legal or governmental proceedings pending, other than those,
if any, referred to in the Prospectus or the Prospectus as amended or
supplemented, as the case may be, to which the Seller, the Depositor or the
Master Servicer is a party or of which any property of the Seller, the Depositor
or the Master Servicer is the subject, which, in the judgment of the Seller, the
Depositor or the Master Servicer, as applicable, have a reasonable likelihood of
resulting in a material adverse change in the financial condition, shareholders'
equity or results of operations of the Seller, the Depositor and the Master
Servicer; and to the best knowledge of each of the Seller, the Depositor or the
Master Servicer, as applicable, no such proceedings are threatened or
contemplated by governmental authorities or threatened by others, (iii) the
performance by the Seller, the Depositor and the Master Servicer of all of their
respective obligations hereunder to be performed at or prior to the Closing
Date, and (iv) such other matters as you may reasonably request.
(i) The Trustee shall have furnished to the Underwriters a certificate of
the Trustee, signed by one or more duly authorized officers of the Trustee,
dated the date of the Closing Date, as to the due authorization, execution and
delivery of the Pooling and Servicing Agreement by the Trustee and the
acceptance by the Trustee of the trust created by the Pooling and Servicing
Agreement and the due execution and delivery of the Certificates by the Trustee
thereunder and such other matters as you shall reasonably request.
(j) An Insurance Indemnification Agreement shall have been entered into
between the Certificate Insurer, the Master Servicer, the Depositor, the Seller
and the Underwriters, in which the Certificate Insurer will represent to the
Underwriters, among other representations, that (i) the information under the
captions "Description of the Certificate Insurer," and "Credit
Enhancement--Description of the Certificate Insurance Policies" in the
Prospectus was approved by the Certificate Insurer and does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make such statements therein, in the light of the circumstances under which
they were made, not misleading and (ii) there has been no change in the
financial condition of the Certificate Insurer since September 30, 1996 which
would have a material adverse effect on the Certificate Insurer's ability to
meet its obligations under the Policy.
(k) The Policies shall have been issued by the Certificate Insurer
pursuant to the Insurance Agreement and shall have been duly countersigned by
an authorized agent of the Certificate Insurer, if so required under applicable
state law or regulation.
20
<PAGE>
(l) The Class A Certificates shall have been rated "AAA" by Standard &
Poor's Ratings Services and "Aaa" by Moody's Investors Service, Inc.
(m) Counsel and special counsel to the Master Servicer, the Depositor and
the Seller shall have furnished to the Underwriters any opinions supplied to
the rating agencies relating to certain matters with respect to the Class A
Certificates.
(n) The Underwriters shall have received from Deloitte & Touche LLP, or
other independent certified public accountants acceptable to the Underwriters,
a letter, dated as of the date of this Agreement in the form heretofore agreed
to.
(o) Prior to the Closing Date, Brown & Wood LLP, as counsel for the
Underwriters, shall have been furnished with such documents and opinions as
they may reasonably require for the purpose of enabling them to pass upon the
issuance of the Class A Certificates and the sale of the Class A Certificates
to the Underwriters as herein contemplated and related proceedings or in order
to evidence the accuracy and completeness of any of the representations and
warranties, or the fulfillment of any of the conditions, herein contained; and
all proceedings taken by the Seller, the Depositor and the Master Servicer in
connection with the issuance of the Class A Certificates and the sale of the
Class A Certificates to the Underwriters as herein contemplated shall be
satisfactory in form and substance to the Underwriters and Brown & Wood LLP.
(p) Since the respective dates as of which information is given in the
Prospectus, there shall not have been any change, or any development involving
a prospective change, in or affecting the general affairs, management,
financial condition, stockholders' equity or results of operations of the
Seller, the Depositor or the Master Servicer otherwise than as set forth or
contemplated in the Prospectus, the effect of which is in the judgment of the
Underwriters so material and adverse as to make it impracticable or inadvisable
to proceed with the public offering or the delivery of the Class A Certificates
on the terms and in the manner contemplated in the Prospectus.
(q) Prior to the Closing Date, the Seller, the Depositor and the Master
Servicer shall have furnished to you such further information, certificates and
documents as you may reasonably request.
If any condition specified in this Section 7 shall not have been fulfilled
when and as required to be fulfilled, this Agreement may be terminated by you
by notice to the Depositor at any time at or prior to the Closing Date, and
such termination shall be without liability of any party to any other party
except as provided in Section 8.
SECTION 8. Payment of Expenses. The Seller, the Depositor and the Master
Servicer jointly and severally agree to pay all
21
<PAGE>
expenses incident to the performance of their obligations under this Agreement,
including without limitation those related to (i)the filing of the Registration
Statement and all amendments thereto, (ii)the preparation, issuance and delivery
of the Certificates, (iii)the fees and disbursements of Morrison & Hecker,
L.L.P./Brown & Wood LLP, as special counsel for the Seller, the Depositor and
the Master Servicer, and Deloitte & Touche LLP, accountants of the Seller, the
Depositor and the Master Servicer, (iv)the qualification of the Class A
Certificates under securities and Blue Sky laws and the determination of the
eligibility of the Class A Certificates for investment in accordance with the
provisions of subsection 6(f) including filing fees, and the fees and
disbursements of Brown & Wood LLP, as counsel for the Underwriters, (v)the
printing and delivery to the Underwriters, in such quantities as you may
reasonably request, of copies of the Registration Statement and Prospectus and
all amendments and supplements thereto, and of any Blue Sky Survey, (vi)the
delivery to the Underwriters, in such quantities as you may reasonably request,
of copies of the Pooling and Servicing Agreement, the Insurance Agreement and
Insurance Indemnification Agreement, (vii)the fees charged by nationally
recognized statistical rating agencies for rating the Class A Certificates,
(viii)the fees and expenses of the Trustee and its counsel and (ix)the fees and
expenses of the Certificate Insurer and its counsel.
If this Agreement is terminated by you in accordance with the provisions
of Section 7, the Seller, the Depositor and the Master Servicer shall reimburse
you for all reasonable out-of-pocket expenses, including the fees and
disbursements of Brown & Wood LLP, as counsel for the Underwriters.
SECTION 9. Indemnification. (a) The Master Servicer, the Depositor
and the Seller jointly and severally agree to indemnify and hold harmless
the Underwriters and each person, if any, who controls the Underwriters within
the meaning of Section 15 of the 1933 Act as follows:
(i) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement or alleged
untrue statement of a material fact contained in the Registration
Statement (or any amendment thereto), including the information deemed to
be a part of the Registration Statement pursuant to Rule 430A under the
1933 Act, if applicable, or the omission or alleged omission therefrom of
a material fact required to be stated therein or necessary to make the
statements therein not misleading or arising out of any untrue statement
or alleged untrue statement of a material fact contained in the Prospectus
(or any amendment or supplement thereto) or the omission or alleged
omission therefrom of a material fact necessary in order to make the
statements therein, in light of the circumstances under which they were
made, not misleading, unless (a) such untrue statement or omission or
alleged untrue statement or omission was made in reliance upon and in
22
<PAGE>
conformity with written information furnished to the Depositor, or
information electronically transmitted to the Depositor, by the
Underwriters or the Certificate Insurer expressly for use in the
Registration Statement (or any amendment thereto), (b) such loss,
liability, claim, damage or expense is incurred by an Underwriter solely
as a result of the distribution by it of Computational Materials in
violation of Section 2(a) hereof or (c) such untrue statement or omission
or alleged untrue statement or omission was made in any Preliminary
Prospectus and corrected in the Prospectus and (1) any such loss, claim,
damage or liability suffered or incurred by an Underwriter resulted from
an action, claim or suit by any person who purchased the Class A
Certificates from such Underwriter in the offering and (2) such
Underwriter failed to deliver or provide a copy of the Prospectus dated
January __, 1997 to such person at or prior to the confirmation of the
sale of such Class A Certificates in any case where such delivery is
required by the 1933 Act;
(ii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, to the extent of the aggregate amount paid in
settlement of any litigation, or investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim
whatsoever based upon any such untrue statement or omission, or any such
alleged untrue statement or omission, if such settlement is effected with
the written consent of the Depositor; and
(iii) against any and all expense whatsoever (including the fees and
disbursements of counsel chosen by you) as reasonably incurred in
investigating, preparing to defend or defending against or appearing as a
third party witness with respect to any litigation, or investigation or
proceeding by any governmental agency or body, commenced or threatened, or
any claim whatsoever based upon any such untrue statement or omission, as
such expense is incurred and to the extent that any such expense is not
paid under (i) or (ii) above.
This indemnity agreement will be in addition to any liability which the
Depositor may otherwise have.
(b) Each of the Underwriters severally agrees to indemnify and hold
harmless the Seller and the Depositor, each of their directors, each of their
officers who signed the Registration Statement, and each person, if any, who
controls the Seller and/or the Depositor within the meaning of Section 15 of
the 1933 Act (each, an "Indemnified Party") against any and all loss,
liability, claim, damage and expense, as incurred, described in the indemnity
contained in subsection (a) of this Section 9, arising out of any untrue
statements or omissions, or alleged untrue statements or omissions, made in the
Registration Statement (or any amendment thereto) or the Prospectus (or any
amendment or supplement thereto) in reliance upon and in conformity with
written information furnished to the Seller and/or to the Depositor by such
Underwriter
23
<PAGE>
expressly for use in the Registration Statement (or any amendment thereto) or
the Prospectus (or any amendment or supplement thereto). The parties hereto
acknowledge that the only information supplied to the Seller and/or to the
Depositor by the Underwriters expressly for use in the Registration Statement or
the Prospectus is limited to the information set forth in the second sentence of
the fourth paragraph on the cover, the third paragraph on page 2, and the second
paragraph under the caption "Underwriting" in the Prospectus. In addition, each
Underwriter severally agrees to indemnify and hold harmless each Indemnified
Party against any and all loss, liability, claim, damage and expense, as
incurred, arising solely out of any breach of such Underwriter's representation
and warranty set forth in Section 2(a) hereof. This indemnity agreement will be
in addition to any liability that the Underwriters may otherwise have.
(c) Each indemnified party shall give prompt notice to each indemnifying
party of any action commenced against it with respect to which indemnity may be
sought hereunder, but failure to so notify an indemnifying party shall not
relieve it from any liability which it may have hereunder unless it has been
materially prejudiced by such failure to notify or from any liability which it
may have otherwise than on account of this indemnity agreement. An indemnifying
party may participate at its own expense in the defense of such action. In no
event shall the indemnifying parties be liable for the fees and expenses of
more than one counsel for all indemnified parties in connection with any one
action or separate but similar or related actions in the same jurisdiction
arising out of the same general allegations or circumstances, unless (i) if the
defendants in any such action include one or more of the indemnified parties
and the indemnifying party, and one or more of the indemnified parties shall
have employed separate counsel after having reasonably concluded that there may
be legal defenses available to it or them that are different from or additional
to those available to the indemnifying party or to one or more of the other
indemnified parties or (ii) the indemnifying party shall not have employed
counsel reasonably satisfactory to the indemnified party to represent the
indemnified party within a reasonable time after notice of the commencement of
the action.
SECTION 10.Contribution. In order to provide for just and equitable
contribution in circumstances in which the indemnity agreement provided for in
Section 9 is for any reason held to be unenforceable by the indemnified parties
although applicable in accordance with its terms, the Master Servicer, the
Depositor and the Seller on the one hand, and the Underwriters (or Underwriter,
if such loss, liability, claim, damage or expense arises solely as a result of
such Underwriter's breach of the representation and warranty set forth in
Section 2(a) hereof), on the other, shall contribute to the aggregate losses,
liabilities, claims, damages and expenses of the nature contemplated by said
indemnity agreement incurred by the Seller and/or the Depositor and one or more
of the Underwriters (i) except for any Underwriter's indemnification arising
solely from a breach of its representation and warranty set
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<PAGE>
forth in Section 2(a) hereof, in such proportion as shall be appropriate to
reflect the relative benefits to the Master Servicer, the Depositor and the
Seller on the one hand and the Underwriters on the other in connection with the
matter to which the indemnification relates, which relative benefits shall be
deemed to be in such proportions the Underwriters shall be responsible for that
portion represented by the percentage that the underwriting discount on the
cover of the Prospectus at the Closing Time bears to the initial public offering
price for the Class A Certificates as set forth thereon, and the Master
Servicer, the Depositor and the Seller shall be jointly and severally
responsible for the balance or (ii) if the allocation provided by clause (i)
above is not permitted by applicable law or otherwise prohibited hereby, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of the Master Servicer, the
Depositor and the Seller on the one hand and the Underwriters or Underwriter, as
applicable, on the other in connection with the statements or omissions that
resulted in such losses, claims, damages or liabilities, or actions in respect
thereof, as well as any other relevant equitable considerations; provided,
however, that no person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. Relative
fault shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the Master
Servicer, the Depositor or the Seller, on the one hand, or the Underwriters, on
the other hand, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such untrue statement or
omission. The Master Servicer, the Depositor, the Seller and the Underwriters
agree that it would not be just and equitable if contributions pursuant to this
Section 10 were to be determined by pro rata allocation (even if the
Underwriters were treated as one entity for such purpose) or by any other method
of allocation which does not take into account the equitable considerations
referred to in the first sentence of this Section 10. The amount paid by an
indemnified party as a result of the losses, claims, damages or liabilities (or
actions in respect thereof) referred to in the first sentence of this Section 10
shall be deemed to include any legal or other expenses reasonably incurred by
such indemnified party in connection with investigating, preparing to defend or
defending against any action or claim that is the subject of this Section 10.
Notwithstanding the provisions of this Section 10, except for any loss, claim,
damage, liability or expense resulting solely from any Underwriter's breach of
the representation and warranty set forth in Section 2(a) hereof, [no
Underwriter shall be required to contribute any amount in excess of the amount
by which the total price at which the Class A Certificates underwritten by such
Underwriter and distributed to the public were offered to the public exceeds the
amount of any damages which such Underwriter has otherwise been required to pay
in respect of such losses,
25
<PAGE>
liabilities, claims, damages and expenses.] The Underwriters' obligations in
this Section 10 to contribute are several in proportion to their respective
underwriting obligations and not joint, and no Underwriter shall be required to
contribute to any loss, liability, claim, damage or expense as a result of
another Underwriter's breach of the representation and warranty set forth in
Section 2(a) hereof. Each party entitled to contribution agrees that upon the
service of a summons or other initial legal process upon it in any action
instituted against it in respect to which contribution may be sought, it shall
promptly give written notice of such service to the party or parties from whom
contribution may be sought, but the omission so to notify such party or parties
of any such service shall not relieve the party from whom contribution may be
sought for any obligation it may have hereunder or otherwise (except as
specifically provided in Section 9 hereof). For purposes of this Section 10,
each person, if any, who controls any Underwriter within the meaning of Section
15 of the 1933 Act shall have the same rights to contribution as such
Underwriter, and each respective director of the Seller and/or the Depositor,
each respective officer of the Seller and/or the Depositor who signed the
Registration Statement, and each person, if any, who controls the Seller and/or
the Depositor within the meaning of Section 15 of the 1933 Act shall have the
same rights to contribution as the Seller and/or the Depositor.
SECTION 11. Representations, Warranties and Agreements to Survive
Delivery. All representations, warranties and agreements contained in this
Agreement or contained in certificates of officers of the Seller, the Depositor
or the Master Servicer submitted pursuant hereto shall remain operative and in
full force and effect, regardless of any investigation made by or on behalf of
the Underwriters or controlling person thereof, or by or on behalf of the
Seller, the Depositor or the Master Servicer and shall survive delivery of any
Underwritten Certificates to the Underwriters.
SECTION 12. Termination of Agreement. You, as representative of the
Underwriters, may terminate this Agreement, immediately upon notice to the
Depositor, at any time at or prior to the Closing Date (i) if there has been an
outbreak or material escalation of hostilities involving the United States of
America where armed conflict appears imminent, or the declaration by the United
States of America of a national emergency or war, if the effect of any such
event in the Underwriters' reasonable judgment makes it impracticable or
inadvisable to proceed with the public offering of the Class A Certificates or
(ii) if trading generally on the New York Stock Exchange has been suspended, or
minimum prices have been established by the exchange or by order of the
Commission or any other governmental authority, or if a banking moratorium has
been declared by either federal or New York State authorities. In the event of
any such termination, the covenant set forth in subsection 6(b), the provisions
of Section 8, the indemnity agreement set forth in Section 9, and the
provisions of Sections 10 and 15 shall remain in effect.
26
<PAGE>
SECTION 13. Default by One or More of the Underwriters. If one or more of
the Underwriters participating in the public offering of the Class A
Certificates shall fail at the Closing Date to purchase the Class A
Certificates which it is (or they are) obligated to purchase hereunder (the
"Defaulted Certificates"), then such of the non-defaulting Underwriters shall
have the right, within 24 hours thereafter, to make arrangements for one or
more of the non-defaulting Underwriters, or any other underwriters, to purchase
all, but not less than all, of the Defaulted Certificates in such amounts as
may be agreed upon and upon the terms herein set forth. If, however, you have
not completed such arrangements within such 24-hour period, then:
(i) if the aggregate principal amount of Defaulted Certificates does
not exceed 10% of the aggregate principal amount of the Class A
Certificates to be purchased pursuant to this Agreement, the
non-defaulting Underwriters named in this Agreement shall be obligated to
purchase the full amount thereof in the proportions that their respective
underwriting obligations hereunder bear to the underwriting obligations of
all such non-defaulting Underwriters, or
(ii) if the aggregate principal amount of Defaulted Certificates
exceeds 10% of the aggregate principal amount of the Class A Certificates
to be purchased pursuant to this Agreement, this Agreement shall
terminate, without any liability on the part of any non-defaulting
Underwriters.
No action taken pursuant to this Section 13 shall relieve any defaulting
Underwriter from the liability with respect to any default of such Underwriter
under this Agreement.
In the event of a default by any Underwriters as set forth in this Section
13, either you or the Seller shall have the right to postpone the Closing Date
for a period not exceeding five Business Days in order that any required
changes in the Registration Statement or Prospectus or in any other documents
or arrangements may be effected.
SECTION 14. Notices. All notices and other communications hereunder shall
be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the
Underwriters shall be directed to them at the address set forth on the first
page hereof. Notices to the Seller, the Depositor or the Master Servicer shall
be directed to Block Mortgage Finance, Inc., 4435 Main Street, Suite 500,
Kansas City, Missouri 64111, to the attention of the Secretary, with a copy to
the Treasurer.
SECTION 15. Parties. This Agreement shall inure to the benefit of and be
binding upon the Underwriters, the Seller, the Depositor and the Master
Servicer, and their respective successors. Nothing expressed or mentioned in
this Agreement is intended nor shall it be construed to give any person, firm
or corporation,
27
<PAGE>
other than the parties hereto and their respective successors and the
controlling persons and officers and directors referred to in Sections 9 and 10
and their heirs and legal representatives, any legal or equitable right, remedy
or claim under or with respect to this Agreement or any provision herein
contained. This Agreement and all conditions and provisions hereof are intended
to be for the sole and exclusive benefit of the parties and their respective
successors and said controlling persons and officers and directors and their
heirs and legal representatives (to the extent of their rights as specified
herein) and except as provided above for the benefit of no other person, firm or
corporation. No purchaser of Class A Certificates from the Underwriters shall be
deemed to be a successor by reason merely of such purchase.
SECTION 16. Governing Law and Time. This Agreement shall be governed by
the law of the State of New York and shall be construed in accordance with such
law. Specified times of day refer to New York City time.
SECTION 17. Counterparts. This Agreement may be executed in counterparts,
each of which shall constitute an original of any party whose signature appears
on it, and all of which shall together constitute a single instrument.
28
<PAGE>
If the foregoing is in accordance with the Underwriters' understanding of
our agreement, please sign and return to us a counterpart hereof, whereupon
this instrument along with all counterparts will become a binding agreement
among the Underwriters, the Seller, HFC and the Subservicers in accordance with
its terms.
Very truly yours,
BLOCK MORTGAGE FINANCE, INC. as
Depositor
By:________________________________________
Name:
Title:
COMPANION MORTGAGE CORPORATION, as
Seller
By:________________________________________
Name:
Title:
BLOCK FINANCIAL CORPORATION, as
Master Servicer
By:________________________________________
Name:
Title:
<PAGE>
CONFIRMED AND ACCEPTED, as of the date first above written:
MORGAN STANLEY & CO. INCORPORATED
as Representative of the Underwriters
By:________________________________
Name:
Title:
<PAGE>
<TABLE>
<CAPTION>
Schedule A
----------
Underwriting
------------
Class A-1 Class A-2 Class A-3 Class A-4 Class A-5
Underwriter Certificates Certificates Certificates Certificates Certificates
----------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Morgan Stanley & Co. $ $ $ $ $
Incorporated...........
Salomon Brothers Inc... $ $ $ $ $
</TABLE>
<PAGE>
EXHIBIT A
Opinion of _________________ pursuant to
Section 7(b) of the Underwriting Agreement
January __, 1997
MORGAN STANLEY & CO. INCORPORATED
as Representative of the Underwriters
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Re: Block Asset Backed
Certificates, Series 1997-1,
-----------------------------
Ladies and Gentlemen:
We address this opinion to you pursuant to Section 7(b) of the Underwriting
Agreement dated January ___, 1997 (the "Underwriting Agreement") among
______________ and the underwriters referred to therein (together, the
"Underwriters"). Pursuant to the Pooling and Servicing Agreement referred to
below, the Seller will sell to the Depositor, and the Depositor will sell to
the Trust all of their right, title and interest in and to the Mortgage Loans.
Capitalized terms not defined herein have the meanings ascribed to them in the
Underwriting Agreement.
As special counsel for the Seller and the Depositor, we have, among other
things (i) participated in the preparation of the Agreement and (ii) cooperated
with officers of the Seller and the Depositor, representative of the
Underwriters and independent accountants in the preparation of the Registration
Statement on Form S-3 (Registration Nos. 333-14041) filed with the Securities
and Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended (the "Act"), the Prospectus dated January ___, 1997 and the Prospectus
Supplement, dated January __, 1997, each in the form in which it was
transmitted for filing with the Commission pursuant to Rule 424(b) of the Rules
and Regulations under the Act (together the "Final Prospectus").
We advise you that in our opinion:
[(i) The Agreement is not required to be qualified under the Trust Indenture
Act;]
[(ii) Neither the Seller nor the Trust created by the Agreement is an
"investment company" or under the "control"
A-1
<PAGE>
of an "investment company" as such terms are defined in the Investment Company
Act of 1940;]
[(iii) The Certificates and the Agreement conform in all material respects
to the respective descriptions thereof in the Final Prospectus; and]
(iv) The statements in the Final Prospectus under the captions "Prospectus
Summary--Federal Income Tax Consequences" and "Federal Income Tax Consequences"
to the extent that they constitute matters of law or legal conclusions with
respect thereto, have been prepared or reviewed by us and correctly represent
our opinion.
The opinions set forth herein are subject to the following qualifications:
No opinion is expressed as to the effect of the compliance or noncompliance
of the Seller, the Depositor or the Trustee with any state or federal laws or
regulations applicable to them because of their legal or regulatory status or
the nature of their respective businesses, or to the due authorization,
execution and delivery of the Agreement and the Certificates. As to such
matters, we have relied upon the opinion of ____________________ of even date
herewith, delivered pursuant to Section 7(c) of the Underwriting Agreement, and
have made no independent investigation of the matters referred to in such
opinion.
In expressing the foregoing opinions, we have examined originals, or copies
of originals certified to our satisfaction, of such agreements, documents,
certificates and other statements of public officials and responsible officers
of each of the Seller, the Depositor and the Trustee and other papers and
matters of fact and law as we have deemed relevant and necessary as a basis for
the opinions we expressed herein. We have relied, with respect to factual
matters, on representations and warranties made by, and on certificates and
other documents furnished by responsible officers of each of the Trustee, the
Seller and the Depositor. In expressing the foregoing opinions, we have
assumed, with your permission, (i) the authenticity of all documents submitted
to us as originals and the conformity with the original documents of any copies
of such documents submitted to us for our examination, (ii) that each of the
Seller, the Depositor and the Trustee has been duly organized and is validly
existing and in good standing under the laws of its jurisdiction of
incorporation and (iii) the due execution and delivery, pursuant to due
authorization, of the agreements and documents referred to above by the
Trustee.
A-2
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The opinions expressed herein are only with respect to federal laws of the
United States and the laws of the State of New York. We consent to the reliance
on this opinion by Standard & Poor's Ratings Services and Moody's Investors
Service, Inc. Subject to the foregoing sentence, this opinion is being
delivered solely for the benefit of the persons to whom it is addressed.
Accordingly, it may not be quoted, filed with any government authority or other
regulatory agency or otherwise circulated or utilized for any purpose without
our prior written consent.
Very truly yours,
<PAGE>
CERTIFICATE OF INCORPORATION
OF
BLOCK MORTGAGE FINANCE, INC.
Pursuant to Title 8 of the
Delaware Code of 1953, as Amended
ARTICLE I
NAME
The name of the Corporation is Block Mortgage Finance, Inc.
ARTICLE II
REGISTERED OFFICE AND REGISTERED AGENT
The registered office of the Corporation in the State of Delaware is
located at 1209 Orange Street in the City of Wilmington, County of New Castle
19805. The name of the Corporation's registered agent is Corporation Trust
Company.
ARTICLE III
CORPORATE PURPOSE
The corporation is formed for only the following purposes:
(a) To acquire, own, hold, sell, transfer, assign, pledge, finance,
refinance and otherwise deal with: (i) loans secured by (A) first, second
and junior lien mortgages, deeds of trust or similar liens on residential
properties, and (B) related assets; (ii) any participation interest in,
security (in bond or pass-through form) or funding agreement based on,
backed or collateralized by, directly or indirectly, any of the foregoing
(the loans and related assets
<PAGE>
described in clause (a)(i) and the participation interest, securities and
funding agreements described in clause (a)(ii), collectively, "Mortgage
Loans"); (iii) (A) conditional sales contracts and installment sales or
loan agreements secured by manufactured housing, and (B) related assets
(the loans and related assets described in clause (a)(ii), collectively,
"Contracts"); and (iv) (A) private (i.e., 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 (B) certificates insured or guaranteed by
the Federal Home Loan Mortgage Corporation, the Federal National Mortgage
Association or the Government National Mortgage Association, and (C)
related assets (the certificates and related assets described in clause
(a)(iii), collectively, "Mortgage-Backed Securities" and together with the
Mortgage Loans and Contracts, the "Primary Assets");
(b) (i) to establish and fund one or more trusts (the "Trusts") and
to authorize such Trusts to engage in one or more of the activities
described in immediately preceding clause (a) of this Article III and to
issue certificates (the "Certificates") in one or more classes pursuant to
pooling and servicing agreements (each, a "Pooling and Servicing
Agreement"), with each class having the characteristics specified in the
related Pooling and Servicing Agreement, representing ownership interests
in the Primary Assets;
(c) to acquire, own, hold, invest in, offer, sell, transfer, assign,
pledge, finance and deal in and with any Certificates issued by a Trust
established by the corporation pursuant to clause (b) of this Article III;
and
(d) to engage in any other acts and activities and to exercise any
powers permitted to corporations under the laws of the State of Delaware
which are incidental to, or connected with the foregoing, and necessary,
suitable or convenient to accomplish any of the foregoing.
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The purposes specified in this Article III shall be construed as
powers as well as purposes of the corporation.
Except as otherwise provided in this Article III, the corporation
shall not incur any indebtedness or undertake any obligations except in
the ordinary course of its business.
ARTICLE IV
CAPITAL STOCK
The total number of shares of capital stock which the Corporation shall
have authority to issue is one thousand (1,000) shares designated as Common
Stock and the par value of each such share of Common Stock is one dollar
($1.00), amounting in the aggregate to one thousand dollars ($1,000.00).
ARTICLE V
INCORPORATOR
The name and mailing address of the sole incorporator is Bruce Hurwitz,
care of Brown & Wood LLP, One World Trade Center, New York, New York 10048.
ARTICLE VI
CORPORATE GOVERNANCE
The following provisions shall govern management of the business and the
conduct of the affairs of the Corporation, and for further definition, shall
limit and regulate the powers of the Corporation and the powers of its
directors and stockholders:
(a) The business and affairs of the Corporation shall be managed by
or under the direction of the Board of Directors.
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(b) In furtherance and not in limitation of the powers conferred by
statutes, the Board of Directors shall have concurrent power with the
stockholders to make, alter, amend, change, add to or repeal the bylaws of
the Corporation.
(c) The number of directors of the Corporation shall be no fewer than
one and the exact number shall be as from time to time fixed by, or in the
manner provided in, the bylaws of the Corporation. Election of directors
need not be by written ballot unless the bylaws so provide. At all times,
at least one of the directors (the "Outside Director") serving on the
Board of Directors shall not, at the time of such appointment, at any time
in the preceding five year period or during such individual's tenure as an
Outside Director, be (a) a direct or indirect legal or beneficial owner of
the Corporation or any of its affiliates, (b) a creditor, supplier,
employee, officer, director (other than with respect to such appointment
as an Outside Director), family member, manager or contractor of the
Corporation or any of its affiliates, or (c) a person who controls, either
directly, indirectly or otherwise, the Corporation or any of its
affiliates or any creditor, supplier, employee, officer, director, manager
or contractor of the Corporation or any of its affiliates.
(d) In addition to the powers and authority hereinabove or by statute
expressly conferred upon them, the Board of Directors is hereby empowered
to exercise all such powers and do all such acts and things as may be
exercised or done by the Corporation, subject nevertheless to the
provisions of the General Corporation Law of the State of Delaware (the
"General Corporation Law"), this Certificate of Incorporation and the
bylaws of the Corporation; provided, however, that no bylaw hereafter
adopted by the stockholders shall invalidate any prior act of the Board of
Directors that would have been valid if such bylaw had not been adopted.
The Corporation's Board of Directors shall duly authorize all of the
Corporation's actions.
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Notwithstanding any other provisions of this Certificate of Incorporation,
a vacancy in the directorship filled by an Outside Director shall not
limit or otherwise restrict the Board of Directors from taking any action
which it is otherwise authorized to take hereunder or under applicable
law, except any action described in Article IX and Article XIII.
(e) The Corporation's funds and other assets will not be commingled
with those of any of its stockholders or of any direct or indirect parent
of the Corporation or of any affiliate of any such parent.
(f) The Corporation will maintain separate corporate records and
books of account from those of any of its stockholders or of any direct or
indirect parent of the Corporation or of any affiliate of any such parent.
ARTICLE VII
RESTRICTION ON THE ISSUANCE OF DEBT
The Corporation shall not issue, assume or guarantee any debt securities
or certificates without the Corporation having received confirmation from each
rating agency rating any outstanding debt security or certificate issued by the
Corporation that such action by the Corporation shall not result in the
termination or lowering of the rating of such debt security or certificate.
ARTICLE VIII
MERGERS, CONSOLIDATIONS AND ASSET TRANSFERS
The Corporation shall not, so long as any of the Certificates issued by a
Trust established by the Corporation, are outstanding, dissolve, liquidate,
merge or consolidate with, or transfer substantially all of its assets to, any
entity, unless each of the nationally recognized statistical rating
organizations which is then rating any of such Certificates confirms in writing
that such action shall not result, in and of itself, in a downgrading,
withdrawal or qualification of the rating then assigned by such rating
organization to
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<PAGE>
such Certificates; provided, however, that in any event, the corporation
may dissolve, liquidate, merge or consolidate with, or transfer substantially
all of its assets to, any entity if (a) such action is for the purpose of
changing the state of incorporation of the Corporation or changing the form of
organization through which the business of the Corporation is carried out, and
(b) such entity has provisions in its governing instruments identical in
substance to the provisions of Articles III, VI, VII, VIII and IX of this
Certificate of Incorporation.
ARTICLE IX
BANKRUPTCY
The unanimous consent of the Board of Directors, including any Outside
Director, shall be required before the Corporation may:
(a) file, or consent to the filing of, a bankruptcy or insolvency
petition or otherwise institute or consent to institution of insolvency
proceedings;
(b) dissolve, liquidate, consolidate, merge, or sell all or
substantially all of its assets;
(c) engage in any other business activity not otherwise provided for
in this Certificate of Incorporation; or
(d) amend this Certificate of Incorporation.
ARTICLE X
COMPROMISE OR ARRANGEMENT BETWEEN
CORPORATION AND ITS CREDITORS OR STOCKHOLDERS
Whenever a compromise or arrangement is proposed between this Corporation
and its creditors or any class of them and/or between this Corporation and its
stockholder or any class of them, any court of equitable jurisdiction within
the State of Delaware may, on the application in summary way of this
Corporation or of any creditor or stockholder thereof or on the application of
any receiver or receivers appointed for this Corporation under the provisions
of Section 291 of Title 8 of the Delaware Code or
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<PAGE>
on the application of trustees in dissolution or of any receiver or receivers
appointed for this Corporation under the provisions of Section 279 of Title 8
of the Delaware Code, order a meeting of the creditors or class of creditors
and/or of the stockholders or class of stockholders of this Corporation, as the
case may be, to be summoned in such manner as the said court directs. If a
majority in number representing three-fourths in value of the creditors or
class of creditors and/or of the stockholders or class of stockholders of this
Corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this Corporation as a consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or class of creditors and/or on all the
stockholder or class of stockholders of this Corporation, as the case may be,
and also on this Corporation.
ARTICLE XI
LIABILITY OF DIRECTORS
To the maximum extent permitted by the General Corporation Law as from
time to time amended, a director of this Corporation shall not be liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director.
ARTICLE XII
DURATION
The Corporation is to have perpetual existence.
ARTICLE XIII
AMENDMENTS
The Corporation reserves the right to amend, alter, change or repeal any
provisions contained in this Certificate of Incorporation in the manner now or
hereafter prescribed by statute, and all rights conferred upon stockholders
herein are granted subject to this reservation; provided, however, that no
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<PAGE>
such amendment of Article III, VI, VII, VIII, IX, X or XIII shall be effective
unless each of the nationally recognized statistical rating organizations
which is then rating any of such Certificates confirms in writing that such
amendment shall not result, in and of itself, in a downgrading, withdrawal or
qualification of the rating then assigned by such rating organization to such
Certificates.
IN WITNESS WHEREOF, I have duly executed this Certificate of Incorporation
this ____ day of September, A.D. 1996.
/s/ Bruce Hurwitz
----------------------------------
Bruce Hurwitz
Sole Incorporator
BLOCK MORTGAGE FINANCE, INC.
________________________________
BYLAWS
________________________________
The following Bylaws were adopted by the Sole Incorporator of the Corporation
on September 30, 1996.
ARTICLE I
OFFICES
SECTION 1. Principal Office. The principal office of the Corporation
shall be located at 4435 Main Street, Suite 500, Kansas City, Missouri 64111.
SECTION 2. Other Offices. The Corporation may also have offices at such
other places within and without the State of Delaware as the Board of Directors
may from time to time determine or the business of the Corporation may require.
ARTICLE II
MEETINGS OF SHAREHOLDERS
SECTION 1. Annual Meeting. An annual meeting of the shareholders shall
be held on the first Tuesday of September each year, at such hour as may be
fixed from time to time by the Board of Directors and stated in the notice of
such meeting or waiver of notice thereof, at which meeting the shareholders
shall elect
<PAGE>
a Board of Directors and transact such other business as may properly come
before the meeting.
If such annual meeting is not held as herein provided for, it may be held as
soon thereafter as may be convenient. Such subsequent meeting shall be called
in the same manner as hereinafter provided for special meetings of shareholders.
SECTION 2. Special Meetings. Special meetings of shareholders for any
purpose or purposes, unless otherwise prescribed by statute, by the Certificate
of Incorporation or by these bylaws, may be called at any time by the President,
the Secretary or the Board of Directors, and shall be called by any of them at
the written request of the holders of record of not less than a majority of all
the shares then outstanding and entitled to vote thereat. Such request shall
state the purpose or purposes of the proposed meeting. The time and place for
such special meeting shall be stated in the notice of the meeting or in a duly
executed waiver of notice thereof. The business transacted at any special
meeting of shareholders shall be limited to the purposes stated in such notice.
SECTION 3. Place of Meeting. Meetings of shareholders shall be held
within or without the State of Delaware at such place as may be fixed from time
to time by the Board of Directors, or as shall be specified in the notice of any
meeting or a duly executed waiver of notice thereof. If no place is otherwise
fixed, such meetings shall be held at the principal office of the Corporation.
2
<PAGE>
SECTION 4. Notice of Meetings. Written notice of each meeting of
shareholders, whether annual or special, stating the place, date and hour of the
meeting and, unless it is an annual meeting, the purpose or purposes of the
meeting and the name of the person by whom or at whose direction the meeting is
being called, shall be given either personally or by mail, telegram, or cable to
each shareholder of record entitled to vote, not less than ten days nor more
than sixty days prior to the date of the meeting, unless a greater period of
notice is required by law in a particular case.
SECTION 5. Quorum. The holders of record of a majority of the shares of
stock issued and outstanding and entitled to vote at any meeting of
shareholders, represented in person or by proxy, shall constitute a quorum for
the transaction of business thereat, except as otherwise provided by statute or
by the Certificate of Incorporation. When a quorum is once present to organize
a meeting, it is not broken by the subsequent withdrawal of any shareholders.
If, however, such quorum shall not be present or represented at any meeting of
shareholders, a majority of the shareholders entitled to vote thereat, present
in person or by proxy, or if no such shareholder is present in person or by
proxy, any officer entitled to preside at or act as secretary of such meeting,
shall have the power to adjourn the meeting from time to time, without notice
other than by announcement at the meeting, until a quorum shall be present or
represented. At such adjourned meeting at which a quorum shall be present or
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<PAGE>
represented, any business may be transacted which might have been transacted at
the meeting as originally called.
SECTION 6. Proxies. Every shareholder entitled to vote at a meeting of
shareholders, or to express consent to any proposal without a meeting, may vote,
or consent, as the case may be, in person or may authorize another person or
persons to so act for him by proxy.
SECTION 7. Voting. At each meeting of shareholders, each shareholder of
record entitled to vote at the meeting shall be entitled to one vote for each
share of stock registered in his name on the books of the Corporation unless
otherwise provided by law or by the Certificate of Incorporation.
At each meeting at which a quorum is present, the vote of the holders of
a majority of the shares of stock present, in person or by proxy, and entitled
to vote thereat, shall determine all corporate matters brought before the
meeting except as otherwise required by statute or by the Certificate of
Incorporation.
SECTION 8. Written Consent in Lieu of Meeting. Any action required or
permitted to be taken by vote of the shareholders may be taken without a
meeting, without prior notice and without a vote, if a consent in writing,
setting forth the action so taken, shall be signed by the holders of outstanding
stock having not less than the minimum number of votes that would be necessary
to authorize or take such action at a meeting at which all shares entitled to
vote thereon were present and voted.
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<PAGE>
ARTICLE III
DIRECTORS
SECTION 1. General Powers. The property, affairs and business of the
Corporation shall be managed by its Board of Directors which may adopt all such
rules and regulations for the conduct of its meetings and for the management of
the property, affairs and business of the Corporation as it may deem proper, not
inconsistent with applicable law, the Certificate of Incorporation and these
Bylaws, and may exercise all such powers of the Corporation and do all such
lawful acts and things as are not by statute, by the Certificate of
Incorporation or by these Bylaws directed or required to be exercised or done by
the shareholders.
SECTION 2. Number and Qualifications. The number of directors shall be
three. The number of directors may be changed from time to time by amendment to
these Bylaws.
SECTION 3. Election and Term of Office. The directors, other than the
initial Board of Directors, shall be elected at the annual meeting of
shareholders. Each director shall serve until the next succeeding annual
meeting and until his successor has been elected and has qualified, or until his
prior resignation, death or removal. The initial Board of Directors shall hold
office until the first annual meeting of shareholders.
SECTION 4. Resignation. Any director may resign at any time by giving
written notice to the Board of Directors, the president or the secretary of the
Corporation. Unless otherwise
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<PAGE>
specified in the notice, the resignation shall take effect upon receipt thereof
by the board or such officer, and the acceptance of the resignation shall not be
necessary to make it effective.
SECTION 5. Removal. Any or all of the directors may be removed, with or
without cause, at any time by the vote of the holders of record of a majority of
shares of stock issued and outstanding and entitled to vote present, in person
or by proxy, at a special meeting of shareholders called for that purpose,
unless otherwise prescribed by statute or by the Certificate of Incorporation.
SECTION 6. Vacancies. All vacancies occurring in the Board of Directors,
including vacancies caused by removal with or without cause, may be filled,
subject to the action of the shareholders in regard to vacancies caused by
removal described hereinafter, by majority vote of all remaining directors in
office, though less than a quorum. If death, resignation or removal of a
director or directors results in there being no remaining directors or if the
remaining directors are unable to fill a vacancy or vacancies by majority vote,
the vacancies shall be filled by election at a special meeting of shareholders
called for that purpose. A director elected by the Board of Directors to fill a
newly created directorship or vacancy shall hold office until the next
succeeding annual meeting of the shareholders and until his successor has been
elected and has qualified.
Notwithstanding any other provision of this section, any vacancy on the
Board of Directors resulting from removal with or
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without cause by vote of the shareholders at a special meeting of the
shareholders called for that purpose may be filed at such meeting by a majority
vote of the shareholders present, in person or by proxy, and entitled to vote,
provided that in the event the shareholders do not fill such vacancy it shall be
filled by the Board of Directors as provided in this section. A director
elected by vote of the shareholders shall hold office for the unexpired portion
of the term of his predecessor in office and until the election and
qualification of his successor.
SECTION 7. Annual and Regular Meetings. An annual meeting of the Board
of Directors for the election of officers and for the transaction of any other
business shall be held in each year immediately following the annual meeting of
shareholders at the place of such annual meeting of shareholders or as soon as
practical after the annual meeting of shareholders at such place and time as
shall be fixed by the consent in writing of all the directors.
Regular meetings of the Board of Directors may be held at such times as
the Board may from time to time determine by resolution duly adopted at any
meeting of the Board.
SECTION 8. Special Meetings. A special meeting of the Board of Directors
may be called at any time by the President and shall be called by the President
or Secretary on the written request of any director.
SECTION 9. Place and Time of Regular and Special Meetings. The Board of
Directors may hold any regular meeting without
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notice, at such time and place, either within or without the State of Delaware,
as the Board may from time to time determine by resolution duly adopted at any
meeting of the Board.
Special meetings of the Board of Directors shall be held at such time and
place, either within or without the State of Delaware, as may be fixed by the
President calling the meeting or by the Directors requesting the meeting as
specified in their request, as the case may be. If no place is otherwise fixed,
such regular and special meetings shall be held at the principal office of the
Corporation.
SECTION 10. Notice of Meetings. Notice of the time and place of each
special meeting of the Board of Directors shall be given to each director at
least twenty-four hours prior to the date of such meeting personally or by mail,
telegram/cable, facsimile or telephone. Neither the business to be transacted
at, nor the purpose of, any special meeting of the Board of Directors need be
specified in the notice of such meeting or waiver of notice thereof.
SECTION 11. Quorum and Voting. A majority of the directors in office shall
constitute a quorum for the transaction of business at any meeting of the Board
of Directors and the affirmative vote of a majority of the directors present at
any meeting at which a quorum is present shall constitute the act of the Board
of Directors, except as may be otherwise provided by statute or by the
Certificate of Incorporation. If a quorum shall not be present at any meeting
of the Board of Directors, a
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majority of the directors present may adjourn the meeting from time to time,
without notice other than by announcement at the meeting, until a quorum shall
be present.
SECTION 12. Committees. The Board of Directors, by resolution,
adopted by a majority of the entire Board, may designate one or more committees,
including an Executive Committee, each committee to consist of one or more of
the directors of the Corporation. Each committee shall serve at the pleasure of
the Board of Directors and each member of each such committee shall hold office
until the next annual meeting of the Board of Directors or until he shall choose
to be a director, or until his death, resignation or removal, or until the Board
of Directors shall dissolve the committee. Each committee shall have and may
exercise all the powers and authority of the Board to the extent provided in the
resolution, except as otherwise required by law or the Certificate of
Incorporation. Any member of any committee may be removed at any time, with or
without cause, by the vote of a majority of directors at any regular or special
meeting of the Board. Vacancies in the membership of any committee shall be
filed by the Board of Directors at a regular or special meeting of the Board of
Directors by the vote of a majority of directors. Such committee or committees
shall have such name or names as may be determined from time to time by
resolution adopted by the Board of Directors. Each committee shall keep regular
minutes of its meetings and report the same to the Board of Directors when
required.
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SECTION 13. Meetings by Conference Call. At any meeting of the Board
of Directors, or any committee designated by the Board of Directors, any one or
more of the members thereof may participate in such meeting of the Board or of
such committee by means of a conference telephone or similar communications
equipment allowing all persons participating in the meeting to hear each other
at the same time. Participation in a meeting by such means shall constitute
presence in person at the meeting.
SECTION 14. Written Consent in Lieu of Meeting. Any action required or
permitted to be taken by the Board of Directors or any committee thereof may be
taken without a meeting if a consent in writing to the adoption of a resolution
authorizing the action so taken shall be signed by all the directors or the
members of the committee, as the case may be.
SECTION 15. Compensation. The Board of Directors, irrespective of any
personal interest of its members, shall have authority to establish reasonable
compensation, and allowances for expenses, of all directors for services to the
corporation as directors, committee members, officers, or otherwise.
ARTICLE IV
NOTICES
SECTION 1. Notice by Mail. Whenever, under the provisions of any statute
or of the Certificate of Incorporation or of these Bylaws, notice is required to
be given to any director or shareholder and such notice is given by mail, such
notice shall
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be deemed to have been given when deposited in the United States mail, with
postage thereon prepaid, directed to the director or shareholder at his address
as it appears on the records of the Corporation, or if he shall have filed a
written request with the Secretary that notices intended for him be mailed to
some other address, then directed to him at such other address.
SECTION 2. Waiver of Notice. Whenever under the provisions of any
statute or of the Certificate of Incorporation or of these Bylaws, any notice of
a meeting is required to be given to any director or shareholder, a written
waiver signed by the person or persons entitled to such notice, either in person
or by proxy if such person is a shareholder, whether before or after the
meeting, shall be deemed equivalent to the giving of such notice.
SECTION 3. Attendance at Meetings. The attendance of a person at any
meeting, whether a shareholder, in person or by proxy, or a director, shall
constitute a waiver of notice by him, unless he attends for the express purpose
of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened.
ARTICLE V
OFFICERS
SECTION 1. Number. The officers of the Corporation shall be a President,
a Secretary, and a Treasurer, and may include one or more Vice Presidents, one
or more Assistant Secretaries, and such other officers as the Board of Directors
may from time
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to time determine. Two or more offices may be held by the same person.
SECTION 2. Election and Term of Office. The officers of the Corporation
shall be elected by the Board of Directors at any regular or special meeting of
the Board and each shall serve at the pleasure of the Board.
SECTION 3. Resignations. Any officer may resign at any time by giving
written notice to the Board of Directors, or to the President or the Secretary
of the Corporation. Any such resignation shall take effect at the time of the
receipt of such notice or at any later time specified therein; and, unless
otherwise specified therein, the acceptance of such resignation shall not be
necessary to make it effective.
SECTION 4. The President. The President shall have supervision over the
business, direction and general management of the Corporation, and shall perform
such other duties as the Board of Directors may direct.
SECTION 5. Vice Presidents. The Vice Presidents shall exercise such
powers and perform such duties as from time to time may be assigned to them
respectively by the Board or by any more senior ranking officer.
SECTION 6. Secretary. The Secretary shall record all the votes of the
stockholders and of the directors and shall maintain the minutes of the meetings
of the stockholders and of the Board of Directors; he shall see that notices of
meetings of the Board and stockholders are given and that all records and
reports are
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properly kept and filed by the Corporation as required by law; and, in general,
he shall perform all duties incident to the office of Secretary, and such other
duties as may from time to time be assigned to him by the Board or the
President.
SECTION 7. Assistant Secretaries. In the absence or disability of the
Secretary or when so directed by the Secretary, any Assistant Secretary may
perform all the duties of the Secretary, and when so acting, shall have all the
powers of, and be subject to all the restrictions upon, the Secretary. The
Assistant Secretaries shall perform such other duties as from time to time may
be assigned to them respectively by the Board, the President, or the Secretary.
SECTION 8. Treasurer. The Treasurer shall have charge of all financial
records and reports of the Corporation and shall have or provide for the custody
of all funds and securities of the Corporation; and, in general, he shall
perform all duties incident to the office of Treasurer and such other duties as
may from time to time be assigned to him by the Board, or the President.
SECTION 9. Compensation of Officers and Others. The compensation of all
officers shall be fixed from time to time by the Board of Directors or any
Committee or officer authorized by the Board to do so. No officer shall be
precluded from receiving such compensation by reason of the fact that he is also
a director of the Corporation.
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ARTICLE VI
INDEMNIFICATION OF DIRECTORS AND OFFICERS
SECTION 1. Indemnification. To the maximum extent permitted by the
Delaware General Corporation Law as from time to time amended, the Corporation
shall indemnify its currently acting and its former directors, officers,
employees, and agents and those persons who, at the request of the Corporation,
served or have served another corporation, partnership, joint venture, trust or
other enterprise in one or more such capacities against any and all liabilities
incurred in connection with their services in such capacities.
SECTION 2. Insurance. The Corporation shall have power to purchase and
maintain insurance on behalf of any person who 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, against any liability
asserted against him and incurred by him in any such capacity, or arising out of
his status as such, whether or not the Corporation would have the power to
indemnify him against such liability under the provisions of these Bylaws.
14
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ARTICLE VII
BORROWING, DEPOSITS, PROXIES, ETC.
SECTION 1. Borrowing. No officer, agent or employee of the Corporation
shall have any power or authority to borrow money on its behalf, to pledge its
credit, or to mortgage or pledge its real or personal property, except within
the scope and to the extent of the authority delegated by resolution of the
Board of Directors. Authority may be given by the Board for any of the above
purposes and may be general or limited to specific instances.
SECTION 2. Deposits. All funds of the Corporation shall be deposited
from time to time to the credit of the Corporation in such banks, trust
companies, or other depositories as the Board of Directors may approve or
designate, and all such funds shall be withdrawn under such policies as the
Board shall from time to time determine.
SECTION 3. Proxies. Unless otherwise ordered by the Board of Directors,
any officer of the Corporation may appoint an attorney or attorneys (who may be
or include such officer himself), in the name and on behalf of the Corporation,
to cast the votes which the Corporation may be entitled to cast as a stockholder
or otherwise in any other corporation any of whose stock or other securities are
held by or for the Corporation, at meetings of the holders of the stock or other
securities of such other corporation, or, in connection with the ownership of
such stock or other securities, to consent in writing to any action by
15
<PAGE>
such other corporation, and may instruct the person or persons so appointed as
to the manner of casting such votes or giving such consent, and may execute or
cause to be executed in the name and on behalf of the Corporation and under its
seal such written proxies or other instruments as he may deem necessary or
proper in the premises.
SECTION 4. Separate Books and Records, etc. The Corporation shall at
all times (a) maintain and keep the Corporation's assets separate and apart from
any affiliate of the Corporation, and under separate registration, and (b)
maintain the Corporation's books and records separate and apart from those of
any affiliate of the Corporation.
ARTICLE VIII
CERTIFICATES FOR SHARES
SECTION 1. Form and Execution of Certificates. The shares of the
Corporation shall be represented by certificates in such form as required by
statute and as shall be adopted from time to time by the Board of Directors.
The certificates shall be numbered consecutively and registered in the books of
the Corporation in the order in which they are issued, together with the number
of shares represented by each certificate, the name of the person to whom the
certificate is issued and the date of issuance hereof. Each certificate shall
be signed by the President or a Vice President and by the Secretary or an
Assistant Secretary, may (but need not) be sealed with a
16
<PAGE>
corporate seal or a facsimile hereof and shall be countersigned and registered
in such manner, if any, as the Board of Directors may prescribe. The signatures
of any such officers of the Corporation upon a certificate may be facsimiles if
the certificate is countersigned by a transfer agent or registered by a
registrar other than the Corporation itself or an employee of the Corporation.
No certificate shall be issued for any shares until such share is fully paid.
The certificate shall bear such legend thereon, referring to such restrictions
on transfer as may be required by law, as the Secretary of the Corporation, on
advice of counsel, may reasonably require.
SECTION 2. Lost, Stolen or Destroyed Certificates. The Board of
Directors, in its discretion, may direct a new certificate to be issued in place
of any certificate theretofore issued by the Corporation alleged to have been
lost, stolen or destroyed. Prior to authorizing such issue of a new certificate
or as a condition precedent to the issue thereof, the Board of Directors, in its
discretion, may require satisfactory proof of loss, theft or destruction or a
bond of indemnity as it deems adequate against any claim that may be made
against the Corporation with respect to the certificate alleged to have been
lost, stolen or destroyed.
SECTION 3. Transfers of Shares. The transfer or assignment of shares
shall be made only upon the books of the Corporation by the registered owner or
by his duly authorized attorney. Upon surrender to the Corporation of a
certificate for shares duly
17
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endorsed or accompanied by proper evidence of succession, assignment or
authority to transfer, the Corporation shall issue a new certificate to the
person entitled thereto, and the older certificate shall be canceled and the
transaction recorded upon the books of the Corporation.
SECTION 4. Fixing Record Date. For the purpose of determining shareholders
entitled to notice of or to vote at any meeting of shareholders or any
adjournment thereof, or to express consent to corporate action in writing
without a meeting, or for the purpose of determining shareholders entitled to
receive payment of any dividend or other distribution or the allotment of any
rights, or for the purpose of determining shareholders entitled to exercise any
rights in respect of any change, conversion or exchange of stock, or for the
purpose of any other lawful action, the Board of Directors may fix, in advance,
a date as the record date for any such determination of shareholders. Such date
shall not be more than sixty days prior to any other action. Only shareholders
of record on the date so fixed shall be entitled to receive notice of, or to
vote at, such meeting or any adjournment thereof, to give such consent, to
receive payment of such dividend or distribution or the allotment of such right,
to exercise any such rights, or to take any other such action, notwithstanding
any transfer of any shares on the books of the Corporation subsequent to the
record date so fixed. If no such record date is fixed, the record date for
determining stockholders entitled to notice of or to vote at a meeting of the
18
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stockholders shall be at the close of business on the tenth day preceding the
day on which the meeting is held; the record date for determining the
stockholders entitled to express consent to corporate action in writing without
a meeting, when no prior action by the Board of Directors is necessary, shall be
the day on which the first written consent is expressed; and the record date for
any other purpose shall be at the close of business on the day on which the
Board of Directors adopts the resolution relating thereto.
SECTION 5. Registered Shareholders. The Corporation shall be entitled
to recognize the exclusive right of a person registered in its books as the
owner of shares to receive dividends and to vote as such owner, and shall not be
bound to recognize any equitable or other claim to or interest in such share or
shares on the part of any other person, whether or not it shall have express or
other notice thereof, except as otherwise provided by law.
ARTICLE IX
GENERAL PROVISION
SECTION 1. Dividends. Dividends on the outstanding shares of the
Corporation may be declared by the Board of Directors in such amounts and at
such time or times as the Board may determine, subject to the provisions of the
Certificate of Incorporation and applicable law. Dividends may be paid in cash,
in shares of the Corporation's capital stock or bonds or in the
19
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Corporation's property, including the shares or bonds of other corporations,
subject to any provisions of law or of the Certificate of Incorporation.
SECTION 2. Execution of Instruments. All corporate instruments and
documents, with the exception of certificates for shares of the Corporation as
provided in Section 1 of ARTICLE VIII, shall be signed by such officers, agents
or employees of the Corporation as from time to time may be designated by the
Board of Directors or by such officer or officers to whom the Board of Directors
may delegate the power to so designate.
SECTION 3. Fiscal Year. The fiscal year of the Corporation shall begin
on the first day of May in each year but may be changed from time to time by
resolution of the Board of Directors.
SECTION 4. Corporate Seal. The corporate seal shall have inscribed
thereon the name of the Corporation, the year of its organization and the words
"Corporate Seal, Delaware". The seal may be used by causing it or a facsimile
thereof to be impressed, affixed, reproduced, engraved or printed.
ARTICLE X
AMENDMENTS
These Bylaws may be amended or repealed or new bylaws may be adopted at
any meeting of shareholders at which a quorum is present or represented by the
affirmative vote of the holders of a majority of shares issued and outstanding
and entitled to vote
20
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thereat, provided notice of the general nature of the proposed change in the
Bylaws be contained in the notice of such meeting. These Bylaws may also be
amended or repealed or new Bylaws may be adopted by the Board of Directors at
any meeting of the Board.
21
<PAGE>
POOLING AND SERVICING AGREEMENT
Relating to
BLOCK MORTGAGE FINANCE ASSET BACKED CERTIFICATES, SERIES 1997-1
Among
BLOCK MORTGAGE FINANCE, INC.,
as Depositor
COMPANION MORTGAGE CORPORATION,
as Seller,
BLOCK FINANCIAL CORPORATION,
as Master Servicer
and
BANKERS TRUST COMPANY OF CALIFORNIA, N.A.,
as Trustee
Dated as of January 1, 1997
<PAGE>
CONTENTS
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ARTICLE I
DEFINITIONS; RULES OF CONSTRUCTION...................................... 3
Section 1.01 Definitions.......................................................................... 3
ARTICLE II
ESTABLISHMENT AND ORGANIZATION OF THE TRUST................................. 32
Section 2.01 Establishment of the Trust........................................................... 32
Section 2.02 Office............................................................................... 32
Section 2.03 Purposes and Powers.................................................................. 32
Section 2.04 Appointment of the Trustee; Declaration of Trust..................................... 32
Section 2.05 Expenses of the Trust................................................................ 32
Section 2.06 Ownership of the Trust............................................................... 33
Section 2.07 Situs of the Trust................................................................... 33
Section 2.08 Miscellaneous REMIC Provisions....................................................... 33
ARTICLE III
REPRESENTATIONS, WARRANTIES AND COVENANTS
OF THE DEPOSITOR, THE MASTER SERVICER AND THE SELLER;
COVENANT OF SELLER TO CONVEY MORTGAGE LOANS................................. 36
Section 3.01 Representations and Warranties of the Depositor...................................... 36
Section 3.02 Representations and Warranties of the Master Servicer................................ 38
Section 3.03 Representations and Warranties of the Seller......................................... 40
Section 3.04 Covenants of Seller to Take Certain Actions with Respect to the
Mortgage Loans In Certain Situations................................................. 43
Section 3.05 Conveyance of the Mortgage Loans and Qualified Replacement
Mortgages............................................................................ 44
Section 3.06 Acceptance by Trustee; Certain Substitutions of Mortgage Loans;
Certification by Trustee............................................................. 47
ARTICLE IV
ISSUANCE AND SALE OF CERTIFICATES...................................... 49
Section 4.01 Issuance of Certificates............................................................. 49
Section 4.02 Sale of Certificates................................................................. 49
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ARTICLE V
CERTIFICATES AND TRANSFER OF INTERESTS.................................... 50
Section 5.01 Terms................................................................................ 50
Section 5.02 Forms................................................................................ 50
Section 5.03 Execution, Authentication and Delivery............................................... 50
Section 5.04 Registration and Transfer of Certificates............................................ 51
Section 5.05 Mutilated, Destroyed, Lost or Stolen Certificates.................................... 53
Section 5.06 Persons Deemed Owners................................................................ 54
Section 5.07 Cancellation......................................................................... 54
Section 5.08 Limitation on Transfer of Ownership Rights........................................... 54
Section 5.09 Assignment of Rights................................................................. 55
ARTICLE VI
COVENANTS.................................................. 56
Section 6.01 Distributions........................................................................ 56
Section 6.02 Money for Distributions to be Held in Trust; Withholding............................. 56
Section 6.03 Protection of Trust Estate........................................................... 57
Section 6.04 Performance of Obligations........................................................... 58
Section 6.05 Negative Covenants................................................................... 58
Section 6.06 No Other Powers...................................................................... 58
Section 6.07 Limitation of Suits.................................................................. 59
Section 6.08 Unconditional Rights of Owners to Receive Distributions.............................. 59
Section 6.09 Rights and Remedies Cumulative....................................................... 60
Section 6.10 Delay or Omission Not Waiver......................................................... 60
Section 6.11 Control by Owners.................................................................... 60
Section 6.12 Indemnification...................................................................... 60
Section 6.13 Access to Owners of Certificates' Names and Addresses................................ 61
ARTICLE VII
ACCOUNTS, DISBURSEMENTS AND RELEASES..................................... 62
Section 7.01 Collection of Money.................................................................. 62
Section 7.02 Establishment of Accounts............................................................ 62
Section 7.03 Flow of Funds........................................................................ 63
Section 7.04 Reserved............................................................................. 67
Section 7.05 Investment of Accounts............................................................... 67
Section 7.06 Payment of Trust Expenses............................................................ 67
Section 7.07 Eligible Investments................................................................. 67
</TABLE>
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Section 7.08 Accounting and Directions by Trustee................................................. 69
Section 7.09 Reports by Trustee to Owners and Certificate Insurer................................. 70
Section 7.10 Reports by Trustee................................................................... 72
Section 7.11 Preference Payments.................................................................. 72
ARTICLE VIII
SERVICING AND ADMINISTRATION
OF MORTGAGE LOANS.............................................. 74
Section 8.01 Master Servicer and Sub-Servicers.................................................... 74
Section 8.02 Collection of Certain Mortgage Loan Payments......................................... 75
Section 8.03 Sub-Servicing Agreements Between Master Servicer and Sub-Servicers................... 75
Section 8.04 Successor Sub-Servicers.............................................................. 75
Section 8.05 Liability of Master Servicer; Indemnification ....................................... 76
Section 8.06 No Contractual Relationship Between Sub-Servicer, Trustee or the
Owners............................................................................... 77
Section 8.07 Assumption or Termination of Sub-Servicing Agreement by Trustee...................... 77
Section 8.08 Collection Account................................................................... 77
Section 8.09 P&I Advances and Servicing Advances.................................................. 79
Section 8.10 Compensating Interest: Repurchase of Mortgage Loans.................................. 80
Section 8.11 Maintenance of Insurance............................................................. 81
Section 8.12 Due-on-Sale Clauses; Assumption and Substitution Agreements.......................... 83
Section 8.13 Realization Upon Defaulted Mortgage Loans; Inspection................................ 84
Section 8.14 Trustee to Cooperate; Release of Files............................................... 85
Section 8.15 Servicing Compensation............................................................... 86
Section 8.16 Annual Statement as to Compliance.................................................... 86
Section 8.17 Annual Independent Certified Public Accountants' Reports............................. 86
Section 8.18 Access to Certain Documentation and Information Regarding the
Mortgage Loans....................................................................... 87
Section 8.19 Merger or Consolidation of the Master Servicer; Assignment........................... 87
Section 8.20 Removal of Master Servicer; Resignation of Master Servicer........................... 87
Section 8.21 Inspections by Certificate Insurer; Errors and Omissions Insurance................... 92
ARTICLE IX
TERMINATION OF TRUST............................................. 93
Section 9.01 Termination of Trust................................................................. 93
Section 9.02 Termination Upon Option of Owners of Class R Certificates and
Market Services...................................................................... 93
Section 9.03 Termination Auction.................................................................. 94
Section 9.04 Termination Upon Loss of REMIC Status................................................ 95
</TABLE>
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Section 9.05 Disposition of Proceeds.............................................................. 97
ARTICLE X
THE TRUSTEE................................................. 98
Section 10.01 Certain Duties and Responsibilities.................................................. 98
Section 10.02 Removal of Trustee for Cause......................................................... 99
Section 10.03 Certain Rights of the Trustee........................................................100
Section 10.04 Not Responsible for Recitals or Issuance of Certificates.............................102
Section 10.05 May Hold Certificates................................................................102
Section 10.06 Money Held in Trust..................................................................102
Section 10.07 Compensation and Reimbursement; No Lien for Fees.....................................102
Section 10.08 Corporate Trustee Required; Eligibility..............................................102
Section 10.09 Resignation and Removal; Appointment of Successor....................................103
Section 10.10 Acceptance of Appointment by Successor Trustee.......................................104
Section 10.11 Merger, Conversion, Consolidation or Succession to Business of the
Trustee..............................................................................105
Section 10.12 Reporting; Withholding...............................................................105
Section 10.13 Liability of the Trustee.............................................................105
Section 10.14 Appointment of Co-Trustee or Separate Trustee .......................................106
ARTICLE XI
MISCELLANEOUS................................................108
Section 11.01 Compliance Certificates and Opinions.................................................108
Section 11.02 Form of Documents Delivered to the Trustee...........................................108
Section 11.03 Acts of Owners.......................................................................109
Section 11.04 Notices, etc.........................................................................109
Section 11.05 Notices and Reports to Owners; Waiver of Notices.....................................110
Section 11.06 Rules by Trustee and Seller..........................................................110
Section 11.07 Successors and Assigns...............................................................110
Section 11.08 Severability.........................................................................110
Section 11.09 Benefits of Agreement................................................................111
Section 11.10 Legal Holidays.......................................................................111
Section 11.11 Governing Law; Submission to Jurisdiction............................................111
Section 11.12 Counterparts.........................................................................112
Section 11.13 Usury................................................................................112
Section 11.14 Amendment............................................................................112
Section 11.15 Paying Agent; Appointment and Acceptance of Duties...................................113
Section 11.16 REMIC Status.........................................................................114
Section 11.17 Additional Limitation on Action and Imposition of Tax................................115
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Section 11.18 Appointment of Tax Matters Person....................................................116
Section 11.19 The Certificate Insurer..............................................................116
Section 11.20 Reserved.............................................................................116
Section 11.21 Third Party Rights...................................................................116
Section 11.22 Notices..............................................................................116
</TABLE>
v
<PAGE>
SCHEDULE I REPRESENTATIONS AND WARRANTIES AS TO THE MORTGAGE
LOANS
SCHEDULE I-A SCHEDULE OF FIXED RATE GROUP MORTGAGE LOANS
SCHEDULE I-B SCHEDULE OF ADJUSTABLE RATE GROUP MORTGAGE LOANS
SCHEDULE II RESERVED
SCHEDULE III MORTGAGE LOANS WITH DELINQUENCY CHARACTERISTICS
SCHEDULE IV MORTGAGE LOANS WITH 15-YEAR "BALLOON" PAYMENTS
EXHIBIT A FORM OF CLASS A CERTIFICATE
EXHIBIT B FORM OF CLASS X CERTIFICATE
EXHIBIT C FORM OF CLASS R CERTIFICATE
EXHIBIT D CERTIFICATION RE: PAYOFF MORTGAGE LOAN
EXHIBIT E TRUSTEE RECEIPT
EXHIBIT F POOL CERTIFICATION
EXHIBIT G DELIVERY ORDER
EXHIBIT H AFFIDAVIT FOR TAX MATTERS PERSON
EXHIBIT I NOTICE TO CERTIFICATE INSURER
EXHIBIT J RESERVED
EXHIBIT K TERMINATION AUCTION PROCEDURES
vi
<PAGE>
POOLING AND SERVICING AGREEMENT, relating to BLOCK MORTGAGE FINANCE
ASSET BACKED CERTIFICATES, SERIES 1997-1, dated as of January 1, 1997 by and
among BLOCK MORTGAGE FINANCE, INC., a Delaware corporation, in its capacity as
Depositor (the "Depositor"), COMPANION MORTGAGE CORPORATION, a Delaware
corporation, in its capacities as Seller (in such capacity, the "Seller"), BLOCK
FINANCIAL CORPORATION, a Delaware corporation, as Master Servicer (in such
capacity, the "Master Servicer") and BANKERS TRUST COMPANY OF CALIFORNIA, N.A.,
a national banking corporation, in its capacity as the trustee (the "Trustee").
WHEREAS, the Depositor wishes to establish a trust and provide for the
allocation and sale of the beneficial interests therein and the maintenance and
distribution thereof;
WHEREAS, the Master Servicer has agreed to service the Mortgage Loans,
which constitute the principal assets of the trust estate;
WHEREAS, all things necessary to make the Certificates, when executed
by the Depositor and authenticated by the Trustee, valid instruments, and to
make this Agreement a valid agreement, in accordance with their and its terms,
have been done;
WHEREAS, Bankers Trust Company of California, N.A. is willing to serve
in the capacity of Trustee hereunder; and
WHEREAS, MBIA Insurance Corporation is intended to be a third-party
beneficiary of this Agreement and is hereby recognized by the parties hereto to
be a third-party beneficiary of this Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein contained, the Depositor, the Seller, the Master Servicer, and
the Trustee hereby agree as follows:
CONVEYANCE
To provide for the distribution of the principal of and/or interest on
the Class A Certificates, the Class X Certificates and the Class R Certificates
in accordance with their terms, all of the sums distributable under this
Agreement with respect to the Certificates and the performance of the covenants
contained in this Agreement, the Seller hereby bargains, sells, conveys, assigns
and transfers to the Depositor and the Depositor hereby bargains, sells,
conveys, assigns and transfers to the Trustee, in trust, without recourse and
for the exclusive benefit of the Owners of the Certificates, all of its
respective right, title and interest in and to any and all benefits accruing to
it from (a) the Mortgage Loans (other than any principal and interest payments
received thereon prior to the Cut-Off Date) listed in Schedules I-A and I-B to
this Agreement which the Seller is causing to be delivered to the Depositor and
the Depositor is causing to be delivered to the Trustee herewith (and all
substitutions therefor as provided by Sections 3.03, 3.04 and 3.06), together
with the related Mortgage Loan documents and the Seller's and Depositor's
interest in any Mortgaged Property which secures a Mortgage Loan but which has
been acquired by foreclosure or deed in lieu of foreclosure, and all payments
thereon and proceeds of the conversion, voluntary or involuntary, of the
foregoing; (b) such amounts as may be held by the Trustee in the Distribution
Account together with investment earnings on such amounts and such amounts as
may be held by the Master Servicer in the name of the Trustee in the Collection
Account, if any, exclusive of
<PAGE>
investment earnings thereon (except as otherwise provided herein), whether in
the form of cash, instruments, securities or other properties (including any
Eligible Investments held by the Master Servicer); (c) the Certificate Insurance
Policies and (d) proceeds of all the foregoing (including, but not by way of
limitation, all proceeds of any mortgage insurance, hazard insurance and title
insurance policy relating to the Mortgage Loans, cash proceeds, accounts,
accounts receivable, notes, drafts, acceptances, chattel paper, checks, deposit
accounts, rights to payment of any and every kind, and other forms of
obligations and receivables which at any time constitute all or part of or are
included in the proceeds of any of the foregoing) to pay the Certificates as
specified herein ((a)-(d) above shall be collectively referred to herein as the
"Trust Estate").
The Trustee acknowledges such sale, accepts the Trust hereunder in
accordance with the provisions hereof and agrees to perform the duties herein to
the best of its ability to the end that the interests of the Owners may be
adequately and effectively protected.
2
<PAGE>
ARTICLE I
DEFINITIONS; RULES OF CONSTRUCTION
Section 1.01 Definitions.
For all purposes of this Agreement, the following terms shall have the
meanings set forth below, unless the context clearly indicates otherwise:
"Account": Any account established in accordance with Section 7.02 or
8.08 hereof.
"Accrual Period": With respect to the Fixed Rate Certificates and any
Distribution Date, the calendar month immediately preceding the month in which
the Distribution Date occurs; a "calendar month" shall be deemed to be 30 days.
With respect to the Adjustable Rate Certificates and any Distribution Date, the
period commencing on the immediately preceding Distribution Date (or the Closing
Date in the case of the first Distribution Date) and ending on the day
immediately preceding the current Distribution Date. All calculations of
interest on the Fixed Rate Certificates will be made on the basis of a 360-day
year assumed to consist of twelve 30 day months and calculations of interest on
the Adjustable Rate Certificates will be made on the basis of the actual number
of days elapsed in the related Accrual Period and a year of 360 days.
"Adjustable Rate Certificates": The Class A-5 Certificates.
"Adjustable Rate Group": The pool of Mortgage Loans identified in the
related Schedule of Mortgage Loans as having been assigned to the Adjustable
Rate Group in Schedule I-B hereto, including any Qualified Replacement Mortgages
delivered in replacement thereof.
"Adjustable Rate Group Available Funds": As defined in Section
7.02(d) hereof.
"Adjustable Rate Group Available Funds Shortfall": As defined in
Section 7.03(c)(i)(A) hereof.
"Adjustable Rate Group Certificate Insurance Policy": The certificate
guaranty insurance policy (number ________) dated January ___, 1997 issued by
the Certificate Insurer for the benefit of the Owners of the Adjustable Rate
Certificates pursuant to which the Certificate Insurer guarantees Insured
Payments.
"Adjustable Rate Group Initial Specified Subordinated Amount": As
defined in the Insurance Agreement.
"Adjustable Rate Group Interest Remittance Amount": As of any Monthly
Remittance Date, the sum, without duplication, of (i) all interest due during
the related Due Period with respect to the Mortgage Loans in the Adjustable Rate
Group (less the Expense Rate with respect to such Mortgage Loans), (ii) all
Compensating Interest paid by the Master Servicer on such Monthly Remittance
Date with respect to the Adjustable Rate Group and (iii) the portion of the
Substitution Amount relating to interest on the Mortgage Loans in the Adjustable
Rate Group.
3
<PAGE>
"Adjustable Rate Group Monthly Remittance Amount": As of any Monthly
Remittance Date, the sum of (i) the Adjustable Rate Group Interest Remittance
Amount and (ii) the Adjustable Rate Group Principal Remittance Amount for such
Monthly Remittance Date.
"Adjustable Rate Group Principal Distribution Amount": With respect
to the Class A-5 Certificates for any Distribution Date, the lesser of:
(a) the Adjustable Rate Group Total Available Funds plus any Insured
Payment with respect to the Class A-5 Certificates minus the Class A-5 Current
Interest; and
(b) the excess, if any, of (i) the sum of:
(A) the Preference Amount owed to the Owners of the
Class A-5 Certificates as such amounts relate to principal
previously distributed on the Class A-5 Certificates,
(B) the principal collected by the Master Servicer on
or prior to the related Determination Date with respect to
Mortgage Loans in the Adjustable Rate Group that was due
during the related Due Period or advanced by the Master
Servicer for such Distribution Date,
(C) the principal portion of all Prepayments received
by the Master Servicer during the Prepayment Period and
remitted to the Trustee as of the Monthly Remittance Date;
(D) the Loan Purchase Price of each Mortgage Loan in
the Adjustable Rate Group that was repurchased by the Seller
or purchased by the Master Servicer on or prior to the related
Monthly Remittance Date, to the extent such Loan Purchase
Price is actually received by the Trustee on or prior to the
related Monthly Remittance Date,
(E) any Substitution Adjustments delivered by the
Seller on or prior to the related Monthly Remittance Date in
connection with a substitution of a Mortgage Loan in the
Adjustable Rate Group (to the extent such Substitution
Adjustments relate to principal), to the extent such
Substitution Adjustments are actually received by the Trustee
on or prior to the related Monthly Remittance Date,
(F) all Net Liquidation Proceeds actually collected
by the Master Servicer with respect to Mortgage Loans in the
Adjustable Rate Group during the related Due Period (to the
extent such Net Liquidation Proceeds relate to principal) to
the extent such Net Liquidation Proceeds are actually received
by the Trustee on or prior to the related Monthly Remittance
Date,
(G) the amount of any Subordination Deficit with
respect to the Adjustable Rate Group for such Distribution
Date,
4
<PAGE>
(H) the portion of the proceeds received by the
Trustee with respect to the Adjustable Rate Group from any
termination of the Trust (to the extent such proceeds related
to principal),
(I) the amount of any Subordination Increase Amount
with respect to the Adjustable Rate Group for such
Distribution Date, to the extent of any Net Monthly Excess
Cashflow available for such purpose, and
(J) the portion of any Carry Forward Amount relating
to principal with respect to the Adjustable Rate Group for
such Distribution Date;
over
(ii) the amount of any Subordination Reduction Amount with
respect to the Adjustable Rate Group for such Distribution Date.
"Adjustable Rate Group Principal Remittance Amount": As of any Monthly
Remittance Date, the sum, without duplication, of (i) the principal actually
collected by the Master Servicer on or prior to the related Determination Date
with respect to Mortgage Loans in the Adjustable Rate Group to the extent that
it was due during the related Due Period, (ii) the Loan Purchase Price of each
Mortgage Loan in the Adjustable Rate Group that was purchased from the Trust
during the related Due Period, to the extent such Loan Purchase Price was
actually deposited in the Collection Account, (iii) any Substitution Adjustments
relating to principal delivered by the Seller in connection with a substitution
of a Mortgage Loan in the Adjustable Rate Group, to the extent such Substitution
Adjustments were actually deposited in the Collection Account during the related
Due Period, and (iv) all Net Liquidation Proceeds actually collected by the
Master Servicer with respect to the Mortgage Loans in the Adjustable Rate Group
during the related Due Period (to the extent such Net Liquidation Proceeds
related to principal).
"Adjustable Rate Group Specified Subordinated Amount": As defined in
the Insurance Agreement.
"Adjustable Rate Group Subordinated Amount": As of any Distribution
Date, the excess, if any, of (x) the aggregate Loan Balances of the Mortgage
Loans in the Adjustable Rate Group as of the close of business on the last day
of the related Due Period (taking into account all amounts received on or prior
to the related Determination Date) over (y) the Class A-5 Certificate Principal
Balance as of such Distribution Date (after taking into account the payment of
the Class A-5 Distribution Amount thereon (except for any Subordination Deficit
with respect to the Adjustable Rate Group and Subordination Increase Amount with
respect to the Adjustable Rate Group) on such Distribution Date).
"Adjustable Rate Group Total Available Funds": As defined in Section
7.02(d) hereof.
"Adjustable Rate Group Total Monthly Excess Spread": With respect to
the Adjustable Rate Group and any Distribution Date, the excess, if any, of (i)
the interest which is collected on the Mortgage Loans in such Group prior to the
related Determination Date for payment due during the related Due Period less
the Expense Rate with respect to Mortgage Loans in the Adjustable Rate Group
plus (x) the interest component of any P&I Advances and (y) Compensating
Interest paid by the Master Servicer with
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respect to the Adjustable Rate Group for such Due Period over (ii) the interest
accrued on the Class A-5 Certificates during the Accrual Period for such
Distribution Date.
"Adjusted Pass-Through Rate": A rate equal to the sum of (a) the
Weighted Average Pass-Through Rate plus (b) any portion of the Premium Amount
and the Trustee Fee (calculated as a percentage of the outstanding principal
amount of the Certificates) then accrued and outstanding.
"Advisor": As defined in Section 9.03 hereof.
"Agreement": This Pooling and Servicing Agreement, as it may be
amended from time to time, including the Exhibits and Schedules hereto.
"Applicant": As defined in Section 6.13 hereof.
"Appraised Value": The appraised value of any Mortgaged Property based
upon the appraisal or other valuation made at the time of the origination of the
related Mortgage Loan, or, in the case of a Mortgage Loan which is a purchase
money mortgage, the sales price of the Mortgaged Property at such time of
origination, if such sales price is less than such appraised value.
"Assignment Event": The calendar day on which any of the following
occur: (i) the occurrence and continuation of an Event of Default, (ii) the
reduction of the Master Servicer's long-term, unsecured debt rating below A3 by
Moody's and A-1 by S&P, (iii) the suspension, termination or withdrawal of the
Master Servicer's long-term, unsecured debt rating by Moody's or S&P, (iv) the
request of the Certificate Insurer to file any assignment of the Mortgage Loans
and (v) a change in the ownership of the Master Servicer.
"Auction Date": As defined in Section 9.03 hereof.
"Auction Procedures": As defined in Section 9.03 hereof.
"Authorized Officer": With respect to any Person, any officer of such
Person who is authorized to act for such Person in matters relating to the
Agreement, and whose action is binding upon such Person, with respect to the
Depositor, the Seller and the Master Servicer, initially including those
individuals whose names appear on the lists of Authorized Officers delivered at
the Closing; with respect to the Trustee, any Vice President, Assistant Vice
President, Trust Officer or any Officer of the Trustee located at the Corporate
Trust Office.
"Available Funds": The Fixed Rate Group Available Funds or the
Adjustable Rate Group Available Funds, as the case may be.
"Available Funds Shortfall": A Fixed Rate Group Available Funds
Shortfall or Adjustable Rate Group Available Funds Shortfall, as the case may
be.
"Basis Risk Carryover Amount": With respect to any Distribution Date,
the sum of the Basis Risk Excess for such Distribution Date and any Basis Risk
Excess from prior Distribution Dates.
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"Basis Risk Excess": With respect to any Distribution Date as to which
the Class A-5 Pass-Through Rate is the Class A-5 Available Funds Cap Rate, the
excess of (i) (a) the lesser of (a) the Net Lifetime Cap for such Distribution
Date and (b) the amount of interest the Class A-5 Certificates would be entitled
to receive on such Distribution Date at the then-applicable Class A-5
Pass-Through Rate without reference to the Class A-5 Available Funds Cap Rate
over (ii) the amount of interest the Class A-5 Certificates will receive on such
Distribution Date at the Class A-5 Available Funds Cap Rate.
"Business Day": Any day that is not a Saturday, Sunday or other day on
which commercial banking institutions in The City of New York, or in the city in
which the principal Corporate Trust Office of the Trustee is located, are
authorized or obligated by law or executive order to be closed.
"Carry Forward Amount": With respect to any Class of the Class A
Certificates for any Distribution Date, the sum of (x) the amount, if any, by
which (i) the Class A Distribution Amount allocable to such Class as of the
immediately preceding Distribution Date exceeded (ii) the amount of the actual
distribution made to the Owners of such Class of the Class A Certificates on
such immediately preceding Distribution Date plus (y) 30 days' interest on such
amount at the Pass-Through Rate in effect with respect to such Class of Class A
Certificates.
"Certificate": Any one of the Class A Certificates, Class X
Certificates or Class R Certificates, each representing the interests and the
rights described in this Agreement.
"Certificate Insurance Policies": The Adjustable Rate Group
Certificate Insurance Policy and the Fixed Rate Group Certificate Insurance
Policy.
"Certificate Insurer": MBIA Insurance Corporation, the principal
operating subsidiary of MBIA Inc., a New York Stock Exchange listed company, or
any successor thereto, as issuer of the Certificate
Insurance Policies.
"Certificate Insurer Default": The existence and continuance of any
of the following:
(a) the Certificate Insurer fails to make a payment
required under either of the Certificate Insurance Policies in accordance with
their terms: or
(b)(i) the entry by a court having jurisdiction in the
premises of (A) a decree or order for relief in respect of the Certificate
Insurer in an involuntary case or proceeding under any applicable United States
federal or state bankruptcy, insolvency, rehabilitation, reorganization or other
similar law or (B) a decree or order adjudging the Certificate Insurer as
bankrupt or insolvent, or approving as properly filed a petition seeking
reorganizing, rehabilitation, arrangement, adjustment or composition of or in
respect of the Certificate Insurer under any applicable United States federal or
state law, or appointing a custodian, receiver, liquidator, rehabilitator,
assignee, trustee, sequestrator or other similar official of the Certificate
Insurer or of any substantial part of its property, or ordering the winding-up
or liquidation of its affairs, and the continuance of any such decree or order
for relief or any such other decree or order unstayed and in effect for a period
of 60 consecutive days; or
(ii) the commencement by the Certificate Insurer of a
voluntary case or proceeding under any applicable United States federal or state
bankruptcy, insolvency, reorganization or other similar law
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or of any other case or proceeding to be adjudicated as bankrupt or insolvent,
or the consent of the Certificate Insurer to the entry of a decree or order for
relief in respect of the Certificate Insurer in an involuntary case or
proceeding under any applicable United States federal or state bankruptcy,
insolvency case or proceeding against the Certificate Insurer, or the
acquiescence by the Certificate Insurer to the filing of such petition or to the
appointment of or the taking possession by a custodian, receiver, liquidator,
assignee, trustee, sequestrator or similar official of the Certificate Insurer
or of any substantial part of its property, or the failure of the Certificate
Insurer to pay debts generally as they become due, or the admission by the
Certificate Insurer in writing of its inability to pay its debts generally as
they become due, or the taking of corporate action by the Certificate Insurer in
furtherance of any such action.
"Certificate Principal Balance": As of the Start-up Day as to each of
the following Classes of Class A Certificates, the principal balances thereof,
as follows:
Class A-1 Certificates - $
Class A-2 Certificates - $
Class A-3 Certificates - $
Class A-4 Certificates - $
Class A-5 Certificates - $
The Class X Certificates and the Class R Certificates do not have a
Certificate Principal Balance.
"Class": Any class of the Class A Certificates, the Class X
Certificates or the Class R Certificates.
"Class A Certificate": Any one of the Class A-1 Certificates, Class
A-2 Certificates, Class A-3 Certificates, Class A-4 Certificates or Class A-5
Certificates.
"Class A Certificate Principal Balance": As of any time of
determination, the Certificate Principal Balance as of the Start-up Day of all
Class A Certificates less any amounts actually distributed on such Class A
Certificates with respect to the Class A Distribution Amount pursuant to Section
7.03(c)(iii)(C) with respect to principal thereon on all prior Distribution
Dates (except, for purposes of effecting the Certificate Insurer's subrogation
rights, that portion of Insured Payments made in respect of principal).
"Class A Certificate Termination Date": With respect to the Class A-1
Certificates, the Class A-1 Certificate Termination Date, with respect to the
Class A-2 Certificates, the Class A-2 Certificate Termination Date, with respect
to the Class A-3 Certificates, the Class A-3 Certificate Termination Date, with
respect to the Class A-4 Certificates, the Class A-4 Certificate Termination
Date and with respect to the Class A-5 Certificates, the Class A-5 Certificate
Termination Date.
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"Class A Distribution Amount": The sum of the Class A-1 Distribution
Amount, Class A-2 Distribution Amount, Class A-3 Distribution Amount, Class A-4
Distribution Amount and Class A-5 Distribution Amount.
"Class A-1 Certificate": Any one of the Certificates designated on the
face thereof as a Class A-1 Certificate, substantially in the form annexed
hereto as Exhibit A, authenticated and delivered by the Trustee, representing
the right to distributions as set forth herein.
"Class A-1 Certificate Principal Balance": As of any time of
determination, the Certificate Principal Balance as of the Start-up Day of all
Class A-1 Certificates less any amounts actually distributed with respect to the
Class A-1 Distribution Amount pursuant to Section 7.03(c)(iii)(C) hereof with
respect to principal thereon on all prior Distribution Dates (except, for
purposes of effecting the Certificate Insurer's subrogation rights, that portion
of Insured Payments made in respect of principal).
"Class A-1 Certificate Termination Date": The Distribution Date on
which the Class A-1 Certificate Principal Balance is reduced to zero.
"Class A-1 Current Interest": With respect to any Distribution Date,
the amount of interest accrued on the Class A-1 Certificate Principal Balance
immediately prior to such Distribution Date during the related Accrual Period at
the Class A-1 Pass-Through Rate plus the Preference Amount owed to the Owners of
the Class A-1 Certificates as it relates to interest previously paid on the
Class A-1 Certificates plus the Carry Forward Amount, if any, with respect to
the Class A-1 Certificates.
"Class A-1 Distribution Amount": The sum of (x) Class A-1 Current
Interest and (y) the Fixed Rate Group Principal Distribution Amount payable to
the Owners of the Class A-1 Certificates pursuant to Section 7.03(c)(iii)(C)
hereof.
"Class A-1 Pass-Through Rate": _______% per annum.
"Class A-2 Certificate": Any one of the Certificates designated on the
face thereof as a Class A-2 Certificate, substantially in the form annexed
hereto as Exhibit A, authenticated and delivered by the Trustee, representing
the right to distributions as set forth herein.
"Class A-2 Certificate Principal Balance": As of any time of
determination, the Certificate Principal Balance as of the Start-up Day of all
Class A-2 Certificates less any amounts actually distributed with respect to the
Class A-2 Distribution Amount pursuant to Section 7.03(c)(iii)(C) hereof with
respect to principal thereon on all prior Distribution Dates (except, for
purposes of effecting the Certificate Insurer's subrogation rights, that portion
of Insured Payments made in respect of principal).
"Class A-2 Certificate Termination Date": The Distribution Date on
which the Class A-2 Certificate Principal Balance is reduced to zero.
"Class A-2 Current Interest": With respect to any Distribution Date,
the amount of interest accrued on the Class A-2 Certificate Principal Balance
immediately prior to such Distribution Date during the related Accrual Period at
the Class A-2 Pass-Through Rate plus the Preference Amount owed to the
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Owners of the Class A-2 Certificates as it relates to interest previously paid
on the Class A-2 Certificates plus the Carry Forward Amount, if any, with
respect to the Class A-2 Certificates.
"Class A-2 Distribution Amount": The sum of (x) Class A-2 Current
Interest and (y) the Fixed Rate Group Principal Distribution Amount payable to
the Owners of the Class A-2 Certificates pursuant to Section 7.03(c)(iii)(C)
hereof.
"Class A-2 Pass-Through Rate": _______% per annum.
"Class A-3 Certificate": Any one of the Certificates designated on the
face thereof as a Class A-3 Certificate, substantially in the form annexed
hereto as Exhibit A, authenticated and delivered by the Trustee, representing
the right to distributions as set forth herein.
"Class A-3 Certificate Principal Balance": As of any time of
determination, the Certificate Principal Balance as of the Start-up Day of all
Class A-3 Certificates less any amounts actually distributed with respect to
the Class A-3 Distribution Amount pursuant to Section 7.03(c)(iii)(C) hereof
with respect to principal thereon on all prior Distribution Dates (except, for
purposes of effecting the Certificate Insurer's subrogation rights, that
portion of Insured Payments made in respect of principal).
"Class A-3 Certificate Termination Date": The Distribution Date on
which the Class A-3 Certificate Principal Balance is reduced to zero.
"Class A-3 Current Interest": With respect to any Distribution Date,
the amount of interest accrued on the Class A-3 Certificate Principal Balance
immediately prior to such Distribution Date during the related Accrual Period at
the Class A-3 Pass-Through Rate plus the Preference Amount owed to the Owners of
the Class A-3 Certificates as it relates to interest previously paid on the
Class A-3 Certificates plus the Carry Forward Amount, if any, with respect to
the Class A-3 Certificates.
"Class A-3 Distribution Amount": The sum of (x) Class A-3 Current
Interest and (y) the Fixed Rate Group Principal Distribution Amount payable to
the Owners of the Class A-3 Certificates pursuant to Section 7.03(c)(iii)(C)
hereof.
"Class A-3 Pass-Through Rate": _______% per annum.
"Class A-4 Certificate": Any one of the Certificates designated on the
face thereof as a Class A-4 Certificate, substantially in the form annexed
hereto as Exhibit A, authenticated and delivered by the Trustee, representing
the right to distributions as set forth herein.
"Class A-4 Certificate Principal Balance": As of any time of
determination, the Certificate Principal Balance as of the Start-up Day of all
Class A-4 Certificates less any amounts actually distributed with respect to the
Class A-4 Distribution Amount pursuant to Section 7.03(c)(iii)(C) hereof with
respect to principal thereon on all prior Distribution Dates (except, for
purposes of effecting the Certificate Insurer's subrogation rights, that portion
of Insured Payments made in respect of principal).
"Class A-4 Certificate Termination Date": The Distribution Date on
which the Class A-4 Certificate Principal Balance is reduced to zero.
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"Class A-4 Current Interest": With respect to any Distribution Date,
the amount of interest accrued on the Class A-4 Certificate Principal Balance
immediately prior to such Distribution Date during the related Accrual Period at
the Class A-4 Pass-Through Rate plus the Preference Amount owed to the Owners of
the Class A-4 Certificates as it relates to interest previously paid on the
Class A-4 Certificates plus the Carry Forward Amount, if any, with respect to
the Class A-4 Certificates.
"Class A-4 Distribution Amount": The sum of (x) Class A-4 Current
Interest and (y) the Fixed Rate Group Principal Distribution Amount payable to
the Owners of the Class A-4 Certificates pursuant to Section 7.03(c)(iii)(C)
hereof.
"Class A-4 Pass-Through Rate": _______% per annum.
"Class A-5 Available Funds Cap Rate": On any Distribution Date prior to
the [seventh] Distribution Date, the weighted average of the Mortgage Rates of
the Mortgage Loans in the Adjustable Rate Group less the sum of the Expense Rate
and, on any Distribution Date on and after the [seventh] Distribution Date,
________% per annum.
"Class A-5 Certificate": Any one of the Certificates designated on the
face thereof as a Class A-5 Certificate, substantially in the form annexed
hereto as Exhibit A, authenticated and delivered by the Trustee, representing
the right to distributions as set forth herein.
"Class A-5 Certificate Principal Balance": As of any time of
determination, the Certificate Principal Balance as of the Start-up Day of all
Class A-5 Certificates less any amounts actually distributed with respect to the
Class A-5 Distribution Amount pursuant to Section 7.03(c)(iii)(C) hereof with
respect to principal thereon on all prior Distribution Dates (except, for
purposes of effecting the Certificate Insurer's subrogation rights, that portion
of Insured Payments made in respect of principal).
"Class A-5 Certificate Termination Date": The Distribution Date on
which the Class A-5 Certificate Principal Balance is reduced to zero.
"Class A-5 Current Interest": With respect to any Distribution Date,
the amount of interest accrued on the Class A-5 Certificate Principal Balance
immediately prior to such Distribution Date during the related Accrual Period at
the Class A-5 Pass-Through Rate plus the Preference Amount owed to the Owners of
the Class A-5 Certificates as it relates to interest previously paid on the
Class A-5 Certificates plus the Carry Forward Amount, if any, with respect to
the Class A-5 Certificates.
"Class A-5 Distribution Amount": The sum of (x) Class A-5 Current
Interest and (y) the Adjustable Rate Group Principal Distribution Amount
payable to the Owners of Class A-5 Certificates pursuant to Section
7.03(c)(iii)(C) hereof.
"Class A-5 Pass-Through Rate": For any Distribution Date in any month
prior to the month in which the Optional Termination Date occurs, the lesser of
(i) LIBOR plus ______% per annum and (ii) the Class A-5 Available Funds Cap Rate
for such Distribution Date and for any Distribution Date in any month commencing
with the month in which the Optional Termination Date occurs, the lesser of (i)
LIBOR plus ____% per annum and (ii) the Class A-5 Available Funds Cap Rate for
such Distribution Date.
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"Class R Certificate": Any one of the Certificates designated on the
face thereof as a Class R Certificate, substantially in the form annexed hereto
as Exhibit C, authenticated and delivered by the Trustee, representing the right
to distributions as set forth herein, and evidencing an interest designated as
the "residual interest" in the REMIC for the purposes of the REMIC Provisions.
"Class X Certificate": Any one of the Class X-1 Certificates or Class
X-2 Certificates.
["Class X-1 Carry Forward Amount": With respect to any Distribution
Date the sum of (a) the amount, if any, by which (x) the Class X-1 Distribution
Amount as of the immediately preceding Distribution Date exceeded (y) the
amount of the actual distribution made to Owners of the Class X-1 Certificates
on such immediately preceding Distribution Date plus (b) 30 days' interest on
such amount at the Late Payment Rate.]
"Class X-1 Certificate": Any one of the Certificates designated on the
face thereof as a Class X-1 Certificate, substantially in the form annexed
hereto as Exhibit B, authenticated and delivered by the Trustee, representing
the right to distributions as set forth herein.
["Class X-1 Distribution Amount": With respect to any Distribution
Date, the sum of:
(i) with respect to the Mortgage Loans in the Fixed Rate
Group, one-twelfth of the product of (x) the sum of the aggregate
outstanding Loan Balances of such Mortgage Loans on the immediately
preceding Distribution Date and (y) the excess of (I) the weighted
average of the Mortgage Rates of such Mortgage Loans on such
immediately preceding Distribution Date over (II) the sum of the
following payments allocable to the Fixed Rate Group on or in respect
of the related Distribution Date (in the case of (A), (B), (C) and (D)
expressed as a percentage of such aggregate outstanding Loan Balance):
(A) the Servicing Fee, (B) the Premium Amount, (C) the Trustee Fee, (D)
any Reimbursement Amount and (E) the weighted average of the Class A-1
Pass-Through Rate, Class A-2 Pass-Through Rate, Class A-3 Pass-Through
Rate and Class A-4 Pass-Through Rate for such Distribution Date; and
(ii) the Class X-1 Carry Forward Amount.]
["Class X-2 Carry Forward Amount": With respect to any Distribution
Date the sum of (a) the amount, if any, by which (x) the Class X-2 Distribution
Amount as of the immediately preceding Distribution Date exceeded (y) the amount
of the actual distribution made to Owners of the Class X-2 Certificates on such
immediately preceding Distribution Date plus (b) 30 days' interest on such
amount at the Late Payment Rate.]
"Class X-2 Certificate": Any one of the Certificates designated on the
face thereof as a Class X-2 Certificate, substantially in the form annexed
hereto as Exhibit B, authenticated and delivered by the Trustee, representing
the right to distribution as set forth herein.
["Class X-2 Distribution Amount": With respect to any Payment Date,
the sum of:
(i) with respect to the Mortgage Loans in the
Adjustable Rate Group, one-twelfth of the product of (x) the sum of
the aggregate outstanding Loan Balances of such Mortgage Loans
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on the immediately preceding Distribution Date and (y) the excess of
(I) the weighted average of the Mortgage Rates of such Mortgage Loans
on such immediately preceding Distribution Date over (II) the sum of
the following payments allocable to the Adjustable Rate Group on or in
respect of the related Distribution Date (in the case of (A), (B), (C)
and (D) expressed as a percentage of such aggregate outstanding Loan
Balance); (A) the Servicing Fee, (B) the Premium Amount, (C) the
Trustee Fee, (D) any Reimbursement Amount and (E) the Class A-5
Pass-Through Rate for such Distribution Date; and
(ii) the Class X-2 Carry Forward Amount.]
"Closing": As defined in Section 4.02 hereof.
"Code": The Internal Revenue Code of 1986, as amended.
"Collection Account": The collection account created by the Master
Servicer pursuant to Section 8.08(a) hereof.
"Compensating Interest": As defined in Section 8.10(a) hereof.
"Corporate Trust Office": The principal office of the Trustee at 3
Park Plaza, Irvine, California 92714.
"Cumulative Realized Losses": As of any date of determination, the
aggregate amount of Realized Losses with respect to the Mortgage Loans since
the Cut-Off Date.
"Current Interest": With respect to any Distribution Date, the sum of
the Class A-1 Current Interest, Class A-2 Current Interest, Class A-3 Current
Interest, Class A-4 Current Interest, and Class A-5
Current Interest.
"Cut-Off Date": As of the close of business on [December 31, 1996].
"Daily Collections": As defined in Section 8.08(c) hereof.
"Delinquent": A Mortgage Loan is "Delinquent" if any payment due
thereon is not made by the close of business on the day such payment is
scheduled to be due. A Mortgage Loan is "30 days Delinquent" if such payment has
not been received by the close of business on the corresponding day of the month
immediately succeeding the month in which such payment was due, or, if there is
no such corresponding day (e.g., as when a 30-day month follows a 31-day month
in which a payment was due on the 31st day of such month) then on the last day
of such immediately succeeding month. Similarly for "60 days Delinquent," "90
days Delinquent" and so on.
"Delivery Order": The delivery order in the form set forth as Exhibit
G hereto and delivered by the Depositor to the Trustee on the Startup Day
pursuant to Section 4.01 hereof.
"Depositor": Block Mortgage Finance, Inc., a Delaware corporation, or
any successor thereto.
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"Depository": The Depository Trust Company, 7 Hanover Square, New
York, New York 10004, and any successor Depository hereafter named.
"Determination Date": The [15th] day of any month, or if such [15th]
day is not a Business Day, the Business Day immediately preceding such [15th]
day, commencing on February [14,] 1997.
"Direct Participant" or "DTC Participant": Any broker-dealer, bank or
other financial institution for which the Depository holds Class A Certificates
from time to time as a securities depository
"Disqualified Organization": Shall have the meaning set forth from
time to time in the definition thereof at Section 860E(e)(5) of the Code (or
any successor statute thereto) and applicable to the Trust.
"Distribution Account": The distribution account established in
accordance with Section 7.02(a) hereof and maintained in the corporate trust
department of the Trustee; provided that the funds in such account shall not be
commingled with other funds held by the Trustee.
"Distribution Date": Any date on which the Trustee is required to make
distributions to the Owners, which shall be the 25th day of each month or if
such day is not a Business Day, the next Business Day thereafter, commencing in
the month following the Startup Day.
"Due Period": With respect to any Monthly Remittance Date, the
calendar month immediately preceding the calendar month in which such Monthly
Remittance Date occurs.
"Eligible Account": Either (i) an account maintained with a federally
or state-chartered depository institution or trust company, the short term
unsecured debt obligations of which are rated "A-1" by Standard & Poor's and
"P-1" by Moody's, (ii) one or more accounts maintained with a federally or
state-chartered depository institution which accounts are fully insured by
either the Savings Association Insurance Fund or the Bank Insurance Fund of the
FDIC with a minimum long-term unsecured debt rating of "Baa3" by Moody's and
"BBB-" by Standard & Poor's, (iii) a segregated trust account maintained with
the Trustee or an affiliate of the Trustee in its fiduciary capacity or (iv)
otherwise confirmed in writing by each of the Rating Agencies that the
maintenance of such account shall not, in and of itself, result in a
downgrading, withdrawal or qualification of the rating then assigned by such
Rating Agency to any Class of Certificates. Eligible Accounts may bear interest.
"Eligible Investments": Those investments so designated pursuant to
Section 7.07 hereof.
"Event of Default": Any one of the events described in Section
8.20(a) or 8.20(b).
"Excess Subordinated Amount": With respect to any Mortgage Loan Group
and Distribution Date, the excess, if any, of (x) the Subordinated Amount that
would apply to the related Mortgage Loan Group on such Distribution Date after
taking into account the payment of the related Class A Distribution Amounts on
such Distribution Date (except for any distributions of related Subordination
Reduction Amounts on such Distribution Date), over (y) the related Specified
Subordinated Amount for such Distribution Date.
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"Expense Rate": For any Distribution Date and each of the Fixed Rate
Group and the Adjustable Rate Group, the sum of the rates at which the Servicing
Fee, the Premium Amount and the Trustee Fee applicable to each of the Fixed Rate
Group and the Adjustable Rate Group are calculated.
"FDIC": The Federal Deposit Insurance Corporation, a corporate
instrumentality of the United States, or any successor thereto.
"FHLMC": The Federal Home Loan Mortgage Corporation, a corporate
instrumentality of the United States created pursuant to the Emergency Home
Finance Act of 1970, as amended, or any successor thereof.
"File": The documents delivered to the Trustee pursuant to Section
3.06 hereof pertaining to a particular Mortgage Loan and any additional
documents required to be added to the File pursuant to this Agreement.
"Final Certification": As defined in Section 3.06(c) hereof.
"Final Determination": As defined in Section 9.04(a) hereof.
"Final Scheduled Distribution Date": For each Class of Class A
Certificates, as set out in Section 2.08(e).
"First Mortgage Loan": A Mortgage Loan which constitutes a first
priority mortgage lien with respect to the related Mortgaged Property.
"Fixed Rate Certificate": Any one of the Class A-1 Certificates,
Class A-2 Certificates, Class A-3 Certificates and Class A-4 Certificates.
"Fixed Rate Group": The pool of Mortgage Loans identified in the
related Schedule of Mortgage Loans as having been assigned to the Fixed Rate
Group in Schedule l-A hereto, including any Qualified Replacement Mortgages
delivered in replacement thereof.
"Fixed Rate Group Available Funds": As defined in Section 7.02(c)
hereof.
"Fixed Rate Group Available Funds Shortfall": As defined in Section
7.03(c)(i)(A) hereof.
"Fixed Rate Group Certificate Insurance Policy": The certificate
guaranty insurance policy (number ____________) dated January __, 1997 issued by
the Certificate Insurer for the benefit of the owners of the Fixed Rate
Certificates pursuant to which the Certificate Insurer guarantees Insured
Payments.
"Fixed Rate Group Current Interest": With respect to any Distribution
Date, the sum of the Class A-1 Current Interest, Class A-2 Current Interest,
Class A-3 Current Interest and Class A-4 Current Interest.
"Fixed Rate Group Initial Specified Subordinated Amount": As defined
in the Insurance Agreement.
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"Fixed Rate Group Interest Remittance Amount": As of any Monthly
Remittance Date, the sum, without duplication, of (i) all interest due during
the related Due Period with respect to the Mortgage Loans in the Fixed Rate
Group (less the Expense Rate with respect to such Mortgage Loans), (ii) all
Compensating Interest paid by the Master Servicer on such Monthly Remittance
Date with respect to the Fixed Rate Group and (iii) the portion of the
Substitution Amount relating to interest on the Mortgage Loans in the Fixed Rate
Group.
"Fixed Rate Group Monthly Remittance Amount": As of any Monthly
Remittance Date, the sum of (i) the Fixed Rate Group Interest Remittance Amount
and (ii) the Fixed Rate Group Principal Remittance Amount for such Monthly
Remittance Date.
"Fixed Rate Group Principal Distribution Amount": With respect to the
Fixed Rate Certificates for any Distribution Date, the lesser of:
(a) the Fixed Rate Group Total Available Funds plus any Insured
Payment with respect to the Fixed Rate Certificates minus the Fixed Rate Group
Current Interest; and
(b) the excess, if any, (i) the sum of:
(A) the Preference Amount owed to the Owners of the
Fixed Rate Certificates as such amounts relate to principal
previously distributed on the Fixed Rate Certificates,
(B) the principal collected by the Master Servicer on
or prior to the related Determination Date with respect to
Mortgage Loans in the Fixed Rate Group that was due during the
related Due Period or advanced by the Master Servicer for such
Distribution Date,
(C) the principal portion of all Prepayments received
by the Master Servicer during the Prepayment Period and
remitted to the Trustee as of the Monthly Remittance Date;
(D) the Loan Purchase Price of each Mortgage Loan in
the Fixed Rate Group that was repurchased by the Seller or
purchased by the Master Servicer on or prior to the related
Monthly Remittance Date, to the extent such Loan Purchase
Price is actually received by the Trustee on or prior to the
related Monthly Remittance Date,
(E) any Substitution Adjustments delivered by the
Seller on or prior to the related Monthly Remittance Date in
connection with a substitution of a Mortgage Loan in the Fixed
Rate Group (to the extent such Substitution Adjustments relate
to principal), to the extent such Substitution Adjustments are
actually received by the Trustee on or prior to the related
Monthly Remittance Date,
(F) all Net Liquidation Proceeds actually collected
by the Master Servicer with respect to Mortgage Loans in the
Fixed Rate Group during the related Due Period (to the extent
such Net Liquidation Proceeds relate to principal) to the
extent such Net
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Liquidation Proceeds are actually received by the Trustee on
or prior to the related Monthly Remittance Date,
(G) the amount of any Subordination Deficit
with respect to the Fixed Rate Group for such Distribution
Date,
(H) the portion of the proceeds received by the
Trustee with respect to the Fixed Rate Group from any
termination of the Trust (to the extent such proceeds related
to principal),
(I) the amount of any Subordination Increase Amount
with respect to the Fixed Rate Group for such Distribution
Date, to the extent of any Net Monthly Excess Cashflow
available for such purpose, and
(J) the portion of any Carry Forward Amount relating
to principal with respect to the Fixed Rate Group for such
Distribution Date;
over
(ii) the amount of any Subordination Reduction Amount with
respect to the Fixed Rate Group for such Distribution Date.
"Fixed Rate Group Principal Remittance Amount": As of any Monthly
Remittance Date, the sum, without duplication, of (i) the principal actually
collected by the Master Servicer on or prior to the related Determination Date
with respect to Mortgage Loans in the Fixed Rate Group during the related Due
Period, (ii) the Loan Purchase Price of each Mortgage Loan in the Fixed Rate
Group that was purchased from the Trust during the related Due Period, to the
extent such Loan Purchase Price was actually deposited in the Collection
Account, (iii) any Substitution Adjustments relating to principal delivered by
the Seller in connection with a substitution of a Mortgage Loan in the Fixed
Rate Group, to the extent such Substitution Adjustments were actually deposited
in the Collection Account during the related Due Period, and (iv) all Net
Liquidation Proceeds actually collected by the Master Servicer with respect to
the Mortgage Loans in the Fixed Rate Group during the related Due Period (to the
extent such Net Liquidation Proceeds related to principal).
"Fixed Rate Group Specified Subordinated Amount": As defined in the
Insurance Agreement.
"Fixed Rate Group Subordinated Amount": As of any Distribution Date,
the excess, if any, of (x) the aggregate Loan Balances of the Mortgage Loans in
the Fixed Rate Group as of the close of business on the last day of the related
Due Period (taking into account all amounts received on or prior to the related
Determination Date) over (y) the sum of the Class A-1 Certificate Principal
Balance, Class A-2 Certificate Principal Balance, Class A-3 Certificate
Principal Balance and Class A-4 Certificate Principal Balance as of such
Distribution Date (after taking into account the payment of the Fixed Rate Group
Principal Distribution Amount thereon (except for any Subordination Deficit with
respect to the Fixed Rate Group and Subordination Increase Amount with respect
to the Fixed Rate Group) on such Distribution Date).
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"Fixed Rate Group Total Available Funds": As defined in Section
7.02(c) hereof.
"Fixed Rate Group Total Monthly Excess Spread": With respect to the
Fixed Rate Group and any Distribution Date, the excess, if any, of (i) the
interest which is collected on the Mortgage Loans in such Group during the
related Due Period less the Expense Rate with respect to Mortgage Loans in the
Fixed Rate Group plus (x) the interest component of any P&I Advances and (y)
Compensating Interest paid by the Master Servicer with respect to the Fixed Rate
Group for such Due Period over (ii) the interest accrued on the Fixed Rate
Certificates during the Accrual Period for such Distribution Date.
"FNMA": The Federal National Mortgage Association, a
federally-chartered and privately-owned corporation existing under the Federal
National Mortgage Association Charter Act, as amended, or any successor
thereof.
"FNMA Guide": FNMA's Servicing Guide, as the same may be amended by
FNMA from time to time, and the Master Servicer shall elect to apply such
amendments in accordance with Section 8.01 hereof.
"Highest Lawful Rate": As defined in Section 11.13.
"Indemnification Agreement": The Indemnification Agreement dated as
of January __, 1997 among the Certificate Insurer, the Depositor and the
Underwriters.
"Indirect Participant": Any financial institution for whom any Direct
Participant holds an interest in a Class A Certificate.
"Insurance Agreement": The Insurance Agreement dated as of January
__, 1997, among the Depositor, the Seller, the Master Servicer, the Certificate
Insurer and the Trustee, as it may be amended from time to time.
"Insurance Policy": Any hazard, flood, title or primary mortgage
insurance policy relating to a Mortgage Loan plus any amount remitted under
Section 8.11 hereof.
"Insurance Proceeds": Proceeds of any Insurance Policy or other
insurance policy relating to a Mortgage Loan and/or the Mortgaged Property
securing any Mortgage Loan, to the extent proceeds are not to be applied to the
restoration of the related Mortgaged Property in accordance with the express
requirements of the related Mortgage or Note or other documents included in the
related File or in accordance with prudent and customary servicing practices.
"Insured Payment": With respect to the related Mortgage Loan Group and
as to any Distribution Date (i) the excess, if any, of (a) the sum of the
related Current Interest (net of Prepayment Interest Shortfalls and interest
reductions arising under the Relief Act) and the then existing related
Subordination Deficit, if any, over (b) the Total Available Funds with respect
to such Group (net of the Premium Amount allocable to such Group) after taking
into account (x) the cross-collateralization provisions of Sections
7.03(c)(i)(A) and (B) and 7.03(c)(ii)(A) and (B) hereof and (y) the portion of
any Fixed Rate Group Principal Distribution Amount or Adjustable Rate Group
Principal Distribution Amount, as the case may be, to be actually distributed
on such Distribution Date without regard to any related Insured Payment
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to be made with respect to such Distribution Date plus (ii) an amount equal to
the Preference Amount with respect to the related Class of Class A Certificates.
"Interest Remittance Amount": The sum of the Fixed Rate Group
Interest Remittance Amount and the Adjustable Rate Group Interest Remittance
Amount.
"Late Payment Rate": For any Distribution Date, the fluctuating rate of
interest, as it is published from time to time in the New York, New York edition
of The Wall Street Journal under the caption "Money Rates" as the "prime rate,"
to change when and as such published prime rate changes plus ____%. The Late
Payment Rate shall be computed on the basis of a year of 360 days calculating
the actual number of days elapsed. In no event shall the Late Payment Rate
exceed the Highest Lawful Rate.
"LIBOR": With respect to any Accrual Period for the Class A-5
Certificates, the rate determined by the Trustee on the related LIBOR
Determination Date on the basis of the quotations, as set forth on the Telerate
Screen Page 3750, offered by the principal London office of each of 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.
"LIBOR Business Day": Any day other than (i) a Saturday or a Sunday, or
(ii) a day on which banking institutions in the City of New York, New York, or
the City of London, England are authorized or obligated by law or executive
order to be closed.
"LIBOR Determination Date": With respect to any Accrual Period for
the Class A-5 Certificates, the second LIBOR Business Day preceding the
commencement of such Accrual Period.
"Liquidated Loan": As defined in Section 8.13(b) hereof.
"Liquidation Expenses": Expenses, not to exceed the Liquidation
Proceeds, which are incurred by the Master Servicer in connection with the
liquidation of any defaulted Mortgage Loan or property acquired in respect
thereof, such expenses including, without limitation, legal fees and expenses,
committee or referee fees, and, if applicable, brokerage commissions and
conveyance taxes, and any Servicing Advances expended by the Master Servicer
pursuant to this Agreement with respect to such Mortgage Loan not previously
reimbursed from collection or other proceeds therefrom.
"Liquidation Proceeds": Any amounts (including Insurance Proceeds)
recovered by the Master Servicer in connection with (i) the taking of a
Mortgaged Property by exercise of the power of eminent domain or condemnation,
(ii) any Liquidated Loan, whether through trustee's sale, foreclosure sale or
otherwise, (iii) the sale of a defaulted Mortgage Loan or an REO Property in
accordance with Section 8.13, or (iv) the sale of all of the Mortgage Loans in
accordance with Article IX.
"Loan Balance": With respect to each Mortgage Loan and as of any date
of determination, the outstanding principal balance thereof on the Cut-Off Date,
less any principal payments relating to such Mortgage Loan included in previous
Monthly Remittance Amounts, provided, however, that the Loan Balance for any
Mortgage Loan that has become a Liquidated Loan shall be zero as of the first
day of the Due Period following the Due Period in which such Mortgage Loan
becomes a Liquidated Loan, and at all times thereafter.
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"Loan Purchase Price": With respect to any Mortgage Loan purchased from
the Trust on a Monthly Remittance Date pursuant to Section 3.03, 3.04, 3.06(b),
8.10(b) or 8.13(a) hereof, an amount equal to the Loan Balance of such Mortgage
Loan as of the date of purchase (assuming that the Monthly Remittance Amount
remitted by the Master Servicer on such Monthly Remittance Date has already been
remitted), plus one month's interest on the outstanding Loan Balance thereof as
of the beginning of the related Due Period computed at the then applicable
Mortgage Rate, together with (without duplication) the aggregate amounts of (i)
all unreimbursed P&I Advances and Servicing Advances theretofore made with
respect to such Mortgage Loan, (ii) all P&I Advances and Servicing Advances
which the Master Servicer has theretofore failed to remit with respect to such
Mortgage Loan and (iii) all reimbursed P&I Advances to the extent that
reimbursement is not made from the Mortgagor or from Liquidation Proceeds from
the respective Mortgage Loan.
"Loan-to-Value Ratio": As of any particular date (i) with respect to
any First Mortgage Loan, the percentage obtained by dividing the Appraised Value
into the original principal balance of the Note relating to such First Mortgage
Loan and (ii) with respect to any Second Mortgage Loan, the percentage obtained
by dividing the Appraised Value as of the date of origination of such Second
Mortgage Loan into an amount equal to the sum of (a) the remaining principal
balance of the note relating to the related Senior Lien as of the date of
origination of the related Second Mortgage Loan and (b) the original principal
balance of the Note relating to such Second Mortgage Loan.
"Master REMIC": As described in Section 2.08 hereof.
"Master Servicer": Block Financial Corporation, a Delaware
corporation, and its permitted successors and assigns.
"Master Servicer Affiliate": A Person (i) controlling, controlled by
or under common control with the Master Servicer and (ii) which is qualified to
service residential mortgage loans.
"Minimum Termination Amount": As of any time after the Optional
Termination Date, an amount equal to the sum of (a) the Class A-1 Certificate
Principal Balance, (b) any shortfall in interest due to the Owners of the Class
A-1 Certificates in respect of prior Distribution Dates, (c) one month's
interest on the Class A-1 Certificate Principal Balance at the Class A-1
Pass-Through Rate, (d) the Class A-2 Certificate Principal Balance, (e) any
shortfall in interest due to the Owners of the Class A-2 Certificates in respect
of prior Distribution Dates, (f) one month's interest on the Class A-2
Certificate Principal Balance at the Class A-2 Pass-Through Rate, (g) the Class
A-3 Certificate Principal Balance, (h) any shortfall in interest due to the
Owners of the Class A-3 Certificates in respect of prior Distribution Dates, (i)
one month's interest on the Class A-3 Certificate Principal Balance at the Class
A-3 Pass-Through Rate, (j) the Class A-4 Certificate Principal Balance, (k) any
shortfall in interest due to the Class A-4 Certificates in respect of prior
Distribution Dates, (l) one month's interest on the Class A-4 Certificate
Principal Balance at the Class A-4 Pass-Through Rate, (m) the Class A-5
Certificate Principal Balance, (n) any shortfall in interest due to the Owners
of the Class A-5 Certificates in respect of prior Distribution Dates, (o) one
month's interest on the Class A-5 Certificate Principal Balance at the Class A-5
Pass-Through Rate, (p) any shortfall in interest due to the Owners of the Class
X-1 Certificates in respect of prior Distribution Dates, and (q) any shortfall
in interest due to the Owners of the Class X-2 Certificates in respect of prior
Distribution Dates.
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"Monthly Remittance Amount": The sum of the Fixed Rate Group Monthly
Remittance Amount and the Adjustable Rate Group Monthly Remittance Amount.
"Monthly Remittance Date": With respect to any Distribution Date, the
Business Day immediately prior to such Distribution Date.
"Moody's": Moody's Investors Service, Inc.
"Mortgage": The mortgage, deed of trust or other instrument creating
a first or second lien on an estate in fee simple interest in real property
securing a Note.
"Mortgage Loan Group" or "Group": The Fixed Rate Group or the
Adjustable Rate Group, as the case may be. References herein to the related
Class of Class A Certificates, when used with respect to a Mortgage Loan Group,
shall mean (A) in the case of the Fixed Rate Group, the Fixed Rate Certificates
and (B) in the case of the Adjustable Rate Group, the Class A-5 Certificates.
"Mortgage Loans": Such of the mortgage loans transferred and assigned
to the Trust pursuant to Section 3.05(a) hereof, together with any Qualified
Replacement Mortgages substituted therefor in accordance with this Agreement, as
from time to time are held as a part of the Trust Estate, the mortgage loans
originally so held being identified in the Schedules of Mortgage Loans. The term
"Mortgage Loan" includes the terms "First Mortgage Loan" and "Second Mortgage
Loan". The term "Mortgage Loan" includes any Mortgage Loan which is Delinquent,
which relates to a foreclosure or which relates to a Mortgaged Property which is
REO Property prior to such Mortgaged Property's disposition by the Trust. Any
mortgage loan which, although intended by the parties hereto to have been, and
which purportedly was, transferred and assigned to the Trust by the Depositor,
in fact was not transferred and assigned to the Trust for any reason whatsoever,
including, without limitation, the incorrectness of the statement set forth in
Section 3.04(b)(x) hereof with respect to such mortgage loan, shall nevertheless
be considered a "Mortgage Loan" for all purposes of this Agreement.
"Mortgage Rate": The rate of interest borne by each Note.
"Mortgaged Property": The underlying property securing a Mortgage Loan.
"Mortgagor": The obligor on a Note.
"MR Interest": The sole class of "residual interest" in the Master
REMIC.
"Net Lifetime Cap": With respect to any Distribution Date, the weighted
average of the maximum Mortgage Rates on the Mortgage Loans in the Adjustable
Rate Group as of the first day of the related Due Period, minus the sum of (a)
the Servicing Fee, (b) the Trustee Fee, (c) the Premium Amount and (d)
commencing on the [seventh] Distribution Date, 0.50% per annum.
"Net Liquidation Proceeds": As to any Liquidated Loan, Liquidation
Proceeds net of Liquidation Expenses and unreimbursed P&I Advances relating to
such Mortgage Loan. In no event shall Net Liquidation Proceeds with respect to
any Liquidated Loan be less than zero.
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"Net Monthly Excess Cashflow": As defined in Section 7.03(c)(ii)
hereof.
"Nonrecoverable Advance": Any portion of a P&I Advance or a Servicing
Advance proposed to be made or previously made which has not been previously
reimbursed to the Master Servicer, and which the Master Servicer has determined
in its good faith business judgment will not or, in the case of a proposed P&I
Advance or Servicing Advance, would not be ultimately recoverable by the Master
Servicer from late payments, Insurance Proceeds, condemnation proceeds,
Liquidation Proceeds and other collections on or in respect of the related
Mortgage Loan. The determination by the Master Servicer that it has made a
Nonrecoverable Advance or that any proposed P&I Advance or Servicing Advance, if
made, would constitute a Nonrecoverable Advance shall be evidenced by an
Officer's Certificate delivered to the Trustee and the Depositor setting forth
such determination and the procedures and considerations of the Master Servicer
forming the basis of such determination, which shall include a copy of any
information or reports obtained by the Master Servicer which may support such
determinations. Notwithstanding the above, the Trustee shall be entitled to rely
upon any determination of the Master Servicer that any P&I Advance or Servicing
Advance previously made is a Nonrecoverable Advance or that any proposed Advance
or Servicing Advance, if made, would constitute a Nonrecoverable Advance.
"Note": The note or other evidence of indebtedness evidencing the
indebtedness of a Mortgagor under a Mortgage Loan.
"Officer's Certificate": A certificate signed by any Authorized
Officer of any Person delivering such certificate and delivered to the Trustee.
"Operative Documents": Collectively, this Agreement, the Certificate
Insurance Policy, the Certificates, the Indemnification Agreement and the
Insurance Agreement.
"Optional Termination Date": The first Monthly Remittance Date on
which the aggregate of the Loan Balances of the Mortgage Loans is less than 10%
of the Original Aggregate Loan Balance.
"Original Aggregate Loan Balance": The aggregate Loan Balances of all
Mortgage Loans as of the Startup Day, i.e., $________________________________.
"Outstanding": With respect to all Certificates of a Class, as of any
date of determination, all such Certificates theretofore executed and delivered
hereunder except:
(i) Certificates theretofore cancelled by the Registrar or
delivered to the Registrar for cancellation;
(ii) Certificates or portions thereof for which full and final
payment of money in the necessary amount has been theretofore deposited
with the Trustee or any Paying Agent in trust for the Owners of such
Certificates;
(iii) Certificates in exchange for or in lieu of which other
Certificates have been executed and delivered pursuant to this
Agreement, unless proof satisfactory to the Trustee is presented that
any such Certificates are held by a bona fide purchaser;
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(iv) Certificates alleged to have been destroyed, lost or
stolen for which replacement Certificates have been issued as provided
for in Section 5.05 hereof; and
(v) Certificates as to which the Trustee has made the final
distribution thereon, whether or not such certificate is ever returned
to the Trustee.
"Owner": The Person in whose name a Certificate is registered in the
Register, and the Certificate Insurer, to the extent described in Section 5.06
and Section 7.03(e) hereof, respectively; provided that solely for the purposes
of determining the exercise of any voting rights hereunder, if Class A
Certificates are beneficially owned by the Depositor, the Seller or any
affiliate thereof. Neither the Depositor, the Seller nor such affiliate shall be
considered an Owner hereunder.
"Pass-Through Rate": Any of the Class A-1 Pass-Through Rate, the Class
A-2 Pass-Through Rate, the Class A-3 Pass-Through Rate, the Class A-4
Pass-Through Rate or the Class A-5 Pass-Through Rate.
"Paying Agent": Initially, the Trustee, and thereafter, the Trustee or
any other Person that meets the eligibility standards for the Paying Agent
specified in Section 11.15 hereof and is authorized by the Trustee and the
Depositor to make payments on the Certificates on behalf of the Trustee.
"Percentage Interest": With respect to a Class A Certificate, a
fraction, expressed as a percentage, the numerator of which is the Class A
Certificate Principal Balance represented by such Class A Certificate on such
date of determination and the denominator of which is the aggregate of the
Certificate Principal Balance of all classes of Class A Certificates as of such
date of determination. With respect to a Class X or a Class R Certificate, the
portion of the Class evidenced thereby, expressed as a percentage, as stated on
the face of such Certificate, all of which shall total 100% with respect to the
related Class.
"Person": Any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization or government or any agency or political subdivision thereof.
"P&I Advance": As defined in Section 8.09(a) hereof.
"Pool Certification": As defined in Section 3.06(a) hereof.
"Preference Amount": With respect to the Class A Certificates, any
amounts of Current Interest and principal included in previous distributions of
any Class A Distribution Amounts to the Owners of the Class A Certificates which
are recovered from such Owners 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 and which
have not theretofore been repaid to such Owners and for which there has been
full compliance with the provisions of Section 7.11 (including the receipt of
payment therefor from the Certificate Insurer).
"Premium Amount": As defined in the Insurance Agreement.
"Prepaid Installment": With respect to any Mortgage Loan, any
installment of principal thereof and interest thereon received by the Master
Servicer prior to the scheduled due date for such installment,
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intended by the Mortgagor as an early payment thereof and not as a Prepayment
with respect to such Mortgage Loan.
"Prepayment": Any payment of principal of a Mortgage Loan which is
received by the Master Servicer in advance of the scheduled due date for the
payment of such principal (other than the principal portion of any Prepaid
Installment), Substitution Amounts, the portion of the purchase price of any
Mortgage Loan purchased from the Trust pursuant to Section 3.03, 3.04, 3.06(b)
or 8.10(b) hereof representing principal and the proceeds of any Insurance
Policy which are to be applied as a payment of principal on the related Mortgage
Loan shall be deemed to be Prepayments for all purposes of this Agreement.
"Prepayment Interest Shortfall": With respect to any Distribution
Date, the amount of any shortfall in the payment of interest on a Mortgage Loan
which arises from a Prepayment on such Mortgage Loan.
"Prepayment Period": With respect to any Distribution Date, the period
commencing on the prior Determination Date and ending on the calendar day
immediately prior to the related Determination Date.
"Preservation Expenses": Expenditures made by the Master Servicer in
connection with a foreclosed Mortgage Loan prior to the liquidation thereof,
including, without limitation, expenditures for real estate property taxes,
hazard insurance premiums, property restoration or preservation.
"Principal Remittance Amount": The sum of the Fixed Rate Group
Principal Remittance Amount and the Adjustable Rate Group Principal Remittance
Amount.
"Prohibited Transaction": The meaning set forth from time to time in
the definition thereof at Section 860F(a)(2) of the Code (or any successor
statute thereto) and applicable to the Trust.
"Prospectus": The Prospectus dated January __, 1997 constituting part
of the Registration Statement.
"Prospectus Supplement": The Block Mortgage Finance Asset Backed
Certificates, Series 1997-1 Prospectus Supplement dated January __, 1997 to the
Prospectus.
"Purchase Option Period": As defined in Section 9.04(a) hereof.
"Qualified Insurer": An insurance company or security or bonding
company qualified to write the related insurance policy in the relevant
jurisdiction, which shall have a claims paying ability of "AA" or better by each
Rating Agency, unless each of the Rating Agencies has confirmed in writing that
an insurance company with a lower claims paying ability shall not result, in an
of itself, in a downgrading, withdrawal or qualification of the rating then
assigned by such Rating Agency to any Class of Certificates.
"Qualified Liquidation": The meaning set forth from time to time in
the definition thereof at Section 860F(a)(4) of the Code (or any successor
statute thereto) and applicable to the Trust.
"Qualified Mortgage": The meaning set forth from time to time in the
definition thereof at Section 860G(a)(3) of the Code (or any successor statute
thereto) and applicable to the Trust.
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"Qualified Replacement Mortgage": A Mortgage Loan substituted for
another pursuant to Section 3.03, 3.04 or 3.06(b) hereof, which (i) has a
Mortgage Rate at least equal to the Mortgage Rate of the Mortgage Loan being
replaced, (ii) is of the same property type (or is a single family dwelling) and
the same occupancy status (or is a primary residence) as the replaced Mortgage
Loan, (iii) shall mature no later than ______________ 1, 2026, (iv) has a
Loan-to-Value Ratio as of the Replacement Cut-Off Date no higher than the
Loan-to-Value Ratio of the replaced Mortgage Loan at such time, (v) shall be of
the same or higher credit quality classification (determined in accordance with
(i) the credit underwriting guidelines pursuant to which the replaced Mortgage
Loan was underwritten at the time the replaced Mortgage Loan was underwritten,
or (ii) the standards acceptable to the Rating Agencies, which would not cause a
downgrade or removal of the ratings assigned to the Class A Certificates
(without giving effect to any Certificate Insurance Policy) as the Mortgage Loan
which such Qualified Replacement Mortgage replaces, (vi) has a Loan Balance as
of the related Replacement Cut-Off Date equal to or less than the Loan Balance
of the replaced Mortgage Loan as of such Replacement Cut-Off Date, (vii) shall
not provide for a "balloon" payment if the related Mortgage Loan did not provide
for a "balloon" payment (and if such related Mortgage Loan provided for a
"balloon" payment, such Qualified Replacement Mortgage shall have an original
maturity of not greater than (and not more than one year less than) the original
maturity of such related Mortgage Loan), (viii) shall be a fixed rate Mortgage
Loan with the same lien priority as the replaced Mortgage Loan if the Mortgage
Loan being replaced is in the Fixed Rate Group and shall be a first lien
adjustable rate Mortgage Loan if the Mortgage Loan being replaced is in the
Adjustable Rate Group and (ix) satisfies the criteria set forth from time to
time in the definition thereof at Section 860G(a)(3) of the Code (or any
successor statute hereto) and applicable to the Trust.
"Rating Agencies": Collectively, Moody's and Standard & Poor's or any
successors thereto.
"Realized Loss": As to any Liquidated Loan, the amount, if any, by
which the Loan Balance thereof as of the date of liquidation is in excess of Net
Liquidation Proceeds realized thereon applied in reduction of such Loan Balance.
"Record Date": With respect to the Fixed Rate Certificates and each
Distribution Date, the last day of the calendar month immediately preceding the
calendar month in which such Distribution Date occurs and with respect to the
Class A-5 Certificates, the day immediately preceding such Distribution Date.
"Reference Banks": Bankers Trust Company, Barclays Bank PLC, The Bank
of Tokyo and National Westminster Bank PLC, provided that if any of the
foregoing banks are not suitable to serve as a Reference Bank pursuant to the
following criteria, then any leading banks selected by the Trustee which are
engaged in transactions in Eurodollar deposits in the international Eurocurrency
market (i) with an established place of business in London, (ii) not
controlling, under the control of or under common control with the Seller or any
affiliate thereof, (iii) whose quotations appear on Telerate Page 3750 on the
relevant LIBOR Determination Date and (iv) which have been designated as such by
the Trustee.
"Register": The register maintained by the Registrar in accordance
with Section 5.04 hereof, in which the names of the Owners are set forth.
"Registrar": The Trustee, acting in its capacity as Registrar
appointed pursuant to Section 5.04 hereof, or any duly appointed and eligible
successor thereto.
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"Registration Statement": The Registration Statement filed by the
Depositor with the Securities and Exchange Commission (Registration Number
333-14041), including all amendments thereto and including the Prospectus
Supplement relating to the Class A Certificates constituting a part thereof.
"Reimbursement Amount": As of any Distribution Date, the sum of (x)(i)
all Insured Payments previously paid to the Trustee by the Certificate Insurer
and not previously repaid to the Certificate Insurer pursuant to Section
7.03(c)(i)(C) and (D) hereof plus (ii) interest accrued on each such Insured
Payment not previously repaid calculated at the Reimbursement Late Payment Rate
and (y)(i) any amounts then due and owing to the Certificate Insurer under the
Insurance Agreement plus (ii) interest on such amounts at the Late Payment Rate.
The Certificate Insurer shall notify the Trustee, the Depositor and the Seller
of the amount of any Reimbursement Amount.
"Reimbursement Late Payment Rate": Means for any Distribution Date,
the rate of interest as it is publicly announced by Citibank, N.A., or any
successor thereto, at its principal office in New York, New York as its prime
rate (any change in such prime rate of interest to be effective on the date
such change is announced by Citibank, N.A.) plus _____%. The Reimbursement Late
Payment Rate shall be computed on the basis of a year of 365 days elapsed. In
no event shall the Reimbursement Late Payment Rate exceed the maximum rate
permissible under any applicable law limiting interest rates.
"REMIC": A "real estate mortgage investment conduit" within the
meaning of Section 860D of the Code.
"REMIC Opinion": As defined in Section 3.03 hereof.
"REMIC Provisions": Provisions of the federal income tax law relating
to real estate mortgage investment conduits, which appear at Section 860A
through 860G of Subchapter M of Chapter 1 of the Code, and related provisions,
and regulations and revenue rulings promulgated thereunder, as the foregoing may
be in effect from time to time.
"REO Property": A Mortgaged Property acquired by the Master Servicer on
behalf of the Trust through foreclosure or deed-in-lieu of foreclosure in
connection with a defaulted Mortgage Loan.
"Replacement Cut-Off Date": With respect to any Qualified Replacement
Mortgage, the first day of the calendar month in which such Qualified
Replacement Mortgage is conveyed to the Trust.
"Representation Letter": Letters to, or agreements with, the
Depository to effectuate a book entry system with respect to the Class A
Certificates registered in the Register under the nominee name of the
Depository.
"Residual Net Monthly Excess Cashflow": With respect to any
Distribution Date, the aggregate Net Monthly Excess Cashflow, if any, remaining
after the making of all applications, transfers and disbursements described in
Sections 7.03(c)(i), 7.03(c)(ii), 7.03(c)(iii), 7.03(c)(iv)(A) and
7.03(c)(iv)(B) hereof.
"Schedules of Mortgage Loans": The schedules of Mortgage Loans,
separated by Mortgage Loan Group listing each Mortgage Loan in the related
Mortgage Loan Group to be conveyed on the Startup
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Day. Such Schedules of Mortgage Loans shall identify each Mortgage Loan by the
Master Servicer's loan number and the Mortgagor's name and address (including
the state) of the Mortgaged Property and shall set forth as to each Mortgage
Loan the lien status thereof, the Loan-to-Value Ratio and the Loan Balance as of
the Cut-Off Date or Replacement Cut-Off Date, the Mortgage Rate thereof (and
with respect to the Mortgage Loans in the Adjustable Rate Group the margin), the
current scheduled monthly payment of principal and interest and the maturity of
the related Note, the property type, occupancy status, Appraised Value and
original term-to-maturity thereof and whether or not such Mortgage Loan
(including related Note) has been modified.
"Scheduled Payment": As of any date of calculation, with respect to a
Mortgage Loan, the then stated scheduled monthly installment of principal and
interest payable thereunder which, if timely paid, would result in the full
amortization of principal over the term thereof (or, in the case of a "balloon"
Note, the term to the nominal maturity date for amortization purposes, without
regard to the actual maturity date).
"Second Mortgage Loan": A Mortgage Loan which constitutes a second
priority mortgage lien with respect to the related Mortgaged Property.
"Securities Act": The Securities Act of 1933, as amended.
"Seller": Companion Mortgage Corporation, a Delaware corporation.
"Senior Lien": With respect to any Second Mortgage Loan, the mortgage
loan relating to the corresponding Mortgaged Property having a first priority
lien.
"Servicing Advance": As defined in Section 8.09(b) and Section
8.13(a) hereof.
"Servicing Fee": With respect to any Mortgage Loan, an amount retained
by the Master Servicer as compensation for servicing and administration duties
relating to such Mortgage Loan pursuant to Section 8.15 and equal to 0.50% per
annum of the then outstanding principal amount of such Mortgage Loan as of the
first day of each calendar month payable on a monthly basis; provided, however,
that in the event that, as of any Distribution Date, (i) the sum of (x) the
Fixed Rate Group Current Interest applicable to such Distribution Date
(expressed as a percentage of the aggregate outstanding Loan Balance) and (y)
the annualized rate at which the Servicing Fee would otherwise be calculated
exceeds (ii) the weighted average Mortgage Rate of the Mortgage Loans in the
Fixed Rate Group for the related Due Period, then the aggregate Servicing Fee
with respect to the Mortgage Loans in the Fixed Rate Group for the related Due
Period shall be reduced by an amount equal to the product of (a) one-twelfth of
such excess (not to exceed ____ basis points on a per annum basis) and (b) the
aggregate Loan Balances of the Mortgage Loans in the Fixed Rate Group of the
opening of business on the first day of such related Due Period.
"Simple Interest Loans": Any Mortgage Loan as to which, pursuant to the
Note relating thereto, interest is computed and charged to the Mortgagor at the
Mortgage Rate on the outstanding principal balance of such Note based on the
number of days elapsed between receipt of the Mortgagor's last payment through
receipt of the Mortgagor's most current payment.
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"Specified Subordinated Amount": As applicable, the Fixed Rate Group
Specified Subordinated Amount or the Adjustable Rate Group Specified
Subordinated Amount.
"SR Interest": The sole class of "residual interest" in the
Subsidiary REMIC.
"Standard & Poor's": Standard & Poor's Rating Services, a Division of
the McGraw-Hill Companies.
"Startup Day": January __, 1997.
"Subordinate Certificates": Collectively, the Class R Certificates
and the Class X Certificates.
"Subordinated Amount": The Fixed Rate Group Subordinated Amount or
the Adjustable Rate Group Subordinated Amount, as the case may be.
"Subordination Deficiency Amount": With respect to any Mortgage Loan
Group and Distribution Date, the excess, if any, of (i) the Specified
Subordinated Amount applicable to such Mortgage Loan Group and Distribution Date
over (ii) the Subordinated Amount applicable to such Mortgage Loan Group and
Distribution Date prior to taking into account the payment of any related
Subordination Increase Amounts on such Distribution Date.
"Subordination Deficit": With respect to any Mortgage Loan Group and
Distribution Date, the amount, if any, by which (x) the aggregate of the related
Class A Certificate Principal Balances, after taking into account the payment of
the Class A Distribution Amount with respect to such Mortgage Loan Group on such
Distribution Date (except for any Subordination Deficit with respect to such
Mortgage Loan Group and Subordination Increase Amount with respect to such
Mortgage Loan Group), exceeds (y) the aggregate Loan Balances of the Mortgage
Loans in the related Mortgage Loan Group as of the close of business on the last
day of the related Due Period.
"Subordination Increase Amount": With respect to any Mortgage Loan
Group and Distribution Date, the aggregate amount of Net Monthly Excess Cashflow
allocated to such Mortgage Loan Group pursuant to Sections 7.03(c)(ii)(A) and
(B) on such Distribution Date.
"Subordination Reduction Amount": With respect to any Mortgage Loan
Group and Distribution Date, an amount equal to the lesser of (x) the Excess
Subordinated Amount for such Mortgage Loan Group and Distribution Date and (y)
the Principal Remittance Amount with respect to such Mortgage Loan Group for the
related Due Period.
"Subsidiary REMIC": As described in Section 2.08 hereof.
"Subsidiary REMIC Interest": Any one of the Subsidiary REMIC Regular
Interests or the SR Interest.
Principal of and interest on the Subsidiary REMIC Regular Interests and
the SR Interest shall be allocated to the Corresponding Classes of Certificates
in the manner set forth in the following table:
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Corresponding Class of Certificates(1)
<TABLE>
<CAPTION>
Subsidiary REMIC Initial Principal Allocation Allocation
Interest Balance Interest Rate of Principal of Interest
<S> <C> <C> <C> <C>
1 A-1 A-1
2 A-2 A-2
3 A-3 A-3
4 A-4 A-4
5 A-5 A-5
6 (2) (3) ___ X-1
7 (2) (3) ___ X-2
8 (4) (4) M-R(5) M-R(5)
SR (4) (4) A-R A-R
</TABLE>
(1) The amount of principal and interest allocable from a Subsidiary REMIC
Regular Interest to its Corresponding Class of Certificates on any
Distribution Date shall be 100%.
(2) The Notional Amount of the Subsidiary REMIC Interest 6 and Subsidiary
REMIC Interest 7 with respect to any Distribution Date will be equal to
the Notional Amount of the Class X-1 and Class X-2 Certificates,
respectively, with respect to such Distribution Date.
(3) The Interest Rate for Subsidiary REMIC Interest 6 and Subsidiary REMIC
Interest 7 for any Distribution Date will be equal to the Pass-Through
Rate applicable to the Class 5 Certificates with respect to such
Distribution Date.
(4) The MR Interest and the SR Interest will have no principal balance and
will not bear interest.
(5) The beneficial ownership of the MR Interest and the SR Interest is
represented by the Class A-R Certificates.
"Subsidiary REMIC Regular Interest": Any one of the "regular
interests" in the Subsidiary REMIC described in Section 2.08 hereof.
"Sub-Servicer: Any Person with whom the Master Servicer has entered
into a Sub-Servicing Agreement and who satisfies any requirements set forth in
Section 8.03 hereof in respect of the qualification of a Sub-Servicer.
"Sub-Servicing Agreement": The written contract between the Master
Servicer and any Sub-Servicer relating to servicing and/or administration of
certain Mortgage Loans as permitted by Section 8.03.
"Substitution Adjustment": As defined in Section 3.03 hereof.
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"Tax Matters Certificate": The Certificate representing the Tax
Matters Person Residual Interest, initially issued to the Trustee as the initial
Tax Matters Person.
"Tax Matters Person": The Person appointed for the Trust pursuant to
Section 11.18 hereof to act as the Tax Matters Person under the Code.
"Tax Matters Person Residual Interest": The 0.001% interest in the
"residual interest" in the REMIC, which shall be issued to and held by [the
Trustee] throughout the term hereof unless another Person shall accept an
assignment of such interest and the designation of Tax Matters Person pursuant
to Section 11.18 hereof.
"Termination Auction": As defined in Section 9.03 hereof.
"Termination Notice": As defined in Section 9.04(a) hereof.
"Total Available Funds": As defined in Section 7.02(d) hereof.
"Total Monthly Excess Cashflow": As defined in Section 7.03(c)(i)
hereof.
"Total Monthly Excess Spread": The Fixed Rate Group Total Monthly
Excess Spread or the Adjustable Rate Group Total Monthly Excess Spread, as the
case may be.
"Trust": Block Mortgage Finance Asset Backed Certificates, Series
1997-1, the trust created under this Agreement.
"Trust Estate": As defined in the conveyance clause under this
Agreement.
"Trustee": Bankers Trust Company of California, N.A., a national
banking corporation, the Corporate Trust Office of which is located on the date
of execution of this Agreement at 3 Park Plaza, Irvine, California 92714, not in
its individual capacity but solely as Trustee under this Agreement, and any
successor hereunder.
"Trustee Fee": The fee payable monthly on each Distribution Date in an
amount equal to one-twelfth of the sum of (i) ______________% multiplied by the
then-outstanding Class A Certificate Principal Balance and (ii) $______________.
"Underwriters": Morgan Stanley & Co. Incorporated and Salomon Brothers
Inc.
"Voting Rights": The portion of the voting rights of all of the
Certificates which is allocated to any Certificate. As of any date of
determination, the Voting Rights shall be allocated among the Owners of the
Certificates in proportion to the Percentage Interests of their respective
Certificates on such date.
"Weighted Average Pass-Through Rate": As to the Class A Certificates
and any Distribution Date, the weighted average of the Class A-1 Pass-Through
Rate, Class A-2 Pass-Through Rate, Class A-3 Pass-Through Rate, Class A-4
Pass-Through Rate, and Class A-5 Pass-Through Rate (such rate calculated for
this purpose on the basis of a 360-day year assumed to consist of twelve 30 day
months) weighted by
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<PAGE>
the respective Certificate Principal Balances of the related Class, as of such
Distribution Date prior to taking into account any distributions to be made on
such Distribution Date.
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<PAGE>
ARTICLE II
ESTABLISHMENT AND ORGANIZATION OF THE TRUST
Section 2.01 Establishment of the Trust.
The parties hereto do hereby create and establish, pursuant to the laws
of the State of New York and this Agreement, the Trust, which, for convenience,
shall be known as "Block Mortgage Finance Asset Backed Certificates, Series
1997-1," which shall contain two separate pools of Mortgage Loans.
Section 2.02 Office.
The office of the Trust shall be in care of the Trustee, addressed to 3
Park Plaza, Irvine, California 92714, Attention: Corporate Trust Department, or
at such other address as the Trustee may designate by notice to the Depositor,
the Seller, the Master Servicer, the Owners and the Certificate Insurer.
Section 2.03 Purposes and Powers.
The purpose of the Trust is to engage in the following activities and
only such activities: (i) the issuance of the Certificates and the acquiring,
owning and holding of Mortgage Loans and the Trust Estate in connection
therewith; (ii) activities that are necessary, suitable or convenient to
accomplish the foregoing or are incidental thereto or connected therewith,
including the investment of moneys in accordance with this Agreement; and (iii)
such other activities as may be required in connection with conservation of the
Trust Estate and distributions to the Owners; provided, however, that nothing
contained herein shall permit the Trustee to take any action which would
adversely affect either the Master REMIC's or the Subsidiary REMIC's status as a
REMIC.
Section 2.04 Appointment of the Trustee; Declaration of Trust.
The Depositor hereby appoints the Trustee as trustee of the Trust
effective as of the Startup Day, to have all the rights, powers and duties set
forth herein. The Trustee hereby acknowledges and accepts such appointment,
represents and warrants its eligibility as of the Startup Day to serve as
Trustee pursuant to Section 10.08 hereof and declares that it will hold the
Trust Estate in trust upon and subject to the conditions set forth herein for
the benefit of the Owners.
Section 2.05 Expenses of the Trust.
The expenses of the Trust, including (i) any portion of the Trustee Fee
not paid pursuant to Section 7.03(c)(iii)(D) hereof, (ii) any reasonable
expenses of the Trustee, and (iii) any other expenses of the Trust that have
been reviewed by the Master Servicer, which review shall not be required in
connection with the enforcement of a remedy by the Trustee resulting from a
default under this Agreement, shall be paid directly by the Master Servicer. The
Master Servicer shall pay directly the reasonable fees and expenses of counsel
to the Trustee. The reasonable fees and expenses of the Trustee's counsel in
connection with the review and delivery of this Agreement and related
documentation shall be paid by the Master Servicer on the Startup Day. In
addition, any expense of the Trust arising from the
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breach of a representation and warranty relating to the Mortgage Loans, shall be
paid by the [Master Servicer]. In addition, if any assignment of Mortgage is
required to be filed pursuant to the terms of this Agreement, the Master
Servicer shall pay, or shall reimburse the Trustee, for all costs and expenses
associated with filing such assignment in the appropriate recording office.
Section 2.06 Ownership of the Trust.
On the Startup Day, the ownership interests in the Trust shall be
transferred as set forth in Section 4.02 hereof, such transfer to be evidenced
by sale of the Certificates as described therein. Thereafter, transfer of any
ownership interest shall be governed by Sections 5.04 and 5.08 hereof.
Section 2.07 Situs of the Trust.
It is the intention of the parties hereto that the Trust constitute a
trust under the laws of the State of New York. The Trust will be created and
administered in, and all Accounts maintained by the Trustee on behalf of the
Trust will be located in, the State of New York. The Trust will not have any
employees and will not have any real or personal property (other than property
acquired pursuant to Section 8.13 hereof) located in any state other than in the
State of New York and payments will be received by the Trustee only in the State
of New York and payments from the Trustee will be made only from the State of
New York. The Trust's only office will be at the office of the Trustee as set
forth in Section 2.02 hereof.
Section 2.08 Miscellaneous REMIC Provisions.
(a) The Trust for federal income tax purposes will consist of two
REMICs. The Subsidiary REMIC will consist of all of the assets constituting the
Trust Estate and will be evidenced by the Subsidiary REMIC Regular Interests
(which will be uncertificated and will represent the "regular interests" in the
Subsidiary REMIC) and the SR Interest as the single "residual interest" in the
Subsidiary REMIC. The Trustee will hold the Subsidiary REMIC Regular Interests.
The Trustee will hold the Subsidiary REMIC Regular Interests. The Master REMIC
will consist of the Subsidiary REMIC Regular Interests and will be evidenced by
the Regular Certificates (which will represent the "regular interests" in the
Master REMIC) and the MR Interest as the single "residual interest" in the
Master REMIC. The Class R Certificates will represent beneficial ownership of
the SR Interest and the MR Interest. The Owner of the Tax Matters Person
Residual Interest is hereby designated as "tax matters person" as defined in the
REMIC Provisions with respect to the Trust.
(b) The Trust shall, for federal income tax purposes, maintain books on
a calendar year basis and report income on an accrual basis.
(c) The Trustee shall cause each of the Master REMIC and the Subsidiary
REMIC to elect to be treated as a REMIC under Section 860D of the Code. Any
inconsistencies or ambiguities in this Agreement or in the administration of the
Trust shall be resolved in a manner that preserves the validity of such election
to be treated as a REMIC.
(d) The Trustee shall provide to the Internal Revenue Service and to
the person described in Section 860(E)(e)(3) and (6) of the Code the information
described in Treasury Regulation Section
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1.860D-l(b)(5)(ii), or any successor regulation thereto with respect to the
Trust. Such information will be provided in the manner described in Treasury
Regulation Section 1.860E-2(a)(5), or any successor regulation thereto.
(e) For federal income tax purposes, the Final Scheduled Distribution
Date for each Class of Certificates is hereby set to be the Distribution Date
indicated below:
Final Scheduled
Class Distribution Date
Class A-1 Certificates
Class A-2 Certificates
Class A-3 Certificates
Class A-4 Certificates
Class A-5 Certificates
Class X-1 Certificates
Class X-2 Certificates
Class R Certificates
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<PAGE>
ARTICLE III
REPRESENTATIONS, WARRANTIES AND COVENANTS
OF THE DEPOSITOR, THE MASTER SERVICER AND THE SELLER;
COVENANT OF SELLER TO CONVEY MORTGAGE LOANS
Section 3.01 Representations and Warranties of the Depositor.
The Depositor hereby represents, warrants and covenants to the Trustee,
the Certificate Insurer and the Owners that as of the Startup Day:
(a) The Depositor is a corporation duly organized, validly existing and
in good standing under the laws governing its creation and existence and is in
good standing as a foreign corporation in each jurisdiction in which the nature
of its business, or the properties owned or leased by it make such qualification
necessary, except where the failure to so qualify would not have a material
adverse effect on the Depositor, the Owners or the Certificate Insurer. The
Depositor has all requisite corporate power and authority to own and operate its
properties, to carry out its business as presently conducted and as proposed to
be conducted and to enter into and discharge its obligations under this
Agreement and the other Operative Documents to which it is a party.
(b) The execution and delivery of this Agreement by the Depositor and
its performance and compliance with the terms of this Agreement and the other
Operative Documents to which it is a party have been duly authorized by all
necessary corporate action on the part of the Depositor and will not (i) violate
the Depositor's Certificate of Incorporation or Bylaws, (ii) constitute a
default (or an event which, with notice or lapse of time, or both, would
constitute a default) under, or result in a breach of, any material contract,
agreement or other instrument to which the Depositor is a party or by which the
Depositor is bound or (iii) violate any statute or any order, rule or regulation
of any court, governmental agency or body or other tribunal having jurisdiction
over the Depositor or any of its properties, except where the failure to so
comply would not have a material adverse effect on the Depositor, the Owners or
the Certificate Insurer.
(c) This Agreement and the other Operative Documents to which the
Depositor is a party, assuming due authorization, execution and delivery by the
other parties hereto and thereto, each constitutes a valid, legal and binding
obligation of the Depositor, enforceable against it in accordance with the terms
hereof and thereof, except as the enforcement thereof may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other similar
laws affecting creditors' rights generally and by general principles of equity
(whether considered in a proceeding or action in equity or at law).
(d) The Depositor is not in default with respect to any order or decree
of any court or any order, regulation or demand of any federal, state, municipal
or governmental agency, which default would materially and adversely affect the
condition (financial or other) or operations of the Depositor or its properties
or the consequences of which would materially and adversely affect its
performance hereunder or under the other Operative Documents to which the
Depositor is a party.
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<PAGE>
(e) No litigation is pending with respect to which the Depositor has
received service of process or, to the best of the Depositor's knowledge,
threatened against the Depositor which litigation might have consequences that
would prohibit its entering into this Agreement or any other Operative Documents
to which it is a party or that would materially and adversely affect the
condition (financial or otherwise) or operations of the Depositor or its
properties or might have consequences that would materially and adversely affect
its performance hereunder and under the other Operative Documents to which the
Depositor is a party.
(f) No certificate of an officer, statement furnished in writing or
report delivered pursuant to the terms hereof by the Depositor contains any
untrue statement of a material fact or omits to state any material fact
necessary to make the certificate, statement or report not misleading.
(g) The statements contained in the Registration Statement which
describe the Depositor or matters or activities for which the Depositor is
responsible in accordance with the Operative Documents or which are attributable
to the Depositor therein are true and correct in all material respects, and the
Registration Statement does not contain any untrue statement of a material fact
with respect to the Depositor required to be stated therein or necessary to make
the statements contained therein with respect to the Depositor, in light of the
circumstances under which they were made, not misleading. The Registration
Statement does not contain any untrue statement of a material fact required to
be stated therein or omit to state any material fact necessary to make the
statements contained therein, in light of the circumstances under which they
were made, not misleading.
(h) All actions, approvals, consents, waivers, exemptions, variances,
franchises, orders, permits, authorizations, rights and licenses required to be
taken, given or obtained to or by the Depositor, as the case may be, by or from
any federal, state or other governmental authority or agency (other than any
such actions, approvals, etc. under any state securities laws, real estate
syndication or "Blue Sky" statutes, as to which the Depositor makes no such
representation or warranty), that are necessary or advisable in connection with
the purchase and sale of the Certificates and the execution and delivery by the
Depositor of the Operative Documents to which it is a party, have been duly
taken, given or obtained, as the case may be, are in full force and effect on
the date hereof, are not subject to any pending proceedings or appeals
(administrative, judicial or otherwise) and either the time within which any
appeal therefrom may be taken or review thereof may be obtained has expired or
no review thereof may be obtained or appeal therefrom taken, and are adequate to
authorize the consummation of the transactions contemplated by this Agreement
and the other Operative Documents on the part of the Depositor and the
performance by the Depositor of its obligations under this Agreement and such of
the other Operative Documents to which it is a party.
(i) The Depositor is not insolvent, nor will it be made insolvent by
the transfer of the Mortgage Loans, nor is the Depositor aware of any pending
insolvency of the Depositor, the Seller or the Master Servicer.
(j) The transactions contemplated by the Agreement are in the ordinary
course of business of the Depositor.
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(k) The transfer, assignment and conveyance of the Notes and the
Mortgages by the Depositor hereunder are not subject to the bulk transfer laws
or any similar statutory provisions in effect in any applicable jurisdiction.
It is understood and agreed that the representations and warranties set
forth in this Section 3.01 shall survive delivery of the respective Mortgage
Loans to the Trustee.
Section 3.02 Representations and Warranties of the Master
Servicer.
The Master Servicer hereby represents, warrants and covenants to the
Trustee, the Certificate Insurer and the Owners that as of the Startup Day:
(a) The Master Servicer is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware, is, and
each Sub-Servicer is, in compliance with the laws of each state in which any
Mortgaged Property is located to the extent necessary to enable it to perform
its obligations hereunder and is in good standing as a foreign corporation in
each jurisdiction in which the nature of its business, or the properties owned
or leased by it make such qualification necessary, except where to failure to so
qualify would not have a material adverse effect on the Master Servicer, the
Sub-Servicer, if applicable, the Owners, the Trust or the Certificate Insurer.
The Master Servicer and each Sub-Servicer has all requisite corporate power and
authority to own and operate its properties, to carry out its business as
presently conducted and as proposed to be conducted and to enter into and
discharge its obligations under this Agreement and the other Operative Documents
to which it is a party. [Either the Master Servicer or a Sub-Servicer is
designated as an approved seller-servicer by FNMA for first and second mortgage
loans and has combined equity and subordinated debt of at least $1,500,000, as
determined in accordance with generally accepted accounting principles.]
(b) The execution and delivery of this Agreement by the Master Servicer
and its performance and compliance with the terms of this Agreement have been
duly authorized by all necessary corporate action on the part of the Master
Servicer and will not (i) violate the Master Servicer's Certificate of
Incorporation or Bylaws (ii) constitute a default (or an event which, with
notice or lapse of time, or both, would constitute a default) under, or result
in the breach of, any material contract, agreement or other instrument to which
the Master Servicer is a party or by which the Master Servicer is bound or (iii)
violate any statute or any order, rule or regulation of any court, governmental
agency or body or other tribunal having jurisdiction over the Master Servicer or
any of its properties, except where the failure to so comply would not have a
material adverse effect on the Master Servicer, the Owners, the Trust or the
Certificate Insurer.
(c) This Agreement and the Operative Documents to which the Master
Servicer is a party, assuming due authorization, execution and delivery by the
other parties hereto and thereto, each constitutes a valid, legal and binding
obligation of the Master Servicer, enforceable against it in accordance with the
terms hereof and thereof, except as the enforcement hereof may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other similar
laws affecting creditors' rights generally and by general principles of equity
(whether considered in a proceeding or action in equity or at law).
(d) The Master Servicer is not in default with respect to any order or
decree of any court or any order, regulation or demand of any federal, state,
municipal or governmental agency, which default
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might have consequences that would materially and adversely affect the condition
(financial or otherwise) or operations of the Master Servicer or its properties
or might have consequences that would materially and adversely affect its
performance hereunder or under the other Operative Documents to which the Master
Servicer is a party.
(e) No litigation is pending with respect to which the Master Servicer
has received service of process or, to the best of the Master Servicer's
knowledge, threatened against the Master Servicer which litigation might have
consequences that would prohibit its entering into this Agreement or any other
Operative Documents to which the Master Servicer is a party or that would
materially and adversely affect the condition (financial or otherwise) or
operations of the Master Servicer or its properties or might have consequences
that would materially and adversely affect its performance hereunder and the
other Operative Documents to which the Master Servicer is a party.
(f) No certificate of an officer, statement furnished in writing or
report delivered pursuant to the terms hereof by the Master Servicer contains
any untrue statement of a material fact or omits to state any material fact
necessary to make the certificate, statement or report not misleading.
(g) The statements contained in the Registration Statement which
describe the Master Servicer or matters or activities for which the Master
Servicer is responsible in accordance with the Operative Document or which are
attributed to the Master Servicer therein are true and correct in all material
respects, and the Registration Statement does not contain any untrue statement
of a material fact with respect to the Master Servicer or omit to state a
material fact required to be stated therein or necessary to make the statements
contained therein with respect to the Master Servicer, in light of the
circumstances under which they were made, not misleading.
(h) The Servicing Fee is a "current (normal) servicing fee rate" as
that term is used in Statement of Financial Accounting Standards No. 65 issued
by the Financial Accounting Standards Board. Neither the Master Servicer nor any
affiliate thereof will report on any financial statements any part of the
Servicing Fee as an adjustment to the sales price of the Mortgage Loans.
(i) All actions, approvals, consents, waivers, exemptions, variances,
franchises, orders, permits, authorizations, rights and licenses required to be
taken, given or obtained to or by the Master Servicer, as the case may be, by or
from any federal, state or other governmental authority or agency (other than
any such actions, approvals, etc. under any state securities laws, real estate
syndication or "Blue Sky" statutes, as to which the Master Servicer makes no
such representation or warranty), that are necessary or advisable in connection
with the execution and delivery by the Master Servicer of the Operative
Documents to which it is a party, have been duly taken, given or obtained, as
the case may be, are in full force and effect on the date hereof, are not
subject to any pending proceedings or appeals (administrative, judicial or
otherwise) and either the time within which any appeal therefrom may be taken or
review thereof may be obtained has expired or no review thereof may be obtained
or appeal therefrom taken, and are adequate to authorize the consummation of the
transactions contemplated by this Agreement and the other Operative Documents on
the part of the Master Servicer and the performance by the Master Servicer of
its obligations under this Agreement and such of the other Operative Documents
to which it is a party.
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(j) The collection practices used by the Master Servicer and each
Sub-Servicer with respect to the Mortgage Loans have been, in all material
respects, legal, proper, prudent and customary in the mortgage servicing
business and in conformity with relevant FNMA guidelines.
(k) The Transactions contemplated by this Agreement are in the ordinary
course of business of the Master Servicer.
It is understood and agreed that the representations and warranties set
forth in this Section 3.02 shall survive delivery of the Mortgage Loans to the
Trustee.
Upon discovery by any of the Depositor, the Seller, the Master
Servicer, the Certificate Insurer, any Owner or the Trustee (each, for purposes
of this paragraph, a party) of a breach of any of the representations and
warranties set forth in this Section 3.02 which materially and adversely affects
the interests of the Owners or of the Certificate Insurer, the party discovering
such breach shall give prompt written notice to the other parties. Within 60
days of its discovery or its receipt of notice of breach, the Master Servicer
shall cure such breach in all material respects and, upon the Master Servicer's
continued failure to cure such breach, may thereafter be removed by the Trustee
pursuant to Section 8.20 hereof; provided, however, that if any party can
establish to the reasonable satisfaction of the Certificate Insurer that it is
diligently pursuing remedial action, then the cure period may be extended with
the written approval of the Certificate Insurer.
Section 3.03 Representations and Warranties of the Seller.
The Seller hereby represents, warrants and covenants to the Trustee,
the Certificate Insurer and the Owners that as of the Startup Day:
(a) The Seller is a corporation duly organized, validly existing and in
good standing under the laws governing its creation and existence and is in good
standing as a foreign corporation in each jurisdiction in which the nature of
its business, or the properties owned or leased by it, make such qualification
necessary, except where the failure to so qualify would not have a material
adverse effect on the Seller, the Owners, the Trust and the Certificate Insurer.
The Seller has all requisite corporate power and authority to own and operate
its properties, to carry out its business as presently conducted and as proposed
to be conducted and to enter into and discharge its obligations under this
Agreement and the other Operative Documents to which it is a party.
(b) The execution and delivery of this Agreement by the Seller and its
performance and compliance with the terms of this Agreement and the other
Operative Documents to which it is a party have been duly authorized by all
necessary corporate action on the part of the Seller and will not (i) violate
the Seller's Certificate of Incorporation or Bylaws (ii) constitute a default
(or an event which, with notice or lapse of time, or both, would constitute a
default) under, or result in a breach of, any material contract, agreement or
other instrument to which the Seller is a party or by which the Seller is bound
or (iii) violate any statute or any order, rule or regulation of any court,
governmental agency or body or other tribunal having jurisdiction over the
Seller or any of its properties, except where the failure to so comply would not
have a material adverse effect on the Seller, the Owners, the Trust and the
Certificate Insurer.
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(c) This Agreement and the other Operative Documents to which the
Seller is a party, assuming due authorization, execution and delivery by the
other parties hereto and thereto, each constitutes a valid, legal and binding
obligation of the Seller, enforceable against it in accordance with the terms
hereof and thereof, except as the enforcement thereof may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other similar
laws affecting creditors' rights generally and by general principles of equity
(whether considered in a proceeding or action in equity or at law).
(d) The Seller is not in default with respect to any order or decree of
any court or any order, regulation or demand of any federal, state, municipal or
governmental agency, which default would materially and adversely affect the
condition (financial or other) or operations of the Seller or its properties or
the consequences of which would materially and adversely affect its performance
hereunder and under the other Operative Documents to which the Seller is a
party.
(e) No litigation is pending with respect to which the Seller has
received service of process or, to the Seller's knowledge, threatened against
the Seller which litigation might have consequences that would prohibit its
entering into this Agreement or any other Operative Documents to which it is a
party or that would materially and adversely affect the condition (financial or
otherwise) or operations of the Seller or its properties or might have
consequences that would materially and adversely affect its performance
hereunder and under the other Operative Documents to which the Seller is a
party.
(f) No certificate of an officer, statement furnished in writing or
report delivered pursuant to the terms hereof by the Seller contains any untrue
statement of a material fact or omits to state any material fact necessary to
make the certificate, statement or report not misleading.
(g) The statements contained in the Registration Statement which
describe the Seller or matters or activities for which the Seller is responsible
in accordance with the Operative Documents or which are attributable to the
Seller therein are true and correct in all material respects. The Registration
Statement does not contain any untrue statement of a material fact required to
be stated therein, or omit to state any material fact necessary to make the
statements contained therein, in light of the circumstances under which they
were made, not misleading.
(h) Upon the receipt of each Mortgage Loan (including the related Note)
and other items of the Trust Estate by the Trustee under this Agreement, the
Trust will have good title to such Mortgage Loan (including the related Note)
and such other items of the Trust Estate free and clear of any lien, charge,
mortgage, encumbrance or rights of others, except as set forth in Section 3.04
(b) (ix) (other than liens which will be simultaneously released).
(i) Neither the Seller nor any affiliate thereof will report on any
financial statement any part of the Servicing Fee as an adjustment to the sales
price of the Mortgage Loans.
(j) All actions, approvals, consents, waivers, exemptions, variances,
franchises, orders, permits, authorizations, rights and licenses required to be
taken, given or obtained to or by the Seller, as the case may be, by or from any
federal, state or other governmental authority or agency (other than any such
actions, approvals, etc., under any state securities laws, real estate
syndication or "Blue Sky" statutes, as to which the Seller makes no such
representation or warranty), that are necessary or advisable in connection with
the purchase and sale of the Certificates and the execution and delivery by the
Seller of
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the Operative Documents to which it is a party, have been duly taken, given or
obtained, as the case may be, are in full force and effect on the date hereof,
are not subject to any pending proceedings or appeals (administrative, judicial
or otherwise) and either the time within which any appeal therefrom may be taken
or review thereof may be obtained has expired or no review thereof may be
obtained or appeal therefrom taken, and are adequate to authorize the
consummation of the transactions contemplated by this Agreement and the other
Operative Documents on the part of the Seller and the performance by the Seller
of its obligations under this Agreement and such of the other Operative
Documents to which it is a party.
(k) The origination practices used by the Seller or the Person from
whom the Seller purchased the Mortgage Loans with respect to such Mortgage Loans
have been in all material respects, legal, proper, prudent and customary in the
mortgage lending business in the jurisdiction in which the related Mortgage
Properties are located.
(l) The Seller is not insolvent, nor will it be made insolvent by the
transfer of the Mortgage Loans, nor is the Seller aware of any pending
insolvency of the Seller, the Depositor or the Master Servicer.
(m) The transfer, assignment and conveyance of the Notes and the
Mortgages by the Seller hereunder are not subject to the bulk transfer laws or
any similar statutory provisions in effect in any applicable jurisdiction.
(n) The transactions contemplated by this Agreement are in the ordinary
course of business of the Seller.
It is understood and agreed that the representations and warranties set
forth in this Section 3.03 shall survive delivery of the respective Mortgage
Loans to the Trustee.
Upon discovery by any of the Master Servicer, the Seller, the
Depositor, the Certificate Insurer or the Trustee (each, for purposes of this
paragraph, a "party") of a breach of any of the representations and warranties
set forth in this Section 3.03 which materially and adversely affects the
interests of the Owners or the Certificate Insurer, the party discovering such
breach shall give prompt written notice to the other parties. The Seller hereby
covenants and agrees that within 60 days of its discovery or its receipt of
notice of breach, it shall cure such breach in all material respects or, with
respect to a breach of clause (h) above, the Seller may (or may cause an
affiliate of the Seller to) on the Monthly Remittance Date next succeeding such
discovery or receipt of notice (i) substitute in lieu of any Mortgage Loan not
in compliance with clause (h) a Qualified Replacement Mortgage and, if the
outstanding principal amount of such Qualified Replacement Mortgage as of the
applicable Replacement Cut-Off Date is less than the Loan Balance of such
Mortgage Loan as of such Replacement Cut-Off Date, deliver an amount equal to
such difference together with the aggregate amount of (A) all P&I Advances and
Servicing Advances theretofore made with respect to such Mortgage Loan, to the
extent unreimbursed to the Master Servicer and (B) all P&I Advances and
Servicing Advances which the Master Servicer has theretofore failed to remit
with respect to such Mortgage Loan (a "Substitution Adjustment") to the Master
Servicer for deposit in the Collection Account or (ii) purchase such Mortgage
Loan from the Trust at the Loan Purchase Price, which purchase price shall be
delivered to the Master Servicer for deposit in the Collection Account.
Notwithstanding any provision of this Agreement to the contrary, with respect to
any Mortgage Loan which is not in default or as to which no default is imminent,
no repurchase or substitution pursuant to
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Section 3.03, 3.04 or 3.06 shall be made unless the Seller obtains for the
Trustee and the Certificate Insurer an opinion of counsel experienced in federal
income tax matters to the effect that such a repurchase or substitution would
not constitute a Prohibited Transaction for the Trust or otherwise subject the
Trust to tax and would not jeopardize the status of the Trust as a REMIC (a
"REMIC Opinion") addressed to the Trustee and the Certificate Insurer and
acceptable to the Certificate Insurer and the Trustee. Any Mortgage Loan as to
which repurchase or substitution was delayed pursuant to this Section shall be
repurchased or substituted for (subject to compliance with Sections 3.03, 3.04
or 3.06, as the case may be) upon the earlier of (a) the occurrence of a default
or imminent default with respect to such Mortgage Loan and (b) receipt by the
Trustee and the Certificate Insurer of a REMIC Opinion.
Section 3.04 Covenants of Seller to Take Certain Actions with
Respect to the Mortgage Loans In Certain Situations.
(a) The Seller hereby makes the representations set forth on Schedule I
hereto with respect to the Mortgage Loans.
(b) Upon the discovery by the Seller, the Master Servicer, the
Certificate Insurer, or the Trustee (i) that any of the statements set forth in
Schedule I hereto were untrue as of the Startup Day with the result that the
interests of the Owners or the Certificate Insurer are materially and adversely
affected or (ii) that statements set forth in clauses (ix), (x), (xiii),
(xxxvi), (xl), or (xli) of Schedule I hereto were untrue in any material respect
as of the Startup Day, the party discovering such breach shall give prompt
written notice to the other parties. Upon the earliest to occur of the Seller's
discovery or its receipt of notice of breach from any one of the other parties,
the Seller hereby covenants and warrants that it shall promptly cure such breach
in all material respects or, subject to the last two sentences of Section 3.03,
it shall on the second Monthly Remittance Date next succeeding such discovery or
receipt of notice (i) substitute in lieu of each Mortgage Loan which has given
rise to the requirement for action by the Seller a Qualified Replacement
Mortgage and deliver the Substitution Adjustment to the Master Servicer for
deposit in the Collection Account or (ii) purchase such Mortgage Loan from the
Trust at a purchase price equal to the Loan Purchase Price thereof, which
purchase price shall be delivered to the Master Servicer for deposit in the
Collection Account. Other than as specified in Section 6.12 hereof, it is
understood and agreed that the foregoing obligation of the Seller so to
substitute or purchase any Mortgage Loan shall constitute the sole remedy
respecting a discovery of any such statement which is untrue in any material
respect in this Section 3.04 available to the Owners, the Trustee and the
Certificate Insurer.
(c) In the event that any such repurchase results in a prohibited
transaction tax, the Trustee shall immediately notify the Seller in writing
thereof and the Seller will, within 10 days of receiving notice thereof from the
Trustee deposit the amount due from the Trust with the Trustee for the payment
thereof, including any interest and penalties, in immediately available funds.
In the event that any Qualified Replacement Mortgage is delivered by the Seller
to the Trust pursuant to Section 3.03, Section 3.04 or Section 3.06 hereof, the
Seller shall be obligated to take the actions described in Section 3.04(b) with
respect to such Qualified Replacement Mortgage upon the discovery by any of the
Owners, the Seller, the Master Servicer, the Certificate Insurer, or the Trustee
that the statements set forth in clause (ix), (x), (xiii), (xxxvi), (xl) or
(xli) of Schedule I hereto are untrue in any material respect on the date such
Qualified Replacement Mortgage is conveyed to the Trust or that any of the other
statements set forth in Schedule I hereto are untrue on the date such Qualified
Replacement Mortgage is conveyed to the Trust such that the interests of the
Owners or the Certificate Insurer in the related Qualified Replacement
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Mortgage are materially and adversely affected; provided, however, that for the
purposes of this subsection (c) the statements in Schedule I hereto referring to
items "as of the Cut-Off Date" or "as of the Startup Day" shall be deemed to
refer to such items as of the date such Qualified Replacement Mortgage is
conveyed to the Trust.
(d) It is understood and agreed that the covenants set forth in this
Section 3.04 shall survive delivery of the respective Mortgage Loans (including
Qualified Replacement Mortgages) to the Trustee.
(e) The Trustee shall have no duty to conduct any affirmative
investigation other than as specifically set forth in this Agreement as to the
occurrence of any condition requiring the repurchase or substitution of any
Mortgage Loan pursuant to this Article III or the eligibility of any Mortgage
Loan for the purpose of this Agreement.
Notwithstanding the fact that a representation contained in Schedule I
hereto may be limited to the Seller's knowledge, such limitation shall not
relieve the Seller of its repurchase obligation under the Section 3.05 hereof,
or its obligations under Section 6.12 hereof.
Section 3.05 Conveyance of the Mortgage Loans and Qualified
Replacement Mortgages.
(a) On the Startup Day the Seller, concurrently with the execution and
delivery hereof, hereby transfers, assigns, sets over and otherwise conveys to
the Depositor and the Depositor, concurrently with the execution and delivery
hereof, transfers, assigns, sets over and otherwise conveys, without recourse,
to the Trustee for the benefit of the Owners all of their respective right,
title and interest in and to the Trust Estate; provided, further, however, that
the Seller reserves and retains all of its right, title and interest in and to
principal (including Prepayments) collected and interest on each Mortgage Loan
collected on or prior to the Cut-Off Date. The transfer by the Depositor of the
Mortgage Loans set forth on the Schedule of Mortgage Loans to the Trustee is
absolute and is intended by the Owners and all parties hereto to be treated as a
sale by the Depositor.
It is intended that the sale, transfer, assignment and conveyance
herein contemplated constitute a sale of the Mortgage Loans conveying good title
thereto free and clear of any liens and encumbrances from the Seller to the
Depositor and from the Depositor to the Trust and that the Mortgage Loans not be
part of the Depositor's or the Seller's estate in the event of insolvency. In
the event that such conveyance is deemed to be a loan, the parties intend that
the Seller shall be deemed to have granted to the Depositor and the Depositor
shall be deemed to have granted to the Trustee a first priority perfected
security interest in the Trust Estate, and that this Agreement shall constitute
a security agreement under applicable law.
[In connection with such sale, transfer, assignment, and conveyance
from the Seller to the Depositor, the Seller has filed, in the appropriate
office or offices in the States of _____________________ and
_____________________, a UCC-1 financing statement executed by the Seller as
debtor, naming the Depositor as secured party and listing the Mortgage Loans and
the other property described above as collateral. The characterization of the
Seller as debtor and the Depositor as secured party on such financing statements
is solely for protective purposes and shall in no way be construed as being
contrary to the intent of the parties that this transaction be treated as a sale
of the Seller's entire right, title and interest in and to the Trust Estate. In
connection with such filing, the Seller agrees that it shall cause to be filed
all necessary continuation statements thereof and to take or cause to
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be taken such actions and execute such documents as are necessary to perfect and
protect the Trustee's, the Owners' and the Certificate Insurer's interest in the
Trust Estate.]
[In connection with such sale, transfer, assignment, and conveyance
from the Depositor to the Trustee, the Depositor has filed, in the appropriate
office or offices in the States of ______________________ and
______________________, a UCC-1 financing statement executed by the Depositor as
debtor, naming the Trustee as secured party and listing the Mortgage Loans and
the other property described above as collateral. The characterization of the
Depositor as debtor and the Trustee as secured party in such financing
statements is solely for protective purposes and shall in no way be construed as
being contrary to the intent of the parties that this transaction be treated as
a sale of the Depositor's entire right, title and interest in and to the Trust
Estate. In connection with such filing, the Depositor agrees that it shall cause
to be filed all necessary continuation statements thereof and to take or cause
to be taken such actions and execute such documents as are necessary to perfect
and protect the Trustee's, the Owners' and the Certificate Insurer's interest in
the Trust Estate.]
(b) In connection with the transfer and assignment of the
Mortgage Loans, the Depositor agrees to:
(i) deliver without recourse to the Trustee on the Startup Day
with respect to each Mortgage Loan, (A) the original Mortgage Note,
endorsed by the Seller or the originator of such Mortgage Loan, without
recourse, in the following form: "Pay to the order of
________________________ without recourse", with all intervening
endorsements that show a complete chain of endorsement from the
originator to the Seller; (B) the original recorded Mortgage; (C) a
duly executed assignment of the Mortgage to "Bankers Trust Company of
California, N.A., a national banking corporation, as trustee under the
Pooling and Servicing Agreement dated as of January 1, 1997, Block
Mortgage Finance, Asset Backed Certificate, Series 1997-1, without
recourse" (each such assignment, when duly and validly completed, to be
in recordable form and sufficient to effect the assignment of and
transfer to the assignee thereof, under the Mortgage to which such
assignment relates); (D) the original recorded assignment or
assignments of the Mortgage together with all interim recorded
assignments of such Mortgage; (E) the original or copies of each
assumption, modification, written assurance or substitution agreement,
if any; and (F) the original or duplicate original lender's title
policy and all riders thereto or, in the event such original title
policy has not been received from the insurer, any one of an original
title binder, an original preliminary title report or an original title
commitment, or a copy thereof certified by the title company, with the
original policy of title insurance to be delivered within one year of
the Closing Date.
(ii) cause, within two days following an Assignment Event, the
assignments of the Mortgages referred to in (C) above to be submitted
for recording in the appropriate jurisdictions; provided, however, that
the Depositor shall not be required to record an assignment of a
Mortgage if the Depositor furnishes to the Trustee, the Rating Agencies
and the Certificate Insurer, on an Assignment Event, at the Depositor's
expense an opinion of counsel with respect to the relevant jurisdiction
that such recording is not necessary to perfect the Trustee's interest
in the related Mortgage Loans (in form and substance and from counsel
satisfactory to the Certificate Insurer and the Rating Agencies);
notwithstanding the furnishing of such opinion of counsel, however, the
Certificate Insurer may, in its reasonable discretion after
consultation with the Depositor prior
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to the date on which all assignments of Mortgages are required to be
filed hereunder, require the filing of assignments of Mortgages in any
state that is the subject of such opinions; and
(iii) deliver the title insurance policy or title searches,
the original Mortgages and such recorded assignments, together with
originals or duly certified copies of any and all prior assignments, to
the Trustee within 15 days of receipt thereof by the Depositor (but in
any event, with respect to any Mortgage as to which original recording
information has been made available to the Depositor, within one year
after the Startup Day.
Notwithstanding anything to the contrary contained in this Section
3.05, in those instances where the public recording office retains the original
Mortgage, the assignment of a Mortgage or the intervening assignments of the
Mortgage after it has been recorded, the Depositor shall be deemed to have
satisfied its obligations hereunder upon delivery to the Trustee of a copy of
such Mortgage, such assignment or assignments of Mortgage certified by the
public recording office to be a true copy of the recorded original thereof.
The Depositor hereby appoints the Trustee its attorney-in-fact for the
purpose of, and with full power in, preparing, executing and recording, on its
behalf, all assignments of Mortgages in the event that the Depositor fails to do
so on a timely basis.
Copies of all Mortgage assignments received by the Trustee shall be
retained in the related File.
All recording required pursuant to this Section 3.05 shall be
accomplished at the expense of the Seller.
(c) In the case of Mortgage Loans which have been prepaid in full after
the Cut-Off Date and prior to the Startup Day, the Depositor, in lieu of the
foregoing, will deliver within six (6) days after the Startup Day to the Trustee
a certification of an Authorized Officer of the Depositor in the form set forth
in Exhibit D.
(d) The Seller shall transfer, assign, set over and otherwise convey,
without recourse, to the Trustee all right, title and interest of the Seller in
and to any Qualified Replacement Mortgage delivered to the Trustee on behalf of
the Trust by the Seller pursuant to Section 3.03, 3.04 or 3.06 hereof and all
its right, title and interest to principal and interest due on such Qualified
Replacement Mortgage after the applicable Replacement Cut-Off Date; provided,
however, that the Seller shall reserve and retain all right, title and interest
in and to payments of principal and interest due or received on such Qualified
Replacement Mortgage on or prior to the applicable Replacement Cut-Off Date.
(e) As to each Mortgage Loan released from the Trust in connection with
the conveyance of a Qualified Replacement Mortgage therefor, the Trustee will
transfer, assign, set over and otherwise convey without recourse or
representation, on the Seller's order, all of its right, title and interest in
and to such released Mortgage Loan and all the Trust's right, title and interest
to principal and interest due on such released Mortgage Loan after the
applicable Replacement Cut-Off Date; provided, however, that the Trust shall
reserve and retain all right, title and interest in and to payments of principal
and interest due on such released Mortgage Loan on or prior to the applicable
Replacement Cut-Off Date.
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(f) In connection with any transfer and assignment of a Qualified
Replacement Mortgage to the Trustee on behalf of the Trust, the Seller agrees to
(i) deliver without recourse to the Trustee on the date of delivery of such
Qualified Replacement Mortgage the original Note relating thereto, endorsed in
blank or to the order of the Trustee, deliver an assignment in blank with
respect to such Qualified Replacement Mortgage, (ii) deliver the original
Qualified Replacement Mortgage, together with original or duly certified copies
of any and all prior assignments, to the Trustee within 15 days of receipt
thereof by the Seller (but in any event within 120 days after the date of
conveyance of such Qualified Replacement Mortgage) and (iv) deliver the title
insurance policy, or where no such policy is required to be provided under
Section 3.05(b)(i)(F), the other evidence of title in the same manner required
in Section 3.05(b)(i)(F).
(g) As to each Mortgage Loan released from the Trust in connection with
the conveyance of a Qualified Replacement Mortgage, the Trustee shall deliver on
the date of conveyance of such Qualified Replacement Mortgage and on the order
of the Seller (i) the original Note relating thereto, endorsed without recourse
or representation, to the Seller, (ii) the original Mortgage so released and all
assignments relating thereto and (iii) such other documents as constituted the
File with respect thereto.
(h) If a Mortgage assignment is lost or is returned from the recorder's
office unrecorded due to a defect therein, the Seller shall prepare a substitute
assignment or cure such defect, as the case may be, and thereafter cause such
substitute or cured assignment to be duly recorded.
Section 3.06 Acceptance by Trustee; Certain Substitutions of Mortgage
Loans; Certification by Trustee.
(a) The Trustee agrees to execute and deliver on the Startup Day an
acknowledgment of receipt of the items delivered by the Seller or the Depositor
in the form attached as Exhibit E hereto, and declares that it will hold such
documents and any amendments, replacement or supplements thereto, as well as any
other assets included in the definition of Trust Estate and delivered to the
Trustee, as Trustee in trust upon and subject to the conditions set forth herein
for the benefit of the Owners. The Trustee agrees, for the benefit of the
Owners, to review such items within 45 days after the Startup Day (or, with
respect to any document delivered after the Startup Day, within 45 days of
receipt and with respect to any Qualified Replacement Mortgage, within 45 days
after the assignment thereof) and to deliver to the Depositor, the Seller, the
Master Servicer and the Certificate Insurer a certification in the form attached
hereto as Exhibit F (a "Pool Certification") to the effect that, as to each
Mortgage Loan listed in the Schedule of Mortgage Loans (other than any Mortgage
Loan paid in full or any Mortgage Loan specifically identified in such Pool
Certification as not covered by such Pool Certification), (i) all documents
required to be delivered to it pursuant to Section 3.05(b)(i) of this Agreement
are in its possession, (ii) such documents have been reviewed by it and have not
been mutilated, damaged or torn and relate to such Mortgage Loan and (iii) based
on its examination and only as to the foregoing documents, the information set
forth on the Schedule of Mortgage Loans accurately reflects the information set
forth in the File. The Trustee shall have no responsibility for reviewing any
File except as expressly provided in this subsection 3.06(a). Without limiting
the effect of the preceding sentence, in reviewing any File, the Trustee shall
have no responsibility for determining whether any document is valid and
binding, whether the text of any assignment is in proper form (except to
determine if the Trustee is the assignee), whether any document has been
recorded in accordance with the requirements of any applicable jurisdiction or
whether a blanket assignment is permitted in any applicable jurisdiction, but
shall only be required to determine whether a document has been executed, that
it appears to be what it purports
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to be and, where applicable, that it purports to be recorded. The Trustee shall
be under no duty or obligation to inspect, review or examine any such documents,
instruments, certificates or other papers to determine that they are genuine,
enforceable, or appropriate for the represented purpose or that they are other
than what they purport to be on their face, nor shall the Trustee be under any
duty to determine independently whether there are any intervening assignments or
assumption or modification agreements with respect to any Mortgage Loan.
(b) If the Trustee during such 45-day period finds any document
constituting a part of a File which is not executed, has not been received, or
is unrelated to the Mortgage Loans identified in the Schedule of Mortgage Loans,
or that any Mortgage Loan does not conform to the description thereof as set
forth in the Schedule of Mortgage Loans, the Trustee shall promptly so notify
the Depositor, the Seller, the Certificate Insurer and the Owners. In performing
any such review, the Trustee may conclusively rely on the Seller as to the
purported genuineness of any such document and any signature thereon. It is
understood that the scope of the Trustee's review of the items delivered by the
Seller pursuant to Section 3.05(b)(i) is limited solely to confirming that the
documents listed in Section 3.05(b)(i) have been executed and received, relate
to the Files identified in the Schedule of Mortgage Loans and conform to the
description thereof in the Schedule of Mortgage Loans. The Seller agrees to use
reasonable efforts to remedy a material defect in a document constituting part
of a File of which it is so notified by the Trustee. If, however, within 60 days
after the Trustee's notice to it respecting such defect the Seller has not
remedied the defect and the defect materially and adversely affects the interest
in the related Mortgage Loan of the Owners or of the Certificate Insurer, the
Seller will (or will cause an affiliate of the Seller to) on the next succeeding
Monthly Remittance Date (i) substitute in lieu of such Mortgage Loan a Qualified
Replacement Mortgage and deliver the Substitution Adjustment to the Master
Servicer for deposit in the Collection Account or (ii) purchase such Mortgage
Loan at a purchase price equal to the Loan Purchase Price thereof, which
purchase price shall be delivered to the Master Servicer for deposit in the
Collection Account.
(c) In addition to the foregoing, the Trustee also agrees to make a
review during the 12th month after the Startup Day indicating the current status
of the exceptions previously indicated on the Pool Certification (the "Final
Certification"). After delivery of the Final Certification, the Trustee shall
provide to the Certificate Insurer no less frequently than monthly updated
certifications indicating the then current status of exceptions, until all such
exceptions have been eliminated.
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ARTICLE IV
ISSUANCE AND SALE OF CERTIFICATES
Section 4.01 Issuance of Certificates.
On the Startup Day, upon the Trustee's receipt from the Depositor of an
executed Delivery Order in the form set forth as Exhibit G hereto, the Trustee
shall authenticate and deliver the Certificates on behalf of the Trust.
Section 4.02 Sale of Certificates.
At __ a.m. New York City time on the Startup Day (the "Closing"), at
the offices of Brown & Wood LLP, One World Trade Center, New York, New York (or
at such other location acceptable to the Seller), the Seller will sell and
convey the Mortgage Loans and the money, instruments and other property related
thereto to the Depositor and the Depositor will sell and convey the Mortgage
Loans and the money, instruments and other property related thereto to the
Trustee, and the Trustee will deliver (i) to the Underwriters the Class A
Certificates with an aggregate Percentage Interest in each Class equal to 100%,
registered in the name of Cede & Co., or in such other names as the Underwriters
shall direct, against payment of the purchase price thereof by wire transfer of
immediately available funds to the Trustee, and (ii) to the respective
registered owners thereof, a Class X-1 Certificate and a Class X-2 Certificate,
each with a Percentage Interest equal to 100%, registered in the name of the
Seller, a Class R Certificate with a Percentage Interest equal to 99.999%,
registered in the name of the Seller and a Class R Certificate with a Percentage
Interest equal to .001%, registered in the name of the Trustee.
Upon the Trustee's receipt of the entire net proceeds of the sale of
the Class A Certificates, the Trustee shall remit the entire balance of such net
proceeds to the Depositor in accordance with instructions delivered by the
Depositor.
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ARTICLE V
CERTIFICATES AND TRANSFER OF INTERESTS
Section 5.01 Terms.
(a) The Certificates are pass-through securities having the rights
described therein and herein. Notwithstanding references herein or therein with
respect to the Certificates to "principal" and "interest", no debt of any Person
is represented thereby, nor are the Certificates or the underlying Notes
guaranteed by any Person (except that the Notes may be recourse to the
Mortgagors thereof to the extent permitted by law and except for the rights of
the Trustee on behalf of the Owners of the Class A Certificates with respect to
the Certificate Insurance Policy). Subject to Section 8.08, the Certificates are
payable solely from payments received on or with respect to the Mortgage Loans,
moneys in the Collection Account, earnings on moneys and the proceeds of
property held as a part of the Trust Estate and, with respect to the Class A
Certificates upon the occurrence of certain events, from Insured Payments. Each
Certificate entitles the Owner thereof to receive monthly on each Distribution
Date, in order of priority of distributions with respect to such Class of
Certificates as set forth in Section 7.03, a specified portion of such payments
with respect to the Mortgage Loans (and, with respect to the Owners of the Class
A Certificates, Insured Payments deposited in the Distribution Account), pro
rata in accordance with such Owner's Percentage Interest.
(b) Each Owner is required, and hereby agrees, to return to the Trustee
any Certificate with respect to which the Trustee has made the final
distribution due thereon. Any such Certificate as to which the Trustee has made
the final distribution thereon shall be deemed cancelled and shall no longer be
Outstanding for any purpose of this Agreement and the related Certificate
Insurance Policy, whether or not such Certificate is ever returned to the
Trustee, except to the extent of a Reimbursement Amount on such Class of
Certificates, in which case the Certificate Insurer will be subrogated to the
rights of such Owner and the Class of Certificate will not be deemed cancelled.
Section 5.02 Forms.
The Class A-1 Certificates, Class A-2 Certificates, Class A-3
Certificates, Class A-4 Certificates and Class A-5 Certificates, the Class X
Certificates and the Class R Certificates shall be in substantially the forms
set forth in Exhibits A, B and C hereof, respectively, with such appropriate
insertions, omissions, substitutions and other variations as are required or
permitted by this Agreement or as may in the Trustee's judgment be necessary,
appropriate or convenient to comply, or facilitate compliance, with applicable
laws, and may have such letters, numbers or other marks of identification and
such legends or endorsements placed thereon as may be required to comply with
the rules of any applicable securities laws or as may, consistently herewith, be
determined by the Authorized Officer of the Trustee executing such Certificates,
as evidenced by his execution thereof.
Section 5.03 Execution, Authentication and Delivery.
Each Certificate shall be executed on behalf of the Trust, by the
manual or facsimile signature of one of the Trustee's Authorized Officers and
shall be authenticated by the manual or facsimile signature of one of the
Trustee's Authorized Officers.
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Certificates bearing the manual signature of individuals who were at
any time the proper officers of the Trustee shall, upon proper authentication by
the Trustee, bind the Trust, notwithstanding that such individuals or any of
them have ceased to hold such offices prior to the execution and delivery of
such Certificates or did not hold such offices at the date of authentication of
such Certificates.
The initial Certificates shall be dated as of the Startup Day and
delivered at the Closing to the parties specified in Section 4.02 hereof.
Subsequently issued Certificates will be dated as of the issuance of the
Certificate.
No Certificate shall be valid until executed and authenticated as set
forth above.
Section 5.04 Registration and Transfer of Certificates.
(a) The Trustee shall cause to be kept a register (the "Register") in
which, subject to such reasonable regulations as it may prescribe, the Trustee
shall provide for the registration of Certificates and the registration of
transfer of Certificates. The Trustee is hereby initially appointed Registrar
for the purpose of registering Certificates and transfers of Certificates as
herein provided. The Certificate Insurer, the Owners and the Trustee shall have
the right to inspect the Register during the Trustee's normal hours and to
obtain copies thereof, and the Trustee shall have the right to rely upon a
certificate executed on behalf of the Registrar by an Authorized Officer thereof
as to the names and addresses of the Owners of the Certificates and the
principal amounts and numbers of such Certificates.
If a Person other than the Trustee is appointed as Registrar by the
Owners of a majority of the aggregate Percentage Interests represented by the
Class A Certificates then Outstanding with the consent of the Certificate
Insurer, or if there are no longer any Class A Certificates then outstanding, by
such majority of the Percentage Interests represented by each of the Class X
Certificates and Class R Certificates, the Trustee will give the Certificate
Insurer and the Owners prompt written notice of the appointment of such
Registrar and of the location, and any change in the location, of the Register.
In connection with any such appointment the annual fees of the bank then serving
as Trustee and Registrar shall thenceforth be reduced by the amount to be agreed
upon by the Trustee and the Depositor at such time and the reasonable fees of
the Registrar shall be paid, as expenses of the Trust, pursuant to Section 7.05
hereof.
(b) Subject to the provisions of Section 5.08 hereof, upon surrender
for registration of transfer of any Certificate at the office designated as the
location of the Register, upon the direction of the Registrar the Trustee shall
execute, authenticate and deliver, in the name of the designated transferee or
transferees, one or more new Certificates of a like Class and in the aggregate
principal amount or percentage interest of the Certificate so surrendered.
(c) At the option of any Owner, Certificates of any Class owned by such
Owner may be exchanged for other Certificates authorized of like Class and tenor
and a like aggregate original principal amount or percentage interest and
bearing numbers not contemporaneously outstanding, upon surrender of the
Certificates to be exchanged at the office designated as the location of the
Register. Whenever any Certificate is so surrendered for exchange, upon the
direction of the Registrar, the Trustee shall execute, authenticate and deliver
the Certificate or Certificates which the Owner making the exchange is entitled
to receive.
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(d) All Certificates issued upon any registration of transfer or
exchange of Certificates shall be valid evidence of the same ownership interests
in the Trust and entitled to the same benefits under this Agreement as the
Certificates surrendered upon such registration of transfer or exchange.
(e) Every Certificate presented or surrendered for registration of
transfer or exchange shall be duly endorsed, or be accompanied by a written
instrument of transfer in form satisfactory to the Registrar duly executed by
the Owner thereof or his attorney duly authorized in writing.
(f) No service charge shall be made to an Owner for any registration of
transfer or exchange of Certificates, but the Registrar or Trustee may require
payment of a sum sufficient to cover any tax or other governmental charge that
may be imposed in connection with any registration of transfer or exchange of
Certificates; any other expenses in connection with such transfer or exchange
shall be an expense of the Trust.
(g) It is intended that the Class A Certificates be registered so as to
participate in a global book-entry system with the Depository, as set forth
herein. Each Class of Class A Certificates shall, except as otherwise provided
in Subsection (h), be initially issued in the form of a single fully registered
Class A Certificate of such Class. Upon initial issuance, the ownership of each
such Class A Certificate shall be registered in the Register in the name of Cede
& Co., or any successor thereto, as nominee for the Depository.
On the Startup Day, the Class A-1 Certificates, Class A-2 Certificates,
Class A-3 Certificates, Class A-4 Certificates and Class A-5 Certificates shall
be issued in denominations of no less than $25,000 and multiples of $1,000 in
excess thereof (except that one certificate in each class may be issued in an
amount less than $25,000 or in an integral multiple other than $1,000).
The Depositor and the Trustee are hereby authorized to execute and
deliver the Representation Letter with the Depository.
With respect to the Class A Certificates registered in the Register in
the name of Cede & Co., as nominee of the Depository, the Depositor, the Master
Servicer, the Seller and the Trustee shall have no responsibility or obligation
to Direct or Indirect Participants or beneficial owners for which the Depository
holds Class A Certificates from time to time as a Depository. Without limiting
the immediately preceding sentence, the Depositor, the Master Servicer, the
Seller and the Trustee shall have no responsibility or obligation with respect
to (i) the accuracy of the records of the Depository, Cede & Co., or any Direct
or Indirect Participant with respect to the ownership interest in the Class A
Certificates, (ii) the delivery to any Direct or Indirect Participant or any
other Person, other than a registered Owner of a Class A Certificate as shown in
the Register, of any notice with respect to the Class A Certificates or (iii)
the payment to any Direct or Indirect Participant or any other Person, other
than a registered Owner of a Class A Certificate as shown in the Register, of
any amount with respect to any distribution of principal or interest on the
Class A Certificates. No Person other than a registered Owner of a Class A
Certificate as shown in the Register shall receive a certificate evidencing such
Class A Certificate.
Upon delivery by the Depository to the Trustee of written notice to the
effect that the Depository has determined to substitute a new nominee in place
of Cede & Co., and subject to the provisions hereof with respect to the payment
of interest by the mailing of checks or drafts to the registered Owners of Class
A Certificates appearing as registered Owners in the registration books
maintained by the Trustee at the
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close of business on a Record Date, the name "Cede & Co." in this Agreement
shall refer to such new nominee of the Depository.
(h) In the event that (i) the Depository or the Depositor advises the
Trustee in writing that the Depository is no longer willing, qualified or able
to discharge properly its responsibilities as nominee and depository with
respect to the Class A Certificates and the Depositor or the Trustee is unable
to located a qualified successor, (ii) the Depositor at its sole option elects
to terminate the book-entry system through the Depository or (iii) after the
occurrence of an Event of Default, beneficial owners having not less than 51% of
the Voting Rights evidenced by the Class A Certificates advise the Trustee and
the Depository through the Direct Participants in writing that the continuation
of a book-entry system through the Depository is no longer in the best interests
of beneficial owners, the Class A Certificates shall no longer be restricted to
being registered in the Register in the name of Cede & Co. (or a successor
nominee) as nominee of the Depository. At that time, the Depositor may determine
that the Class A Certificates shall be registered in the name of and deposited
with a successor depository operating a global book-entry system, as may be
acceptable to the Depositor and at the Depositor's expense, or such depository's
agent or designee but, if the Depositor does not select such alternative global
book-entry system, then the Class A Certificates may be registered in whatever
name or names registered Owners of Class A Certificates transferring Class A
Certificates shall designate, in accordance with the provisions hereof.
(i) Notwithstanding any other provision of this Agreement to the
contrary, so long as any Class A Certificate is registered in the name of Cede &
Co., as nominee of the Depository, all distributions of principal or interest on
such Class A Certificates and all notices with respect to such Class A
Certificates shall be made and given, respectively, in the manner provided in
the Representation Letter.
Section 5.05 Mutilated, Destroyed, Lost or Stolen Certificates.
If (i) any mutilated Certificate is surrendered to the Trustee, or the
Trustee receives evidence to its satisfaction of the destruction, loss or theft
of any Certificate, and (ii) in the case of any mutilated Certificate, such
mutilated Certificate shall first be surrendered to the Trustee, and in the case
of any destroyed, lost or stolen Certificate, there shall be first delivered to
the Trustee such security or indemnity as may be reasonably required by it to
hold the Trustee and the Certificate Insurer harmless, then, in the absence of
notice to the Trustee or the Registrar that such Certificate has been acquired
by a bona fide purchaser, the Trustee shall execute, authenticate and deliver,
in exchange for or in lieu of any such mutilated, destroyed, lost or stolen
Certificate, a new Certificate of like Class, tenor and aggregate principal
amount, bearing a number not contemporaneously outstanding.
Upon the issuance of any new Certificate under this Section, the
Registrar or Trustee may require the payment of a sum sufficient to cover any
tax or other governmental charge that may be imposed in relation thereto; any
other expenses in connection with such issuance shall be an expense of the
Trust.
Every new Certificate issued pursuant to this Section in exchange for
or in lieu of any mutilated, destroyed, lost or stolen Certificate shall
constitute evidence of a substitute interest in the Trust, and shall be entitled
to all the benefits of this Agreement equally and proportionately with any and
all other Certificates of the same Class duly issued hereunder and such
mutilated, destroyed, lost or stolen Certificate shall not be valid for any
purpose.
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The provisions of this Section are exclusive and shall preclude (to the
extent lawful) all other rights and remedies with respect to the replacement or
payment of mutilated, destroyed, lost or stolen Certificates.
Section 5.06 Persons Deemed Owners.
The Certificate Insurer, the Trustee and any agent of the Trustee may
treat the Person in whose name any Certificate is registered as the Owner of
such Certificate for the purpose of receiving distributions with respect to such
Certificate and for all other purposes whatsoever, and neither the Certificate
Issuer, the Trustee nor any agent of the Trustee shall be affected by notice to
the contrary.
Section 5.07 Cancellation.
All Certificates surrendered for registration of transfer or exchange
shall, if surrendered to any Person other than the Trustee, be delivered to the
Trustee and shall be promptly cancelled by it. No Certificate shall be
authenticated in lieu of or in exchange for any Certificate cancelled as
provided in this Section, except as expressly permitted by this Agreement. All
cancelled Certificates may be held by the Trustee in accordance with its
standard retention policy.
Section 5.08 Limitation on Transfer of Ownership Rights.
(a) No sale or other transfer of record or beneficial ownership of a
Class R Certificate (whether pursuant to a purchase, a transfer resulting from a
default under a secured lending agreement or otherwise) shall be made to a
Disqualified Organization or an agent of a Disqualified Organization. The
transfer, sale or other disposition of a Class R Certificate (whether pursuant
to a purchase, a transfer resulting from a default under a secured lending
agreement or otherwise) to a Disqualified Organization shall be deemed to be of
no legal force or effect whatsoever and such transferee shall not be deemed to
be an Owner for any purpose hereunder, including, but not limited to, the
receipt of distributions on such Class R Certificate. Furthermore, in no event
shall the Trustee accept surrender for transfer or registration of transfer, or
register the transfer, of any Class R Certificate nor authenticate and make
available any new Class R Certificate unless the Trustee has received an
affidavit from the proposed transferee in the form attached hereto as Exhibit H.
Each holder of a Class R Certificate by his acceptance thereof, shall be deemed
for all purposes to have consented to the provisions of this Section 5.08(a).
(b) No other sale or other transfer of record or beneficial ownership
of a Class X Certificate or a Class R Certificate shall be made unless such
transfer is exempt from the registration requirements of the Securities Act and
any applicable state securities laws or is made in accordance with said Act and
laws. In the event such a transfer is to be made within three years from the
Startup Day, (i) the Trustee shall require a written opinion of counsel
acceptable to and in form and substance satisfactory to the Depositor, the
Registrar, the Trustee and the Certificate Insurer in the event that such
transfer may be made pursuant to an exemption, describing the applicable
exemption and the basis therefor, from said Act and laws or is being made
pursuant to said Act and laws, which opinion of counsel shall not be an expense
of the Trustee, the Trust Estate, the Registrar, the Servicer, the Seller, the
Depositor or the Certificate Insurer, and (ii) the Trustee shall require the
transferee to execute an investment letter acceptable to and in form and
substance satisfactory to the Depositor, the Registrar, the Trustee and the
Certificate Insurer certifying to the Trustee, the Certificate Insurer, the
Registrar and the Depositor the facts surrounding such transfer, which
investment letter shall not be an expense of the Trustee, the Trust
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Estate, the Certificate Insurer, the Registrar,the Servicer, the Seller, the
Depositor. The Owner of a Class X Certificate or a Class R Certificate desiring
to effect such transfer shall, and does hereby agree to, indemnify the Trustee,
the Certificate Insurer, the Depositor, the Servicer, the Registrar and the
Seller against any liability that may result if the transfer is not so exempt or
is not made in accordance with such federal and state laws.
(c) No transfer of a Class X or Class R Certificate shall be made
unless the Registrar shall have received either: (i) a representation letter
from the transferee of such Class X or Class R Certificate, acceptable to and in
form and substance satisfactory to the Registrar, to the effect that such
transferee is not an employee benefit plan subject to Section 406 of ERISA nor a
plan or other arrangement subject to Section 406 of ERISA nor a plan or other
arrangement subject to Section 4975 of the Code (collectively, a "Plan"), nor is
acting on behalf of any Plan nor using the assets of any Plan to effect such
transfer or in the case of an insurance company purchasing such Certificates,
with funds from its general account, the transfer is covered by the Prohibited
Transaction Class Exemption 95-60 or (ii) in the event that any Class X or Class
R Certificates is purchased by a Plan, or by a person or entity acting on behalf
of any Plan or using the assets of any Plan to effect such transfer, an Opinion
of Counsel, acceptable to and in form and substance satisfactory to the
Depositor, the Trustee and the Registrar, which Opinion of Counsel shall not be
at the expense of the Trustee or the Trust, to the effect that the purchase or
holding of any Class X or Class R Certificates will not result in the assets of
the Trust being deemed to be "plan assets," will not cause the Trust to be
subject to the fiduciary requirements and prohibited transaction provisions of
ERISA and the Code, and will not subject the Depositor, Seller, Registrar,
Servicer, Certificate Insurer or the Trustee to any obligation or liability in
addition to those expressly undertaken under this Agreement. Notwithstanding
anything else to the contrary herein, any purported transfer of a Certificate to
or on behalf of any Plan without the delivery to the Trustee of an Opinion of
Counsel as described above shall be null and void and of no effect.
(d) No sale or other transfer of any Class A Certificate may be made to
the Depositor, the Seller or the Master Servicer. No sale or other transfer of
any Class A Certificate may be made to an affiliate of the Seller unless the
Trustee and the Certificate Insurer shall have been furnished with an opinion of
counsel acceptable to the Certificate Insurer and the Trustee experienced in
federal bankruptcy matters to the effect that such sale or transfer would not
adversely affect the character of the conveyance of the Mortgage Loans to the
Trust as a sale. To the extent any payment to an Owner of a Class A Certificate
constitutes an Insured Payment, such payment will not be made to the Seller, the
Depositor or the Master Servicer or any Subservicer. The Class R Certificate
issued to Trustee on the Startup Day may not be transferred or sold to any
Person, except to a Person who accepts the appointment of Tax Matters Person
pursuant to Section 11.18 hereof.
Section 5.09 Assignment of Rights.
An Owner may pledge, encumber, hypothecate or assign all or any part of
its right to receive distributions hereunder, but such pledge, encumbrance,
hypothecation or assignment shall not constitute a transfer of an ownership
interest sufficient to render the transferee an Owner of the Trust without
compliance with the provisions of Section 5.04 and Section 5.08 hereof.
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ARTICLE VI
COVENANTS
Section 6.01 Distributions.
On each Distribution Date, the Trustee will withdraw amounts from the
Distribution Account and make the distributions with respect to the Certificates
in accordance with the terms of the Certificates and this Agreement. Such
distributions shall be made (i) by check or draft mailed on each Distribution
Date or (ii) if requested by any Owner of (A) a Class A-1, Class A-2, Class A-3,
Class A-4 or Class A-5 Certificate having an original principal balance of not
less than $1,000,000 or (B) a Class X Certificate or Class R Certificate having
a Percentage Interest of not less than 10% in writing not later than one
Business Day prior to the applicable Record Date (which request does not have to
be repeated unless it has been withdrawn), to such Owner by wire transfer to an
account within the United States designated no later than five Business Days
prior to the related Record Date, made on each Distribution Date, in each case
to each Owner of record on the immediately preceding Record Date.
Section 6.02 Money for Distributions to be Held in Trust;
Withholding.
(a) All payments of amounts due and payable with respect to any
Certificate that are to be made from amounts withdrawn from the Distribution
Account or from Insured Payments shall be made by and on behalf of the Trustee,
and no amounts so withdrawn from the Distribution Account for payments of
Certificates and no Insured Payment shall be paid over to the Trustee except as
provided in this Section
(b) Whenever the Trustee has appointed one or more Paying Agents
pursuant to Section 11.15 hereof, the Trustee will, on the Business Day
immediately preceding each Distribution Date, cause to be deposited with such
Paying Agents in immediately available funds an aggregate sum sufficient to pay
the amounts then becoming due (to the extent funds are then available for such
purpose in the Distribution Account for the Class to which such amounts are due)
such sum to be held in trust for the benefit of the Owners entitled thereto.
(c) The Trustee may at any time direct any Paying Agent to pay to the
Trustee all sums held in trust by such Paying Agent, such sums to be held by the
Trustee upon the same trusts as those upon which the sums were held by such
Paying Agent; and upon such payment by any Paying Agent to the Trustee, such
Paying Agent shall be released from all further liability with respect to such
money.
(d) Each Paying Agent, including the Trustee on behalf of the Trust,
shall comply with all requirements of the Code and applicable state and local
law with respect to the withholding from any distributions made by it to any
Owner of any applicable withholding taxes imposed thereon and with respect to
any applicable reporting requirements in connection therewith.
(e) Any money held by the Trustee or any Paying Agent in trust for the
payment of any amount due with respect to any Class A Certificate and remaining
unclaimed by the Owner of such Class A Certificate for the period then specified
in the escheat laws of the State of New York after such amount has become due
and payable shall be discharged from such trust and be paid to the Owners of the
Class R Certificates; and the Owner of such Class A Certificate shall
thereafter, as an unsecured general creditor, look only to the Owners of the
Class R Certificates for payment thereof (but only to the extent of the
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amounts so paid to the Owners of the Class R Certificates) and all liability of
the Trustee or such Paying Agent with respect to such trust money shall
thereupon cease; provided, however, that the Trustee or such Paying Agent before
being required to make any such payment, may, at the expense of the Trust, cause
to be published once, in the eastern edition of The Wall Street Journal, notice
that such money remains unclaimed and that, after a date specified therein,
which shall be not fewer than 30 days from the date of such publication, any
unclaimed balance of such money then remaining will be paid to the Owners of the
Class R Certificates. The Trustee shall also adopt and employ, at the expense of
the Trust, any other reasonable means of notification of such payment (including
but not limited to mailing notice of such payment to Owners whose right to or
interest in moneys due and payable but not claimed is determinable from the
records of the Registrar, the Trustee or any Paying Agent, at the last address
of record for each such Owner).
Section 6.03 Protection of Trust Estate.
(a) The Trustee will hold the Trust Estate in trust for the benefit of
the Owners and the Certificate Insurer and, upon request of the Certificate
Insurer or, with the consent of the Certificate Insurer, at the request of the
Depositor, will from time to time execute and deliver all such supplements and
amendments hereto pursuant to Section 11.14 hereof and all instruments of
further assurance and other instruments, and will take such other action upon
such request from the Depositor or the Certificate Insurer, to:
(i) more effectively hold in trust all or any portion
of the Trust Estate;
(ii) perfect, publish notice of, or protect the validity
of any grant made or to be made by this Agreement;
(iii) enforce any of the Mortgage Loans; or
(iv) preserve and defend title to the Trust Estate and the rights
of the Trustee, and the ownership interests of the Owners represented
thereby, in such Trust Estate against the claims of all Persons and
parties.
The Trustee shall send copies of any request received from the
Certificate Insurer or the Depositor to take any action pursuant to this Section
6.03 to the other parties hereto.
(b) The Trustee shall have the power to enforce, and shall enforce the
obligations and rights of the other parties to this Agreement, and of the
Certificate Insurer or the Owners, by action, suit or proceeding at law or
equity, and shall also have the power to enjoin, by action or suit in equity,
any acts or occurrences which may be unlawful or in violation of the rights of
the Certificate Insurer as such rights are set forth in this Agreement;
provided, however, that nothing in this Section shall require any action by the
Trustee unless the Trustee shall first (i) have been furnished indemnity
satisfactory to it and (ii) when required by this Agreement, have been requested
by the Certificate Insurer or the Owners of a majority of the Percentage
Interests represented by the Class A Certificates then Outstanding with the
consent of the Certificate Insurer or, if there are no longer any Class A
Certificates then outstanding, by such majority of the Percentage Interests
represented by the Class R Certificates; provided, further, however, that if
there is a dispute with respect to payments under the Certificate Insurance
Policy the Trustee's sole responsibility is to the Owners.
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(c) The Trustee shall execute any instrument required pursuant to this
Section so long as such instrument does not conflict with this Agreement or with
the Trustee's fiduciary duties hereunder, or adversely affect its rights and
immunities hereunder.
Section 6.04 Performance of Obligations.
The Trustee will not take any action that would release any Person from
any of such Person's covenants or obligations under any instrument or document
relating to the Certificates or which would result in the amendment,
hypothecation, subordination, termination or discharge of, or impair the
validity or effectiveness of, any such instrument or document, except as
expressly provided in this Agreement or such other instrument or document.
The Trustee may contract with other Persons to assist it in performing
its duties hereunder pursuant to Section 10.03(g).
Section 6.05 Negative Covenants.
The Trustee will not permit the Trust to:
(i) sell, transfer, exchange or otherwise dispose of any of the
Trust Estate except as expressly permitted by this Agreement;
(ii) claim any credit on, or make any deduction from the
distributions payable in respect of, the Certificates (other than
amounts properly withheld from such payments under the Code) or assert
any claim against any present or former Owner by reason of the payment
of any taxes levied or assessed upon any of the Trust Estate;
(iii) incur, assume or guaranty any indebtedness of any Person
except pursuant to this Agreement;
(iv) dissolve or liquidate in whole or in part, except pursuant
to Article IX hereof; or
(v) (A) permit the validity or effectiveness of this Agreement
to be impaired, or permit any Person to be released from any covenants
or obligations with respect to the Trust or to the Certificates under
this Agreement, except as may be expressly permitted hereby or (B)
permit any lien, charge, adverse claim, security interest, mortgage or
other encumbrance to be created on or extend to or otherwise arise upon
or burden the Trust Estate or any part thereof or any interest therein
or the proceeds thereof.
Section 6.06 No Other Powers.
The Trustee will not permit the Trust to engage in any business
activity or transaction other than those activities permitted by Section 2.03
hereof.
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Section 6.07 Limitation of Suits.
No Owner shall have any right to institute any proceeding, judicial or
otherwise, with respect to this Agreement or the Certificate Insurance Policy,
or for the appointment of a receiver or trustee of the Trust, or for any other
remedy with respect to an event of default hereunder, unless:
(1) such Owner has previously given written notice to the
Depositor and the Trustee of such Owner's intention to
institute such proceeding;
(2) the Owners of not less than 25% of the Percentage Interests
represented by the Class A Certificates then Outstanding or,
if there are no Class A Certificates then Outstanding, by such
percentage of the Percentage Interests represented by the
Class X Certificates and the Class R Certificates, shall have
made written request to the Trustee to institute such
Proceeding in its own name as Trustee establishing the Trust;
(3) such Owner or Owners have offered to the Trustee reasonable
indemnity against the costs, expenses and liabilities to be
incurred in compliance with such request;
(4) the Trustee for 60 days after its receipt of such notice,
request and offer of indemnity has failed to institute such
proceeding;
(5) as long as any Class A Certificates are Outstanding, the
Certificate Insurer consented in writing thereto (unless
the Certificate Insurer is the party against whom the
proceeding is directed): and
(6) no direction inconsistent with such written request has been
given to the Trustee during such 60-day period by the Owners
of a majority of the Percentage Interests represented by the
Class A Certificates or, if there are no Class A Certificates
then Outstanding, by such majority of the Percentage Interests
represented by the Class X Certificates and the Class R
Certificates:
it being understood and intended that no one or more Owners shall have any right
in any manner whatever by virtue of, or by availing themselves of, any provision
of this Agreement to affect, disturb or prejudice the rights of any other Owner
of the same Class or to obtain or to seek to obtain priority or preference over
any other Owner of the same Class or to enforce any right under this Agreement,
except in the manner herein provided and for the equal and ratable benefit of
all the Owners of the same Class.
In the event the Trustee shall receive conflicting or inconsistent
requests and indemnity from two or more groups of Owners, each representing less
than a majority of the applicable Class of Certificates and each conforming to
paragraphs (1)-(6) of this Section 6.07, the Certificate Insurer in its sole
discretion may determine what action, if any, shall be taken, notwithstanding
any other provision of this Agreement (unless the Certificate Insurer is the
party against whom the proceeding is directed).
Section 6.08 Unconditional Rights of Owners to Receive Distributions.
Notwithstanding any other provision in this Agreement, the Owner of any
Certificate shall have the right, which is absolute and unconditional, to
receive distributions to the extent provided herein and
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therein with respect to such Certificate or to institute suit for the
enforcement of any such distribution, and such right shall not be impaired
without the consent of such Owner.
Section 6.09 Rights and Remedies Cumulative.
Except as otherwise provided herein, no right or remedy herein
conferred upon or reserved to the Trustee, the Certificate Insurer or the Owners
is intended to be exclusive of any other right or remedy, and every right and
remedy shall, to the extent permitted by law, be cumulative and in addition to
every other right and remedy given hereunder or now or hereafter existing at law
or in equity or otherwise. Except as otherwise provided herein, the assertion or
employment of any right or remedy hereunder, or otherwise, shall not prevent the
concurrent assertion or employment of any other appropriate right or remedy.
Section 6.10 Delay or Omission Not Waiver.
No delay of the Trustee, the Certificate Insurer or any Owner of any
Certificate to exercise any right or remedy under this Agreement with respect to
any event described in Section 8.20(a) or (b) shall impair any such right or
remedy or constitute a waiver of any such event or an acquiescence therein.
Every right and remedy given by this Article VI or by law to the Trustee, the
Certificate Insurer or the Owners may be exercised from time to time, and as
often as may be deemed expedient, by the Trustee, the Certificate Insurer or the
Owners, as the case may be.
Section 6.11 Control by Owners.
The Certificate Insurer or the Owners of a majority of the Percentage
Interests represented by the Class A Certificates then Outstanding with the
consent of the Certificate Insurer or, if there are no longer any Class A
Certificates then Outstanding, by such majority of the Percentage Interests
represented by the Class X Certificates and the Class R Certificates then
Outstanding may direct the time, method and place of conducting any proceeding
for any remedy available to the Trustee with respect to the Certificates or
exercising any trust or power conferred on the Trustee with respect to the
Certificates or the Trust Estate, including, but not limited to, those powers
set forth in Section 6.03 and Section 8.20 hereof, provided that:
(i) such direction shall not be in conflict with any rule of law
or with this Agreement;
(ii) the Trustee shall have been provided with indemnity
satisfactory to it; and
(iii) the Trustee may take any other action deemed proper by the
Trustee, as the case may be, which is not inconsistent with
such direction; provided, however, that the Seller or the
Trustee, as the case may be, need not take any action which it
determines might involve it in liability or may be unjustly
prejudicial to the Owners not so directing.
Section 6.12 Indemnification.
The Depositor agrees to indemnify and hold the Trustee, the Certificate
Insurer and each Owner harmless against any and all claims, losses, penalties,
fines, forfeitures, legal fees and related costs, judgments, and any other
costs, fees and expenses that the Trustee, the Certificate Insurer and any Owner
may sustain in any way related to the negligent or willful failure of the
Depositor to perform its duties
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in compliance with the terms of this Agreement. The Depositor shall immediately
notify the Trustee, the Certificate Insurer and each Owner if such a claim is
made by a third party with respect to this Agreement, and the Depositor shall
assume (with the consent of the Trustee) the defense of any such claim and pay
all expenses in connection therewith, including reasonable counsel fees, and
promptly pay, discharge and satisfy any judgment or decree which may be entered
against the Master Servicer, the Seller, the Trustee, the Certificate Insurer
and/or any Owner in respect of such claim. The Trustee may, if necessary,
reimburse the Depositor from amounts otherwise distributable on the Class X or
Class R Certificates for all amounts advanced by it pursuant to the preceding
sentence, except when the claim relates directly to the failure of the Depositor
to perform its duties in compliance with the terms of this Agreement. In
addition to the foregoing, the Seller agrees to indemnify and hold the Trustee,
the Certificate Insurer and each Owner harmless against any and all claims,
losses, penalties, fines, forfeitures, legal fees and related costs, judgments,
and other costs, fees and expenses that the Trustee, the Certificate Insurer and
any Owner may sustain in any way related to the breach by the Seller of its
representations and warranties set forth in Section 3.04(a) hereof with respect
to a Mortgage Loan if such Mortgage Loan qualifies as a "high cost mortgage"
pursuant to Section 226.32 of the Truth-in-Lending Act, as amended. The
provisions of this Section 6.12 shall survive the termination of this Agreement
and the payment of the outstanding Certificates.
Section 6.13 Access to Owners of Certificates' Names and Addresses. (a)
If any Owner (for purposes of this Section 6.13, an "Applicant") applies in
writing to the Trustee, and such application states that the Applicant desires
to communicate with other Owners with respect to their rights under this
Agreement or under the Certificates and is accompanied by a copy of the
communication which such Applicant proposes to transmit, then the Trustee shall,
at the expense of such Applicant, within ten (10) Business Days after the
receipt of such application, furnish or cause to be furnished to such Applicant
a list of the names and addresses of the Owners of record as of the most recent
Distribution Date.
(b) Every Owner, by receiving and holding such list, agrees with the
Trustee that the Trustee shall not be held accountable in any way by reason of
the disclosure of any information as to the names and addresses of the owners
hereunder, regardless of the source from which such information was derived.
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ARTICLE VII
ACCOUNTS, DISBURSEMENTS AND RELEASES
Section 7.01 Collection of Money.
Except as otherwise expressly provided herein, the Trustee shall demand
payment or delivery of all money and other property payable to or receivable by
the Trustee pursuant to this Agreement or the Certificate Insurance Policies,
including (a) all payments due on the Mortgage Loans in accordance with the
respective terms and conditions of such Mortgage Loans and required to be paid
over to the Trustee by the Master Servicer or by any Sub-Servicer and (b)
Insured Payments. The Trustee shall hold all such money and property received by
it, other than pursuant to or as contemplated by Section 6.02(e) hereof, as part
of the Trust Estate and shall apply it as provided in this Agreement.
Section 7.02 Establishment of Accounts;
(a) The Depositor shall cause to be established on the Startup Day, and
the Trustee shall maintain, at the Corporate Trust Office, the Distribution
Account, which is to be held by the Trustee on behalf of the Owners of the
Certificates, the Trustee and the Certificate Insurer, as their interests may
appear.
(b) [Reserved.]
(c) On the Business Day after each Determination Date the Trustee shall
determine (subject to the terms of Section 10.03(j) hereof, based solely on
information provided to it by the Master Servicer) with respect to the
immediately following Distribution Date, the amount that is expected to be on
deposit in the Distribution Account as of such Distribution Date for the Fixed
Rate Group (disregarding the amount of any Insured Payments), which amount will
be equal to the sum of (x) the amount on deposit therein with respect to such
Fixed Rate Group excluding the amount of any Total Monthly Excess Cashflow from
the Fixed Rate Group included in such amount plus (y) any amount of Total
Monthly Excess Cashflow from the Adjustable Rate Group to be applied on such
Distribution Date to the Fixed Rate Certificates. The amount described in clause
(x) of the preceding sentence with respect to each Distribution Date is the
"Fixed Rate Group Available Funds"; the sum of the amounts described in clauses
(x) and (y) of the preceding sentence with respect to each Distribution Date is
the "Fixed Rate Group Total Available Funds."
(d) On the Business Day after each Determination Date the Trustee shall
determine (subject to the terms of Section 10.03(j) hereof, based solely on
information provided to it by the Master Servicer) with respect to the
immediately following Distribution Date, the amount that is expected to be on
deposit in the Distribution Account as of such Distribution Date for the
Adjustable Rate Group (disregarding the amount of any Insured Payments), which
amount will be equal to the sum of (x) the amount on deposit therein with
respect to such Group excluding the amount of any Total Monthly Excess Cashflow
from the Adjustable Rate Group included in such amount plus (y) any amount of
Total Monthly Excess Cashflow from the Fixed Rate Group to be applied on such
Distribution Date to the Class A-5 Certificates. The amount described in clause
(x) of the preceding sentence with respect to each Distribution Date is the
"Adjustable Rate Group Available Funds"; the sum of the amounts described in
clauses (x) and (y) of the preceding sentence with respect to each Distribution
Date is the "Adjustable Rate Group Total Available
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Funds." Collectively, the Fixed Rate Group Total Available Funds and the
Adjustable Rate Group Total Available funding is the "Total Available Funds."
Section 7.03 Flow of Funds.
(a) With respect to the Fixed Rate Group, the Trustee shall deposit to
the Distribution Account, without duplication, upon receipt, any Insured
Payments relating to such Group, the proceeds of any liquidation of the assets
of the Trust insofar as such assets relate to the Fixed Rate Group, all
remittances made to the Trustee pursuant to Section 8.08(d)(ii) insofar as such
assets relate to the Fixed Rate Group, and the Fixed Rate Group Monthly
Remittance Amount remitted by the Master Servicer.
(b) With respect to the Adjustable Rate Group, the Trustee shall
deposit to the Distribution Account without duplication, upon receipt, any
Insured Payments relating to such Group, the proceeds of any liquidation of the
assets of the Trust insofar as such assets relate to the Adjustable Rate Group,
all remittances made to the Trustee pursuant to Section 8.08(d)(ii) insofar as
such assets relate to the Adjustable Rate Group and the Adjustable Rate Group
Monthly Remittance Amount remitted by the Master Servicer.
(c) With respect to the Distribution Account, on each Distribution
Date, the Trustee shall make the following allocations, disbursements and
transfers for each Mortgage Loan Group from amounts deposited therein pursuant
to subsections (a) and (b), respectively, in the following order of priority,
and each such allocation, transfer and disbursement shall be treated as having
occurred only after all preceding allocations, transfers and disbursements have
occurred:
(i) first, on each Distribution Date, the Trustee shall
allocate an amount equal to the sum of (x) the Total Monthly Excess Spread with
respect to such Mortgage Loan Group and Distribution Date plus (y) any
Subordination Reduction Amount with respect to such Mortgage Loan Group and
Distribution Date (such sum (net of the related Premium Amount paid pursuant to
clause (iii)(B) below, as applicable, and the Trustee Fee allocable to such
Mortgage Loan Group then payable under clause (iii)(D) below) being the "Total
Monthly Excess Cashflow" with respect to such Mortgage Loan Group and
Distribution Date) with respect to such Mortgage Loan Group in the following
order of priority:
(A) first, such Total Monthly Excess Cashflow with
respect to each Mortgage Loan Group shall be
allocated to the payment of the related Class A
Distribution Amount pursuant to clauses (iii)(A) or
(iii)(C), as applicable, below on such Distribution
Date with respect to the related Mortgage Loan Group
in an amount equal to the amount, if any, by which
(x) the related Class A Distribution Amount
(calculated for this purpose only by reference to
clause (b) of the definition of the Fixed Rate Group
Principal Distribution Amount or Adjustable Rate
Group Principal Distribution Amount, as the case may
be, and without any Subordination Increase Amount
with respect to the related Mortgage Loan Group) for
such Distribution Date exceeds (y) the Available
Funds with respect to such Mortgage Loan Group for
such Distribution Date (the amount of such
difference being the "Fixed Rate Group Available
Funds Shortfall" with respect to the Fixed Rate
Group, and the "Adjustable Rate Group Available
Funds Shortfall" with respect to the Adjustable Rate
Group);
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(B) second, any portion of the Total Monthly Excess
Cashflow with respect to such Mortgage Loan Group
remaining after the allocation described in clause
(A) above shall be allocated against any Available
Funds Shortfall with respect to the other Mortgage
Loan Group and to the payment of the related Class A
Distribution Amount with respect to the other
Mortgage Loan Group pursuant to clause (iii) below;
(C) third, any portion of the Total Monthly Excess
Cashflow with respect to such Mortgage Loan Group
remaining after the allocations described in clauses
(A) and (B) above shall be disbursed to the
Certificate Insurer in respect of amounts owed on
account of any Reimbursement Amount with respect to
the related Mortgage Loan Group; and
(D) fourth, any portion of the Total Monthly Excess
Cashflow with respect to such Mortgage Loan Group
remaining after the allocations described in clauses
(A), (B) and (C) above shall be disbursed to the
Certificate Insurer in respect of any Reimbursement
Amount with respect to the other Mortgage Loan Group.
(ii) second, on each Distribution Date, the Trustee shall apply the
amount, if any, of the Total Monthly Excess Cashflow with
respect to a Mortgage Loan Group on a Distribution Date
remaining after the allocations described in clause (i) above
(the "Net Monthly Excess Cashflow") for such Mortgage Loan
Group and Distribution Date in the following order of
priority:
(A) first, such Net Monthly Excess Cashflow shall be used
to reduce to zero, through the allocation of a
Subordination Increase Amount to the payment of the
related Class A Distribution Amount pursuant to
clause (iii) below, any Subordination Deficiency
Amount with respect to the related Mortgage Loan
Group as of such Distribution Date;
(B) second, any Net Monthly Excess Cashflow remaining
after the application described in clause (A) above
shall be used to reduce to zero, through the
allocation of a Subordination Increase Amount to the
payment of the related Class A Distribution Amount
pursuant to clause (iii) below, the Subordination
Deficiency Amount, if any, with respect to the other
Mortgage Loan Group; and
(C) third, any Net Monthly Excess Cashflow remaining
after the applications described in clauses (A) and
(B) above shall be paid to the Master Servicer to the
extent of any unreimbursed P&I Advances and
unreimbursed Servicing Advances:
(iii) third, following the making by the Trustee of all allocations,
transfers and disbursements described above under this
subsection (c), from amounts (including any related Insured
Payment) then on deposit in the Distribution Account with
respect to the related Mortgage Loan Group, the Trustee shall
distribute:
(A) to the Owners of the Class A Certificates of the
related Mortgage Loan Group, the Fixed Rate Group
Current Interest or Class A-5 Current Interest, as
applicable,
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on a pro rata basis without any priority among such
Class A Certificates, until the applicable Class A
Certificate Termination Date;
(B) to the Certificate Insurer, on each Distribution Date
for the related Mortgage Loan Group, the prorated
Premium Amount determined by the relative Certificate
Principal Balance of the related Classes of Class A
Certificates for such Distribution Date;
(C) to the Owners of the related Class of Class A
Certificates, (I) the Fixed Rate Group Principal
Distribution Amount shall be distributed as follows:
(a) first, to the Owners of the Class A-1
Certificates until the Class A-1 Certificate
Termination Date, (b) second, to the Owners of the
Class A-2 Certificates until the Class A-2
Certificate Termination Date, (c) third, to the
Owners of the Class A-3 Certificates until the Class
A-3 Certificate Termination Date and (d) fourth, to
the Owners of the Class A-4 Certificates until the
Class A-4 Certificate Termination Date and (II) the
Adjustable Rate Group Principal Distribution Amount
shall be distributed to the Owners of the Class A-5
Certificates until the Class A-5 Certificate
Termination Date;
(D) to the Trustee, the Trustee Fees with respect to such
Mortgage Loan Group then due (plus any expenses owing
to the Trustee pursuant to Section 3.02(e) of the
Insurance Agreement);
(E) to the Class A-5 Certificates, the Basis Risk
Carryover Amount outstanding on such Distribution
Date;
(F) to the Owners of the Class X Certificates, the Class
X-1 Distribution Amount and Class X-2 Distribution
Amount; and
(G) to the Owners of the Class R Certificates, any
amounts remaining in the Distribution Account.
(d) On any Distribution Date during the continuance of any
Certificate Insurer Default:
(i) Any amounts otherwise payable to the Certificate
Insurer as Premium Amounts or Reimbursement Amounts
shall be retained in the Distribution Account as
Total Available Funds; and
(ii) If there is a Subordination Deficit, then the Class A
Principal Distribution Amount for such Distribution
Date shall be distributed pro rata to the Owners of
any Outstanding Class A Certificates on such
Distribution Date.
(e) Notwithstanding clause (c)(iii) above, the aggregate amounts
distributed on all Distribution Dates to the Owners of the Class A Certificates
on account of principal pursuant to clause (c)(iii)(C) shall not exceed the
original Certificate Principal Balance of the related Certificates.
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(f) Upon receipt of Insured Payments from the Certificate Insurer on
behalf of the Owners of the Class A Certificates, the Trustee shall deposit such
Insured Payments in the Distribution Account and shall distribute such Insured
Payments, or the proceeds thereof, (i) in the case of the Fixed Rate
Certificates, through the Distribution Account to the Owners of such
Certificates and (ii) in the case of the Class A-5 Certificates, through the
Distribution Account to the Owners of such Certificates.
(g) Anything herein to the contrary notwithstanding, any payment with
respect to principal of or interest on any of the Class A Certificates which is
made with moneys received pursuant to the terms of the Certificate Insurance
Policy shall not be considered payment of such Certificates from the Trust and
shall not result in the payment of or the provision for the payment of the
principal of or interest on such Certificates within the meaning of Section
7.03. The Depositor, the Master Servicer and the Trustee acknowledge, and each
Owner by its acceptance of a Certificate agrees, that without the need for any
further action on the part of the Certificate Insurer, the Depositor, the Master
Servicer, the Trustee or the Registrar (a) to the extent the Certificate Insurer
makes payments, directly or indirectly, on account of principal of or interest
on any Class A Certificates to the Owners of such Certificates, the Certificate
Insurer will be fully subrogated to the rights of such Owners to receive such
principal and interest [together with any interest thereon at the applicable
Pass-Through Rate from the Trust] and (b) the Certificate Insurer shall be paid
such principal and interest only from the sources and in the manner provided
herein for the payment of such principal and interest.
It is understood and agreed that the intention of the parties is that
the Certificate Insurer shall not be entitled to receive all or any portion of
Reimbursement Amounts unless on such Distribution Date the Owners of the Class A
Certificates shall also have received the full amount of the Class A
Distribution Amount for such Distribution Date.
The Trustee or Paying Agent shall (i) receive as attorney-in-fact of
each Owner of Class A Certificates any Insured Payment from the Certificate
Insurer and (ii) disburse the same to the Owners of the related Class A
Certificates as set forth in Section 7.03(c)(iii). Insured Payments disbursed by
the Trustee or Paying Agent from proceeds of the Certificate Insurance Policy
shall not be considered payment by the Trust, nor shall such payments discharge
the obligation of the Trust with respect to such Class A Certificates; provided,
however, that in the event that the Owners of the Class A Certificates shall
have received the full amount of the Class A Distribution Amount for such
Distribution Date, the Certificate Insurer shall be entitled to receive the
related Reimbursement Amount pursuant to Section 7.03(c)(i) hereof.
The rights of the Owners to receive distributions from the proceeds of
the Trust Estate, and all ownership interests of the Owners in such
distributions, shall be as set forth in this Agreement. In this regard, all
rights of the Owners of the Class X Certificates and the Class R Certificates to
receive distributions in respect of the Class X Certificates and the Class R
Certificates, and all ownership interests of the Owners of the Class X
Certificates and the Class R Certificates in and to such distributions, shall be
subject and subordinate to the preferential rights of the holders of the Class A
Certificates to receive distributions thereon and the ownership interests of
such Owners in such distributions, as described herein. In accordance with the
foregoing, the ownership interests of the Owners of the Class X Certificates and
the Class R Certificates in amounts deposited in the Accounts from time to time
shall not vest unless and until such amounts are distributed in respect of the
Class X Certificates and the Class R Certificates in accordance with the terms
of this Agreement. Notwithstanding anything contained in this Agreement to the
contrary, the Owners of the Class X Certificates and the Class R Certificates
shall not be required to
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refund any amount properly distributed on the Class X Certificates and the Class
R Certificates pursuant to this Section 7.03.
Section 7.04 Reserved.
Section 7.05 Investment of Accounts.
(a) Consistent with any requirements of the Code, all or a portion of
the Distribution Account held by the Trustee for the benefit of the Owners shall
be invested and reinvested by the Trustee in the name of the Trustee for the
benefit of the Owners, as directed in writing by the Depositor, in one or more
Eligible Investments bearing interest or sold at a discount. If the Depositor
shall have failed to give investment directions to the Trustee then the Trustee
shall invest in money market funds described in Section 7.07(i); to be
redeemable without penalty no later than the Business Day immediately preceding
the next Distribution Date. The bank serving as Trustee or any affiliate thereof
may be the obligor on any investment which otherwise qualifies as an Eligible
Investment. No investment in any Account shall mature later than the Business
Day immediately preceding the next Distribution Date.
(b) If any amounts are needed for disbursement from any Account held by
the Trustee and sufficient uninvested funds are not available to make such
disbursement, the Trustee shall cause to be sold or otherwise converted to cash
a sufficient amount of the investments in such Account. No investments will be
liquidated prior to maturity unless the proceeds thereof are needed for
disbursement.
(c) Subject to Section 10.01 hereof, the Trustee shall not in any way
be held liable by reason of any insufficiency in any Account held by the Trustee
resulting from any loss on any Eligible Investment included therein (except to
the extent that the bank serving as Trustee is the obligor thereon).
(d) All income or other gain from investments in any Account held by
the Trustee shall be deposited in such Account immediately on receipt, and any
loss resulting from such investments shall be charged to such Account, as
appropriate, subject to the provisions of Section 8.08(b) requiring that the
Master Servicer contribute funds in an amount equal to such loss in the case of
the Collection Account and permitting the Master Servicer to retain all income
or gain with respect to investments of funds in the Collection Account.
Section 7.06 Payment of Trust Expenses.
(a) The Trustee shall make demand on the Master Servicer to pay the
amount of the expenses of the Trust (other than payments of premiums to the
Certificate Insurer) (including Trustee's fees and expenses not covered by
Section 7.03(c)(iii)(D)) and the Master Servicer shall promptly pay such
expenses directly to the Persons to whom such amounts are due.
(b) The Master Servicer shall pay directly the reasonable fees and
expenses of counsel to the Trustee.
Section 7.07 Eligible Investments.
The following are Eligible Investments:
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(a) direct general obligations of, or obligations fully and
unconditionally guaranteed as to the timely payment of principal and interest
by, the United States or any agency or instrumentality thereof, provided such
obligations are backed by the full faith and credit of the United States,
Federal Housing Administration debentures, FHLMC senior debt obligations, and
FNMA senior debt obligations, but excluding any of such securities whose terms
do not provide for payment of a fixed dollar amount upon maturity or call for
redemption;
(b) Federal Housing Administration debentures;
(c) Consolidated senior debt obligations of any Federal Home Loan
Banks;
(d) Federal funds, certificates of deposit, time deposits, and bankers'
acceptances (having original maturities of not more than 365 days) of any
domestic bank, the short-term debt obligations of which have been rated A-1 or
better by Standard & Poor's and P-1 by Moody's;
(e) Deposits of any bank or savings and loan association (the long-term
deposit rating of which is Baa3 or better by Moody's and BBB by Standard &
Poor's) which has combined capital, surplus and undivided profits of at least
$50,000,000 which deposits are insured by the FDIC and held up to the limits
insured by the FDIC;
(f) Investment agreements approved by the Certificate Insurer provided:
1. The agreement is with a bank or insurance company which has
unsecured, uninsured and unguaranteed senior debt obligation rated Aa2 or better
by Moody's and AA or better by Standard & Poor's, or is the lead bank of a
parent bank holding company with an uninsured, unsecured and unguaranteed senior
debt obligation meeting such rating requirements, and
2. Moneys invested thereunder may be withdrawn without any penalty,
premium or charge upon not more than one day's notice (provided such notice may
be amended or canceled at any time prior to the withdrawal date), and
3. The agreement is not subordinated to any other obligations of such
insurance company or bank, and
4. The same guaranteed interest rate will be paid on any future
deposits made pursuant to such agreement, and
5. The Trustee receives an opinion of counsel that such agreement is
an enforceable obligation of such insurance company or bank;
(g) Repurchase agreements collateralized by securities described in (a)
above with any registered broker/dealer subject to the Securities Investors
Protection Corporation's jurisdiction and subject to applicable limits therein
promulgated by Securities Investors Protection Corporation or any commercial
bank, if such broker/dealer or bank has an uninsured, unsecured and unguaranteed
short-term or long-term obligation rated P-1 or Aa2, respectively, or better by
Moody's and A-1+ or AA, respectively, or better by Standard & Poor's, provided:
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a. A master repurchase agreement or specific written
repurchase agreement governs the transaction, and
b. The securities are held free and clear of any lien by the
Trustee or an independent third party acting solely as agent for the
Trustee, and such third party is (a) a Federal Reserve Bank, (b) a bank
which is a member of the FDIC and which has combined capital, surplus
and undivided profits of not less than $125 million, or (c) a bank
approved in writing for such purpose by the Certificate Insurer, and
the Trustee shall have received written confirmation from such third
party that it holds such securities, free and clear of any lien, as
agent for the Trustee, and
c. A perfected first security interest under the Uniform
Commercial Code, or book entry procedures prescribed at 31 CFR 306.1 et
seq. or 31 CFR 350.0 et seq., in such securities is created for the
benefit of the Trustee, and
d. The repurchase agreement has a term of thirty days or less
and the Trustee will value the collateral securities no less frequently
than weekly and will liquidate the collateral securities if any
deficiency in the required collateral percentage is not restored within
two business days of such valuation, and
e. The fair market value of the collateral securities in
relation to the amount of the repurchase obligation, including
principal and interest, is equal to at least 106%.
(h) Commercial paper (having original maturities of not more than 270
days) rated in the highest short-term rating categories of Standard & Poor's and
Moody's; and
(i) Investments in no load money market funds rated AAAm or AAAm-G by
Standard & Poor's and Aaa by Moody's;
provided that no instrument described above shall evidence either the right to
receive (a) only interest with respect to the obligations underlying such
instrument or (b) both principal and interest payments derived from obligations
underlying such instrument and the interest and principal payments with respect
to such instrument provided a yield to maturity at par greater than 120% of the
yield to maturity at par of the underlying obligations; and provided, further,
that all instruments described hereunder shall mature at par on or prior to the
next succeeding Distribution Date unless otherwise provided in this Agreement
and that no instrument described hereunder may be purchased at a price greater
than par if such instrument may be prepaid or called at a price less than its
purchase price prior to stated maturity.
Section 7.08 Accounting and Directions by Trustee.
(a) On the Business Day after each Determination Date occurring on or
prior to the later to occur of the Class A-1 Certificate Termination Date, Class
A-2 Certificate Termination Date, Class A-3 Certificate Termination Date, Class
A-4 Certificate Termination Date and Class A-5 Certificate Termination Date, the
Trustee shall determine, no later than 12:00 noon on such Determination Date,
whether an Insured Payment will be required to be made by the Certificate
Insurer on the following Distribution Date. If the Trustee determines that an
Insured Payment will be required to be made by the Certificate Insurer on the
following Distribution Date then no later than 12:00 noon on the Business Day
immediately preceding the related Distribution Date the Trustee shall furnish
the Certificate Insurer and
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the Depositor with a completed Notice in the form set forth as Exhibit I hereto.
The Notice shall specify the amount of Insured Payment and shall constitute a
claim for an Insured Payment pursuant to the Certificate Insurance Policy.
(b) By 12:00 noon New York time, on the Business Day preceding each
Distribution Date (or such earlier period as shall be agreed by the Depositor
and the Trustee), the Trustee shall notify (subject to the terms of Section
10.03(j) hereof, based solely on information provided to the Trustee by the
Master Servicer) the Depositor, the Seller, the Certificate Insurer and each
Owner of the following information with respect to the next Distribution Date
(which notification may be given by facsimile or by telephone promptly confirmed
in writing):
(1) The aggregate amount then on deposit in the
Distribution Account;
(2) The Class A Distribution Amount, with respect to each
Class individually, and all Classes in the aggregate,
on the next Distribution Date;
(3) The amount of any Subordination Increase Amount;
(4) The amount of any Insured Payment to be made by the
Certificate Insurer on such Distribution Date;
(5) The application of the amounts described in clauses
(1), (3) and (4) preceding to the allocation and
distribution of the related Class A Distribution
Amounts on such Distribution Date in accordance with
Section 7.03 hereof;
(6) The Certificate Principal Balance of each Class of
Class A Certificates, the aggregate amount of the
principal of each Class of Class A Certificates to be
paid on such Distribution Date and the remaining
Certificate Principal Balance of each Class of Class
A Certificates following any such payment;
(7) The amount, if any, of any Realized Losses for the
related Due Period; and
(8) The amount of any Subordination Reduction Amount.
Section 7.09 Reports by Trustee to Owners and Certificate Insurer.
(a) On each Distribution Date the Trustee shall report in writing to
the Depositor, each Owner, the Certificate Insurer, the Underwriters, Standard &
Poor's and Moody's:
(i) the amount of the related distribution to Owners of each
Class of Certificates allocable to principal, separately identifying
the aggregate amount of any principal prepayments included therein, any
principal portion of any Carry Forward Amount included in such
distribution and any remaining principal portion of any Carry Forward
Amount after giving effect to such distribution;
(ii) the amount of such distribution to Class A
Certificateholders of such Class of Certificates allocable to interest,
any interest portion of any Carry Forward Amount included in such
distribution, any remaining interest portion of any Carry Forward
Amount after giving effect
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to such distribution, any amount paid on account of any outstanding
Basis Risk Carryover Amount and any remaining Basis Risk Carryover
Amount after giving effect to such distribution;
(iii) the Certificate Principal Balance of each Class of Class A
Certificates after giving effect to the distribution of principal on
such Distribution Date;
(iv) the aggregate Certificate Principal Balance for the
following Distribution Date;
(v) the related amount of the Servicing Fees paid to or retained
by the Master Servicer;
(vi) the Pass-Through Rate for each such Class of Class A
Certificates with respect to the current Due Period;
(vii) the amount of P&I Advances and Servicing Advances, stated
separately, included in the distribution on such Distribution Date and
the aggregate amount of P&I Advances and Servicing Advances, stated
separately, outstanding as of the close of business of such
Distribution Date;
(viii) 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;
(ix) 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;
(x) the total number and principal balance of any REO Properties
as of the close of business on the Determination Date preceding such
Distribution Date;
(xi) the amount of any Insured Payment included in the amounts
distributed to the holders of each Class of the Class A Certificates on
such Payment Date;
(xii) the aggregate loan balance of all Mortgage Loans and the
aggregate loan balance of the Mortgage Loans in each Loan Group after
giving effect to any payment of principal on such Distribution Date;
(xiii) the Subordinated Amount and Subordination Deficit for each
Loan Group, if any, remaining after giving effect to all distributions
and transfers on such Distribution Date;
(xiv) based upon information furnished by the Master Servicer such
information as may be required by Section 6049(d)(7)(C) of the Code and
the regulations promulgated thereunder to assist the holders of the
Class A Certificates in computing their market discount;
(xv) the total of any Substitution Adjustments or Loan Purchase
Price amounts included in such distribution with respect to each Loan
Group;
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(xvi) the weighted average Mortgage Rate of the Mortgage Loans
with respect to each Loan Group; and
(xvii) such other information as the Certificate Insurer may
reasonably request with respect to delinquent Mortgage Loans.
The Master Servicer shall provide to the Trustee the information
described in Section 8.08(d)(iii) and in clause (b) below no later than the
Determination Date to enable the Trustee to perform its reporting obligations
under this Section, and such obligations of the Trustee under this Section are
conditioned upon such information being received and the information provided
shall be based solely upon information contained in the monthly servicing report
provided by the Master Servicer to the Trustee pursuant to Section 8.01 hereof.
(b) The Master Servicer shall furnish to the Trustee and to the
Certificate Insurer, during the term of this Agreement, such periodic, special,
or other reports or information not specifically provided for herein, as any be
necessary, reasonable, or appropriate with respect to the Trustee or the
Certificate Insurer, as the case may be, or otherwise with respect to the
purposes of this Agreement, all such reports or information to be provided by
and in accordance with such applicable instructions and directions as the
Trustee or the Certificate Insurer may reasonably require; provided, that the
Master Servicer shall be entitled to be reimbursed by the requesting party for
the fees and actual expenses associated with providing such reports, if such
reports are not generally produced in the ordinary course of business.
Section 7.10 Reports by Trustee.
(a) The Trustee shall report to the Depositor, the Seller, the
Underwriters, the Certificate Insurer and each Owner, with respect to the amount
on deposit in the Distribution Account, the amount therein relating to each
Group and the identity of the investments included therein, as the Depositor,
the Seller or the Certificate Insurer may from time to time request. Without
limiting the generality of the foregoing, the Trustee shall, at the request of
the Depositor, the Seller or the Certificate Insurer transmit promptly to the
Depositor, the Seller and the Certificate Insurer copies of all accountings of
receipts in respect of the Mortgage Loans furnished to it by the Master Servicer
and shall notify the Seller and the Certificate Insurer if any Monthly
Remittance Amount has not been received by the Trustee when due.
(b) The Trustee shall report to the Certificate Insurer and each Owner
with respect to any written notices it may from time to time receive which
provide an Authorized Officer with actual knowledge that any of the statements
set forth in Section 3.04(b) hereof are inaccurate.
Section 7.11 Preference Payments.
The Certificate Insurer will pay any Insured Payment that is a
Preference Amount on the Business Day following receipt on a Business Day by the
Certificate Insurer of (i) a certified copy of such order, (ii) an opinion of
counsel satisfactory to the Certificate Insurer that such order is final and not
subject to appeal, (iii) an assignment in such form as is reasonably required by
the Certificate Insurer, irrevocably assigning to the Certificate Insurer all
rights and claims of the Owners relating to or arising under the Class A
Certificates against the debtor which made such Preference Amount or otherwise
with respect to such Preference Amount and (iv) appropriate instruments to
effect the appointment of the Certificate Insurer as agent for such owner in any
legal proceeding related to such Preference Amount, such
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instruments being in a form satisfactory to the Certificate Insurer, provided
that if such documents are received after 12:00 noon New York City time on such
Business Day, they will be deemed to be received on the following Business Day.
Such payment shall be disbursed to the receiver, conservator,
debtor-impossession or trustee in bankruptcy named in the Order and not to the
Trustee or any Owner of Class A Certificate directly (unless an Owner of a Class
A Certificate has previously paid such amount to the receiver, conservator,
debtor-in-possession or trustee in bankruptcy named in the Order, in which case
such payment shall be disbursed to the Trustee for distribution to such Owner
upon proof of such payment reasonably satisfactory to the Certificate Insurer).
Each Owner of a Class A Certificate, by its purchase of Class A
Certificates, the Master Servicer and the Trustee hereby agree that the
Certificate Insurer may at any time during the continuation of any proceeding
relating to a preference claim direct all matters relating to such preference
claim, including, without limitation, the direction of any appeal of any order
relating to such preference claim and the posting of any surety or performance
bond pending any such appeal. In addition and without limitation of the
foregoing, the Certificate Insurer shall be subrogated to the rights of the
Master Servicer, the Trustee and the Owner of each Class A Certificate in the
conduct of any such preference claim, including, without limitation, all rights
of any party to an adversary proceeding action with respect to any court order
issued in connection with any such preference claim.
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ARTICLE VIII
SERVICING AND ADMINISTRATION
OF MORTGAGE LOANS
Section 8.01 Master Servicer and Sub-Servicers.
Acting directly or through one or more Sub-Servicers as provided in
Section 8.03, the Master Servicer shall service and administer the Mortgage
Loans in accordance with this Agreement and the servicing standards set forth in
the FNMA Guide and shall have full power and authority, acting alone, to do or
cause to be done any and all things in connection with such servicing and
administration which it may deem in its reasonable opinion, necessary or
desirable. It is the intent of the parties hereto that the Master Servicer shall
have all of the servicing obligations hereunder which a lender would have under
the FNMA Guide (as such provisions relate to second lien mortgages); provided,
however, that to the extent that such standards, such obligations or the FNMA
Guide are amended by FNMA after the date hereof and the effect of such amendment
would be to impose upon the Master Servicer any material additional costs or
other burdens relating to such servicing obligations, the Master Servicer may,
at its option, determine not to comply with such amendment.
Subject to Section 8.03 hereof, the Master Servicer may, and is hereby
authorized to, perform any of its servicing responsibilities with respect to all
or certain of the Mortgage Loans through a Sub-Servicer as it may from time to
time designate, but no such designation of a Sub-Servicer shall serve to release
the Master Servicer from any of its obligations under this Agreement. Such
Sub-Servicer shall have all the rights and powers of the Master Servicer with
respect to such Mortgage Loans under this Agreement.
Without limiting the generality of the foregoing, but subject to
Sections 8.13 and 8.14, the Master Servicer in its own name or in the name of a
Sub-Servicer may be authorized and empowered pursuant to a power of attorney
executed and delivered by the Trustee to execute and deliver, and may be
authorized and empowered by the Trustee, to execute and deliver, on behalf of
itself, the Owners and the Trustee or any of them, (i) any and all instruments
of satisfaction or cancellation or of partial or full release or discharge and
all other comparable instruments with respect to the Mortgage Loans and with
respect to the Mortgaged Properties, and (ii) to institute foreclosure
proceedings or obtain a deed in lieu of foreclosure so as to effect ownership of
any Mortgaged Property in the name of the Trustee; provided, however, [that to
the extent any instrument described in clause (i) preceding would be delivered
by the Master Servicer outside of its usual procedures for mortgage loans held
in its own portfolio, the Master Servicer shall, prior to executing and
delivering such instrument, obtain the prior written consent of the Certificate
Insurer, and provided further, however,] that Section 8.14(a) shall constitute
an authorization from the Trustee to the Master Servicer to execute an
instrument of satisfaction (or assignment of mortgage without recourse) with
respect to any Mortgage Loan paid in full (or with respect to which payment in
full has been escrowed). The Trustee shall execute any documentation furnished
to it by the Master Servicer for recordation by the Master Servicer in the
appropriate jurisdictions as shall be necessary to effectuate the foregoing.
Subject to Sections 8.13 and 8.14, the Trustee shall execute any authorizations
and other documents as the Master Servicer or such Sub-Servicer shall reasonably
request that are furnished to the Trustee to enable the Master Servicer and such
Sub-Servicer to carry out their respective servicing and administrative duties
hereunder.
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The Master Servicer shall give prompt notice to the Trustee and the
Certificate Insurer of any action, of which the Master Servicer has actual
knowledge, to (i) assert a claim against the Trust or (ii) assert jurisdiction
over the Trust.
Servicing Advances incurred by the Master Servicer or any Sub-Servicer
in connection with the servicing of the Mortgage Loans (including any penalties
in connection with the payment of any taxes and assessments or other charges) on
any Mortgaged Property shall be recoverable by the Master Servicer or such
Sub-Servicer to the extent described in Section 8.09(b) hereof.
Section 8.02 Collection of Certain Mortgage Loan Payments.
The Master Servicer shall use reasonable efforts to collect all
payments called for under the terms and provisions of the Mortgage Loans, and
shall, to the extent such procedures shall be consistent with this Agreement and
the terms and provisions of any applicable Insurance Policy, follow collection
procedures for all Mortgage Loans at least as rigorous as those described in the
FNMA Guide. Consistent with the foregoing, the Master Servicer may in its
discretion waive or permit to be waived any late payment charge, prepayment
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 hereunder as servicing compensation. In the event the Master
Servicer shall consent to the deferment of the due dates for payments due on a
Note, the Master Servicer shall nonetheless make payment of any required P&I
Advance with respect to the payments so extended to the same extent as if such
installment were due, owing and Delinquent and had not been deferred, and shall
be entitled to reimbursement therefor in accordance with Section 8.09(a) hereof.
Section 8.03 Sub-Servicing Agreements Between Master Servicer and
Sub-Servicers.
The Master Servicer may enter into Sub-Servicing Agreements for any
servicing and administration of Mortgage Loans with one or more institutions
that are in compliance with the laws of each state necessary to enable each of
them to perform their obligations under such Sub-Servicing Agreements and either
(x) is NF Investments, Inc., (y) has (i) been designated an approved
seller-servicer by FHLMC or FNMA and (ii) has equity of at least $1,500,000, as
determined in accordance with generally accepted accounting principles or (z) is
a Master Servicer Affiliate. The Master Servicer shall give notice to the
Trustee, the Certificate Insurer and the Rating Agencies of the appointment of
any Sub-Servicer. For purposes of this Agreement, the Master Servicer shall be
deemed to have received payments on Mortgage Loans when any Sub-Servicer has
received such payments. Each Sub-Servicer shall be required to service the
Mortgage Loans in accordance with this Agreement and any such Sub-Servicing
Agreement shall be consistent with and not violate the provisions of this
Agreement. Each Sub-Servicing Agreement shall provide that a successor Master
Servicer shall have the option to terminate such agreement without payment of
any termination fees if the original Master Servicer is terminated or resigns.
Section 8.04 Successor Sub-Servicers.
The Master Servicer shall be entitled to terminate any Sub-Servicing
Agreement in accordance with the terms and conditions of such Sub-Servicing
Agreement and to either itself directly service the
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related Mortgage Loans or enter into a Sub-Servicing Agreement with a successor
Sub-Servicer which qualifies under Section 8.03.
Section 8.05 Liability of Master Servicer; Indemnification.
(a) The Master Servicer shall not be relieved of its obligations under
this Agreement notwithstanding any Sub-Servicing Agreement or any of the
provisions of this Agreement relating to agreements or arrangements between the
Master Servicer and a Sub-Servicer 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 shall be
entitled to enter into any agreement with a Sub-Servicer for indemnification of
the Master Servicer by such Sub-Servicer and nothing contained in such
Sub-Servicing Agreement shall be deemed to limit or modify this Agreement.
(b) The Master Servicer (except the Trustee if it is required to
succeed the Master Servicer hereunder) agrees to indemnify and hold the Trustee,
the Certificate Insurer and each Owner harmless against any and all claims,
losses, penalties, fines, forfeitures, legal fees and related costs, Judgments,
and any other costs, fees and expenses that the Trustee, the Certificate Insurer
and any Owner may sustain in any way related to the failure of the Master
Servicer to perform its duties and service the Mortgage Loans in compliance with
the terms of this Agreement. The Master Servicer shall immediately notify the
Trustee, the Certificate Insurer and each Owner if a claim is made by a third
party with respect to this Agreement, and the Master Servicer shall assume (with
the consent of the Trustee and the Certificate Insurer) the defense of any such
claim and pay all expenses in connection therewith, including reasonable counsel
fees, and promptly pay, discharge and satisfy any judgment or decree which may
be entered against the Master Servicer, the Trustee, the Certificate Insurer
and/or Owner in respect of such claim. The Trustee may, if necessary, reimburse
the Master Servicer from amounts otherwise distributable on the Class R
Certificates for all amounts advanced by it pursuant to the preceding sentence
except when the claim relates directly to the failure of the Master Servicer to
service and administer the Mortgage Loans in compliance with the terms of this
Agreement. The provisions of this Section 8.05 shall survive the termination of
this Agreement and the payment of the outstanding Certificates.
(c) Neither the Depositor, the Master Servicer, nor any of the
directors, officers, employees or agents of the Depositor or the Master Servicer
shall be under any liability to the Trust Fund or the Owners for any action
taken, or for refraining from the taking of any action, in good faith pursuant
to this Agreement, or for errors in judgment; provided, however, that this
provision shall not protect the Depositor or Master Servicer or any such Person
against any breach of warranties or representations made herein, or against any
specific liability imposed on the Master Servicer for a breach of the servicing
standards set forth in the FNMA Guide, or against any liability which would
otherwise be imposed by reason of its respective willful misfeasance, bad faith,
fraud or negligence in the performance of its duties or by reasons of negligent
disregard of its respective obligations or duties hereunder.
[The Depositor, the Master Servicer, and any director, officer,
employee or agent of the Depositor or the Master Servicer, may rely in good
faith on any document of any kind which, prima face, is properly executed and
submitted by any appropriate Person with respect to any matters arising
hereunder. The Depositor, the Master Servicer and any director, officer,
employee or agent of the
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Depositor or the Master Servicer shall be indemnified and held harmless by the
Trust Fund against any loss, liability or expense incurred in connection with
any legal action relating to this Agreement or the Certificates, other than any
loss, liability or expense incurred in connection with any legal action incurred
by reason of its respective misfeasance, bad faith, fraud or negligence, a
breach of a representation or warranty hereunder or (in the case of the Master
Servicer) a breach of the servicing standards set forth in the FNMA Guide in the
performance of its respective duties or by reason of negligent disregard or its
respective obligations or duties hereunder. Neither the Depositor nor the Master
Servicer shall be under any obligation to appear in, prosecute or defend any
legal action unless such action is related to its respective duties under this
Agreement and in its opinion does not expose it to any expense or liability;
provided, however, that the Depositor or the Master Servicer may in its
discretion undertake any action related to its obligations hereunder which it
may deem necessary or desirable with respect to this Agreement and the rights
and duties of the parties hereto and the interests of the Certificateholders
hereunder. In such event, the legal expenses and costs of such action and any
liability resulting therefrom (except any liability related to the Master
Servicer's obligations under Section 8.01) shall be expenses, costs and
liabilities of the Trust Fund, and the Depositor and the Master Servicer shall
be entitled to be reimbursed therefor from the Collection Account as provided in
Section 8.08(d)(i)(D) of this Agreement.]
Section 8.06 No Contractual Relationship Between Sub-Servicer,
Trustee or the Owners.
Any Sub-Servicing Agreement and any other transactions or services
relating to the Mortgage Loans involving a Sub-Servicer shall be deemed to be
between the Sub-Servicer and the Master Servicer alone and the Trustee, the
Certificate Insurer and the Owners shall not be deemed parties thereto and shall
have no claims, rights, obligations, duties or liabilities with respect to any
Sub-Servicer except as set forth in Section 8.07.
Section 8.07 Assumption or Termination of Sub-Servicing Agreement
by Trustee.
In connection with the assumption of the responsibilities, duties and
liabilities and of the authority, power and rights of the Master Servicer
hereunder by the Trustee pursuant to Section 8.20, it is understood and agreed
that the Master Servicer's rights and obligations under any Sub-Servicing
Agreement then in force between the Master Servicer and a Sub-Servicer shall be
assumed simultaneously by the Trustee without act or deed on the part of the
Trustee; provided, however, that the successor Master Servicer may terminate the
Sub-Servicer as provided in Section 8.03.
The terminated Master Servicer shall, upon the reasonable request of
the Trustee, but at the expense of the Master Servicer, deliver to the assuming
party documents and records relating to each Sub-Servicing Agreement and an
accounting of amounts collected and held by it and otherwise use its best
reasonable efforts to effect the orderly and efficient transfer of the
Sub-Servicing Agreements to the assuming party.
Section 8.08 Collection Account.
(a) The Master Servicer shall establish and maintain [with the Trustee]
the Collection Account to be held as an Eligible Account. The Collection Account
shall be entitled "Bankers Trust Company of California, N.A., as Trustee under
the Pooling and Servicing Agreement dated as of January ___, 1997". The Master
Servicer shall notify the Trustee (who will in turn notify the Owners) and the
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Certificate Insurer if there is a change in the name, account number or
institution holding the Collection Account.
Subject to subsection (c) below, the Master Servicer shall deposit all
receipts pursuant to subsection (c) below and related to the Mortgage Loans to
the Collection Account on a daily basis (but no later than the first Business
Day after receipt).
(b) All funds in the Collection Account shall be held (i) uninvested or
(ii) invested in Eligible Investments. Any investments of funds in the
Collection Account shall mature or be withdrawable at par on or prior to the
immediately succeeding Monthly Remittance Date. The Collection Account shall be
held in trust in the name of the Trustee for the benefit of the Owners. Any
investment earnings on funds held in the Collection Account shall be for the
account of the Master Servicer and may only be withdrawn from the Collection
Account by the Master Servicer immediately following the remittance of the
Monthly Remittance Amount (and the Total Monthly Excess Spread included therein)
by the Master Servicer. Prior to each Monthly Remittance Date, the Master
Servicer shall deposit into the Collection Account the net amount of any
investment losses on such funds during the related Due Period. Any references
herein to amounts on deposit in the Collection Account shall refer to amounts
net of such investment earnings.
(c) The Master Servicer shall deposit to the Collection Account on the
Business Day after receipt all principal and interest collections on the
Mortgage Loans received after the Cut-Off Date including any Prepayments and Net
Liquidation Proceeds, other recoveries or amounts related to the Mortgage Loans
received by the Master Servicer and any income from REO Properties, but net of
(i) the Servicing Fee with respect to each Mortgage Loan and other servicing
compensation to the Master Servicer as permitted by Section 8.15 hereof, (ii)
principal due and interest on any Mortgage Loan on or prior to the Cut-Off Date,
(iii) Net Liquidation Proceeds to the extent such Net Liquidation Proceeds
exceed the sum of (I) the Loan Balance of the related Mortgage Loan immediately
prior to liquidation, (II) accrued and unpaid interest on such Mortgage Loan
(net of the Servicing Fee) to the date of such liquidation, and (III) any
Realized Losses incurred during the related Due Period, (iv) reimbursements for
P&I Advances and (v) reimbursements for amounts deposited in the Collection
Account representing payments of principal and/or interest on a Note by a
Mortgagor which are subsequently returned by a depository institution as unpaid
(all such net amount herein referred to as "Daily Collections").
(d) (i) The Master Servicer may make withdrawals for its own account
from the amounts on deposit in the Collection Account, with respect to each
Mortgage Loan Group, for the following purposes:
(A) to withdraw investment earnings on amounts on deposit in the
Collection Account:
(B) [to reimburse itself pursuant to Section 8.09 for
unrecovered P&I Advances and Servicing Advances;]
[(C) to the extent not reimbursed or paid pursuant to any other
clause of this Section 8.08(d)(i), to reimburse or pay the
Master Servicer, the Trustee and/or the Depositor for unpaid
items incurred by or on behalf of such Person pursuant to any
provision of this Agreement pursuant to which such Person is
entitled to reimbursement or payment
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from the Trust Fund, in each case only to the extent
reimbursable under such Section, it being acknowledged that
this clause (D) shall not be deemed to modify the substance of
any such Section, including the provisions of such Section
that set forth the extent to which one of the foregoing
Persons is or is not entitled to payment or reimbursement;]
(D) to withdraw amounts that have been deposited to the
Collection Account in error; and
(E) to clear and terminate the Collection Account following the
termination of the Trust pursuant to Article IX.
(ii) The Master Servicer shall (a) remit to the Trustee for deposit in
the Distribution Account by wire transfer, or otherwise make funds available in
immediately available funds, without duplication, the Daily Collections
allocable to a Due Period not later than the related Monthly Remittance Date and
Loan Purchase Prices and Substitution Adjustments two Business Days following
the related purchase or substitution, and (b) no later than the Determination
Date immediately preceding the related Distribution Date, deliver to the Trustee
and the Certificate Insurer a monthly servicing report, with respect to each
Mortgage Loan Group, containing the following information: (i) principal and
interest collected, scheduled interest, Liquidated Loans, summary and detailed
delinquency reports, Liquidation Proceeds and other similar information
concerning the servicing of the Mortgage Loans and (ii) the information
described in Section 7.09(b). In addition, the Master Servicer shall inform the
Trustee and the Certificate Insurer on each Monthly Remittance Date, with
respect to each Mortgage Loan Group, of the amounts of any Loan Purchase Prices
or Substitution Adjustments so remitted during the related Due Period.
Section 8.09 P&I Advances and Servicing Advances.
(a) If the amount on deposit in the Distribution Account as of any
Monthly Remittance Date is less than the sum of (I) the Interest Remittance
Amount on such Monthly Remittance Date and (II) the Principal Remittance Amount
on such Monthly Remittance Date, the Master Servicer shall remit to the Trustee
for deposit into the Distribution Account a sufficient amount of its own funds
to make the total amount remitted to the Trustee equal to such sum. Such amounts
of the Master Servicer's own funds so deposited are "P&I Advances", including
but not limited to any amount advanced due to the invocation by a Mortgagor of
the relief provisions provided by the Soldiers' and Sailors' Civil Relief Act of
1940.
The Master Servicer shall be permitted to reimburse itself for any P&I
Advances paid from the Master Servicer's own funds from collections on any
Mortgage Loan in the related Mortgage Loan Group deposited to the Collection
Account subsequent to the related Due Period, and shall deposit into the
Collection Account with respect thereto (i) collections from the Mortgagor whose
Delinquency gave rise to the shortfall which resulted in such P&I Advance and
(ii) Net Liquidation Proceeds recovered on account of the related Mortgage Loan
to the extent of the amount of P&I Advances related thereto. If not recovered
from the related Mortgagor or the related Net Liquidation Proceeds, the Master
Servicer shall recover P&I Advances pursuant to Section 7.03(c)(ii)(C).
Notwithstanding the foregoing, the Master Servicer shall not be
obligated to make a P&I Advance as to any Mortgage Loan if the Master Servicer
determines that such P&I Advance, if made,
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would be a Nonrecoverable Advance. The Master Servicer shall give written notice
of such determination to the Trustee and the Certificate Insurer; and the
Trustee shall promptly furnish a copy of such notice to the Owners; provided,
that the Master Servicer shall be entitled to recover any unreimbursed P&I
Advances from the aforesaid Liquidation Proceeds prior to the payment of the
Liquidation Proceeds to any other party to this Agreement.
(b) The Master Servicer will pay all "out-of-pocket" costs and
expenses incurred in the performance of its servicing obligations, (each such
expenditure, a "Servicing Advance") including, but not limited to, the cost of
(i) Preservation Expenses, (ii) any enforcement or judicial proceedings,
including foreclosures, (iii) the management and liquidation of REO Property and
(iv) advances required by Section 8.13(a), but the Master Servicer shall not be
obligated to make any such Servicing Advance if the Master Servicer determines
that such Servicing Advance, if made, would be a Nonrecoverable Advance. The
Master Servicer may recover Servicing Advances (x) from the Mortgagors to the
extent permitted by the Mortgage Loans or, if not recovered from the Mortgagor
on whose behalf such Servicing Advance was made, from Liquidation Proceeds
realized upon the liquidation of the related Mortgage Loan and (y) as provided
in Section 7.03(c)(ii)(C). The Master Servicer shall be entitled to recover the
Servicing Advances from the aforesaid Liquidation Proceeds prior to the payment
of the Liquidation Proceeds to any other party to this Agreement. Except as
provided in the previous sentence, in no case may the Master Servicer recover
Servicing Advances from the principal and interest payments on any Mortgage Loan
or from any amounts relating to any other Mortgage Loan except as provided in
Section 7.03(c)(ii)(C).
Section 8.10 Compensating Interest: Repurchase of Mortgage Loans.
(a) If a Prepayment of a Mortgage Loan occurs during any Prepayment
Period which gives rise to a Prepayment Interest Shortfall or if the amount
received prior to the related Determination Date with respect to a Simple
Interest Loan represents less than a full month's interest due during the
related Due Period, any difference between the interest collected from the
Mortgagor and the full month's interest at the Mortgage Rate less the Servicing
Fee ("Compensating Interest") that is due shall be deposited by the Master
Servicer (but not in excess of one-half of the Servicing Fee for the related Due
Period on such Mortgage Loan) to the Collection Account on the related Monthly
Remittance Date and shall be included in the Monthly Remittance to be made
available to the Trustee on such Monthly Remittance Date.
(b) The Master Servicer, and in the absence of the exercise thereof
by the Master Servicer, the Certificate Insurer, has the right and the option,
but not the obligation, to purchase for its own account any Mortgage Loan which
becomes Delinquent, in whole or in part, as to four consecutive monthly
installments or any Mortgage Loan as to which enforcement proceedings have been
brought by the Master Servicer pursuant to Section 8.13; provided, however, that
the Master Servicer or the Certificate Insurer, as the case may be, may not
purchase any such Mortgage Loan unless the Master Servicer or the Certificate
Insurer, as the case may be, has delivered to the Trustee an opinion of counsel
experienced in federal income tax matters acceptable to the Master Servicer or
the Certificate Insurer, as the case may be, and the Trustee to the effect that
such a purchase would not constitute a Prohibited Transaction for the Trust or
otherwise subject the Trust to tax and would not jeopardize the status of the
Trust as a REMIC. Any such Mortgage Loan so purchased shall be purchased by the
Master Servicer or the Certificate Insurer as the case may be on a Monthly
Remittance Date at a
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purchase price equal to the Loan Purchase Price thereof, which purchase price
shall be deposited in the Collection Account.
(c) The Net Liquidation Proceeds from the disposition of any REO
Property shall be deposited in the Collection Account and remitted to the
Trustee as part of the Daily Collections remitted by the Master Servicer to the
Trustee.
Section 8.11 Maintenance of Insurance.
(a) The Master Servicer on behalf of the Trustee, as mortgagee, shall
use its reasonable efforts in accordance with the servicing standards set forth
in the FNMA Guide to cause the related Mortgagor to maintain for each Mortgage
Loan (other than any Mortgage Loan as to which the related Mortgaged Property
has become an REO Property), and if the Mortgagor does not so maintain, shall
itself maintain (subject to the provisions of this Agreement concerning
Nonrecoverable dances) to the extent the Trustee as mortgagee has an insurable
interest and to the extent available at commercially reasonable rates (A) fire
and hazard insurance with extended coverage on the related Mortgaged Property in
an amount which is at least equal to the lesser of (i) 100% of the then "full
replacement cost" of the improvements and equipment (excluding foundations,
footings and excavation costs), without deduction for physical depreciation, and
(ii) the outstanding principal balance of the related Mortgage Loan or such
other amount as is necessary to prevent any reduction in such policy by reason
of the application of co-insurance and to prevent the Trustee thereunder from
being deemed to be a co-insurer, in each case with a replacement cost rider and
(B) such other insurance as provided in the related Mortgage Loan. The Master
Servicer shall maintain, to the extent available at commercially reasonable
rates, fire and hazard insurance from a Qualified Insurer with extended coverage
on each REO Property in an amount which is at least equal to 100% of the then
"full replacement cost" of the improvements and equipment (excluding
foundations, footings and excavation costs), without deduction for physical
depreciation. The Master Servicer shall maintain, to the extent available at
commercially reasonable rates, from a Qualified Insurer, with respect to each
REO Property such other insurance as provided in the related Mortgage Loan. In
the case of any insurance otherwise required to be maintained pursuant to this
Section that is not being so maintained because the Master Servicer has deemed
that it is not available at commercially reasonable rates, the Master Servicer
shall deliver an Officer's Certificate to the Trustee detailing the steps that
the Master Servicer took in seeking such insurance and the factors which led to
its determination that such insurance is not so available. Any amounts collected
by the Master Servicer under any such policies (other than amounts to be applied
to the restoration or repair of the related Mortgaged Property or amounts to be
released to the Borrower in accordance with the terms of the related Mortgage)
shall be deposited into the Collection Account pursuant to Section 8.08(c),
subject to withdrawal pursuant to Section 8.08(d). Any cost incurred by the
Master Servicer in maintaining any such insurance shall not, for the purpose of
calculating distributions to Owners, be added to the unpaid principal balance of
the related Mortgage Loan, notwithstanding that the terms of such Mortgage Loan
so permit. It is understood and agreed that no earthquake or other additional
insurance other than flood insurance is to be required of any Mortgagor or to be
maintained by the Master Servicer other than pursuant to the terms of the
related Mortgage, Note or other Mortgage Loan documents and pursuant to such
applicable laws and regulations as shall at any time be in force and as shall
require such additional insurance. If the Mortgaged Property is located in a
federally designated special flood hazard area, the Master Servicer will use its
reasonable efforts in accordance with the servicing standards set forth in the
FNMA Guide to cause the related Mortgagor to maintain or will itself obtain
(subject to the provisions of this Agreement concerning
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Nonrecoverable Advances) flood insurance in respect thereof to the extent
available at commercially reasonable rates. Such flood insurance shall be in an
amount equal to the lesser of (i) the unpaid principal balance of the related
Mortgage Loan and (ii) the maximum amount of such insurance required by the
terms of the related Mortgage and as is available for the related property under
the national flood insurance program (assuming that the area in which such
property is located is participating in such program). If an REO Property is
located in a federally designated special flood hazard area, the Master Servicer
will obtain flood insurance in respect thereof providing substantially the same
coverage as described in the preceding sentences. If at any time during the term
of this Agreement a recovery under a flood or fire and hazard insurance policy
in respect of an REO Property is not available but would have been available if
such insurance were maintained thereon in accordance with the standards applied
to Mortgaged Properties described herein, the Master Servicer shall either (i)
immediately deposit into the Collection Account from its own funds the amount
that would have been recovered or (ii) apply to the restoration and repair of
the property from its own funds the amount that would have been recovered, if
such application would be consistent with the servicing standard set forth in
Section 8.01; provided, however, that the Master Servicer shall not be
responsible for any shortfall in insurance proceeds resulting from an insurer's
refusal or inability to pay a claim. Costs of the Master Servicer of maintaining
insurance policies pursuant to this Section 8.11 shall be paid by the Master
Servicer as a Servicing Advance and shall be reimbursable to the Master
Servicer.
The Master Servicer agrees to prepare and present, on behalf of itself,
the Trustee and the Owners, claims under each related insurance policy
maintained pursuant to this Section 8.11 in a timely fashion in accordance with
the terms of such policy and to take such reasonable steps as are necessary to
receive payment or to permit recovery thereunder.
The Master Servicer shall require that all insurance policies required
hereunder shall name the Trustee or the Master Servicer, on behalf of the
Trustee as the mortgagee, as loss payee and that all such insurance policies
require that 30 days' notice be given to the Master Servicer before termination
to the extent required by the related Mortgage, Note, or other Mortgage Loan
documents.
(b) (I) If the Master Servicer obtains and maintains a blanket
insurance policy with a Qualified Insurer at its own expense insuring against
fire and hazard losses or other required insurance on all of the Mortgage Loans,
it shall conclusively be deemed to have satisfied its obligations concerning the
maintenance of such insurance coverage set forth in Section 8.11(a), it being
understood and agreed that such policy may contain a deductible clause, in which
case the Master Servicer shall, in the event that (i) there shall not have been
maintained on one or more of the related Mortgaged Properties a policy otherwise
complying with the provisions of Section 8.11(a), and (ii) there shall have been
one or more losses which would have been covered by such a policy had it been
maintained, immediately deposit into the Collection Account from its own funds
the amount not otherwise payable under the blanket policy because of such
deductible clause to the extent that any such deductible exceeds the deductible
limitation that pertained to the related Mortgage Loan, or, in the absence of
such deductible limitation, the deductible limitation which is consistent with
the servicing standard set forth in Section 8.01. In connection with its
activities as Master Servicer hereunder, the Master Servicer agrees to prepare
and present, on behalf of itself, the Trustee and Owners, claims under any such
blanket policy which it maintains in a timely fashion in accordance with the
terms of such policy and to take such reasonable steps as are necessary to
receive payment or permit recovery thereunder.
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(II) If the Master Servicer causes any Mortgaged Property or REO
Property to be covered by a master force placed insurance policy, which policy
is issued by a Qualified Insurer and provides no less coverage in scope and
amount for such Mortgaged Property or REO Mortgaged Property than the insurance
required to be maintained pursuant to Section 8.11(a), the Master Servicer shall
conclusively be deemed to have satisfied its obligations to maintain insurance
pursuant to Section 8.11(a). Such policy may contain a deductible clause, in
which case the Master Servicer, shall, in the event that (i) there shall not
have been maintained on the related Mortgaged Property or REO Property a policy
otherwise complying with the provisions of Section 8.11(a), and (ii) there shall
have been one or more losses which would have been covered by such a policy had
it been maintained, immediately deposit into the Collection Account from its own
funds the amount not otherwise payable under such policy because of such
deductible to the extent that any such deductible exceeds the deductible
limitation that pertained to the related Mortgage Loan, or, in the absence of
any such deductible limitation, the deductible limitation which is consistent
with the servicing standard set forth in Section 8.01.
Section 8.12 Due-on-Sale Clauses; Assumption and Substitution
Agreements.
When a Mortgaged Property has been or is about to be conveyed by the
Mortgagor, the Master Servicer shall, to the extent it has knowledge of such
conveyance or prospective conveyance, exercise its rights to accelerate the
maturity of the related Mortgage Loan under any "due-on-sale" clause contained
in the related Mortgage or Note; provided, however, that the Master Servicer
shall not exercise any such right if the "due-on-sale" clause, in the reasonable
belief of the Master Servicer, is not enforceable under applicable law. An
opinion of counsel to the foregoing effect shall conclusively establish the
reasonableness of such belief. ln such event, the Master Servicer shall make
reasonable efforts 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 Note and, unless prohibited by
applicable law or the Mortgage Documents, the Mortgagor remains liable thereon.
If the foregoing is not permitted under applicable law, the Master Servicer is
authorized 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 Note; provided,
however, that to the extent any such substitution of liability agreement would
be delivered by the Master Servicer outside of its usual procedures for mortgage
loans held in its own portfolio the Master Servicer shall, prior to executing
and delivering such agreement, obtain the prior written consent of the
Certificate Insurer. The Mortgage Loan, as assumed, shall conform in all
respects to the requirements, representations and warranties of this Agreement.
The Master Servicer shall notify the Trustee that any such assumption or
substitution agreement has been completed by forwarding to the Trustee the
original copy of such assumption or substitution agreement (indicating the File
to which it relates) which copy shall be added by the Trustee to the related
File and which shall, for all purposes, be considered a part of such File to the
same extent as all other documents and instruments constituting a part thereof.
The Master Servicer shall be responsible for recording any such assumption or
substitution agreements. In connection with any such assumption or substitution
agreement, the required monthly payment on the related Mortgage Loan shall not
be changed but shall remain as in effect immediately prior to the assumption or
substitution, the stated maturity or outstanding principal amount of such
Mortgage Loan shall not be changed nor shall any required monthly payments of
principal or interest be deferred or forgiven. Any fee collected by the Master
Servicer or the Sub-Servicer for consenting to any such conveyance or entering
into an assumption or substitution agreement shall be retained by or paid to the
Master Servicer as additional servicing compensation.
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Notwithstanding the foregoing paragraph or any other provision of this
Agreement, the Master Servicer shall not be deemed to be in default, breach or
any other violation of its obligations hereunder by reason of any assumption of
a Mortgage Loan by operation of law or any assumption which the Master Servicer
may be restricted by law from preventing, for any reason whatsoever.
Section 8.13 Realization Upon Defaulted Mortgage Loans; Inspection.
(a) The Master Servicer shall foreclose upon or otherwise comparably
effect the ownership in the name of the Trustee on behalf of the Trust of
Mortgaged Properties relating to defaulted Mortgage Loans as to which no
satisfactory arrangements can be made for collection of Delinquent payments and
which the Master Servicer has not purchased pursuant to Section 8.10(b) subject
to Section 8.09, in connection with such foreclosure or other conversion, the
Master Servicer shall exercise such of the rights and powers vested in it
hereunder, and use the same degree of care and skill in their exercise or use,
as prudent mortgage lenders would exercise or use under the circumstances in the
conduct of their own affairs and consistent with the servicing standards set
forth in the FNMA Guide, including, but not limited to, advancing funds for the
payment of taxes, amounts due with respect to Senior Liens, and insurance
premiums. Any amounts so advanced shall constitute "Servicing Advances" within
the meaning of Section 8.09(b) hereof. The Master Servicer shall sell any REO
Property within 23 months of its acquisition by the Trust, at such price as the
Master Servicer deems necessary to comply with this covenant unless the Trustee
obtains for the Certificate Insurer, Trustee and the Master Servicer an opinion
of counsel experienced in federal income tax matters acceptable to the
Certificate Insurer and the Trustee, addressed to the Certificate Insurer, the
Trustee and the Master Servicer, to the effect that the holding by the Trust of
such REO Property for any greater period will not result in the imposition of
taxes on "Prohibited Transactions" of the Trust or any REMIC therein as defined
in Section 860F of the Code or cause the Trust to fail to qualify as a REMIC
under the REMIC Provisions at any time that any Certificates are outstanding.
Notwithstanding the generality of the foregoing provisions, the Master Servicer
shall manage, conserve, protect and operate each REO Property for the Owners
solely for the purpose of its prompt disposition and sale in a manner which does
not cause such REO Property to fail to qualify as "foreclosure property" within
the meaning of Section 860G(a)(8) of the Code or result in the receipt by the
Trust of any income from "non-permitted assets" within the meaning of Section
860F(a)(2)(B) of the Code or any "net income from foreclosure property" which is
subject to taxation under the REMIC Provisions. Pursuant to its efforts to sell
such REO Property, the Master Servicer shall either itself or through an agent
selected by the Master Servicer protect and conserve such REO Property in the
same manner and to such extent as is customary in the locality where such REO
Property is located and may, incident to its conservation and protection of the
interests of the Owners, rent the same, or any part thereof, as the Master
Servicer deems to be in the best interest of the Owners for the period prior to
the sale of such REO Property. The Master Servicer shall take into account the
existence of any hazardous substances, hazardous wastes or solid wastes, as such
terms are defined in the Comprehensive Environmental Response Compensation and
Liability Act, the Resource Conservation and Recovery Act of 1976, or other
federal, state or local environmental legislation, on or under a Mortgaged
Property in determining whether to foreclose upon or otherwise comparably
convert the ownership of such Mortgaged Property. The Master Servicer shall not
take any such action with respect to any Mortgaged Property known by the Master
Servicer to contain such wastes or substances or to be within one mile of the
site of such wastes or substances, without the prior written consent of the
Certificate Insurer.
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(b) The Master Servicer shall determine, with respect to each defaulted
Mortgage Loan and in accordance with the procedures set forth in the FNMA Guide,
when it has recovered, whether through trustee's sale, foreclosure sale or
otherwise, all amounts it expects to recover from or on account of such
defaulted Mortgage Loan, whereupon such Mortgage Loan shall become a "Liquidated
Loan". After a Mortgage Loan has become a Liquidated Loan, the Master Servicer
shall promptly prepare and forward to the Depositor, the Trustee and the
Certificate Insurer a report detailing the Liquidation Proceeds received from
the Liquidated Loan, expenses incurred with respect thereto, and any loss
incurred in connection therewith.
(c) The Master Servicer shall not acquire any personal property
pursuant to this Section 8.13 unless either: (i) such personal property is
incident to real property (within the meaning of Section 856(e)(1) of the Code)
so acquired by the Master Servicer; or (ii) the Master Servicer shall have
obtained an opinion of counsel experienced in federal income tax matters
acceptable to the Certificate Insurer and the Trustee addressed to the
Certificate Insurer, the Trustee and the Master Servicer, to the effect that the
holding of such personal property as part of the Trust will not cause the
imposition of taxes on a Prohibited Transaction or cause either the Master REMIC
or the Subsidiary REMIC to fail to qualify as a REMIC under the REMIC
provisions.
Section 8.14 Trustee to Cooperate; Release of Files.
(a) Upon the payment in full of any Mortgage Loan (including any
liquidation of such Mortgage Loan through foreclosure or otherwise), or the
receipt by the Master Servicer of a notification that payment in full will be
escrowed in a manner customary for such purposes, the Master Servicer shall
deliver to the Trustee a completed FNMA "Request for Release of Documents" (FNMA
Form 2009). Upon receipt of such Request for Release of Documents, the Trustee
shall promptly release the related File, in trust, in its reasonable discretion
to (i) the Master Servicer, (ii) an escrow agent or (iii) any employee, agent or
attorney of the Trustee. Upon any such payment in full, or the receipt of such
notification that such funds have been placed in escrow, the Master Servicer is
authorized to give, as attorney-in-fact for the Trustee and the mortgagee under
the Mortgage which secured the Note, an instrument of satisfaction (or
assignment of Mortgage without recourse) regarding the Mortgaged Property
relating to such Mortgage, which instrument of satisfaction or assignment, as
the case may be, shall be delivered to the Person or Persons entitled thereto
against receipt therefor of payment in full, it being understood and agreed that
no expense incurred in connection with such instrument of satisfaction or
assignment, as the case may be, shall be chargeable to the Collection Account.
In lieu of executing any such satisfaction or assignment, as the case may be,
the Master Servicer may prepare and submit to the Trustee a satisfaction (or
assignment without recourse, if requested by the Person or Persons entitled
thereto) in form for execution by the Trustee with all requisite information
completed by the Master Servicer; in such event, the Trustee shall execute and
acknowledge such satisfaction or assignment, as the case may be, and deliver the
same with the related File, as aforesaid.
(b) From time to time and as appropriate in the servicing of any
Mortgage Loan, including, without limitation, foreclosure or other comparable
conversion of a Mortgage Loan or collection under any applicable Insurance
Policy, the Trustee shall (except in the case of the payment or liquidation
pursuant to which the related File is released to an escrow agent or an
employee, agent or attorney of the Trustee), upon request of the Master Servicer
and delivery to the Trustee of a receipt signed by an Authorized Officer of the
Master Servicer, release the related File to the Master Servicer and shall
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execute such documents as shall be necessary to the prosecution of any such
proceedings, including, without limitation, an assignment without recourse of
the related Mortgage to the Master Servicer; provided that there shall not be
released and unreturned at any one time more than 10% of the entire number of
Files. Such receipt shall obligate the Master Servicer to return the File to the
Trustee when the need therefor by the Master Servicer no longer exists unless
the Mortgage Loan shall be liquidated, in which case, upon receipt of the FNMA
"Liquidation Schedule" relating to such liquidation, the receipt shall be
released by the Trustee to the Master Servicer.
(c) The Master Servicer shall have the right to accept applications
of Mortgagors for consent to (i) partial releases of Mortgages, (ii)
alterations, (iii) removal, demolition or division of properties subject to
Mortgages and (iv) second mortgage subordination agreements. No application for
approval shall be considered by the Master Servicer unless: (x) the provisions
of the related Note and Mortgage have been complied with; (y) the Loan-to-Value
Ratio and debt-to-income ratio after any release does not exceed the maximum
Loan-to-Value Ratio and debt-to-income ratio established in accordance with the
underwriting standards of the Mortgage Loans and any increase in the
Loan-to-Value Ratio shall not exceed 15% unless approved in writing by the
Certificate Insurer; and (z) the lien priority of the related Mortgage is not
affected. Upon receipt by the Trustee of an Officer's Certificate executed on
behalf of the Master Servicer setting forth the action proposed to be taken in
respect of a particular Mortgage Loan and certifying that the criteria set forth
in the immediately preceding sentence have been satisfied, the Trustee shall
execute and deliver to the Master Servicer the consent or partial release so
requested by the Master Servicer. A proposed form of consent or partial release,
as the case may be, shall accompany any Officer's Certificate delivered by the
Master Servicer pursuant to this paragraph. The Master Servicer shall notify the
Certificate Insurer and the Rating Agencies if an application is approved under
clause (y) above without approval in writing by the Certificate Insurer.
Section 8.15 Servicing Compensation.
As compensation for its activities hereunder, the Master Servicer shall
be entitled to retain the amount of the Servicing Fee with respect to each
Mortgage Loan. The Master Servicer shall be entitled to retain additional
servicing compensation in the form of prepayment charges, release fees, bad
check charges, assumption fees, late payment charges, prepayment penalties, or
any other servicing-related fees, Net Liquidation Proceeds not required to be
deposited in the Collection Account pursuant to Section 8.08(c)(iii) and similar
items, to the extent collected from Mortgagors.
Section 8.16 Annual Statement as to Compliance.
The Master Servicer, at its own expense, will deliver to the Trustee,
the Depositor, the Certificate Insurer and the Rating Agencies, on or before
March 31 of each year, commencing in 1997, an Officer's Certificate stating, as
to each signer thereof, that (i) a review of the activities of the Master
Servicer during such preceding calendar year and of performance under this
Agreement has been made under such officers' supervision, and (ii) to the best
of such officers' knowledge, based on such review, the Master Servicer has
fulfilled all its obligations under this Agreement for such year, or, if there
has been a default in the fulfillment of all such obligations, specifying each
such default known to such officers and the nature and status thereof including
the steps being taken by the Master Servicer to remedy such default.
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Section 8.17 Annual Independent Certified Public Accountants' Reports.
(a) On or before July 31 of any year, commencing in 1997, the Master
Servicer, at its own expense (or if the Trustee is then acting as Master
Servicer, at the expense of the Depositor, which in no event shall exceed $1,000
per annum), shall cause to be delivered to the Trustee, the Certificate Insurer
and the Rating Agencies a letter or letters of a firm of independent, nationally
recognized certified public accountants reasonably acceptable to the Certificate
Insurer, dated as of the date of the Master Servicer's fiscal audit for
subsequent letters, stating that such firm has examined the Master Servicer's
overall servicing operations in accordance with the requirements of the Uniform
Single Audit Program for Mortgage Bankers, and stating, such firm's conclusions
relating thereto.
(b) As long as Block Financial Corporation is acting as Master
Servicer, all references in subsection (a) above to the "Master Servicer" shall
be deemed to be references to the Sub-Servicer.
Section 8.18 Access to Certain Documentation and Information
Regarding the Mortgage Loans.
The Master Servicer shall provide to the Trustee, the Certificate
Insurer and the supervisory agents and examiners of each of the foregoing
(which, in the case of supervisory agents and examiners, may be required by
applicable state and federal regulations) access to the documentation regarding
the Mortgage Loans, such access being afforded without charge but only upon
reasonable request and during normal business hours at the offices of the Master
Servicer designated by it.
Section 8.19 Merger or Consolidation of the Master Servicer;
Assignment.
Subject to the following paragraph, the Master Servicer will keep in
full effect its existence, rights and good standing as a corporation under the
laws of the State of Delaware and will not jeopardize its ability to do business
in each jurisdiction in which one or more of the Mortgaged Properties are
located or to protect the validity and enforceability of this Agreement, the
Certificates or any of the Mortgage Loans and to perform its respective duties
under this Agreement.
The Master Servicer may be merged or consolidated with or into any
Person, or transfer all or substantially all of its assets to any Person, in
which case any Person resulting from any merger or consolidation to which it
shall be a party, or any Person succeeding to its business, shall be the
successor of the Master Servicer and shall be deemed to have assumed all of the
liabilities of the Master Servicer hereunder, if each of he Rating Agencies has
confirmed in writing that such merger, consolidation or transfer and succession
shall not result, in and of itself, in a downgrading, withdrawal or
qualification of the rating then assigned by such Rating Agency to any Class of
Certificates.
Section 8.20 Removal of Master Servicer; Resignation of Master
Servicer.
(a) The Certificate Insurer (or the Owners, with the consent of the
Certificate Insurer pursuant to Section 6.11 hereof) may direct the Trustee to
remove the Master Servicer upon the occurrence of any of the following events:
(i) The Master Servicer shall (I) apply for or consent to the
appointment of a receiver, trustee, liquidator or custodian or similar
entity with respect to itself or its property, (II) admit
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in writing its inability to pay its debts generally as they become due,
(III) make a general assignment for the benefit of creditors, (IV) be
adjudicated a bankrupt or insolvent, (V) commence a voluntary case
under the federal bankruptcy laws of the United States of America or
file a voluntary petition or answer seeking reorganization, an
arrangement with creditors or an order for relief or seeking to take
advantage of any insolvency law or file an answer admitting the
material allegations of a petition filed against it in any bankruptcy,
reorganization or insolvency proceeding or (VI) take corporate action
for the purpose of effecting any of the foregoing; or
(ii) If without the application, approval or consent of the
Master Servicer, a proceeding shall be instituted in any court of
competent jurisdiction, under any law relating to bankruptcy,
insolvency, reorganization or relief of debtors, seeking in respect of
the Master Servicer an order for relief or an adjudication in
bankruptcy, reorganization, dissolution, winding up, liquidation, a
composition or arrangement with creditors, a readjustment of debts, the
appointment of a trustee, receiver, liquidator or custodian or similar
entity with respect to the Master Servicer or of all or any substantial
part of its assets, or other like relief in respect thereof under any
bankruptcy or insolvency law, and, if such proceeding is being
contested by the Master Servicer in good faith, the same shall (A)
result in the entry of an order for relief or any such adjudication or
appointment or (B) continue undismissed or pending and unstayed for any
period of seventy-five (75) consecutive days; or
(iii) The Master Servicer shall fail to perform in any material
respect any one or more of its obligations hereunder and shall continue
in default thereof for a period of thirty (30) days or in the case of a
delay in making a required payment to the Trustee under Section
8.08(d)(ii)(a), one (1) Business Day) after the earlier of (a) actual
knowledge of an officer of the Master Servicer or (b) receipt of notice
from the Trustee or the Certificate Insurer of said failure; provided,
however, that if the Master Servicer can demonstrate to the reasonable
satisfaction of the Certificate Insurer that it is diligently pursuing
remedial action, then the cure period may be extended with the written
approval of the Certificate Insurer; or
(iv) The Master Servicer shall fail to cure any breach of any of
its representations and warranties set forth in Section 3.02 which
materially and adversely affects the interests of the Owners or the
Certificate Insurer for a period of sixty (60) days after the earlier
of the Master Servicer's discovery or receipt of notice thereof;
provided, however, that if the Master Servicer can demonstrate to the
reasonable satisfaction of the Certificate Insurer that it is
diligently pursuing remedial action, then the cure period may be
extended with the written approval of the Certificate Insurer; or
(v) The merger, consolidation or other combination of the Master
Servicer with or into any other entity, unless such merger,
consolidation or other combination is in accordance with Section 8.19.
(b) The Certificate Insurer may instruct the Trustee to remove the
Master Servicer upon (a) the failure by the Master Servicer to make any required
Servicing Advance when due or (b) the failure of the Master Servicer to make any
required P&I Advance or to pay any Compensating Interest when due.
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(c) If any event described in subsection (b) above occurs and is
continuing, during the thirty (30) day period following receipt of notice, the
Trustee, the Owners of the Class R Certificates and the Certificate Insurer
shall cooperate with each other to determine if the occurrence of such event is
more likely than not the result of the acts or omissions of the Master Servicer
or more likely than not the result of events beyond the control of the Master
Servicer. If the Trustee, the Owners of the Class R Certificates and the
Certificate Insurer conclude that the event is the result of the latter, the
Master Servicer shall not be terminated. If the Trustee, the Owners of the Class
R Certificates and the Certificate Insurer conclude that the event is the result
of the former, the Certificate Insurer may terminate the Master Servicer in
accordance with this Section and the Trustee shall act as successor Master
Servicer, provided that the Trustee shall have until the 30th day following the
date of receipt of notice of the event to become the successor Master Servicer
or to appoint a successor Master Servicer pursuant to this Section.
If the Trustee, the Owners of the Class R Certificates and the
Certificate Insurer cannot agree, and the basis for such disagreement is not
arbitrary or unreasonable, as to the cause of the event, the decision of the
Certificate Insurer shall control; provided, however, that if the Certificate
Insurer decides to terminate the Master Servicer, the Trustee shall be relieved
of its obligation to act as successor Master Servicer or to appoint a successor,
which shall be the exclusive obligation of the Certificate Insurer.
The Certificate Insurer agrees to use its best efforts to inform the
Trustee of any materially adverse information regarding the Master Servicer's
servicing activities that comes to the attention of the Certificate Insurer from
time to time.
(d) If any event described in sections (a) and (b) above occurs and
is continuing, the Certificate Insurer shall notify the Owners of the Class R
Certificates in writing if the Certificate Insurer intends to terminate the
Master Servicer in its capacity as Master Servicer under this Agreement. During
the 30 day period following receipt of such notice by the Owners of the Class R
Certificates, such Owners and the Certificate Insurer shall cooperate with each
other to determine if the occurrence of such event is more likely than not the
result of the acts or omissions of the Master Servicer or more likely than not
the result of events beyond the control of the Master Servicer. If the Owners of
the Class R Certificates and the Certificate Insurer conclude that the event is
the result of the latter, the Master Servicer shall not be terminated. If the
Owners of the Class R Certificates and the Certificate Insurer conclude that the
event is the result of the former, the Certificate Insurer may terminate the
Master Servicer in accordance with this Section and the Trustee shall act as
successor Master Servicer, provided that the Trustee shall have until the 30th
day following the date of receipt of notice of the event to become the successor
Master Servicer or to appoint a successor Master Servicer pursuant to this
Section. If the Owners of the Class R Certificates and the Certificate Insurer
cannot agree as to the cause of the event, the decision of the Certificate
Insurer shall control.
(e) The Master Servicer may assign its rights and delegate its duties
and obligations under this Agreement in connection with the sale or transfer of
a substantial portion of its mortgage servicing or asset management portfolio,
provided that: (i) the purchaser or transferee accepting such assignment and
delegation (A) shall be satisfactory to the Trustee, (B) shall be (I) an
established mortgage finance institution, bank or mortgage servicing
institution, organized and doing business under the laws of any state of the
United States or the District of Columbia, authorized under such laws to perform
the duties of a servicer of mortgage loans or (II) a Person resulting from a
merger, consolidation or succession
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that is permitted under Section 8.19, and (C) shall execute and deliver to the
Trustee an agreement, in form and substance reasonably satisfactory to the
Trustee, which contains an assumption by such Person of the due and punctual
performance and observance of each covenant and condition to be performed or
observed by the Master Servicer under this Agreement from and after the date of
such agreement; (ii) as evidenced by a letter from each Rating Agency delivered
to the Trustee, each Rating Agency's rating or ratings of the Certificates in
effect immediately prior to such assignment and delegation will not be
qualified, downgraded or withdrawn as a result of such assignment and
delegation; (iii) the Master Servicer shall not be released from its obligations
under this Agreement that arose prior to the effective date of such assignment
and delegation under this Section 8.20(e); and (iv) the rate at which the
Servicing Fee (or any component thereof) is calculated shall not exceed the rate
in effect prior to such assignment and delegation. Upon acceptance of such
assignment and delegation, the purchaser or transferee shall be the successor
Master Servicer hereunder. The Master Servicer shall not resign from the
obligations and duties hereby imposed on it, except upon determination that its
duties hereunder are no longer permissible under applicable law or are in
material conflict by reason of applicable law with any other activities carried
on by it, the other activities of the Master Servicer so causing such a conflict
being of a type and nature carried on by the Master Servicer at the date of this
Agreement. Any such determination permitting the resignation of the Master
Servicer shall be evidenced by an opinion of counsel to such effect which shall
be delivered to the Trustee and the Certificate Insurer.
(f) No removal or resignation of the Master Servicer shall become
effective until the Trustee or a successor Master Servicer shall have assumed
the Master Servicer's responsibilities and obligations in accordance with this
Section.
(g) Upon removal or resignation of the Master Servicer, the Master
Servicer at its own expense also shall promptly deliver or cause to be delivered
to a successor servicer or the Trustee all the books and records (including,
without limitation, records kept in electronic form) that the Master Servicer
has maintained for the Mortgage Loans, including all tax bills, assessment
notices, insurance premium notices and all other documents as well as all
original documents then in the Master Servicer's possession.
(h) Any collections then being held by the Master Servicer prior to its
removal and any collections received by the Master Servicer after removal or
resignation shall be endorsed by it to the Trustee and remitted directly and
immediately to the successor Master Servicer.
(i) Upon removal or resignation of the Master Servicer, the Trustee (x)
may solicit bids for a successor servicer as described below, and (y) pending
the appointment of a successor servicer as a result of soliciting such bids,
shall serve as Master Servicer. The Trustee shall, if it is unable to obtain a
qualifying bid and is prevented by law from acting as Master Servicer, appoint,
or petition a court of competent jurisdiction to appoint, any housing and home
finance institution, bank or mortgage servicing institution which has been
designated as an approved seller-servicer by FNMA or FHLMC for first and second
mortgage loans and having equity of not less than $1,500,000 (or such lower
level as may be acceptable to the Certificate Insurer), as determined in
accordance with generally accepted accounting principles and acceptable to the
Certificate Insurer and the Owners of the Class R Certificates (provided that if
the Certificate Insurer and such Owners cannot agree within a reasonable period
of time as to the acceptability of such successor Master Servicer, the decision
of the Certificate Insurer shall control) as the successor to the Master
Servicer hereunder in the assumption of all or any
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part of the responsibilities, duties or liabilities of the Master Servicer
hereunder. The compensation of any successor Master Servicer (including, without
limitation, the Trustee) so appointed shall be the aggregate Servicing Fee,
together with the other servicing compensation in the form of assumption fees,
late payment charges or otherwise as provided in Sections 8.08 and 8.15;
provided, however, that if the Trustee acts as successor Master Servicer then
the Seller agrees to pay to the Trustee at such time that the Trustee becomes
such successor Master Servicer a set-up fee of twenty-five dollars ($25.00) for
each Mortgage Loan then included in the Trust Estate. The Trustee shall be
obligated to serve as successor Master Servicer whether or not the fee described
in the preceding sentence is paid by the Seller, but shall in any event be
entitled to receive, and to enforce payment of, such fee from the Seller.
(j) ln the event the Trustee solicits bids as provided above, the
Trustee shall solicit, by public announcement, bids from housing and home
finance institutions, banks and mortgage servicing institutions meeting the
qualifications set forth above. Such public announcement shall specify that the
successor Master Servicer shall be entitled to the full amount of the aggregate
Servicing Fees as servicing compensation, together with the other servicing
compensation in the form of assumption fees, late payment charges or otherwise
as provided in Sections 8.08 and 8.15. Within thirty days after any such public
announcement, the Trustee shall negotiate and effect the sale, transfer and
assignment of the servicing rights and responsibilities hereunder to the
qualified party submitting the highest satisfactory bid as to the price they
will pay to obtain servicing. The Trustee shall deduct from any sum received by
the Trustee from the successor Master Servicer in respect of such sale, transfer
and assignment all costs and expenses of any public announcement and of any
sale, transfer and assignment of the servicing rights and responsibilities
hereunder. After such deductions, the remainder of such sum less any amounts due
the Trustee or the Trust from the Master Servicer shall be paid by the Trustee
to the removed Master Servicer at the time of such sale, transfer and assignment
to the successor Master Servicer.
(k) The Trustee and such successor Master Servicer shall take such
action, consistent with this Agreement, as shall be necessary to effectuate any
such succession, including the notification to all Mortgagors of the transfer of
servicing. The Master Servicer agrees to cooperate with the Trustee and any
successor Master Servicer in effecting the termination of the Master Servicer's
servicing responsibilities and rights hereunder and shall promptly provide the
Trustee or such successor Master Servicer, as applicable, all documents and
records reasonably requested by it to enable it to assume the Master Servicer's
functions hereunder and shall promptly also transfer to the Trustee or such
successor Master Servicer, as applicable, all amounts which then have been or
should have been deposited in the Collection Account by the Master Servicer or
which are thereafter received with respect to the Mortgage Loans. Neither the
Trustee nor any other successor Master Servicer shall be held liable by reason
of any failure to make, or any delay in making, any distribution hereunder or
any portion thereof caused by (i) the failure of the Master Servicer to deliver,
or any delay in delivering, cash, documents or records to it, or (ii)
restrictions imposed by any regulatory authority having jurisdiction over the
Master Servicer. Subject to subsection (j), if the Master Servicer resigns or is
replaced hereunder, the Master Servicer agrees to reimburse the Trust, the
Owners and the Certificate Insurer for the costs and expenses associated with
the transfer of servicing to the replacement Master Servicer, but subject to a
maximum reimbursement to all such parties in the amount of twenty-five dollars
($25.00) for each Mortgage Loan then included in the Trust Estate.
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(l) The Trustee or any other successor Master Servicer, upon assuming
the duties of Master Servicer hereunder, shall immediately make all required P&I
Advances and deposit them to the Collection Account which the Master Servicer
has theretofore failed to remit with respect to the Mortgage Loans; provided,
however, that if the Trustee is acting as successor Master Servicer, the Trustee
shall only be required to make P&I Advances (including the P&I Advances
described in this clause (I)) if, in the Trustee's reasonable good faith
judgment, such P&I Advances will ultimately be recoverable from the Mortgage
Loans.
(m) The Trustee shall give notice to the Certificate Insurer, to the
Mortgagors, to Moody's and to Standard & Poor's of the transfer of the servicing
to the successor Master Servicer.
(n) The Trustee shall give notice to the Certificate Insurer, the
Owners, the Trustee, the Seller, Moody's and Standard & Poor's of the occurrence
of any event described in paragraphs (a) or (b) above of which the Trustee is
aware.
Section 8.21 Inspections by Certificate Insurer; Errors and Omissions
Insurance. (a) Upon reasonable notice, the Trustee, the Certificate Insurer or
any agents thereof may inspect the Master Servicer's servicing operations and
discuss the servicing operations of the Master Servicer during the Master
Servicer's normal business hours with any of its officers or directors;
provided, however, that the costs and expenses incurred by the Master Servicer
or its agents or representatives in connection with any such examinations or
discussions shall be paid by the Master Servicer;
(b) The Master Servicer agrees to maintain errors and omissions
coverage and a fidelity bond, each at least to the extent required by Section
305 of Part I of the FNMA Guide or any successor provision thereof; provided,
however, that if the Trustee shall become the Master Servicer, any customary
insurance coverage that the Trustee maintains shall be deemed sufficient
hereunder; provided, further, that in the event that the fidelity bond or the
errors and omissions coverage is no longer in effect, the Trustee shall promptly
give such notice to the Certificate Insurer and the Owners. Upon the request of
the Trustee or the Certificate Insurer, the Master Servicer shall cause to be
delivered to such requesting Person a certified true copy of such fidelity bond
or errors and omission policy.
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ARTICLE IX
TERMINATION OF TRUST
Section 9.01 Termination of Trust.
The Trust created hereunder and all obligations created by this
Agreement will terminate upon the payment to the Owners of all Certificates,
from amounts other than those available under the Certificate Insurance Policy,
of all amounts held by the Trustee and required to be paid to such Owners
pursuant to this Agreement upon the latest to occur of (a) the final payment or
other liquidation (or any advance made with respect thereto) of the last
Mortgage Loan in the Trust Estate, (b) the disposition of all property acquired
in respect of any Mortgage Loan remaining in the Trust Estate, (c) at any time
when a Qualified Liquidation of both Mortgage Loan Groups included within the
Trust is effected as described below and (d) the final payment to the
Certificate Insurer of all amounts then owing to it. To effect a termination of
this Agreement pursuant to clause (c) above, the Owners of all Certificates then
Outstanding shall (i) unanimously direct the Trustee on behalf of the Trust to
adopt a plan of complete liquidation for each of the Mortgage Loan Groups, as
contemplated by Section 860F(a)(4) of the Code and (ii) provide to the Trustee
an opinion of counsel experienced in federal income tax matters acceptable to
the Certificate Insurer and the Trustee to the effect that each such liquidation
constitutes a Qualified Liquidation, and the Trustee either shall sell the
Mortgage Loans and distribute the proceeds of the liquidation of the Trust
Estate, or shall distribute equitably in kind all of the assets of the Trust
Estate to the remaining Owners of the Certificates each in accordance with such
plan, so that the liquidation or distribution of the Trust Estate, the
distribution of any proceeds of the liquidation and the termination of this
Agreement occur no later than the close of the 90th day after the date of
adoption of the plan of liquidation and such liquidation qualifies as a
Qualified Liquidation. In no event, however, will the Trust created by this
Agreement continue beyond the expiration of twenty-one (21) years from the death
of the last survivor of the descendants of Joseph P. Kennedy, the late
Ambassador of the United States to the Court of Saint James, living on the date
hereof. The Trustee shall give written notice of termination of the Agreement to
each Owner in the manner set forth in Section 11.05.
Section 9.02 Termination Upon Option of Owners of Class R Certificates
and Market Servicer. (a) On any Monthly Remittance Date on or after the Optional
Termination Date, the Owners of a 99.999% Percentage Interest represented by the
Class R Certificates then outstanding may determine to purchase and may cause
the purchase from the Trust of all (but not fewer than all) Mortgage Loans and
all property theretofore acquired in respect of any Mortgage Loan by
foreclosure, deed in lieu of foreclosure, or otherwise then remaining in the
Trust Estate on terms agreed upon between the Certificate Insurer and such
Owners of the Class R Certificates at a price no less than 100% of the aggregate
Loan Balances of the Mortgage Loans as of the day of purchase minus amounts
remitted from the Collection Account to the Distribution Account representing
collections of principal on the Mortgage Loans during the current Due Period,
plus one month's interest on such amount computed at the Adjusted Pass-Through
Rate, plus all accrued and unpaid Servicing Fees plus the aggregate amount of
any unreimbursed Trust Estate expenses, P&I Advances and Servicing Advances and
any P&I Advances which the Master Servicer has theretofore failed to remit. In
connection with such purchase, the Master Servicer shall remit to the Trustee
all amounts then on deposit in the Collection Account for deposit to the
Distribution Account, which deposit shall be deemed to have occurred immediately
preceding such purchase.
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(b) In addition to the foregoing, following the Optional Termination
Date, upon the first Monthly Remittance Date on which the aggregate of the Loan
Balances of the Mortgage Loans is less than 5% of the Original Aggregate Loan
Balance, the Master Servicer may determine to purchase and may cause the
purchase from the Trust of all (but not fewer than all) Mortgage Loans and all
property theretofore acquired in respect of any Mortgage Loan by foreclosure,
deed in lieu of foreclosure, or otherwise then remaining in the Trust Estate at
terms agreed upon between the Certificate Insurer and the Master Servicer, at a
price no less than 100% of the aggregate Loan Balances of the Mortgage Loans as
of the day of purchase minus amounts remitted from the Collection Account to the
Distribution Account representing collections of principal on the Mortgage Loans
during the current Due Period, plus one month's interest on such amount computed
at the Adjusted Pass-Through Rate, plus all accrued and unpaid Servicing Fees
plus the aggregate amount of any unreimbursed First Estate expenses, P&I
Advances and Servicing Advances and any P&I Advances which Master Servicer has
theretofore failed to remit.
(c) In connection with any such purchase, such Owners of the Class R
Certificates or the Master Servicer, as applicable, shall adopt and the Trustee
shall adopt, as to the Trust, a plan of complete liquidation for all of the
Mortgage Loan Groups as contemplated by Section 860F(a)(4) of the Code and shall
provide to the Trustee an opinion of counsel experienced in federal income tax
matters acceptable to the Trustee to the effect that such purchase and
liquidations constitutes, as to the Trust, a Qualified Liquidation. In addition,
such Owners of the Class R Certificates, the Master Servicer or the Certificate
Insurer, as applicable, shall provide to the Trustee an opinion of counsel
acceptable to the Trustee to the effect that such purchase and liquidation does
not constitute a preference payment pursuant to the United States Bankruptcy
Code.
(d) Promptly following any purchase described in this Section 9.02, the
Trustee will release the Files to the Owners of such Class R Certificates or the
Master Servicer, as the case may be, or otherwise upon their order, in a manner
similar to that described in Section 8.14 hereof.
Section 9.03 Termination Auction.
The Trustee shall, in accordance with the procedures and schedule set
forth in Exhibit K hereto (the "Auction Procedures") and upon written notice
from the Master Servicer, make a commercially reasonable effort to sell at fair
market value in a commercially reasonable manner and upon commercially
reasonable terms, by conducting an auction (the "Termination Auction") of the
Mortgage Loans remaining in the Trust in order to effect a termination of the
Trust on a date selected by the Trustee (the "Auction Date"), but in any case
within ninety days following the Optional Termination Date. The Seller (and the
Master Servicer if Block Financial Corporation is not the Master Servicer) may,
but shall not be required to, bid at the Termination Auction. The Trustee shall
be entitled to retain counsel of its choice to represent it in the Termination
Auction, and the fees and expenses of such counsel shall be paid by the Seller.
The Trustee shall sell and transfer the Mortgage Loans to the highest bidder
therefor at the Termination Auction provided that:
(1) the Termination Auction has been conducted in accordance
with the Auction Procedures;
(2) the Trustee has received good faith bids for the Mortgage
Loans from at least two prospective purchasers that are considered by
the Trustee, in its sole discretion, to be
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competitive participants in the market for manufactured housing
installment sale contracts; provided, that at least one of such
prospective purchasers shall not be an Affiliate of the Seller;
(3) a financial advisor selected by the Trustee, the fees of
whom shall be an expense of the Seller, as advisor to the Trustee (in
such capacity, the "Advisor"), shall have advised the Trustee in
writing that at least two of such bidders are participants in the
market for mortgage loans and are willing and able to purchase the
Mortgage Loans (the Trustee may in its discretion select itself or an
affiliate thereof as Advisor);
(4) the highest bid in respect of the Mortgage Loans is not
less than the aggregate fair market value of the Mortgage Loans (as
determined by the Trustee in its sole discretion);
(5) any bid submitted by the Seller or any Affiliate thereof
shall be independently verified and represented in writing by a
qualified independent third party evaluator (which may include the
Advisor or an investment banking firm) selected by the Trustee and may
only be considered if such evaluator determines that the bid reasonably
represents the fair market value of the Mortgage Loans;
(6) the highest bid would result in proceeds from the sale of
the Mortgage Loans which will be at least equal to the Minimum
Termination Amount;
(7) such sale and consequent termination of the Trust must
constitute a "qualified liquidation" of the Trust under Section 860F of
the Code, including the requirement that such qualified liquidation
take place over a period not to exceed 90 days (the Trustee may, in its
discretion, require that the purchaser of such Mortgage Loans provide
an Opinion of Counsel to that effect); and
(8) the terms of the Termination Auction must be made
available to all bidders and must stipulate that the Master Servicer be
retained to service the Mortgage Loans on terms substantially similar
to those in this Agreement.
Provided that all of the conditions set forth in clauses (1) through
(8) have been met, the Trustee shall sell and transfer the Mortgage Loans,
without representation, warranty or recourse of any kind whatsoever, to such
highest bidder in accordance with and upon completion of the Auction Procedures.
The Trustee shall deposit the purchase price for the Mortgage Loans in the
Distribution Account at least one Business Day prior to the fourth Distribution
Date following the Optional Termination Date. In the event that any of such
conditions are not met or such highest bidder fails or refuses to comply with
any of the Auction Procedures, the Trustee shall decline to consummate such sale
and transfer. In such case the Termination Auction shall be concluded and the
Trustee shall be under no further duty to solicit bids for or otherwise to
attempt to sell the Mortgage Loans.
Section 9.04 Termination Upon Loss of REMIC Status.
(a) Following a final determination by the Internal Revenue Service or
by a court of competent jurisdiction, in either case from which no appeal is
taken within the permitted time for such appeal or, if any appeal is taken,
following a final determination of such appeal from which no further
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appeal can be taken, to the effect that the Trust does not and will no longer
qualify as a REMIC pursuant to Section 860D of the Code (the "Final
Determination"), at any time on or after the date which is 30 calendar days
following such Final Determination (i) the Certificate Insurer or the Owners of
a majority in Percentage Interests represented by the Class A Certificates then
Outstanding with the consent of the Certificate Insurer and the Master Servicer
may direct the Trustee on behalf of the Trust to adopt a plan of complete
liquidation, as contemplated by Section 860F(a)(4) of the Code the Master
Servicer or (ii) the Master Servicer or the Certificate Insurer may notify the
Trustee of the Certificate Insurer's, as applicable, determination to purchase
from the Trust all (but not fewer than all) Mortgage Loans and all property
theretofore acquired by foreclosure, deed in lieu of foreclosure, or otherwise
then remaining in the Trust Estate at a price equal to the sum of (x) the
greater of (I) 100% of the aggregate Loan Balances of the Mortgage Loans as of
the day of purchase minus amounts remitted from the Collection Account
representing collections of principal on the Mortgage Loans during the current
Due Period, and (II) the fair market value of such Mortgage Loans (disregarding
accrued interest), (y) one month's interest on such amount computed at the
Adjusted Pass-Through Rate and (z) the aggregate amount of any unreimbursed P&I
Advances and Servicing Advances and any P&I Advances which the Master Servicer
has theretofore failed to remit.
Upon receipt of such direction or notice, the Trustee shall notify the
Owners of the Class R Certificates of such election to liquidate or such
determination to purchase, as the case may be (the "Termination Notice"). The
Owners of a majority of the Percentage Interests of the Class R Certificates
then Outstanding may, within 60 days from the date of receipt of the Termination
Notice (the "Purchase Option Period"), at their option, purchase from the Trust
all (but not fewer than all) Mortgage Loans and all property theretofore
acquired by foreclosure, deed in lieu of foreclosure, or otherwise then
remaining in the Trust Estate at a purchase price equal to the aggregate Loan
Balances of all Mortgage Loans as of the date of such purchase, plus (a) one
month's interest on such amount at the Adjusted Pass-Through Rate, (b) the
aggregate amount of any unreimbursed P&I Advances and Servicing Advances and (c)
any P&I Advances which the Master Servicer has theretofore failed to remit. If,
during the Purchase Option Period, the Owners of the Class R Certificates have
not exercised the option described in the immediately preceding paragraph, then
upon the expiration of the Purchase Option Period (i) in the event that neither
the Master Servicer nor the Certificate Insurer have elected to purchase the
Mortgage Loans, the Trustee shall sell the Mortgage Loans and distribute the
proceeds of the liquidation of the Trust Estate, each in accordance with the
plan of complete liquidation, such that, if so directed, the liquidation of the
Trust Estate, the distribution of the proceeds of the liquidation and the
termination of this Agreement occur no later than the close of the 60th day, or
such later day as the Certificate Insurer or the Owners of the Class A
Certificates with the consent of the Certificate Insurer shall permit or direct
in writing, after the expiration of the Purchase Option Period and (ii) in the
event that the Master Servicer or the Certificate Insurer, as applicable, has
given the Trustee notice of the Certificate Insurer's determination to purchase
the Trust Estate, the Master Servicer or the Certificate Insurer shall, within
60 days, purchase all (but not fewer than all) Mortgage Loans and all property
theretofore acquired by foreclosure, deed in lieu of foreclosure or otherwise
then remaining in the Trust Estate for the price calculated as described in
clause (a)(ii) above. In connection with such purchase, the Master Servicer
shall remit to the Trustee all amounts then on deposit in the Collection Account
for deposit to the Distribution Account, which deposit shall be deemed to have
occurred immediately preceding such purchase.
(b) Following a Final Determination, the Owners of a majority of the
Percentage Interests of the Class R Certificates then Outstanding may, at their
option and upon delivery to the Certificate
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Insurer of an opinion of counsel experienced in federal income tax matters
acceptable to the Certificate Insurer selected by the Owners of the Class R
Certificates, which opinion shall be reasonably satisfactory in form and
substance to the Certificate Insurer, to the effect that the effect of the Final
Determination is to increase substantially the probability that the gross income
of the Trust will be subject to federal taxation, purchase from the Trust all
(but not fewer than all) Mortgage Loans and all property theretofore acquired by
foreclosure, deed in lieu of foreclosure, or otherwise then remaining in the
Trust Estate at a purchase price equal to the aggregate Loan Balances of all
Mortgage Loans as of the date of such purchase, plus (a) one month's interest on
such amount computed at the Adjusted Pass-Through Rate, (b) the aggregate amount
of unreimbursed P&I Advances and (c) any P&I Advances which the Master Servicer
has theretofore failed to remit. In connection with such purchase, the Master
Servicer shall remit to the Trustee all amounts then on deposit in the
Collection Account for deposit to the Distribution Account, which deposit shall
be deemed to have occurred immediately preceding such purchase. The foregoing
opinion shall be deemed satisfactory unless the Certificate Insurer gives the
Owners of a majority of the Percentage Interests of the Class R Certificates
notice that such opinion is not satisfactory within thirty days after receipt of
such opinion. In connection with any such purchase, such Owners shall direct the
Trustee to adopt a plan of complete liquidation as contemplated by Section
860F(a)(4) of the Code and shall provide to the Trustee an opinion of counsel
experienced in federal income tax matters to the effect that such purchase
constitutes a Qualified Liquidation.
Section 9.05 Disposition of Proceeds.
The Trustee shall, upon receipt thereof, deposit the proceeds of any
liquidation of the Trust Estate pursuant to this Article IX to the Distribution
Account; provided, however, that any amounts representing unreimbursed P&I
Advances and Servicing Advances theretofore funded by the Master Servicer from
the Master Servicer's own funds shall be paid by the Trustee to the Master
Servicer from the proceeds of the Trust Estate.
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ARTICLE X
THE TRUSTEE
Section 10.01 Certain Duties and Responsibilities.
(a) The Trustee (i) (A) undertakes to perform such duties and only such
duties as are specifically set forth in this Agreement, and no implied covenants
or obligations shall be read into this Agreement against the Trustee and (B) the
banking institution that is the Trustee shall serve as the Trustee at all times
under this Agreement, and (ii) in the absence of bad faith on its part, may
conclusively rely, as to the truth of the statements and the correctness of the
opinions expressed therein, upon certificates or opinions furnished pursuant to
and conforming to the requirements of this Agreement; but in the case of any
such certificates or opinions which by any provision hereof are specifically
required to be furnished to the Trustee, shall be under a duty to examine the
same to determine whether or not they conform to the requirements of this
Agreement.
(b) Notwithstanding the appointment of the Master Servicer hereunder,
the Trustee is hereby empowered to perform the duties of the Master Servicer it
being expressly understood, however, that the foregoing describes a power and
not an obligation of the Trustee, and that all parties hereto agree that, prior
to any termination of the Master Servicer, the Master Servicer and, thereafter,
the Trustee or any other successor servicer shall perform such duties.
Specifically, and not in limitation of the foregoing, the Trustee shall upon
termination or resignation of the Master Servicer, and pending the appointment
of any other Person as successor Master Servicer, have the power and duty during
its performance as successor Master Servicer:
(i) to collect Mortgagor payments;
(ii) to foreclose on defaulted Mortgage Loans;
(iii) To enforce due-on-sale clauses and to enter into
assumption and substitution agreements as permitted by
Section 8.12 hereof;
(iv) to deliver instruments of satisfaction pursuant to
Section 8.14;
(v) to enforce the Mortgage Loans; and
(vi) to make P&I Advances and Servicing Advances and to pay
Compensating Interest.
(c) No provision of this Agreement shall be construed to relieve the
Trustee from liability for its own negligent action, its own negligent failure
to act or its own willful misconduct, except that:
(i) this subsection shall not be construed to limit the
effect of subsection (a) of this Section;
(ii) the Trustee shall not be personally liable for any error
of judgment made in good faith by an Authorized Officer of
the Trustee, unless it shall be proved that the Trustee
was negligent in ascertaining the pertinent facts; and
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(iii) the Trustee shall not be liable with respect to any action
taken or omitted to be taken by it in good faith in
accordance with any direction given pursuant to Section
6.11.
(d) Whether or not therein expressly so provided, every provision of
this Agreement relating to the conduct or affecting the liability of or
affording protection to the Trustee shall be subject to the provisions of this
Section.
(e) No provision of this Agreement shall require the Trustee to expend
or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties hereunder, or in the exercise of any of its
rights or powers, if it shall have reasonable grounds for believing that
repayment of such funds or adequate indemnity against such risk or liability is
not reasonably assured to it. None of the provisions contained in this Agreement
shall in any event require the Trustee to perform, or be responsible for the
manner of performance of, any of the obligations of the Master Servicer under
this Agreement, except during such time, if any, as the Trustee shall be the
successor to, and be vested with the rights, duties, powers and privileges of,
the Master Servicer in accordance with the terms of this Agreement.
(f) The permissive right of the Trustee to take actions enumerated in
this Agreement shall not be construed as a duty and the Trustee shall not be
answerable for other than its own negligence or willful misconduct.
(g) The Trustee shall be under no obligation to institute any suit, or
to take any remedial proceeding under this Agreement, or to take any steps in
the execution of the trusts hereby created or in the enforcement of any rights
and powers hereunder until it shall be indemnified to its satisfaction against
any and all costs and expenses, outlays and counsel fees and other reasonable
disbursements and against all liability, except liability which is adjudicated
to have resulted from its negligence or willful misconduct, in connection with
any action so taken.
Section 10.02 Removal of Trustee for Cause.
(a) The Trustee may be removed pursuant to paragraph (b) hereof upon
the occurrence of any of the following events (whatever the reason for such
event and whether it shall be voluntary or involuntary or be effected by
operation of law or pursuant to any judgment, decree or order of any court or
any order, rule or regulation of any administrative or governmental body):
(1) the Trustee shall fail to distribute to the Owners
entitled hereto on any Distribution Date amounts available for
distribution in accordance with the terms hereof; (provided, however,
that any such failure which is due to circumstances beyond the control
of the Trustee shall not be a cause for removal hereunder); or
(2) the Trustee shall breach or fail in the performance of any
covenant or agreement of the Trustee in this Agreement, or if any
representation or warranty of the Trustee made in this Agreement or in
any certificate or other writing delivered pursuant hereto or in
connection herewith shall prove to be incorrect in any material respect
as of the time when the same shall have been made, and such failure or
breach shall continue or not be cured for a period of 30 days after
there shall have been given, by registered or certified mail, to the
Trustee by the
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Seller, the Certificate Insurer, or by the Owners of at least 25 % of
the aggregate Percentage Interests in the Trust Estate represented by
the Class A Certificates then Outstanding, or, if there are no Class A
Certificates then Outstanding, by such Percentage Interests represented
by the Class R Certificates, a written notice specifying such failure
or breach and requiring it to be remedied; or
(3) a decree or order of a court or agency or supervisory
authority having jurisdiction for the appointment of a conservator or
receiver or liquidator in any insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings, or for
the winding-up or liquidation of its affairs, shall have been entered
against the Trustee, and such decree or order shall have remained in
force undischarged or unstayed for a period of 75 days; or
(4) a conservator or receiver or liquidator or sequestrator or
custodian of the property of the Trustee is appointed in any
insolvency, readjustment of debt, marshalling of assets and liabilities
or similar proceedings of or relating to the Trustee or relating to all
or substantially all of its property; or
(5) the Trustee shall become insolvent (however insolvency is
evidenced), generally fail to pay its debts as they come due, file or
consent to the filing of a petition to take advantage of any applicable
insolvency or reorganization statute, make an assignment for the
benefit of its creditors, voluntarily suspend payment of its
obligations, or take corporate action for the purpose of any of the
foregoing.
The Depositor shall give to the Certificate Insurer, Moody's and
Standard & Poor's notice of the occurrence of any such event of which the
Depositor is aware.
(b) If any event described in paragraph (a) occurs and is continuing,
then and in every such case (i) the Certificate Insurer or (ii) with the prior
written consent (which shall not be unreasonably withheld) of the Certificate
Insurer, the Depositor and the Owners of a majority of the Percentage Interests
represented by the Class A Certificates or if there are no Class A Certificates
then outstanding by such majority of the Percentage Interests represented by
each of the Class X Certificates and the Class R Certificates, may, whether or
not the Trustee resigns pursuant to Section 10.09(b) hereof, immediately,
concurrently with the giving of notice to the Trustee, and without delaying the
30 days required for notice therein, appoint a successor Trustee pursuant to the
terms of Section 10.09 hereof.
(c) The Master Servicer shall not be liable for any costs relating to
the removal of the Trustee or the appointment of a new Trustee.
Section 10.03 Certain Rights of the Trustee.
Except as otherwise provided in Section 10.01 hereof:
(a) the Trustee may rely and shall be protected in acting or refraining
from acting based upon any resolution, certificate, statement, instrument,
opinion, report, notice, request, direction, consent, order, bond, note or other
paper or document believed by it to be genuine and to have been signed or
presented by the proper party or parties;
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(b) any request or direction of the Depositor, the Seller, the
Certificate Insurer, or the Owners of any Class of Certificates mentioned herein
shall be sufficiently evidenced in writing;
(c) whenever in the administration of this Agreement the Trustee shall
deem it desirable that a matter be proved or established prior to taking,
suffering or omitting any action hereunder, the Trustee (unless other evidence
be herein specifically prescribed) may, in the absence of bad faith on its part,
rely upon an Officer's Certificate;
(d) the Trustee may consult with counsel, and the written advice of
such counsel (selected in good faith by the Trustee) shall be full and complete
authorization and protection in respect of any action taken, suffered or omitted
by it hereunder in good faith and in reasonable reliance thereon;
(e) the Trustee shall be under no obligation to exercise any of the
rights or powers vested in it by this Agreement at the request or direction of
any of the Owners pursuant to this Agreement, unless such Owners shall have
offered to the Trustee reasonable security or indemnity against the costs,
expenses and liabilities which might be incurred by it in compliance with such
request or direction;
(f) the Trustee shall not be bound to make any investigation into the
facts or matters stated in any resolution, certificate, statement, instrument,
opinion, report, notice, request, direction, consent, order, bond, note or other
paper or document, but the Trustee in its discretion may make such further
inquiry or investigation into such facts or matters as it may see fit;
(g) the Trustee may execute any of the trusts or powers hereunder or
perform any duties hereunder either directly or by or through agents, attorneys
or custodians;
(h) the Trustee shall not be liable for any action it takes or omits to
take in good faith which it reasonably believes to be authorized by the
Authorized Officer of any Person or within its rights or powers under this
Agreement other than as to validity and sufficiency of its authentication of the
Certificates;
(i) the right of the Trustee to perform any discretionary act
enumerated in this Agreement shall not be construed as a duty, and the Trustee
shall not be answerable for other than its negligence or willful misconduct in
the performance of such act;
(j) pursuant to the terms of this Agreement, the Master Servicer is
required to furnish to the Trustee from time to time certain information and to
make various calculations which are relevant to the performance of the Trustee's
duties under this Agreement. The Trustee shall be entitled to rely in good faith
on any such information and calculations in the performance of its duties
hereunder, (i) unless and until an Authorized Officer of the Trustee has actual
knowledge, or is advised by any Owner of a Certificate (either in writing or
orally with prompt written or telecopies confirmation), that such information or
calculations is or are incorrect, or (ii) unless there is a manifest error in
any such information: and
(k) the Trustee shall not be required to give any bond or surety in
respect of the execution of the Trust Estate created hereby or the powers
granted hereunder.
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Section 10.04 Not Responsible for Recitals or Issuance of
Certificates.
The recitals and representations contained herein and in the
Certificates, except any such recitals and representations relating to the
Trustee, shall be taken as the statements of the Depositor and the Trustee
assumes no responsibility for their correctness. The Trustee makes no
representation as to the validity or sufficiency of this Agreement, of the
Certificates, or any Mortgage Loan or document related thereto other than as to
validity and sufficiency of its authentication of the Certificates. The Trustee
shall not be accountable for the use or application by the Depositor of any of
the Certificates or of the proceeds of such Certificates, or for the use or
application of any funds paid to the Depositor, the Seller or the Master
Servicer in respect of the Mortgage Loans or deposited into or withdrawn from
the Collection Account by the Depositor, the Master Servicer or the Seller, and
shall have no responsibility for filing any financing or continuation statement
in any public office at any time or otherwise to perfect or maintain the
perfection of any security interest or lien or to prepare or file any tax
returns or Securities and Exchange Commission filings for the Trust or to record
this Agreement. The Trustee shall not be required to take notice or be deemed to
have notice or knowledge of any default unless an Authorized Officer of the
Trustee shall have received written notice thereof or an Authorized Officer has
actual knowledge thereof. In the absence of receipt of such notice, the Trustee
may conclusively assume that no default has occurred.
Section 10.05 May Hold Certificates.
The Trustee, any Paying Agent, Registrar or any other agent of the
Trust, in its individual or any other capacity, may become an Owner or pledgee
of Certificates and may otherwise deal with the Trust with the same rights it
would have if it were not Trustee, any Paying Agent, Registrar or such other
agent.
Section 10.06 Money Held in Trust.
Money held by the Trustee in trust hereunder need not be segregated
from other trust funds except to the extent required herein or required by law.
The Trustee shall be under no liability for interest on any money received by it
hereunder except as otherwise agreed with the Seller and except to the extent of
income or other gain on investments which are deposits in or certificates of
deposit of the Trustee in its commercial capacity.
Section 10.07 Compensation and Reimbursement; No Lien for Fees.
The Trustee shall receive compensation for fees and reimbursement for
expenses pursuant to Section 2.05, Section 7.03(c)(iv)(A) and Section 7.06
hereof. The Trustee shall have no lien on the Trust Estate for the payment of
such fees and expenses.
Section 10.08 Corporate Trustee Required; Eligibility.
There shall at all times be a Trustee hereunder which shall be a
corporation or 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
$50,000,000 subject to supervision or examination by the United States of
America, acceptable to the Certificate Insurer and having a deposit rating of at
least A- from Standard & Poor's
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(or such lower rating as may be acceptable to Standard & Poor's) and A2 by
Moody's (or such lower rating as may be acceptable to Moody's). If such Trustee
publishes reports of condition at least annually, pursuant to law or to the
requirements of the aforesaid supervising or examining authority, then for the
purposes of this Section, the combined capital and surplus of such corporation
or association shall be deemed to be its combined capital and surplus as set
forth in its most recent report of condition so published. If at any time the
Trustee shall cease to be eligible in accordance with the provisions of this
Section, it shall, upon the request of the Depositor with the consent of the
Certificate Insurer (which consent shall not be unreasonably withheld) or of the
Certificate Insurer, resign immediately in the manner and with the effect
hereinafter specified in this Article X.
Section 10.09 Resignation and Removal; Appointment of Successor.
(a) No resignation or removal of the Trustee and no appointment of a
successor trustee pursuant to this Article X shall become effective until the
acceptance of appointment by the successor trustee under Section 10.10 hereof.
(b) The Trustee, or any trustee or trustees hereafter appointed, may
resign at any time by giving written notice of resignation to the Depositor and
by mailing notice of resignation by first-class mail, postage prepaid, to the
Certificate Insurer and the Owners at their addresses appearing on the Register;
provided, that the Trustee cannot resign solely for the failure to receive the
Trustee Fee. A copy of such notice shall be sent by the resigning Trustee to the
Rating Agencies. Upon receiving notice of resignation, the Depositor shall
promptly appoint a successor trustee or trustees acceptable to the Certificate
Insurer by written instrument, in duplicate, executed on behalf of the Trust by
an Authorized Officer of the Seller, one copy of which instrument shall be
delivered to the Trustee so resigning, one copy to the successor trustee or
trustees and one copy to the Master Servicer. 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, or any Owner
may, on behalf of himself and all others similarly situated, petition any such
court for the appointment of a successor trustee. A copy of any such petition
shall be promptly delivered to the Master Servicer. Such court may thereupon,
after such notice, if any, as it may deem proper and appropriate, appoint a
successor trustee.
(c) If at any time the Trustee shall cease to be eligible under Section
10.08 hereof and shall fail to resign after written request therefor by the
Depositor or by the Certificate Insurer, the Certificate Insurer or the
Depositor with the written consent of the Certificate Insurer may remove the
Trustee and appoint a successor trustee acceptable to the Certificate Insurer by
written instrument, in duplicate, executed on behalf of the Trust by an
Authorized Officer of the Depositor, one copy of which instrument shall be
delivered to the Trustee so removed and one copy to the successor trustee.
(d) The Owners of a majority of the Percentage Interests represented by
the Class A Certificates with the consent of the Certificate Insurer, or, if
there are no Class A Certificates then Outstanding, by such majority of the
Percentage Interests represented by the Class R Certificates, may at any time
remove the Trustee and appoint a successor trustee acceptable to the Certificate
Insurer by delivering to the Trustee to be removed, to the successor trustee so
appointed, to the Depositor, to the Master Servicer and to the Certificate
Insurer, copies of the record of the act taken by the Owners, as provided for in
Section 11.03 hereof.
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(e) If the Trustee fails to perform its duties in accordance with the
terms of this Agreement, or becomes ineligible pursuant to Section 10.08 to
serve as Trustee, the Certificate Insurer may remove the Trustee and appoint a
successor trustee by written instrument, in triplicate, signed by the
Certificate Insurer duly authorized, one complete set of which instruments shall
be delivered to the Depositor, one complete set to the Trustee so removed, one
complete set to the successor Trustee so appointed.
(f) If the Trustee shall resign, be removed or become incapable of
acting, or if a vacancy shall occur in the office of the Trustee for any cause,
the Depositor shall promptly appoint a successor trustee acceptable to the
Certificate Insurer. If within one year after such resignation, removal or
incapability or the occurrence of such vacancy, a successor trustee shall be
appointed by act of the Certificate Insurer or the Owners of a majority of the
Percentage Interests represented by the Class A Certificates then Outstanding
with the consent of the Certificate Insurer, the successor trustee so appointed
shall forthwith upon its acceptance of such appointment become the successor
trustee and supersede the successor trustee appointed by the Depositor. If no
successor trustee shall have been so appointed by the Depositor or the Owners
and shall have accepted appointment in the manner hereinafter provided, any
Owner may, on behalf of himself and all others similarly situated, 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.
(g) The Depositor shall give notice of any removal of the Trustee by
mailing notice of such event by first-class mail, postage prepaid, to the
Certificate Insurer, to the Rating Agencies and to the Owners as their names and
addresses appear in the Register. Each notice shall include the name of the
successor Trustee and the address of its corporate trust office.
Section 10.10 Acceptance of Appointment by Successor Trustee.
Every successor trustee appointed hereunder shall execute, acknowledge
and deliver to the Depositor on behalf of the Trust and to its predecessor
Trustee an instrument accepting such appointment hereunder and stating its
eligibility to serve as Trustee hereunder, and thereupon the resignation or
removal of the predecessor Trustee shall become effective and such successor
trustee, without any further act, deed or conveyance, shall become vested with
all the rights, powers, trusts, duties and obligations of its predecessor
hereunder; but, on request of the Depositor or the successor Trustee, such
predecessor Trustee shall, upon payment of its charges then unpaid, execute and
deliver an instrument transferring to such successor trustee all of the rights,
powers and trusts of the Trustee so ceasing to act, and shall duly assign,
transfer and deliver to such successor trustee all property and money held by
such Trustee so ceasing to act hereunder. Upon request of any such successor
trustee, the Depositor on behalf of the Trust shall execute any and all
instruments for more fully and certainly vesting in and confirming to such
successor trustee all such rights, powers and trusts.
Upon acceptance of appointment by a successor Trustee as provided in
this Section, the Depositor shall mail notice thereof by first-class mail,
postage prepaid, to the Owners at their last addresses appearing upon the
Register. The Depositor shall send a copy of such notice to the Rating Agencies.
If the Depositor fails to mail such notice within ten days after acceptance of
appointment by the successor Trustee, the successor trustee shall cause such
notice to be mailed at the expense of the Trust.
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No successor trustee shall accept its appointment unless at the time of
such acceptance such successor shall be qualified and eligible under this
Article X.
Section 10.11 Merger, Conversion, Consolidation or Succession to
Business of the Trustee.
Any corporation or association into which the Trustee may be merged or
converted or with which it may be consolidated, or any corporation or
association resulting from any merger, conversion or consolidation to which the
Trustee shall be a party, or any corporation or association succeeding to all or
substantially all of the corporate trust business of the Trustee, shall be the
successor of the Trustee hereunder, without the execution or filing of any paper
or any further act on the part of any of the parties hereto; provided, however,
that such corporation or association shall be otherwise qualified and eligible
under this Article X. In case any Certificates have been executed, but not
delivered, by the Trustee then in office, any successor by merger, conversion or
consolidation to such Trustee may adopt such execution and deliver the
Certificates so executed with the same effect as if such successor Trustee had
itself executed such Certificates.
Section 10.12 Reporting; Withholding.
(a) The Trustee shall timely provide to the Owners the Internal Revenue
Service's Form 1099 and any other statement required by applicable Treasury
regulations as determined by the Tax Matters Person, and shall withhold, as
required by applicable law, federal, state or local taxes, if any, applicable to
distributions to the Owners, including but not limited to backup withholding
under Section 3406 of the Code and the withholding tax on distributions to
foreign investors under Sections 1441 and 1442 of the Code.
(b) As required by law or upon request of the Tax Matters Person and
except as otherwise specifically set forth in subsection (a) above, the Trustee
shall prepare and timely file all reports required to be filed by the Trust with
any federal, state or local governmental authority having jurisdiction over the
Trust, including other reports that must be filed with the Owners, such as the
Internal Revenue Service's Form 1066 and Schedule Q and the form required under
Section 6050K of the Code, if applicable to REMICs. Furthermore, the Trustee
shall report to Owners, if required, with respect to the allocation of expenses
pursuant to Section 212 of the Code. The Trustee shall collect any forms or
reports from the Owners it determines to be required under applicable federal,
state and local tax laws.
Section 10.13 Liability of the Trustee.
The Trustee shall be liable in accordance herewith only to the extent
of the obligations specifically imposed upon and undertaken by the Trustee
herein. Neither the Trustee nor any of the directors, officers, employees or
agents of the Trustee shall be under any liability on any Certificate or
otherwise to the Certificate Insurer, the Depositor, the Seller, the Master
Servicer or any Owner for any action taken or for refraining from the taking of
any action in good faith pursuant to this Agreement, or for errors in judgment;
provided, however, that this provision shall not protect the Trustee, its
directors, officers, employees or agents or any such Person against any
liability which would otherwise be imposed by reason of negligent action,
negligent failure to act or willful misconduct in the performance of duties or
by reason of reckless disregard of obligations and duties
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hereunder. Subject to the foregoing sentence, the Trustee shall not be liable
for losses on investments of amounts in the Distribution Account (except for any
losses on obligations on which the bank serving as Trustee is the obligor). In
addition, the Depositor, the Seller and the Master Servicer covenant and agree
to indemnify the Trustee, and when the Trustee is acting as Master Servicer, the
Master Servicer, from, and hold it harmless against, any and all losses,
liabilities, damages, claims or expenses (including legal fees and expenses) of
whatsoever kind arising out of or in connection with the performance of its
duties hereunder other than those resulting from the negligence or bad faith of
the Trustee and the Depositor shall pay all amounts not otherwise paid pursuant
to Sections 2.05 and 7.06 hereof. The Trustee and any director, officer,
employee or agent of the Trustee may rely and shall be protected in acting or
refraining from acting in good faith on any certificate, notice or other
document of any kind prima facie properly executed and submitted by the
Authorized Officer of any Person respecting any matters arising hereunder.
Section 10.14 Appointment of Co-Trustee or Separate Trustee .
Notwithstanding any other provisions of this Agreement, at any time,
for the purpose of meeting any legal requirements of any jurisdiction in which
any part of the Trust Estate or Mortgaged Property 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 and reasonably acceptable to the Certificate Insurer to
act as co-Trustee or co-Trustees, jointly with the Trustee, of all or any part
of the Trust Estate or separate Trustee or separate Trustees of any part of the
Trust Estate, and to vest in such Person or Persons, in such capacity and for
the benefit of the Owners, such title to the Trust Estate, or any part thereof,
and, subject to the other provisions of this Section 10.14, such powers, duties,
obligations, rights and trusts as the Master Servicer and the Trustee may
consider necessary or desirable. If the Master Servicer shall not have joined in
such appointment within 15 days after the receipt by it of a request so to do,
or in the case any event indicated in Section 8.20(a) shall have occurred and be
continuing, the Trustee subject to reasonable approval of the Certificate
Insurer alone shall have the power to make such appointment. No co-Trustee or
separate Trustee hereunder shall be required to meet the terms of eligibility as
a successor trustee under Section 10.08 and no notice to Owners of the
appointment of any co-Trustee or separate Trustee shall be required under
Section 10.09.
Every separate Trustee and co-Trustee shall, to the extent permitted,
be appointed and act subject to the following provisions and conditions:
(i) All rights, powers, duties and obligations
conferred or imposed upon the Trustee shall be conferred or imposed
upon and exercised or performed by the Trustee and such separate
Trustee or co-Trustee jointly (it being understood that such separate
Trustee or co-Trustee is not authorized to act separately without the
Trustee joining in such act), except to the extent that under any law
of any jurisdiction in which any particular act or acts are to be
performed (whether as Trustee hereunder or as successor to the Master
Servicer hereunder), the Trustee shall be incompetent or unqualified to
perform such act or acts, in which event such rights, powers, duties
and obligations (including the holding of title to the Trust Estate or
any portion thereof in any such jurisdiction) shall be exercised and
performed singly by such separate Trustee or co-Trustee, but solely at
the direction of the Trustee;
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(ii) No co-Trustee hereunder shall be held personally
liable by reason of any act or omission of any other co-Trustee
hereunder; and
(iii) The Master Servicer, the Certificate Insurer and
the Trustee acting jointly may at any time accept the resignation of or
remove any separate Trustee or co-Trustee.
Any notice, request or other writing given to the Trustee shall be
deemed to have been given to each of the then separate Trustees and co-Trustees,
as effectively as if given to each of them. Every instrument appointing any
separate Trustee or co-Trustee shall refer to this Agreement and the conditions
of this Section 10.14. Each separate Trustee and co-Trustee, upon its acceptance
of the trusts conferred, shall be vested with the estates or property specified
in its instrument of appointment, either jointly with the Trustee or separately,
as may be provided therein, subject to all the provisions of this Agreement,
specifically including every provision of this Agreement relating to the conduct
of, affecting the liability of, or affording protection to, the Trustee. Every
such instrument shall be filed with the Trustee and a copy thereof given to the
Master Servicer.
Any separate Trustee or co-Trustee may, at any time, constitute the
Trustee, its agent or attorney-in-fact, with full power and authority, to the
extent not prohibited by law, to do any lawful act under or in respect of this
Agreement on its behalf and in its name. If any separate Trustee or co-Trustee
shall die, become incapable of acting, resign or be removed, all of its estates,
properties, rights, remedies and trusts shall vest in and be exercised by the
Trustee, to the extent permitted by law, without the appointment of a new or
successor Trustee.
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ARTICLE XI
MISCELLANEOUS
Section 11.01 Compliance Certificates and Opinions.
Upon any application or request by the Depositor, the Seller, the
Certificate Insurer or the Owners to the Trustee to take any action under any
provision of this Agreement, the Depositor, the Seller, the Certificate Insurer
or the Owners, as the case may be, shall furnish to the Trustee a certificate
stating that all conditions precedent, if any, provided for in this Agreement
relating to the proposed action have been complied with, except that in the case
of any such application or request as to which the furnishing of such documents
is specifically required by any provision of this Agreement relating to such
particular application or request, no additional certificate need be furnished.
Except as otherwise specifically provided herein, each certificate or
opinion with respect to compliance with a condition or covenant provided for in
this Agreement (including one furnished pursuant to specific requirements of
this Agreement relating to a particular application or request) shall include:
(a) a statement that each individual signing such certificate
or opinion has read such covenant or condition and the definitions
herein relating thereto:
(b) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions
contained in such certificate or opinion are based; and
(c) a statement as to whether, in the opinion of each such
individual, such condition or covenant has been complied with in all
material respects.
Section 11.02 Form of Documents Delivered to the Trustee.
In any case where several matters are required to be certified by, or
covered by an opinion of, any specified Person, it is not necessary that all
such matters be certified by, or covered by the opinion of, only one such
Person, or that they be so certified or covered by only one document, but one
such Person may certify or give an opinion with respect to some matters and one
or more other such Persons as to other matters, and any such Person may certify
or give an opinion as to such matters in one or several documents.
Any certificate or opinion of an Authorized Officer of the Trustee may
be based, insofar as it relates to legal matters, upon a certificate or opinion
of, or representations by, counsel, unless such Authorized Officer knows, or in
the exercise of reasonable care should know, that the certificate or opinion or
representations with respect to the matters upon which his certificate or
opinion is based are erroneous. Any such certificate or opinion of an Authorized
Officer of the Trustee or any opinion of counsel may be based, insofar as it
relates to factual matters upon a certificate or opinion of, or representations
by, one or more Authorized Officers of the Depositor, the Seller or the Master
Servicer, stating that the information with respect to such factual matters is
in the possession of the Depositor, the Seller or the Master Servicer, unless
such Authorized Officer or counsel knows, or in the exercise of reasonable care
should know, that the certificate or opinion or representations with
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respect to such matters are erroneous. Any opinion of counsel may also be based,
insofar as it relates to factual matters, upon a certificate or opinion of, or
representations by, an Authorized Officer of the Trustee, stating that the
information with respect to such matters is in the possession of the Trustee,
unless such counsel knows, or in the exercise of reasonable care should know,
that the certificate or opinion or representations with respect to such matters
are erroneous. Any opinion of counsel may be based on the written opinion of
other counsel, in which event such opinion of counsel shall be accompanied by a
copy of such other counsel's opinion and shall include a statement to the effect
that such counsel believes that such counsel and the Trustee may reasonably rely
upon the opinion of such other counsel.
Where any Person is required to make, give or execute two or more
applications, requests, consents, certificates, statements, opinions or other
instruments under this Agreement, they may, but need not, be consolidated and
form one instrument.
Section 11.03 Acts of Owners.
(a) Any request, demand, authorization, direction, notice, consent,
waiver or other action provided by this Agreement to be given or taken by the
Owners may be embodied in and evidenced by one or more instruments of
substantially similar tenor signed by such Owners in person or by agent duly
appointed in writing; and, except as herein otherwise expressly provided, such
action shall become effective when such instrument or instruments are delivered
to the Trustee, and, where it is hereby expressly required, to the Depositor.
Such instrument or instruments (and the action embodied therein and evidenced
thereby) are herein sometimes referred to as the "act" of the Owners signing
such instrument or instruments. Proof of execution of any such instrument or of
a writing appointing any such agent shall be sufficient for any purpose of this
Agreement and conclusive in favor of the Trustee and the Trust, if made in the
manner provided in this Section.
(b) The fact and date of the execution by any Person of any such
instrument or writing may be proved by the affidavit of a witness of such
execution or by the certificate of any notary public or other officer authorized
by law to take acknowledgments of deeds, certifying that the individual signing
such instrument or writing acknowledged to him the execution thereof. Whenever
such execution is by an officer of a corporation or a member of a partnership on
behalf of such corporation or partnership, such certificate or affidavit shall
also constitute sufficient proof of his authority.
(c) The ownership of Certificates shall be proved by the Register.
(d) Any request, demand, authorization, direction, notice, consent,
waiver or other action by the Owner of any Certificate shall bind the Owner of
every Certificate issued upon the registration of transfer thereof or in
exchange therefor or in lieu thereof, in respect of anything done, omitted or
suffered to be done by the Trustee or the Trust in reliance thereon, whether or
not notation of such action is made upon such Certificates.
Section 11.04 Notices, etc. to Trustee.
Any request, demand, authorization, direction, notice, consent, waiver
or act of the Owners or other documents provided or permitted by this Agreement
to be made upon, given or furnished to, or filed with the Trustee by any Owner,
the Certificate Insurer, the Depositor or the Seller shall be
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sufficient for every purpose hereunder if made, given, furnished or filed in
writing to or with and received by the Trustee at the Corporate Trust Office.
Section 11.05 Notices and Reports to Owners; Waiver of Notices.
Where this Agreement provides for notice to Owners of any event or the
mailing of any report to Owners, such notice or report shall be sufficiently
given (unless otherwise herein expressly provided) if mailed, first-class
postage prepaid, to each Owner affected by such event or to whom such report is
required to be mailed, at the address of such Owner as it appears on the
Register, not later than the latest date, and not earlier than the earliest
date, prescribed for the giving of such notice or the mailing of such report. In
any case where a notice or report to Owners is mailed in the manner provided
above, neither the failure to mail such notice or report nor any defect in any
notice or report so mailed to any particular Owner shall affect the sufficiency
of such notice or report with respect to other Owners, and any notice or report
which is mailed in the manner herein provided shall be conclusively presumed to
have been duly given or provided. Notwithstanding the foregoing, if the Master
Servicer is removed or resigns or the Trust is terminated, notice of any such
events shall be made by overnight courier, registered mail or telecopy followed
by a telephone call.
Where this Agreement provides for notice in any manner, such notice may
be waived in writing by any Person entitled to receive such notice, either
before or after the event, and such waiver shall be the equivalent of such
notice. Waivers of notice by Owners shall be filed with the Trustee, but such
filing shall not be a condition precedent to the validity of any action taken in
reliance upon such waiver.
In case, by reason of the suspension of regular mail service as a
result of a strike, work stoppage or similar activity, it shall be impractical
to mail notice of any event to Owners when such notice is required to be given
pursuant to any provision of this Agreement, then any manner of giving such
notice as shall be satisfactory to the Trustee shall be deemed to be a
sufficient giving of such notice.
Where this Agreement provides for notice to any Rating Agency that
rated any Certificates, failure to give such notice shall not affect any other
rights or obligations created hereunder.
Section 11.06 Rules by Trustee and Seller.
The Trustee may make reasonable rules for any meeting of Owners.
Section 11.07 Successors and Assigns.
All covenants and agreements in this Agreement by any party hereto
shall bind its successors and assigns, whether so expressed or not.
Section 11.08 Severability.
In case any provision in this Agreement or in the Certificates shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
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Section 11.09 Benefits of Agreement.
Nothing in this Agreement or in the Certificates, expressed or implied,
shall give to any Person, other than the Owners, the Certificate Insurer and the
parties hereto and their successors hereunder, any benefit or any legal or
equitable right, remedy or claim under this Agreement.
Section 11.10 Legal Holidays.
In any case where the date of any Monthly Remittance Date, any
Distribution Date, any other date on which any distribution to any Owner is
proposed to be paid, or any date on which a notice is required to be sent to any
Person pursuant to the terms of this Agreement shall not be a Business Day, then
(notwithstanding any other provision of the Certificates or this Agreement)
payment or mailing need not be made on such date, but may be made on the next
succeeding Business Day with the same force and effect as if made or mailed on
the nominal date of any such Monthly Remittance Date, such Distribution Date, or
such other date for the payment of any distribution to any Owner or the mailing
of such notice, as the case may be, and no interest shall accrue for the period
from and after any such nominal date, provided such payment is made in full on
such next succeeding Business Day.
Section 11.11 Governing Law; Submission to Jurisdiction.
(a) In view of the fact that Owners are expected to reside in many
states and outside the United States and the desire to establish with certainty
that this Agreement will be governed by and construed and interpreted in
accordance with the law of a state having a well-developed body of commercial
and financial law relevant to transactions of the type contemplated herein, this
Agreement and each Certificate shall be construed in accordance with and
governed by the laws of the State of New York applicable to agreements made and
to be performed therein, without giving effect to the conflicts of law
principles thereof.
(b) The parties hereto hereby irrevocably submit to the jurisdiction of
the United States District Court for the Southern District of New York and any
court in the State of New York located in the City and County of New York, and
any appellate court from any thereof, in any action, suit or proceeding brought
against them or in connection with this Agreement or any of the related
documents or the transactions contemplated hereunder or for recognition or
enforcement of any judgment, and the parties hereto hereby irrevocably and
unconditionally agree that all claims in respect of any such action or
proceeding may be heard or determined in such New York State court or, to the
extent permitted by law, in such federal court. The parties hereto agree that a
final judgment in any such action, suit or proceeding shall be conclusive and
may be enforced in other jurisdictions by suit on the judgment or in any other
manner provided by law. To the extent permitted by applicable law, the parties
hereto hereby waive and agree not to assert by way of motion, as a defense or
otherwise in any such suit, action or proceeding, any claim that it is not
personally subject to the jurisdiction of such courts, that the suit, action or
proceeding is brought in an inconvenient forum, that the venue of the suit,
action or proceeding is improper or that the related documents or the subject
matter thereof may not be litigated in or by such courts.
(c) Each of the Depositor, the Seller and the Master Servicer hereby
irrevocably appoints and designates the Trustee as its true and lawful attorney
and duly authorized agent for acceptance of service of legal process with
respect to any action, suit or proceeding set forth in paragraph (b) hereof.
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Each of the Seller and the Master Servicer agrees that service of such process
upon the Trustee shall constitute personal service of such process upon it.
(d) Nothing contained in this Agreement shall limit or affect the right
of the Depositor, the Seller, the Master Servicer or the Certificate Insurer or
any third-party beneficiary hereunder, as the case may be, to serve process in
any other manner permitted by law or to start legal proceedings relating to any
of the Mortgage Loans against any Mortgagor in the courts of any jurisdiction.
Section 11.12 Counterparts.
This instrument may be executed in any number of counterparts, each of
which so executed shall be deemed to be an original, but all such counterparts
shall together constitute but one and the same instrument.
Section 11.13 Usury.
The amount of interest payable or paid on any Certificate
under the terms of this Agreement shall be limited to an amount which shall not
exceed the maximum nonsurious rate of interest allowed by the applicable laws of
the State of New York or any applicable law of the United States permitting a
higher maximum nonsurious rate that preempts such applicable New York laws,
which could lawfully be contracted for, charged or received (the "Highest Lawful
Rate"). In the event any payment of interest on any Certificate exceeds the
Highest Lawful Rate, the Trust stipulates that such excess amount will be deemed
to have been paid to the Owner of such Certificate as a result of an error on
the part of the Trustee acting on behalf of the Trust and the Owner receiving
such excess payment shall promptly, upon discovery of such error or upon notice
thereof from the Trustee on behalf of the Trust, refund the amount of such
excess or, at the option of such Owner, apply the excess to the payment of
principal of such Certificate, if any, remaining unpaid. In addition, all sums
paid or agreed to be paid to the Trustee for the benefit of Owners of
Certificates for the use, forbearance or detention of money shall, to the extent
permitted by applicable law, be amortized, prorated, allocated and spread
throughout the full term of such Certificates.
Section 11.14 Amendment.
(a) The Trustee, the Depositor, the Seller and the Master Servicer may,
at any time and from time to time, and without notice to or the consent of the
Owners but with the consent of the Certificate Insurer, amend this Agreement,
subject to the provisions of Section 11.16 and 11.17 and the Trustee shall
consent to such amendment, for the purpose of (i) curing any ambiguity,
correcting or supplementing any provision hereof which may be inconsistent with
any other provision hereof, or adding provisions hereto which are not
inconsistent with the provisions hereof; (ii) upon receipt of an opinion of
counsel experienced in federal income tax matters to the effect that no
entity-level tax will be imposed on the Trust or upon the transferor of a Class
R Certificate as a result of the ownership of any Class R Certificate by a
Disqualified Organization, removing the restriction on transfer set forth in
Section 5.08(b) hereof or (iii) complying with the requirements of the Code and
the regulations proposed or promulgated thereunder including any amendments
necessary to maintain REMIC status or (iv) for any other purpose, provided that
in the case of this clause (iv) the Person requesting such amendment delivers
(A) an opinion of counsel acceptable to the Trustee that such amendment will not
adversely affect in any material respect the interest of the Owners and (B) such
amendment will not
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result in a withdrawal or reduction of the rating of the Class A Certificates
without regard to the Certificate Insurance Policy. Notwithstanding anything to
the contrary herein, no such amendment shall (a) change in any manner the amount
of, or change the timing of, payments which are required to be distributed to
any Owner without the consent of the Owner of such Certificate, or (b) which
affects in any the manner the terms or provisions of the Certificate Insurance
Policy.
(b) Promptly after the execution of any such amendment, the Trustee
shall furnish written notification of the substance of such amendment to each
Owner in the manner set forth in Section 11.05, and to the Rating Agencies.
(c) The Certificate Insurer, the Owners and the Rating Agencies shall
be provided with copies of any amendments to this Agreement, together with
copies of any opinions or other documents or instruments executed in connection
therewith.
Section 11.15 Paying Agent; Appointment and Acceptance of Duties.
The Trustee is hereby appointed Paying Agent. The Trustee may, subject
to the eligibility requirements for the Trustee set forth in Section 10.08
hereof, appoint one or more other Paying Agents or successor Paying Agents.
Each Paying Agent, immediately upon such appointment, shall signify its
acceptance of the duties and obligations imposed upon it by this Agreement by
written instrument of acceptance deposited with the Trustee.
Each such Paying Agent other than the Trustee shall execute and deliver
to the Trustee an instrument in which such Paying Agent shall agree with the
Trustee, subject to the provisions of Section 6.02, that such Paying Agent will:
(a) allocate all sums received for distribution to the Owners of
Certificates of each Class for which it is acting as Paying Agent on each
Distribution Date among such Owners in the proportion specified by the Trustee;
and
(b) hold all sums held by it for the distribution of amounts due with
respect to the Certificates in trust for the benefit of the Owners entitled
thereto until such sums shall be paid to such Owners or otherwise disposed of as
herein provided and pay such sums to such Persons as herein provided.
Any Paying Agent other than the Trustee may at any time resign and be
discharged of the duties and obligations created by this Agreement by giving at
least sixty (60) days written notice to the Trustee. Any such Paying Agent may
be removed at any time by an instrument filed with such Paying Agent and signed
by the Trustee.
In the event of the resignation or removal of any Paying Agent other
than the Trustee such Paying Agent shall pay over, assign and deliver any moneys
held by it as Paying Agent to its successor, or if there be no successor, to the
Trustee.
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Upon the appointment, removal or notice of resignation of any Paying
Agent, the Trustee shall notify the Certificate Insurer and the Owners by
mailing notice thereof at their addresses appearing on the Register.
Section 11.16 REMIC Status.
(a) The parties hereto intend that each of the Master REMIC and the
Subsidiary REMIC constitute, and that the affairs of the Trust shall be
conducted so as to qualify each as a REMIC in accordance with the REMIC
Provisions. In furtherance of such intention, the Trustee or such other person
designated pursuant to Section 11.18 hereof shall act as agent for the Trust and
as "tax matters person" (as defined in the REMIC Provisions) for the Trust and
in such capacity it shall: (i) prepare or cause to be prepared and filed, in a
timely manner, annual tax returns and any other tax return required to be filed
by the Trust established hereunder using a calendar year as the taxable year for
the Trust established hereunder; (ii) in the first such tax return, make (or
cause to be made) an election satisfying the requirements of the REMIC
Provisions, on behalf of the Trust, for it to be treated as a REMIC; (iii)
prepare and forward, or cause to be prepared and forwarded, to the Owners all
information, reports or tax returns required with respect to the Trust as, when
and in the form required to be provided to the Owners, and to the Internal
Revenue Service and any other relevant governmental taxing authority in
accordance with the REMIC Provisions and any other applicable federal, state or
local laws, including without limitation information reports relating to
"original issue discount" as defined in the Code based upon the prepayment
assumption and calculated by using the "Issue Price" (within the meaning of
Section 1273 of the Code) of the Certificates of the related Class; (iv) not
take any action or omit to take any action that would cause the termination of
the REMIC status of the Trust, except as provided under this Agreement; (v)
represent the Trust in any administrative or judicial proceedings relating to an
examination or audit by any governmental taxing authority, request an
administrative adjustment as to a taxable year of the Trust, enter into
settlement agreements with any governmental taxing agency, extend any statute of
limitations relating to any tax item of the Trust, and otherwise act on behalf
of the Trust or any REMIC therein in relation to any tax matter involving the
Trust or any REMIC therein; (vi) comply with all statutory or regulatory
requirements with regard to its conduct of activities pursuant to the foregoing
clauses of this Section 11.16, including, without limitation, providing all
notices and other information to the Internal Revenue Service and Owners of
Class R Certificates required of a "tax matters person" pursuant to subtitle F
of the Code and the Treasury Regulations thereunder; (vii) make available
information necessary for the computation of any tax imposed (A) on transferors
of residual interests to certain Disqualified Organizations or (B) on
pass-through entities, any interest in which is held by a Disqualified
Organization; and (viii) acquire and hold the Tax Matters Person Residual
Interest. The obligations of the Trustee or such other designated Tax Matters
Person pursuant to this Section 11.16 shall survive the termination or discharge
of this Agreement.
(b) The Seller, the Depositor, the Trustee and the Master Servicer
covenant and agree for the benefit of the Owners and the Certificate Insurer (i)
to take no action which would result in the termination of "REMIC" status for
the Trust, (ii) not to engage in any prohibited transaction", as such term is
defined in Section 860F(a)(2) of the Code, subject to the exceptions set forth
in Section 860F(a)(5) of the Code, and (iii) not to engage in any other action
which may result in the imposition on the Trust of any other taxes under the
Code.
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(c) The Trust shall, for federal income tax purposes, maintain books on
a calendar year basis and report income on an accrual basis.
(d) Except as otherwise permitted by Section 7.05(b), no Eligible
Investment shall be sold prior to its stated maturity (unless sold pursuant to a
plan of liquidation in accordance with Article IX hereto).
(e) Neither the Depositor, the Seller nor the Trustee shall enter into
any arrangement by which the Trustee will receive a fee or other compensation
for services rendered pursuant to this Agreement, other than as expressly
contemplated by this Agreement.
(f) Notwithstanding the foregoing clauses (d) and (e), the Trustee,
Depositor, Master Servicer or the Seller may engage in any of the transactions
prohibited by such clauses, provided that the Trustee shall have received an
opinion of counsel experienced in federal income tax matters acceptable to the
Certificate Insurer to the effect that such transaction does not result in a tax
imposed on the Trustee or cause a termination of REMIC status for the Trust;
provided, however, that such transaction is otherwise permitted under this
Agreement.
(g) The Master Servicer, Trustee and Tax Matters Person agree to
indemnify the Trust for any tax imposed on the Trust as a result of their
negligence.
Section 11.17 Additional Limitation on Action and Imposition of Tax.
Any provision of this Agreement to the contrary notwithstanding, the
Trustee shall not, without having obtained an opinion of counsel experienced in
federal income tax matters acceptable to the Certificate Insurer to the effect
that such transaction does not result in a tax imposed on the Trust or cause a
termination of REMIC status for the Trust, (i) sell any assets in the Trust
Estate, (ii) accept any contribution of assets after the Startup Day or (iii)
agree to any modification of this Agreement. To the extent that sufficient
amounts cannot be so retained to pay or provide for the payment of such tax, the
Trustee is hereby authorized to and shall segregate, into a separate
non-interest bearing account, the net income from any such Prohibited
Transactions of the Trust and use such income, to the extent necessary, to pay
such tax; provided that, to the extent that any such income is paid to the
Internal Revenue Service, the Trustee shall retain an equal amount from future
amounts otherwise distributable to the Owners of Class R Certificates and shall
distribute such retained amounts to the Owners of Class A Certificates to the
extent they are fully reimbursed and then to the Owners of the Class R
Certificates. If any tax, including interest penalties or assessments,
additional amounts or additions to tax, is imposed on the Trust, such tax shall
be charged against amounts otherwise distributable to the owners of the Class R
Certificates on a pro rata basis. The Trustee is hereby authorized to and shall
retain from amounts otherwise distributable to the Owners of the Class R
Certificates sufficient funds to pay or provide for the payment of, and to
actually pay, such tax as is legally owed by the Trust (but such authorization
shall not prevent the Trustee from contesting any such tax in appropriate
proceedings, and withholding payment of such tax, if permitted by law, pending
the outcome of such proceedings).
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Section 11.18 Appointment of Tax Matters Person.
A Tax Matters Person will be appointed for the Trust for all purposes
of the Code and such Tax Matters Person will perform, or cause to be performed,
such duties and take, or cause to be taken, such actions as are required to be
performed or taken by the Tax Matters Person under the Code. The Tax Matters
Person for the Trust shall be [Trustee] as long as it owns a Class R
Certificate. If [Trustee] does not own a Class R Certificate, the Tax Matters
Person may be any other entity that owns a Class R Certificate and accepts a
designation hereunder as Tax Matters person by delivering an affidavit in the
form of Exhibit 1. [Trustee] shall notify the Trustee in writing of the name and
address of another person who accepts a designation as Tax Matters Person
hereunder.
Section 11.19 The Certificate Insurer.
Any right conferred to the Certificate Insurer hereunder shall be
suspended and shall run to the benefit of the Owners during any period in which
the Certificate Insurer is in default in its payment obligations under the
Certificate Insurance Policy. At such time as the Class A Certificates are no
longer Outstanding hereunder, the Certificate Insurer's rights hereunder shall
terminate.
Section 11.20 Reserved.
Section 11.21 Third Party Rights.
The Trustee, the Seller, the Depositor, the Master Servicer and the
Owners agree that the Certificate Insurer shall be deemed a third party
beneficiary of this Agreement as if it were a party hereto.
Section 11.22 Notices.
All notices hereunder shall be given as follows, until any superseding
instructions are given to all other Persons listed below:
The Trustee: Bankers Trust Company of California, N.A.
3 Park Plaza
Irvine, California 92714
Attention: __________
Tel:
Fax:
The Depositor: Block Mortgage Finance, Inc.
One Main Plaza
4435 Main Street, Suite 500
Kansas City, Missouri 64111
Attention: __________
Tel:
Fax:
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The Seller: Companion Mortgage Corporation
One Main Plaza
4435 Main Street, Suite 500
Kansas City, Missouri 64111
Tel:
Fax:
The Master Servicer: Block Financial Corporation
One Main Plaza
4435 Main Street, Suite 500
Kansas City, Missouri 64111
Tel:
Fax:
The Rating Agencies: Moody's Investors Service, Inc.
99 Church Street
New York, New York 10007
Tel:
Fax:
Standard & Poor's Ratings Services,
a division of The McGraw-Hill Companies
26 Broadway
New York, New York 10004
Tel:
Fax:
Owners: As set forth in the Register.
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IN WITNESS WHEREOF, the Depositor, the Seller, the Master Servicer and
the Trustee have caused this Agreement to be duly executed by their respective
officers thereunto duly authorized, all as of the day and year first above
written.
BLOCK MORTGAGE FINANCE, INC.,
as Depositor
By:
------------------------------------
Title:
----------------------------------
COMPANION MORTGAGE CORPORATION, as
Seller
By:
------------------------------------
Title:
----------------------------------
BLOCK FINANCIAL CORPORATION, as Master
Servicer
By:
------------------------------------
Title:
----------------------------------
BANKERS TRUST COMPANY OF CALIFORNIA,
N.A., as Trustee
By:
------------------------------------
Title:
----------------------------------
<PAGE>
STATE OF NEW YORK )
: ss.:
COUNTY OF NEW YORK )
On the ____ of ________, 1997, before me personally came
_______________, to me known, who, being by me duly sworn, did depose and say
that he/she resides at ________________________; that he/she is a
________________________of ____________________, a Delaware corporation; and
that he signed his name thereto by order of the respective Boards of Directors
of said corporation.
IN WITNESS WHEREOF, I have hereunto set any hand and affixed my official
seal the day and year in this certificate first above written.
NOTARIAL SEAL
<PAGE>
STATE OF NEW YORK )
: ss.:
COUNTY OF NEW YORK )
On the ____ of ________, 1997, before me personally came
_______________, to me known, who, being by me duly sworn, did depose and say
that he/she resides at ________________________; that he/she is a
________________________of ____________________, a Delaware corporation; and
that he signed his name thereto by order of the respective Boards of Directors
of said corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal the day and year in this certificate first above written.
NOTARIAL SEAL
<PAGE>
STATE OF NEW YORK )
: ss.:
COUNTY OF NEW YORK )
On the ____ of ________, 1997, before me personally came
_______________, to me known, who, being by me duly sworn, did depose and say
that he/she resides at ________________________; that he/she is a
________________________of ____________________, a Delaware corporation, and
that he signed his name thereto by order of the respective Boards of Directors
of said corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal the day and year in this certificate first above written.
NOTARIAL SEAL
<PAGE>
STATE OF NEW YORK )
: ss.:
COUNTY OF NEW YORK )
On the ____ of ________, 1997, before me personally came
_______________, to me known, who, being by me duly sworn, did depose and say
that he/she resides at ________________________; that he/she is a
________________________of ____________________, a Delaware corporation, and
that he signed his name thereto by order of the respective Boards of Directors
of said corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal the day and year in this certificate first above written.
NOTARIAL SEAL
<PAGE>
SCHEDULE I
REPRESENTATIONS AND WARRANTIES AS TO THE MORTGAGE LOANS
(i) The information with respect to each Mortgage Loan set
forth in the related Schedule of Mortgage Loans is true and correct as
of the Cut-Off Date;
(ii) All the original or certified documentation set forth in
Section 3.05 (including all material documents related thereto) with
respect to each Mortgage Loan has been or will be delivered to the
Trustee on the Startup Day or as otherwise provided in Section 3.05;
(iii) Each Mortgage Loan being transferred to the Trust is a
Qualified Mortgage;
(iv) Each Mortgaged Property is improved by a single
(one-to-four) family residential dwelling, which may include
condominiums and townhouses, small multifamily or mixed-use property or
manufactured homes (provided that such manufactured home is attached to
the property and the manufactured home is encumbered by and secured by a
Mortgage) but shall not include co-operatives; provided, however, that
as of the Cut-Off Date not more than ___% and __% of the aggregate Loan
Balance of the Mortgage Loans in the Fixed Rate Group and Adjustable
Rate Group, respectively, are secured by condominiums with more than 4
stories, not more than ___% and __%, respectively, are secured by
condominiums of less than 4 stories, and not more than ___% and __% of
the aggregate Loan Balance of the Mortgage Loans in the Fixed Rate Group
and Adjustable Rate Group, respectively, are secured by manufactured
homes;
(v) As of the Cut-Off Date no Mortgage Loan in the Fixed Rate
Group has a Loan-to-Value Ratio in excess of 80%, except ___% of such
Mortgage Loans which have a Loan-to-Value Ratio not greater than 95%; as
of the Cut-Off Date no Mortgage Loan in the Adjustable Rate Group has a
Loan-to-Value Ratio greater than 85%.
(vi) Each Mortgage Loan is being master serviced by the
Master Servicer and serviced by a Sub-Servicer;
(vii) The Note related to each Mortgage Loan in the Fixed Rate
Group bears a fixed Mortgage Rate of at least ______% per annum, and the
Note related to each Mortgage Loan in the Adjustable Rate Group bears a
current Mortgage Rate of at least __________% per annum. The weighted
average Mortgage Rate of the Mortgage Loans in the Fixed Rate Group is
at least __________% and the current weighted average Mortgage Rate of
the Mortgage Loans in the Adjustable Rate Group is at least __________%;
(viii) Each Note with respect to the Mortgage Loans will
provide for a schedule of substantially level and equal monthly
Scheduled Payments which are sufficient to amortize fully the principal
balance of such Note on or before its maturity date (other than Notes
representing not more than __________% and __________% of the aggregate
Loan Balance as of the CutOff Date of the Mortgage Loans in the Fixed
Rate Group and the Adjustable Rate Group,
<PAGE>
respectively, which may provide for a "balloon" payment due at the end
of the 15th year, which maturity date is not more than 15 years from the
date of origination);
(ix) As of the Startup Day, each Mortgage is a valid and
subsisting first or second lien of record on the Mortgaged Property
subject in the case of any Second Mortgage Loan only to a Senior Lien on
such Mortgaged Property and subject in all cases to the exceptions to
title set forth in the title insurance policy or attorney's opinion of
title with respect to the related Mortgage Loan, which exceptions are
generally acceptable to banking institutions in connection with their
regular mortgage lending activities, and such other exceptions to which
similar properties are commonly subject and which do not individually,
or in the aggregate, materially and adversely affect the benefits of the
security intended to be provided by such Mortgage;
(x) Immediately prior to the transfer and assignment of the
Mortgage Loans by the Seller to the Depositor and by the Depositor to
the Trust herein contemplated, the Seller and the Depositor, as the case
may be, held good and indefeasible title to, and was the sole owner of,
each Mortgage Loan (including the related Note) conveyed by the Seller
subject to no liens, charges, mortgages, encumbrances or rights of
others except as set forth in clause (ix) or other liens which will be
released simultaneously with such transfer and assignment; and
immediately upon the transfer and assignment herein contemplated, the
Trustee will hold good and indefeasible title to, and be the sole owner
of, each Mortgage Loan subject to no liens, charges, mortgages,
encumbrances or rights of others except as set forth in paragraph (ix)
or other liens which will be released simultaneously with such transfer
and assignment;
(xi) As of the Startup Day, (a) no more than __________ and
__________ of the Mortgage Loans in the Fixed Rate Group and the
Adjustable Rate Group, respectively, as a percentage of the outstanding
aggregate Loan Balance of the Mortgage Loans in such Group, are 30-59
days Delinquent, (b) no more than __________% of the Mortgage Loans in
the Fixed Rate Group, as a percentage of the outstanding aggregate Loan
Balances of the Mortgage Loans in such Group, are 60-89 days Delinquent
and none of the Mortgage Loans in the Adjustable Rate Group is 60+ days
Delinquent, (c) none of the Mortgage Loans in the Fixed Rate Group, is
90+ days Delinquent, (d) none of the Mortgage Loans in the Adjustable
Rate Group are 90 or more days Delinquent, (e) no Obligor of any
Mortgage Loan has been 30 days or more Delinquent more than once during
the 12 months immediately preceding the Startup Day except as indicated
on Schedule III attached hereto and (f) no Obligor of any Mortgage Loan
has been 90 or more days Delinquent during the 12 months immediately
preceding the Startup Day except as indicated on Schedule III attached
hereto.
(xii) There is no delinquent tax or assessment lien on any
Mortgaged Property, and each Mortgaged Property is free of substantial
damage and is in good repair;
(xiii) There is no valid and enforceable offset, defense or
counterclaim to any Note or Mortgage, including the obligation of the
related Mortgagor to pay the unpaid principal of or interest on such
Note;
(xiv) There is no mechanics' lien or claim for work, labor or
material affecting any Mortgaged Property which is or may be a lien
prior to, or equal with, the lien of the related
<PAGE>
Mortgage except those which are insured against by any title insurance
policy referred to in paragraph (xvi) below;
(xv) Each Mortgage Loan at the time it was made complied in
all material respects with applicable state and federal laws and
regulations, including, without limitation, the federal Truth-in-Lending
Act and other consumer protection laws, usury, equal credit opportunity,
disclosure and recording laws;
(xvi) With respect to each Mortgage Loan either (a) an
attorney's opinion of title has been obtained but no title policy has
been obtained (provided that no title policy has been obtained with
respect to not more than 1.0% of the Original Aggregate Loan Balance of
the Mortgage Loans), or (b) a lender's title insurance policy, issued in
standard American Land Title Association form by a title insurance
company authorized to transact business in the state in which the
related Mortgaged Property is situated, in an amount at least equal to
the original balance of such Mortgage Loan together, in the case of a
Second Mortgage Loan, with the then-current principal balance of the
mortgage note relating to the Senior Lien, insuring the mortgagee's
interest under the related Mortgage Loan as the holder of a valid first
or second mortgage lien of record on the real property described in the
related Mortgage, as the case may be, subject only to exceptions of the
character referred to in paragraph (ix) above, was effective on the date
of the origination of such Mortgage Loan, and, as of the Startup Day,
such policy is valid and thereafter such policy shall continue in full
force and effect;
(xvii) Each Sub-Servicer, if any, is a qualified servicer as
defined in Section 8.03 with respect to the Mortgage Loans serviced by
it;
(xviii) The improvements upon each Mortgaged Property are
covered by a valid and existing hazard insurance policy with a generally
acceptable carrier that provides for fire and extended coverage
representing coverage not less than the least of (A) the outstanding
principal balance of the related Mortgage Loan (together, in the case of
a Second Mortgage Loan, with the outstanding principal balance of the
Senior Lien), (B) the minimum amount required to compensate for damage
or loss on a replacement cost basis or (C) the full insurable value of
the Mortgaged Property;
(xix) If any Mortgaged Property is in an area identified in
the Federal Register by the Federal Emergency Management Agency as
having special flood hazards, a flood insurance policy in a form meeting
the requirements of the current guidelines of the Flood Insurance
Administration is in effect with respect to such Mortgaged Property with
a generally acceptable carrier in an amount representing coverage not
less than the least of (A) the outstanding principal balance of the
related Mortgage Loan (together, in the case of a Second Mortgage Loan,
with the outstanding principal balance of the Senior Lien), (B) the
minimum amount required to compensate for damage or loss on a
replacement cost basis or (C) the maximum amount of insurance that is
available under the Flood Disaster Protection Act of 1973;
(xx) Each Mortgage and Note is the legal, valid and binding
obligation of the maker thereof and is enforceable in accordance with
its terms, except only as such enforcement may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting
the enforcement of creditors' rights generally and by general principles
of equity (whether
<PAGE>
considered in a proceeding or action in equity or at law), and, to the
best of the Seller's knowledge, all parties to each Mortgage Loan had
full legal capacity to execute all documents relating to such Mortgage
Loan and convey the estate therein purported to be conveyed;
(xxi) As of the Startup Day, no more than __________% and
__________% of the aggregate Loan Balance of the Mortgage Loans in the
Fixed Rate Group and the Adjustable Rate Group, respectively, will be
secured by Properties located within any single zip code area;
(xxii) Each original Mortgage was recorded or is in the
process of being recorded, and all subsequent assignments of the
original Mortgage have either been delivered for recordation, have been
recorded in the appropriate jurisdictions wherein such recordation is
necessary to perfect the lien thereof as against creditors of or
purchasers from the Seller (or, subject to Section 3.05 hereof, are in
the process of being recorded) or such assignment is in blank and is in
recordable form and has been delivered to the Trustee with the file;
(xxiii) The terms of each Note and each Mortgage have not been
impaired, altered or modified in any respect, except by a written
instrument which has been recorded, if necessary, to protect the
interest of the Owners and the Certificate Insurer and which has been
delivered to the Trustee. The substance of any such alteration or
modification is reflected on the related Schedule of Mortgage Loans;
(xxiv) The proceeds of each Mortgage Loan have been fully
disbursed, and there is no obligation on the part of the mortgagee to
make future advances thereunder. Any and all requirements as to
completion of any on-site or off-site improvements and as to
disbursements of any escrow funds therefor have been complied with. All
costs, fees and expenses incurred in making or closing or recording such
Mortgage Loans were paid;
(xxv) The related Note is not and has not been secured by any
collateral, pledged account or other security except the lien of the
corresponding Mortgage;
(xxvi) No Mortgage Loan has a shared appreciation feature,
or other contingent interest feature;
(xxvii) Each Mortgaged Property is located in the state
identified in the respective Schedule of Mortgage Loans and consists of
one or more parcels of real property with a residential dwelling, as
that term is defined in item (iv) of this Schedule I, erected thereon;
(xxviii) Each Mortgage contains a provision for the
acceleration, subject to federal law, of the payment of the unpaid
principal balance of the related Mortgage Loan in the event the related
Mortgaged Property is sold without the prior consent of the mortgagee
thereunder;
(xxix) Any advances made after the date of origination of a
Mortgage Loan but prior to the Cut-Off Date have been consolidated with
the outstanding principal amount secured by the related Mortgage, and
the secured principal amount, as consolidated, bears a single interest
rate and single repayment term reflected on the respective Schedule of
Mortgage Loans. The consolidated principal amount does not exceed the
original principal amount of the related
<PAGE>
Mortgage Loan. No Note permits or obligates the Master Servicer to
make future advances to the related Mortgagor at the option of the
Mortgagor;
(xxx) There is no proceeding pending or threatened for the
total or partial condemnation of any Mortgaged Property, nor is such a
proceeding currently occurring, and each Mortgaged Property is undamaged
by waste, fire, water, flood, earthquake or earth movement.
(xxxi) All of the improvements which were included for the
purposes of determining the Appraised Value of any Mortgaged Property
lie wholly within the boundaries and building restriction lines of such
Mortgaged Property, and no improvements on adjoining properties encroach
upon such Mortgaged Property, and are stated in the title insurance
policy and affirmatively insured;
(xxxii) No improvement located on or being part of any
Mortgaged Property is in violation of any applicable zoning law or
regulation. All inspections, licenses and certificates required to be
made or issued with respect to all occupied portions of each Mortgaged
Property and, with respect to the use and occupancy of the same,
including but not limited to certificates of occupancy and fire
underwriting certificates, have been made or obtained from the
appropriate authorities and such Mortgaged Property is lawfully occupied
under the applicable law;
(xxxiii) With respect to each Mortgage constituting a deed of
trust, a trustee, duly qualified under applicable law to serve as such,
has been properly designated and currently so serves and is named in
such Mortgage, and no fees or expenses are or will become payable by the
Owners or the Trust to the trustee under the deed of trust, except in
connection with a trustee's sale after default by the related Mortgagor;
(xxxiv) Each Mortgage contains customary and enforceable
provisions which render the rights and remedies of the holder thereof
adequate for the realization against the related Mortgaged Property of
the benefits of the security, including (A) in the case of a Mortgage
designated as a deed of trust, by trustee's sale and (B) otherwise by
judicial foreclosure. there is no homestead or other exemption available
to the related Mortgagor which would materially interfere with the right
to sell All the related Mortgaged Property at a trustee's sale or the
right to foreclose the related Mortgage;
(xxxv) There is no default, breach, violation or event of
acceleration existing under any Mortgage or the related Note and, to the
best of the Seller's knowledge, no event which, with the passage of time
or with notice and the expiration of any grace or cure period, would
constitute a default, breach, violation or event of acceleration; and
neither the Master Servicer nor the Seller has waived any default,
breach, violation or event of acceleration;
(xxxvi) No instrument of release or waiver has been executed
in connection with any Mortgage Loan, and no Mortgagor has been
released, in whole or in part, except in connection with an assumption
agreement which has been approved by the primary mortgage guaranty
insurer, if any, and which has been delivered to the Trustee;
<PAGE>
(xxxvii) The maturity date of each Mortgage Loan is at least
twelve months prior to the maturity date of the related first mortgage
loan if such first mortgage loan provides for a balloon payment;
(xxxviii) Each Mortgage Loan conforms, and all such Mortgage
Loans in the aggregate conform, in all material respects to the
description thereof set forth in the Prospectus Supplement;
(xxxix) The credit underwriting guidelines applicable to each
Mortgage Loan conform in all material respects to the description
thereof set forth in the Prospectus Supplement;
(xl) Each Mortgage Loan was originated based upon a full
appraisal, which included an interior inspection of the subject
property;
(xli) The Mortgage Loans were not selected for inclusion in
the Trust by the Seller on any basis intended to adversely affect the
Trust;
(xlii) No more than __________% and __________% of the
aggregate Loan Balances of the Mortgage Loans in the Fixed Rate Group
and the Adjustable Rate Group, respectively, are secured by Properties
that are non-owner occupied Properties (investor-owned and vacation);
(xliii) No more than __________% and __________% of the
aggregate Loan Balances of the Mortgage Loans in the Fixed Rate Group
and the Adjustable Rate Group, respectively, were originated under the
Seller's non-income verification program;
(xliv) The Seller has no actual knowledge that there exist any
hazardous substances, hazardous wastes or solid wastes, as such terms
are defined in the Comprehensive Environmental Response Compensation and
Liability Act, the Resource Conservation and Recovery Act of 1976, or
other federal, state or local environmental legislation on any Mortgaged
Property;
(xlv) The Seller was properly licensed or otherwise
authorized, to the extent required by applicable law, to originate or
purchase each Mortgage Loan and the communication of the transactions
herein contemplated, including, without limitation, the receipt of
interest by the Owners and the ownership of the Mortgage Loans by the
Trustee as trustee of the Trust will not involve the violation of such
laws;
(xlvi) With respect to each Mortgaged Property subject to a
ground lease (i) the current ground lessor has been identified and all
ground rents which have previously become due and owing have been paid;
(ii) the ground lease term extends, or is automatically renewable, for
at least five years beyond the maturity date of the related Initial
Mortgage Loan; (iii) the ground lease has been duly executed and
recorded; (iv) the amount of the ground rent and any increases therein
are clearly identified in the lease and are for predetermined amounts at
predetermined times; (v) the ground rent payment is included in the
borrower's monthly payment as an expense item; (vi) the Trust has the
right to cure defaults on the ground lease; and (vii) the terms and
conditions of the leasehold do not prevent the free and absolute
marketability of the Mortgaged Property. As of the Cut-Off Date, the
Loan Balance of the
<PAGE>
Initial Mortgage Loans with related Properties subject to ground leases
does not exceed 1 % of the Original Aggregate Loan Balance;
(xlvii) All taxes, governmental assessments, insurance
premiums, leasehold payments or ground rents which previously became due
and owing have been paid or are not yet delinquent, or an escrow of
funds has been established in an amount sufficient to pay for every such
item which remains unpaid and which has been assessed but is not yet
delinquent;
(xlviii) As of the Startup Day, the Seller has not received a
notice of default of any first mortgage loan secured by any Mortgaged
Property which has not been cured by a party other than the Seller:
(xlix) All of the Initial Mortgage Loans in the Adjustable
Rate Group are in a first lien position;
(l) As of the Cut-off Date, each Mortgage Loan has an
outstanding balance of less than $500,000, except for two Mortgage Loans
with outstanding balances in excess of $500,000;
(li) Each Mortgage Loan is secured by a mortgage on property
which, at the time of origination of each Mortgage Loan, has an
appraised value of less than $1 million;
(lii) No more than ___% of the Fixed Rate Group Mortgage
Loans are in a second priority position; and
(liii) The weighted average margin of the Adjustable Rate
Group Mortgage Loans is ----%.
<PAGE>
SCHEDULE I-A
SCHEDULE OF FIXED RATE GROUP MORTGAGE LOANS
<PAGE>
SCHEDULE I-B
SCHEDULE OF ADJUSTABLE RATE GROUP MORTGAGE LOANS
<PAGE>
SCHEDULE II
[RESERVED]
<PAGE>
SCHEDULE III
MORTGAGE LOANS WITH DELINQUENCY CHARACTERISTICS
<PAGE>
SCHEDULE IV
MORTGAGE LOANS WITH 15-YEAR "BALLOON" PAYMENTS
A copy of this Schedule is maintained by the Trustee at the Corporate
Trust Office and by the Seller at its principal office.
<PAGE>
SCHEDULE V
MORTGAGE LOANS WITH 5-YEAR "BALLOON" PAYMENTS
A copy of this Schedule is maintained by the Trustee at the Corporate
Trust Office and by the Seller at its principal office.
<PAGE>
EXHIBIT A
FORM OF CLASS A CERTIFICATE
SOLELY FOR FEDERAL INCOME TAX PURPOSES, THIS CERTIFICATE REPRESENTS A
CLASS OF "REGULAR INTERESTS" IN A "REAL ESTATE MORTGAGE INVESTMENT CONDUIT"
("REMIC") AS THOSE TERMS ARE DEFINED, RESPECTIVELY, IN SECTION 860G AND 860D OF
THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE"), ASSUMING COMPLIANCE
WITH THE REMIC PROVISIONS OF THE CODE.
BLOCK MORTGAGE FINANCE
ASSET BACKED CERTIFICATES, SERIES 1997-1
CLASS A-[ ]
(____% Pass-Through Rate)
Representing Certain Interests in a Pool of [Fixed]
[Adjustable] Rate Group Mortgage Loans Formed by
Block Mortgage Finance, Inc.
and Serviced by
BLOCK FINANCIAL CORPORATION
(This certificate does not represent an interest in, or an obligation
of, nor are the underlying Mortgage Loans insured or guaranteed by, Block
Mortgage Finance, Inc., Companion Mortgage Corporation or Block Financial
Corporation. This Certificate represents a fractional ownership interest in the
[Fixed] [Adjustable] Rate Group Mortgage Loans and certain other property held
by the Trust.)
Unless this certificate is presented by an authorized representative of
The Depository Trust Company, a New York corporation ("DTC"), to the Depositor
or its agent for registration of transfer, exchange, or payment, and any
certificate issued is registered in the name of Cede & Co. or in such other name
as is requested by an authorized representative of DTC (and any payment is made
to Cede & Co. or to such other entity as is requested by an authorized
representative of DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the registered owner
hereof. Cede & Co., has an interest herein.
No: A-[ ]-[ ]
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
CUSIP
- --------------------------------------------------------------------------------------------------------------------------------
$
- --------------------------------------------------------------------------------------------------------------------------------
Original Certificate Date Final Scheduled
Principal Balance Distribution Date
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Registered Owner
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
A-1
<PAGE>
Trustee Authentication
BANKERS TRUST COMPANY OF CALIFORNIA, N.A., as Trustee
By:__________________________________
Name: _______________________________
Title: ______________________________
Date of Authentication ______________
A-2
<PAGE>
The registered Owner named above is the registered beneficial Owner of a
fractional interest in (a) the Mortgage Loans in the [Fixed] [Adjustable] Rate
Group (other than any principal and interest payments received thereon prior to
the Cut-Off Date) listed in Schedule I-[A][B] to the Pooling and Servicing
Agreement which the Seller has caused to be delivered to the Depositor and the
Depositor has caused to be delivered to the Trustee (and all substitutions
therefor as provided by Section 3.03, 3.04 and 3.06 of the Pooling and Servicing
Agreement), together with the related Mortgage Loan documents and the Seller's
and Depositor's interest in any Mortgaged Property which secured a Mortgage Loan
in the [Fixed] [Adjustable] Rate Group but which has been acquired by
foreclosure or deed in lieu of foreclosure, and all payments thereon and
proceeds of the conversion, voluntary or involuntary, of the foregoing; (b) such
amounts as may be held by the Trustee in the Distribution Account, together with
investment earnings on such amounts and such amounts as may be held in the name
of the Trustee in the Collection Account, if any, (exclusive of investment
earnings thereon except as otherwise provided herein), whether in the form of
cash, instruments, securities or other properties (including any Eligible
Investments held by the Master Servicer); (c) the [Fixed] [Adjustable] Rate
Group Certificate Insurance Policy; and (d) proceeds of all the foregoing
(including, but not by way of limitation, all proceeds of any mortgage
insurance, hazard insurance and title insurance policy relating to the Mortgage
Loans in the [Fixed] [Adjustable] Rate Group, cash proceeds, accounts, accounts
receivable, notes, drafts, acceptances, chattel paper, checks, deposit accounts,
rights to payment of any and every kind, and other forms of obligations and
receivables which at any time constitute all or part of or are included in the
proceeds of any of the foregoing) to pay the Certificates as specified in the
Pooling and Servicing Agreement.
The Owner hereof is entitled to principal payments on each Distribution
Date, as hereinafter described, which will fully amortize such original
Certificate Principal Balance over the period from the date of initial issuance
of the Certificates to the final Distribution Date for the Class A-[ ]
Certificates. Therefore, the actual outstanding principal amount of this
Certificate may, on any date subsequent to February __, 1997 (the first
Distribution Date) be less than the original Certificate Principal Balance set
forth above.
Upon receiving the final distribution hereon, the Owner hereof is
required to send this Certificate to the Trustee. The Pooling and Servicing
Agreement (as defined below) provides that, in any event, upon the making of the
final distribution due on this Certificate, this Certificate shall be deemed
cancelled for all purposes under the Pooling and Servicing Agreement.
NEITHER THIS CERTIFICATE NOR THE UNDERLYING MORTGAGE LOANS ARE
INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE GOVERNMENT NATIONAL MORTGAGE ASSOCIATION OR ANY OTHER
GOVERNMENTAL AGENCY.
THE PRINCIPAL OF THIS CERTIFICATE IS PAYABLE IN INSTALLMENTS. THEREFORE,
THE ACTUAL OUTSTANDING PRINCIPAL AMOUNT OF THIS CERTIFICATE MAY ON ANY DATE
SUBSEQUENT TO FEBRUARY __, 1997 (THE FIRST DISTRIBUTION DATE) BE LESS THAN ITS
ORIGINAL CERTIFICATE PRINCIPAL BALANCE.
A-3
<PAGE>
THIS CERTIFICATE IS A PASS-THROUGH CERTIFICATE ONLY AND,
NOTWITHSTANDING REFERENCES HEREIN TO PRINCIPAL AND INTEREST, NO DEBT
OF ANY PERSON IS REPRESENTED HEREBY.
This Certificate is one of a Class of duly-authorized Certificates
designated as Block Mortgage Finance Asset Backed Certificates, Series 1997-1,
Class A-[ ] (the "Class A-[ ] Certificates") and issued under and subject to the
terms, provisions and conditions of that certain Pooling and Servicing Agreement
dated as of January 1, 1997 (the "Pooling and Servicing Agreement") by and among
Block Mortgage Finance, Inc., in its capacity as Depositor (the "Depositor"),
Companion Mortgage Corporation, in its capacity as the Seller (the "Seller"),
Block Financial Corporation, in its capacity as the Master Servicer (the "Master
Servicer"), and Bankers Trust Company of California, N.A., in its capacity as
the Trustee (the "Trustee"), to which Pooling and Servicing Agreement the Owner
of this Certificate by virtue of acceptance hereof assents and by which such
Owner is bound. Also issued under the Pooling and Servicing Agreement are
Certificates designated as Block Mortgage Finance Asset Backed Certificates,
Series 1997-1, Class A-[ ] (the "Class A-[ ] Certificates"), Class A-[ ] (the
"Class A-[ ] Certificates"), Class A-[ ] (the "Class A-[ ] Certificates"), Class
A-[ ] (the "Class A-[ ] Certificates"), Class X-1 (the "Class X-1
Certificates"), Class X-2 (the "Class X-2 Certificates" and, with the Class X-1
Certificates, the "Class X Certificates") and Class R (Residual Interest) (the
"Class R Certificates"). The Class A-1 Certificates, the Class A-2 Certificates,
the Class A-3 Certificates, the Class A-4 Certificates, and the Class A-5
Certificates are together referred to as the "Class A Certificates" and the
Class A Certificates, the Class X Certificates and the Class R Certificates are
together referred to herein as the "Certificates." Terms capitalized herein and
not otherwise defined herein shall have the respective meanings set forth in the
Pooling and Servicing Agreement.
On the 25th day of each month, or, if such day is not a Business Day,
then the next succeeding Business Day (each such day being a "Distribution
Date") commencing February __, 1997, the Owners of the Class A-[ ] Certificates
as of the close of business on the [last day of the calendar month immediately
preceding the calendar month in which a Distribution Date occurs] [day
immediately preceding such Distribution Date] (the "Record Date") will be
entitled to receive the Class A-[ ] Distribution Amount relating to such
Certificate on such Distribution Date. Distributions will be made in immediately
available funds to Owners of Certificates having an aggregate original Class A-[
] Certificate Principal Balance of at least $1,000,000 (by wire transfer or
otherwise) to the account of an Owner at a domestic bank or other entity having
appropriate facilities therefor, if such Owner has so notified the Trustee, or
by check mailed to the address of the person entitled thereto as it appears on
the Register.
Each Owner of record of a Class A-[ ] Certificate will be entitled to
receive such Owner's Percentage Interest in the amounts due on such Distribution
Date to the Owners of the Class A-[ ] Certificates. The Percentage Interest of
each Class A-[ ] Certificate as of any date of determination will be equal to
the percentage obtained by dividing the original Certificate Principal Balance
of such Class A-[ ] Certificate on the Startup Day by the aggregate Class A-[ ]
Certificate Principal Balance on the Startup Day.
The Certificate Insurer is required, subject to the terms of the
Certificate Insurance Policies, to make Insured Payments available to the
Trustee on or prior to the related Distribution Date for distribution to the
Owners. "Insured Payment" means with respect to either Mortgage Loan Group and
as to any Distribution Date (i) the excess, if any, of (a) the sum of the
related Current Interest and the
A-4
<PAGE>
then existing related Subordination Deficit, if any, over (b) the Total
Available Funds with respect to such Group (net of the Premium Amount allocable
to such Group) after taking into account (x) the cross-collateralization
provisions of Sections 7.03(c)(i)(A) and (B) and 7.03(c)(ii)(A) and (B) of the
Pooling and Servicing Agreement and (y) the portion of any Fixed Rate Group
Principal Distribution Amount or Adjustable Rate Group Principal Distribution
Amount, as the case may be, to be actually distributed on such Distribution Date
without regard to any related Insured Payment to be made with respect to such
Distribution Date, plus (ii) an amount equal to the Preference Amount with
respect to the related Class of Class A Certificates.
Upon receipt of amounts under the Certificate Insurance Policies on
behalf of the Owners of the Class A Certificates, the Trustee shall distribute
in accordance with the Pooling and Servicing Agreement such amounts (directly or
through a Paying Agent) to the Owners of the appropriate Class of the Class A
Securities.
The Trustee or any duly-appointed Paying Agent will duly and punctually
pay distributions with respect to this Certificate in accordance with the terms
hereof and the Pooling and Servicing Agreement. Amounts properly withheld under
the Code by any Person from a distribution to any Owner shall be considered as
having been paid by the Trustee to such Owner for all purposes of the Pooling
and Servicing Agreement.
The Mortgage Loans will be serviced by the Master Servicer pursuant to
the Pooling and Servicing Agreement. The Pooling and Servicing Agreement permits
the Master Servicer to enter into Sub-Servicing Agreements with certain
institutions eligible for appointment as Sub-Servicers for the servicing and
administration of certain Mortgage Loans. No appointment of any Sub-Servicer
shall release the Master Servicer from any of its obligations under the Pooling
and Servicing Agreement.
This Certificate does not represent a deposit or other obligation of, or
an interest in, nor are the underlying Mortgage Loans insured or guaranteed by,
Block Mortgage Finance, Inc., Companion Mortgage Corporation, Block Financial
Corporation or any of their affiliates. This Certificate is limited in right of
payment to certain collections and recoveries relating to the Mortgage Loans and
amounts on deposit in the Distribution Account and the Collection Account
(except as otherwise provided in the Pooling and Servicing Agreement) and
payments received by the Trustee pursuant to the [Fixed] [Adjustable] Rate Group
Certificate Insurance Policy, all as more specifically set forth hereinabove and
in the Pooling and Servicing Agreement.
No Owner shall have any right to institute any proceeding, judicial or
otherwise, with respect to the Pooling and Servicing Agreement, or for the
appointment of a receiver or trustee, or for any other remedy under the Pooling
and Servicing Agreement except in compliance with the terms thereof.
Notwithstanding any other provisions in the Pooling and Servicing
Agreement, the Owner of any Certificate shall have the right which is absolute
and unconditional to receive distributions to the extent provided in the Pooling
and Servicing Agreement with respect to such Certificate or to institute suit
for the enforcement of any such distribution, and such right shall not be
impaired without the consent of such Owner. The Owner of this Certificate, by
its acceptance hereof, agrees, however, that to the extent the Certificate
Insurer makes Insured Payments, either directly or indirectly (as by paying
through the Trustee or Paying Agent), to the Owners of such Class A-[ ]
Certificates, the Certificate Insurer will be subrogated to the rights of such
Owners of Class A-[ ] Certificates with respect to such
A-5
<PAGE>
Insured Payment, shall be deemed to the extent of the payments so made to be a
registered Owner of such Class A-[ ] Certificates and shall receive all future
distributions of the Class A-[ ] Distribution Amount until all such Insured
Payments by the Certificate Insurer have been fully reimbursed.
The Pooling and Servicing Agreement provides that the obligations
created thereby will terminate upon the earlier of (i) the payment to the Owners
of all Certificates from amounts other than those available under the
Certificate Insurance Policies of all amounts held by the Trustee and required
to be paid to such Owners pursuant to the Pooling and Servicing Agreement upon
the later to occur of (a) the final payment or other liquidation (or any advance
made with respect thereto) of the last Mortgage Loan in the Trust Estate or (b)
the disposition of all property acquired in respect of any Mortgage Loan
remaining in the Trust Estate or (ii) at any time when a Qualified Liquidation
of the Trust Estate is effected as described below. To effect a termination of
the Pooling and Servicing Agreement pursuant to clause (ii) above, the Owners of
all Certificates then Outstanding shall unanimously direct the Trustee on behalf
of the Trust to adopt a plan of complete liquidation, as contemplated by Section
860F(a)(4) of the Code, and the Trustee shall either sell the Mortgage Loans and
distribute the proceeds of the liquidation of the Trust, or shall distribute
equitably in kind all of the assets of the Trust Estate to the remaining Owners
of the Certificates, each in accordance with such plan, so that the liquidation
or distribution of the Trust Estate, the distribution of any proceeds of the
liquidation and the termination of the Pooling and Servicing Agreement occur no
later than the close of the 90th day after the date of adoption of the plan of
liquidation and such liquidation qualifies as a Qualified Liquidation.
The Pooling and Servicing Agreement additionally provides that (i)
certain Owners of the Class R Certificates and the Master Servicer may, at their
option, purchase, and the Trustee may sell at auction, from the Trust all
remaining Mortgage Loans and other property then constituting the Trust Estate,
and thereby effect early retirement of the Certificates, after the Optional
Termination Date and (ii) under certain circumstances relating to the
qualification of the Trust Estate as a REMIC under the Code the Mortgage Loans
may be sold, thereby effecting the early retirement of the Certificates.
The Trustee shall give written notice of termination of the Pooling and
Servicing Agreement to each Owner in the manner set forth therein.
The Certificate Insurer or the Owners of the majority of the Percentage
Interests represented by the Class A Certificates with the prior written consent
of the Certificate Insurer have the right to exercise any trust or power set
forth in Section 6.11 of the Pooling and Servicing Agreement.
As provided in the Pooling and Servicing Agreement and subject to
certain limitations therein set forth and referred to on the face hereof, the
transfer of this Certificate is registrable in the Register upon surrender of
this Certificate for registration of transfer at the office designated as the
location of the Register duly endorsed by, or accompanied by a written
instrument of transfer in form satisfactory to the Registrar duly executed by,
the Owner hereof or his attorney duly authorized in writing, and thereupon one
or more new Certificates of the like Class, tenor and a like Percentage Interest
will be issued to the designated transferee or transferees.
The Pooling and Servicing Agreement permits, with certain exceptions as
therein provided, the amendment thereof and the modifications of rights and
obligations of the parties provided therein by the Depositor, the Trustee, the
Seller and the Master Servicer at any time and from time to time, with
A-6
<PAGE>
the prior written approval of the Certificate Insurer and without the consent of
the Owners; provided, that in certain circumstances provided for in the Pooling
and Servicing Agreement, such consent of the Owners will be required prior to
amendments. Any such consent by the Owner at the time of the giving thereof, of
this Certificate shall be conclusive and binding upon such Owner and upon all
future Owners of the Certificate and of any Certificate issued upon the
registration of Transfer hereof or in exchange hereof or in lieu hereof whether
or not notation of such consent or waiver is made upon this Certificate.
The Trustee is required to furnish certain information on each
Distribution Date to the Owner of this certificate as more fully described in
the Pooling and Servicing Agreement.
The Class A-[ ] Certificates are issuable only as registered
Certificates in minimum denominations of $25,000 original Certificate Principal
Balance and multiples of $1,000 in excess thereof. As provided in the Pooling
and Servicing Agreement and subject to certain limitations therein set forth,
Class A-[ ] Certificates are exchangeable for new Class A-[ ] Certificates of
authorized denominations evidencing the same aggregate principal amount.
No service charge will be made for any such registration of transfer or
exchange, but the Registrar or Trustee may require payment of a sum sufficient
to cover any tax or other governmental charge payable in connection therewith.
The Trustee and any agent of the Trustee may treat the Person in whose
name this Certificate is registered as the owner hereof for all purposes, and
neither the Trustee or any such agent shall be affected by notice to the
contrary, except as may otherwise be specifically provided in the Pooling and
Servicing Agreement with respect to the Certificate Insurer.
A-7
<PAGE>
EXHIBIT B
FORM OF CLASS X CERTIFICATE
BLOCK MORTGAGE FINANCE
ASSET BACKED CERTIFICATES, SERIES 1997-1
INTEREST-ONLY CLASS X-[ ] CERTIFICATE
Representing Certain Interests Relating to a Pool
of Mortgage Loans formed by Block Mortgage
Finance, Inc.
and Serviced by
BLOCK FINANCIAL CORPORATION
This certificate does not represent an interest in, or an obligation of,
nor are the underlying Mortgage Loans insured or guaranteed by, Block Mortgage
Finance, Inc., Companion Mortgage Corporation or Block Financial Corporation.
This certificate represents a fractional ownership interest in the Mortgage
Loans and certain other property held by the Trust.
No.: X-[ ]-[ ]
-------------
Date
- -------------------- -------------------
Percentage Interest Final Scheduled
Distribution Date
-------------------
Registered Holder
Trustee Authentication
BANKERS TRUST COMPANY OF
CALIFORNIA, N.A., as Trustee
By: __________________________
Name: __________________________
Title: __________________________
Date of Authentication: ___________________
B-1
<PAGE>
The registered Owner named above is the registered Owner of a fractional
interest in (a) the Mortgage Loans in the [Fixed] [Adjustable] Rate Group (other
than any principal and interest payments received thereon on or prior to the
Cut-Off Date) listed in Schedule I-[A][B] to the Pooling and Servicing Agreement
which the Seller has caused to be delivered to the Depositor and the Depositor
has caused to be delivered to the Trustee (and all substitutions therefor as
provided by Section 3.03, 3.04 and 3.06 of the Pooling and Servicing Agreement),
together with the related Mortgage Loan documents and the Seller's and
Depositor's interest in any Property which secured a Mortgage Loan in the
[Fixed] [Adjustable] Rate Group but which has been acquired by foreclosure or
deed in lieu of foreclosure, and all payments thereon and proceeds of the
conversion, voluntary or involuntary, of the foregoing; (b) such amounts as may
be held by the Trustee in the Distribution Account, together with investment
earnings on such amounts and such amounts may be held in the name of the Trustee
in the Collection Account, if any, exclusive of investment earnings thereon
(except as otherwise provided herein), whether in the form of cash, instruments,
securities or other properties (including any Eligible Investments held by the
Master Servicer); (c) the [Fixed] [Adjustable] Rate Group Certificate Insurance
Policy; and (d) proceeds of all the foregoing (including, but not by way of
limitation, all proceeds of any mortgage insurance, hazard insurance and title
insurance policy relating to the Mortgage Loans, cash proceeds, accounts,
accounts receivable, notes, drafts, acceptances, chattel paper, checks, deposit
accounts, rights to payment of any and every kind, and other forms of
obligations and receivables which at any time constitute all or part of or are
included in the proceeds of any of the foregoing) to pay the Certificates as
specified in the Pooling and Servicing Agreement.
Upon receiving the final distribution hereon, the Owner hereof is
required to send this Certificate to the Trustee. The Pooling and Servicing
Agreement provides that, in any event, upon the making of the final distribution
due on this Certificate, this Certificate shall be deemed cancelled for all
purposes under the Pooling and Servicing Agreement.
THIS CERTIFICATE IS SUBORDINATE TO THE CLASS A-1, CLASS A-2, CLASS A-3,
CLASS A-4, AND CLASS A-5 CERTIFICATES OF THIS SERIES TO THE EXTENT DESCRIBED IN
THE POOLING AND SERVICING AGREEMENT REFERRED TO HEREIN.
THIS CERTIFICATE HAS NOT BEEN REGISTERED OR QUALIFIED UNDER THE
SECURITIES ACT OF 1933 (THE "SECURITIES ACT") OR THE SECURITIES LAWS OF ANY
STATE. ANY RESALE, TRANSFER OR OTHER DISPOSITION OF THIS CERTIFICATE WITHOUT
SUCH REGISTRATION OR QUALIFICATION MAY BE MADE ONLY IN A TRANSACTION WHICH DOES
NOT REQUIRE SUCH REGISTRATION OR QUALIFICATION AND IN ACCORDANCE WITH THE
PROVISIONS OF SECTION 5.02 OF THE POOLING AND SERVICING AGREEMENT REFERRED TO
HEREIN.
SOLELY FOR FEDERAL INCOME TAX PURPOSES, THIS CERTIFICATE REPRESENTS A
CLASS OF "REGULAR INTERESTS" IN A "REAL ESTATE MORTGAGE INVESTMENT CONDUIT"
("REMIC") AS THOSE TERMS ARE DEFINED, RESPECTIVELY, IN SECTION 860G AND 860D OF
THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE"), ASSUMING COMPLIANCE
WITH THE REMIC PROVISIONS OF THE CODE.
B-2
<PAGE>
THIS CERTIFICATE IS A PASS-THROUGH CERTIFICATE ONLY AND,
NOTWITHSTANDING REFERENCES HEREIN TO PRINCIPAL AND INTEREST, NO DEBT OF
ANY PERSON IS REPRESENTED HEREBY.
NEITHER THIS CERTIFICATE NOR THE UNDERLYING MORTGAGE LOANS ARE
INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE GOVERNMENT NATIONAL MORTGAGE ASSOCIATION OR ANY OTHER
GOVERNMENTAL AGENCY.
THIS CERTIFICATE IS AN INTEREST ONLY CERTIFICATE. THE HOLDER OF THIS
CERTIFICATE SHALL NOT BE ENTITLED TO ANY DISTRIBUTION OF PRINCIPAL WITH
RESPECT TO THE MORTGAGE LOANS.
This Certificate is one of a Class of duly-authorized Certificates
designated as Block Mortgage Finance, Inc., Asset Backed Certificates, Series
1997-1, Class X-[ ] (the "Class X-[ ] Certificates") and issued under and
subject to the terms, provisions and conditions of that certain Pooling and
Servicing Agreement dated as of January 1, 1997 (the "Pooling and Servicing
Agreement") by and among Block Mortgage Finance, Inc., in its capacity as
Depositor (the "Depositor"), Companion Mortgage Corporation, in its capacity as
the Seller (the "Seller"), Block Financial Corporation, in its capacity as the
Master Servicer (the "Master Servicer"), and Bankers Trust Company of
California, N.A., in its capacity as the Trustee (the "Trustee"), to which
Pooling and Servicing Agreement the Owner of this Certificate by virtue of
acceptance hereof assents and by which such Owner is bound. Also issued under
the Pooling and Servicing Agreement are Certificates designated as Block
Mortgage Finance Asset Backed Certificates, Series 1997-1, Class A-1, Class A-2,
Class A-3, Class A-4 and Class A-5 (collectively, the "Class A Certificates"),
Class X-[ ] (the "Class X-[ ] Certificates" and, with the Class X-[ ]
Certificates, the "Class X Certificates") and Class R (the "Class R
Certificates"). The Class A Certificates, the Class X Certificates and the Class
R Certificates are together referred to herein as the "Certificates." Terms
capitalized herein and not otherwise defined herein shall have the respective
meanings set forth in the Pooling and Servicing Agreement.
Terms capitalized herein and not otherwise defined herein shall have the
respective meanings set forth in the Pooling and Servicing Agreement.
On the 25th day of each month, or, if such day is not a Business Day,
then the next succeeding Business Day (each such day being a "Distribution
Date") commencing February __, 1997, the Owners of the Class X-[ ] Certificates
as of the close of business on the [last business day of the calendar month
immediately preceding the calendar month in which such Distribution Date occurs]
[day immediately preceding such Distribution Date] (the "Record Date") will be
entitled to receive the Class X-[ ] Distribution Amount relating to such
Distribution Date. Distributions will be made in immediately available funds to
such Owners, by wire transfer or otherwise, to the account of an Owner at a
domestic bank or other entity having appropriate facilities therefor, if such
Owner has so notified the Trustee at least 5 business days prior to the related
Record Date, or by check mailed to the address of the person entitled thereto as
it appears on the Register.
Each Owner of record of a Class X-[ ] Certificate will be entitled to
receive such Owner's Percentage Interest in the amounts due on such Distribution
Date to the Owners of the Class X-[ ]
B-3
<PAGE>
Certificates. The Percentage Interest of each Class X-[ ] Certificate as of any
date of determination will be equal to the percentage interest set forth on such
Class X-[ ] Certificate.
The Trustee or any duly appointed Paying Agent will duly and punctually
pay distributions with respect to this Certificate in accordance with the terms
hereof and the Pooling and Servicing Agreement. Amounts properly withheld under
the Code or applicable to any Holder shall be considered as having been paid by
the Trustee to such Owner for all purposes of the Pooling and Servicing
Agreement.
The Mortgage Loans will be serviced by the Master Servicer pursuant to
the Pooling and Servicing Agreement. The Pooling and Servicing Agreement permits
the Master Servicer to enter into Sub-Servicing Agreements with certain
institutions eligible for appointment as Sub-Servicers for the servicing and
administration of certain Mortgage Loans. No appointment of any Sub-Servicer
shall release the Master Servicer from any of its obligations under the Pooling
and Servicing Agreement.
This Certificate does not represent a deposit or other obligation of, or
an interest in, nor are the underlying Mortgage Loans insured or guaranteed by,
Block Mortgage Finance, Inc., Companion Mortgage Corporation or Block Financial
Corporation or any of their affiliates. This Certificate is limited in right of
payment to certain collections and recoveries relating to the Mortgage Loans and
amounts on deposit in the Distribution Account and the Collection Account
(except as otherwise provided in the Pooling and Servicing Agreement), all as
more specifically set forth hereinabove and in the Pooling and Servicing
Agreement.
No Owner shall have any right to institute any proceeding, judicial or
otherwise, with respect to the Pooling and Servicing Agreement, or for the
appointment of a receiver or trustee, or for any other remedy under the Pooling
and Servicing Agreement except in compliance with the terms hereof.
Notwithstanding any other provisions in the Pooling and Servicing
Agreement, the Owner of any Certificate shall have the right which is absolute
and unconditional to receive distributions to the extent provided in the Pooling
and Servicing Agreement with respect to such Certificate or to institute suit
for the enforcement of any such distribution, and such right shall not be
impaired without the consent of such Owner.
The Pooling and Servicing Agreement provides that the obligations
created thereby will terminate upon the earlier of (i) the payment to the Owners
of all Certificates from amounts other than those available under the
Certificate Insurance Policies of all amounts held by the Trustee and required
to be paid to such Owners pursuant to the Pooling and Servicing Agreement upon
the later to occur of (a) the final payment or other liquidation (or any advance
made with respect thereto) of the last Mortgage Loan in the Trust Estate or (b)
the disposition of all property acquired in respect of any Mortgage Loan
remaining in the Trust Estate or (ii) at any time when a Qualified Liquidation
of the Trust Estate is effected as described below. To effect a termination of
the Pooling and Servicing Agreement pursuant to clause (ii) above, the Owners of
all Certificates then Outstanding shall unanimously direct the Trustee on behalf
of the Trust to adopt a plan of complete liquidation, as contemplated by Section
860F(a)(4) of the Code, and the Trustee shall either sell the Mortgage Loans and
distribute the proceeds of the liquidation of the Trust, or shall distribute
equitably in kind all of the assets of the Trust Estate to the remaining Owners
of the Certificates, each in accordance with
B-4
<PAGE>
such plan, so that the liquidation or distribution of the Trust Estate, the
distribution of any proceeds of the liquidation and the termination of the
Pooling and Servicing Agreement occur no later than the close of the 90th day
after the date of adoption of the plan of liquidation and such liquidation
qualifies as a Qualified Liquidation.
The Pooling and Servicing Agreement additionally provides that (i)
certain Owners of the Class R Certificates or the Master Servicer may, at their
option, purchase, and the Trustee may sell at auction, from the Trust all
remaining Mortgage Loans and other property then constituting the Trust Estate,
and thereby effect early retirement of the Certificates, after the Optional
Termination Date and (ii) under certain circumstances relating to the
qualification of the Trust Estate as a REMIC under the Code the Mortgage Loans
may be sold, thereby effecting the early retirement of the Certificates.
The Trustee shall give written notice of termination of the Pooling and
Servicing Agreement to each Owner in the manner set forth therein.
The Certificate Insurer or the Owners of a majority of the Percentage
Interests represented by the Class A Certificates then outstanding with the
prior written consent of the Certificate Insurer have the right to exercise any
trust or power set forth in Section 6.11 of the Pooling and Servicing Agreement.
As provided in the Pooling and Servicing Agreement and subject to
certain limitations therein set forth and referred to on the face hereof, the
transfer of this Certificate is registrable in the Register upon surrender of
this Certificate for registration of transfer at the office designated as the
location of the Register duly endorsed by, or accompanied by a written
instrument of transfer in form satisfactory to the Registrar duly executed by,
the Owner hereof or his attorney duly authorized in writing, and thereupon one
or more new Certificates of the like Class, tenor and a like Percentage Interest
will be issued to the designated transferee or transferees.
The Pooling and Servicing Agreement permits, with certain exceptions as
therein provided, the amendment thereof and the modifications of rights and
obligations of the parties provided therein by the Depositor, the Trustee, the
Seller and the Master Servicer at any time and from time to time, with the prior
written approval of the Certificate Insurer and not less than a majority of the
Percentage Interest represented by each affected Class of Certificates then
Outstanding, and in certain other circumstances provided for in the Pooling and
Servicing Agreement may be amended without the consent of the Owners. Any such
consent by the Owner at the time of the giving thereof, of this Certificate
shall be conclusive and binding upon such Owner and upon all future Owners of
the Certificate and of any Certificate issued upon the registration of Transfer
hereof or in exchange hereof or in lieu hereof whether or not notation of such
consent or waiver is made upon this Certificate.
The Trustee is required to furnish certain information on each
Distribution Date to the Owner of this Certificate, as more fully described in
the Pooling and Servicing Agreement.
The Class X-[ ] Certificates are issuable only as registered
Certificates in minimum percentage interests of all interests in the Class X-[ ]
Certificates. As provided in the Pooling and Servicing Agreement and subject to
certain limitations therein set forth, Class X-[ ] Certificates are
B-5
<PAGE>
exchangeable for new Class X-[ ] Certificates of the same percentage interest as
the Class X-[ ] Certificates exchanged.
No service charge will be made for any such registration of transfer or
exchange, but the Registrar or Trustee may require payment of a sum sufficient
to cover any tax or other governmental charge payable in connection therewith.
The Trustee and any agent of the Trustee may treat the Person in whose
name this certificate is registered as the owner hereof for all purposes, and
neither the Trustee or any such agent shall be affected by notice to the
contrary, except as may otherwise be specifically provided in the Pooling and
Servicing Agreement with respect to the Certificate Insurer.
B-6
<PAGE>
EXHIBIT C
FORM OF CLASS R CERTIFICATE
SOLELY FOR FEDERAL INCOME TAX PURPOSES, THIS CERTIFICATE REPRESENTS AN
INTEREST IN TWO CLASSES OF "RESIDUAL INTERESTS" IN TWO SEPARATE "REAL ESTATE
MORTGAGE INVESTMENT CONDUIT" ("REMIC") AS THOSE TERMS ARE DEFINED, RESPECTIVELY,
IN SECTION 860G AND 860D OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE
"CODE"), ASSUMING COMPLIANCE WITH THE REMIC PROVISIONS OF THE CODE.
THIS CERTIFICATE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "ACT"). ANY RESALE OR TRANSFER OF THIS CERTIFICATE WITHOUT
REGISTRATION THEREOF UNDER THE ACT MAY BE MADE ONLY IN A TRANSACTION EXEMPT FROM
THE REGISTRATION REQUIREMENTS OF THE ACT AND IN ACCORDANCE WITH THE PROVISIONS
OF SECTION 5.08 OF THE POOLING AND SERVICING AGREEMENT REFERRED TO HEREIN.
TRANSFER OF THIS CLASS R CERTIFICATE IS RESTRICTED AS SET FORTH IN THE
POOLING AND SERVICING AGREEMENT. NO TRANSFER OF THIS CLASS R CERTIFICATE MAY BE
MADE TO A "DISQUALIFIED ORGANIZATION" AS DEFINED IN SECTION 860E(e)(5) OF THE
INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE"). SUCH TERM INCLUDES THE
UNITED STATES, ANY STATE OR POLITICAL SUBDIVISION THEREOF, ANY FOREIGN
GOVERNMENT, ANY INTERNATIONAL ORGANIZATION, ANY AGENCY OR INSTRUMENTALITY OF ANY
OF THE FOREGOING (OTHER THAN CERTAIN TAXABLE INSTRUMENTALITIES), ANY COOPERATIVE
ORGANIZATION FURNISHING ELECTRIC ENERGY OR PROVIDING TELEPHONE SERVICE TO
PERSONS IN RURAL AREAS, OR ANY ORGANIZATION (OTHER THAN A FARMER'S COOPERATIVE
THAT IS EXEMPT FROM FEDERAL INCOME TAX UNLESS SUCH ORGANIZATION IS SUBJECT TO
THE TAX ON UNRELATED BUSINESS INCOME. NO TRANSFER OF THIS CLASS R CERTIFICATE
WILL BE REGISTERED BY THE CERTIFICATE REGISTRAR UNLESS THE PROPOSED TRANSFEREE
HAS DELIVERED AN AFFIDAVIT AFFIRMING, AMONG OTHER THINGS, THAT THE PROPOSED
TRANS-FEREE IS NOT A DISQUALIFIED ORGANIZATION AND IS NOT ACQUIRING THE CLASS R
CERTIFICATE FOR THE ACCOUNT OF A DISQUALIFIED ORGANIZATION. A COPY OF THE FORM
OF AFFIDAVIT REQUIRED OF EACH PROPOSED TRANSFEREE IS ON FILE AND AVAILABLE FROM
THE TRUSTEE.
A TRANSFER IN VIOLATION OF THE APPLICABLE RESTRICTIONS MAY GIVE RISE TO
A SUBSTANTIAL TAX UPON THE TRANSFEROR OR, IN CERTAIN CASES, UPON AN AGENT ACTING
FOR THE TRANSFEREE. A PASS-THROUGH ENTITY THAT HOLDS THIS CLASS R CERTIFICATE
AND THAT HAS A DISQUALIFIED ORGANIZATION AS A RECORD OWNER IN ANY TAXABLE YEAR
GENERALLY WILL BE SUBJECT TO A TAX FOR EACH SUCH YEAR EQUAL TO THE PRODUCT OF
(A) THE AMOUNT OF EXCESS INCLUSIONS WITH RESPECT TO THE PORTION OF THIS
CERTIFICATE OWNED THROUGH SUCH PASS-THROUGH ENTITY BY SUCH DISQUALIFIED
ORGANIZATION, AND (B) THE HIGHEST MARGINAL FEDERAL TAX RATE ON CORPORA-
C-1
<PAGE>
TIONS. FOR PURPOSES OF THE PRECEDING SENTENCE, THE TERM "PASS-THROUGH" ENTITY
INCLUDES REGULATED INVESTMENT COMPANIES, REAL ESTATE INVESTMENT TRUSTS, COMMON
TRUST FUNDS, PARTNERSHIPS, TRUSTS, ESTATES, COOPERATIVES TO WHICH PART I OF
SUBCHAPTER 1T OF THE CODE APPLIES AND, EXCEPT AS PROVIDED IN REGULATIONS,
NOMINEES.
NEITHER THIS CERTIFICATE NOR THE UNDERLYING MORTGAGE LOANS ARE INSURED
OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE GOVERNMENT
NATIONAL MORTGAGE ASSOCIATION OR ANY OTHER GOVERNMENTAL AGENCY.
BLOCK MORTGAGE FINANCE
ASSET BACKED CERTIFICATES, SERIES 1997-1
CLASS R
(Residual Interest)
Representing Certain Interests Relating to a Pool
of Mortgage Loans formed by Block Mortgage
Finance, Inc.
and Serviced by
BLOCK FINANCIAL CORPORATION
(This certificate does not represent an interest in, or an obligation
of, nor are the underlying Mortgage Loans insured or guaranteed by, Block
Mortgage Finance, Inc., Companion Mortgage Corporation or Block Financial
Corporation. This Certificate represents a fractional residual ownership
interest in the Trust Estate as defined below.)
No: R-__ _________________
Date
Percentage Interest ________% _________________________________
Final Scheduled Distribution Date
-----------------------
Registered Owner
The registered Owner named above is the registered Owner of a fractional
interest in (a) the Mortgage Loans (other than any principal and interest
payments received thereon on or prior to the Cut-Off Date) listed in Schedule
I-A and Schedule I-B to the Pooling and Servicing Agreement which the Seller has
caused to be delivered to the Depositor and the Depositor has caused to be
delivered to the Trustee (and all substitutions therefor as provided by Section
3.03, 3.04 and 3.06 of the Pooling and Servicing Agreement), together with the
related Mortgage Loan documents and the Seller's and Depositor's interest in any
Property which secured a Mortgage Loan but which has been acquired by
foreclosure or deed in lieu of foreclosure, and all payments thereon and
proceeds of the conversion, voluntary or involuntary, of the foregoing; (b) such
amounts as may be held by the Trustee in the Distribution Account, together with
investment earnings on such amounts and such amounts may be
C-2
<PAGE>
held in the name of the Trustee in the Collection Account, if any, exclusive of
investment earnings thereon (except as otherwise provided herein), whether in
the form of cash, instruments, securities or other properties (including any
Eligible Investments held by the Master Servicer); (c) the Certificate Insurance
Policies; and (d) proceeds of all the foregoing (including, but not by way of
limitation, all proceeds of any mortgage insurance, hazard insurance and title
insurance policy relating to the Mortgage Loans, cash proceeds, accounts,
accounts receivable, notes, drafts, acceptances, chattel paper, checks, deposit
accounts, rights to payment of any and every kind, and other forms of
obligations and receivables which at any time constitute all or part of or are
included in the proceeds of any of the foregoing) to pay the Certificates as
specified in the Pooling and Servicing Agreement.
THIS CERTIFICATE IS A PASS-THROUGH CERTIFICATE ONLY AND, NOTWITH-
STANDING REFERENCES HEREIN TO PRINCIPAL AND INTEREST, NO DEBT OF ANY
PERSON IS REPRESENTED HEREBY.
Trustee Authentication
BANKERS TRUST COMPANY OF CALIFORNIA, N.A., as Trustee
By:_______________________
Name:_____________________
Title:____________________
Date of Authentication___________________
This Certificate is one of a Class of duly-authorized Certificates
designated as Block Mortgage Finance Asset Backed Certificates, Series 1997-1,
Class R (the "Class R Certificates") and issued under and subject to the terms,
provisions and conditions of that certain Pooling and Servicing Agreement dated
as of January 1, 1997 (the "Pooling and Servicing Agreement") by and among Block
Mortgage Finance, Inc., in its capacity as Depositor (the "Depositor"),
Companion Mortgage Corporation, in its capacity as the Seller (the "Seller"),
Block Financial Corporation, in its capacity as the Master Servicer (the "Master
Servicer"), and Banker Trust Company of California, N.A., in its capacity as the
Trustee (the "Trustee"), to which Pooling and Servicing Agreement the Owner of
this Certificate by virtue of acceptance hereof assents and by which such Owner
is bound. Also issued under the Pooling and Servicing Agreement are Certificates
designated as Block Mortgage Finance, Inc., Asset Backed Certificates, Series
1997-1, Class A-1, Class A-2, Class A-3, Class A-4 and Class A-5 (collectively,
the "Class A Certificates") and Class X-1 and Class X-2 (collectively, the
"Class X Certificates"). The Class A Certificates, the Class X Certificates and
the Class R Certificates are together referred to herein as the "Certificates."
Terms capitalized herein and not otherwise defined herein shall have the
respective meanings set forth in the Pooling and Servicing Agreement.
On the 25th day of each month, or, if such day is not a Business Day,
then the next succeeding Business Day (each such day being a "Distribution
Date") commencing February __, 1997, each Owner of a Class R Certificate as of
the close of business on the last day of the calendar month immediately
preceding the calendar month in which a Distribution Date occurs (the "Record
Date") will be entitled to receive the Residual Net Monthly Excess Cashflow
relating to such Certificate on such Distribution Date.
C-3
<PAGE>
Distributions will be made in immediately available funds to Owners of
Class R Certificates having an aggregate Percentage Interest of at least 10% (by
wire transfer or otherwise) to the account of an Owner at a domestic bank or
other entity having appropriate facilities therefor, if such Owner has so
notified the Trustee, or by check mailed to the address of the person entitled
thereto as it appears on the Register.
The Trustee or any duly-appointed Paying Agent will duly and punctually
pay distributions with respect to this Certificate in accordance with the terms
hereof and the Pooling and Servicing Agreement.
Amounts properly withheld under the Code by any Person from a
distribution to any Owner shall be considered as having been paid by the Trustee
to such Owner for all purposes of the Pooling and Servicing Agreement.
The Mortgage Loans will be serviced by the Master Servicer pursuant to
the Pooling and Servicing Agreement. The Pooling and Servicing Agreement permits
the Master Servicer to enter into Sub-Servicing Agreements with certain
institutions eligible for appointment as Sub-Servicers for the servicing and
administration of certain Mortgage Loans. No appointment of any Sub-Servicer
shall release the Master Servicer from any of its obligations under the Pooling
and Servicing Agreement.
This Certificate does not represent a deposit or other obligation of,
or an interest in, nor are the underlying Mortgage Loans insured or guaranteed
by, Block Mortgage Finance, Inc., Companion Mortgage Corporation, Block
Financial Corporation or any of their affiliates. This Certificate is limited in
right of payment to certain collections and recoveries relating to the Mortgage
Loans and amounts on deposit in the Distribution Account and the Collection
Account, all as more specifically set forth hereinabove and in the Pooling and
Servicing Agreement.
No Owner shall have any right to institute any proceeding, judicial or
otherwise, with respect to the Pooling and Servicing Agreement, or for the
appointment of a receiver or trustee, or for any other remedy under the Pooling
and Servicing Agreement except in compliance with the terms thereof.
Notwithstanding any other provisions in the Pooling and Servicing
Agreement, the Owner of any Certificate shall have the right which is absolute
and unconditional to receive distributions to the extent provided in the Pooling
and Servicing Agreement with respect to such Certificate or to institute suit
for the enforcement of any such distribution, and such right shall not be
impaired without the consent of such Owner.
The Pooling and Servicing Agreement provides that the obligations
created thereby will terminate upon the earlier of (i) the payment to the Owners
of all Certificates from amounts other than those available under the
Certificate Insurance Policies of all amounts held by the Trustee and required
to be paid to such Owners pursuant to the Pooling and Servicing Agreement upon
the later to occur of (a) the final payment or other liquidation (or any advance
made with respect thereto) of the last Mortgage Loan in the Trust Estate or (b)
the disposition of all property acquired in respect of any Mortgage Loan
remaining in the Trust Estate or (ii) at any time when a Qualified Liquidation
of the Trust Estate is effected as described below. To effect a termination of
the Pooling and Servicing Agreement pursuant to clause (ii) above, the Owners of
all Certificates then Outstanding shall
C-4
<PAGE>
unanimously direct the Trustee on behalf of the Trust to adopt a plan of
complete liquidation, as contemplated by Section 860F(a)(4) of the Code, and the
Trustee shall either sell the Mortgage Loans and distribute the proceeds of the
liquidation of the Trust, or shall distribute equitably in kind all of the
assets of the Trust Estate to the remaining Owners of the Certificates, each in
accordance with such plan, so that the liquidation or distribution of the Trust
Estate, the distribution of any proceeds of the liquidation and the termination
of the Pooling and Servicing Agreement occur no later than the close of the 90th
day after the date of adoption of the plan of liquidation and such liquidation
qualifies as a Qualified Liquidation.
The Pooling and Servicing Agreement additionally provides that (i)
certain Owners of the Class R Certificates or the Master Servicer may at their
option, purchase, and the Trustee may sell at auction, from the Trust all
remaining Mortgage Loans and other property then constituting the Trust Estate,
and thereby effect early retirement of the Certificates, on any Monthly
Remittance Date after the Optional Termination Date and (ii) under certain
circumstances relating to the qualification of Trust Estate as a REMIC under the
Code the Mortgage Loans may be sold, thereby effecting the early retirement of
the Certificates.
The Trustee shall give written notice of termination of the Pooling and
Servicing Agreement to each Owner in the manner set forth therein.
The Certificate Insurer or the Owners of a majority of the Percentage
Interests represented by the Class A Certificates then outstanding with the
prior written consent of the Certificate Insurer have the right to exercise any
trust or power set forth in Section 6.11 of the Pooling and Servicing Agreement.
As provided in the Pooling and Servicing Agreement and subject to
certain limitations therein set forth and referred to on the face hereof, the
transfer of this Certificate is registrable in the Register upon surrender of
this Certificate for registration of transfer at the office designated as the
location of the Register duly endorsed by, or accompanied by a written
instrument of transfer in form satisfactory to the Registrar duly executed by,
the Owner hereof or his attorney duly authorized in writing, and thereupon one
or more new Certificates of the like Class, tenor and a like Percentage Interest
will be issued to the designated transferee or transferees.
The Pooling and Servicing Agreement permits, with certain exceptions as
therein provided, the amendment thereof and the modifications of rights and
obligations of the parties provided therein by the Depositor, the Trustee, the
Seller and the Master Servicer at any time and from time to time, with the prior
written approval of the Certificate Insurer and not less than a majority of the
Percentage Interest represented by each affected Class of Certificates then
Outstanding, and in certain other circumstances provided for in the Pooling and
Servicing Agreement may be amended without the consent of the Owners. Any such
consent by the Owner at the time of the giving thereof, of this Certificate
shall be conclusive and binding upon such Owner and upon all future Owners of
the Certificate and of any Certificate issued upon the registration of Transfer
hereof or in exchange hereof or in lieu hereof whether or not notation of such
consent or waiver is made upon this Certificate.
The Trustee is required to furnish certain information on each
Distribution Date to the Owner of this Certificates as more fully described in
the Pooling and Servicing Agreement.
C-5
<PAGE>
The Class R Certificates are issuable only as registered Certificates.
As provided in the Pooling and Servicing Agreement and subject to certain
limitations therein set forth, Class R Certificates are exchangeable for new
Class R Certificates evidencing the same Percentage Interest as the Class R
Certificates exchanged.
No service charge will be made for any such registration of transfer or
exchange, but the Registrar or Trustee may require payment of a sum sufficient
to cover any tax or other governmental charge payable in connection therewith.
The Trustee and any agent of the Trustee may treat the Person in whose
name this Certificate is registered as the owner hereof for all purposes, and
neither the Trustee nor any such agent shall be affected by notice to the
contrary, except as may otherwise be specifically provided in the Pooling and
Servicing Agreement with respect to the Certificate Insurer.
C-6
<PAGE>
EXHIBIT D
FORM OF CERTIFICATE RE: MORTGAGE LOANS
PREPAID IN FULL AFTER CUT-OFF DATE
CERTIFICATE RE: PREPAID LOANS
I, _________________________, ___________________ of Block Mortgage
Finance, Inc. ("Block Mortgage"), hereby certify that between the "Cut-Off Date"
(as defined in the Pooling and Servicing Agreement dated as of January 1, 1997
among Block Mortgage, as Depositor, Companion Mortgage Corporation, as Seller,
Block Financial Corporation, as Master Servicer, and Bankers Trust Company of
California, N.A., as Trustee) and the "Startup Day," the following schedule of
"Mortgage Loans" (each as defined in the Pooling and Servicing Agreement) have
been prepaid in full.
<TABLE>
<CAPTION>
Account Original Current Date Paid
Number Name Amount Balance Off
- ---------------------- ---------------------- ---------------------- -------------------- -------------------
<S> <C> <C> <C> <C>
</TABLE>
Dated: January __, 1997
By:___________________________
Title:________________________
D-1
<PAGE>
EXHIBIT E
FORM OF TRUSTEE'S RECEIPT
TRUSTEE'S ACKNOWLEDGEMENT OF RECEIPT
Bankers Trust Company of California, N.A., a national banking
corporation, in its capacity as trustee (the "Trustee") under that certain
Pooling and Servicing Agreement dated as of January 1, 1997 (the "Pooling and
Servicing Agreement") among Block Mortgage Finance, Inc., as Depositor,
Companion Mortgage Corporation, as Seller, Block Financial Corporation, as
Master Servicer, and the Trustee, hereby acknowledges receipt (subject to review
as required by Section 3.06(a) of the Pooling and Servicing Agreement) of the
items delivered to it by the Seller and the Depositor with respect to the
Mortgage Loans pursuant to Section 3.05(b)(i) of the Pooling and Servicing
Agreement.
The Schedule of Mortgage Loans is attached to this Receipt.
The Trustee hereby additionally acknowledges that it shall review such
items as required by Section 3.06(a) of the Pooling and Servicing Agreement and
shall otherwise comply with Section 3.06(b) of the Pooling and Servicing
Agreement as required thereby.
BANKERS TRUST COMPANY OF CALIFORNIA, N.A.,
as Trustee
By:_____________________________________
Title:__________________________________
Dated: January ___, 1997
E-1
<PAGE>
EXHIBIT F
FORM OF POOL CERTIFICATION
POOL CERTIFICATION
WHEREAS, the undersigned is an Authorized Officer of Bankers Trust
Company of California, N.A., a national banking corporation, acting in its
capacity as trustee (the "Trustee") of a certain pool of mortgage loans (the
"Pool") heretofore conveyed in trust to the Trustee, pursuant to that certain
Pooling and Servicing Agreement dated as of January 1, 1997 (the "Pooling and
Servicing Agreement") among Block Mortgage Finance, Inc., as Depositor (the
"Depositor"), Companion Mortgage Corporation, as Seller, Block Financial
Corporation, as Master Servicer, and the Trustee; and
WHEREAS, the Trustee is required, pursuant to Section 3.06(a) of the
Pooling and Servicing Agreement, to review the Mortgage Files relating to the
Pool within a specified period following the Startup Day and to notify the
Seller promptly of any defects with respect to the Pool, and the Seller is
required to remedy such defects or take certain other action, all as set forth
in Section 3.06(b) of the Pooling and Servicing Agreement; and
WHEREAS, Section 3.06(a) of the Pooling and Servicing Agreement requires
the Trustee to deliver this Pool Certification upon the satisfaction of certain
conditions set forth therein.
NOW, THEREFORE, the Trustee hereby certifies that it has determined that
all required documents (or certified copies of documents listed in Section 3.05
of the Pooling and Servicing Agreement) have been executed or received, and that
such documents relate to the Mortgage Loans identified in the Schedule of
Mortgage Loans pursuant to Section 3.06(a) of the Pooling and Servicing
Agreement or, in the event that such documents have not been executed and
received or do not so relate to such Mortgage Loans, any remedial action by the
Seller pursuant to Section 3.06(b) of the Pooling and Servicing Agreement has
been completed. The Trustee makes no certification hereby, however, with respect
to any intervening assignments or assumption and modification agreements.
BANKERS TRUST COMPANY OF CALIFORNIA, N.A.,
as Trustee
By:________________________________
Title:_____________________________
Dated: January ___, 1997
F-1
<PAGE>
EXHIBIT G
FORM OF DELIVERY ORDER
DELIVERY ORDER
Bankers Trust Company of California, N.A., as Trustee
3 Park Plaza
Irvine, California 92714
Attention: Corporate Trustee Department
Dear Sirs:
Pursuant to Section 4.01 of the Pooling and Servicing Agreement, dated
as of January 1, 1997 (the "Pooling and Servicing Agreement") among Block
Mortgage Finance, Inc., as Depositor (the "Depositor"), Companion Mortgage
Corporation, as Seller, Block Financial Corporation, as Master Servicer, and
Bankers Trust Company of California, N.A., a national banking corporation, as
Trustee (the "Trustee"), the Depositor HEREBY CERTIFIES that all conditions
precedent to the issuance of the Block Mortgage Finance, Inc., Asset Backed
Certificates, Series 1997-1, Class A, Class X and Class R (the "Certificates"),
HAVE BEEN SATISFIED, and HEREBY REQUESTS YOU TO AUTHENTICATE AND DELIVER said
Certificates, and to RELEASE said Certificates to the owners thereof, or
otherwise upon their order.
Very truly yours,
BLOCK MORTGAGE FINANCE, INC.
By:___________________________
Title:________________________
Dated: January ___, 1997
G-1
<PAGE>
EXHIBIT H
FORM OF CLASS R TAX MATTERS TRANSFER CERTIFICATE
AFFIDAVIT PURSUANT TO SECTION
860E(e) OF THE INTERNAL REVENUE
CODE OF 1986, AS AMENDED
STATE OF )
) ss:
COUNTY OF )
[NAME OF OFFICER], being first duly sworn, deposes and says:
1. That he is [Title of Officer] of [Name of Investor] (the
"Investor"), a [savings institution] [corporation] duly organized and existing
under the laws of [the State of __________] [the United States], on behalf of
which he makes this affidavit.
2. That (i) the Investor is not a "disqualified organization"
and will not be a "disqualified organization" as of [date of transfer] (For this
purpose, a "disqualified organization" means the United States, any state or
political subdivision thereof, any foreign government, any international
organization, any agency or instrumentality of any of the foregoing (other than
certain taxable instrumentalities), any cooperative organization furnishing
electric energy or providing telephone service to persons in rural areas, or any
organization (other than a farmers' cooperative) that is exempt from federal
income tax unless such organization is subject to the tax on unrelated business
income); (ii) it is not acquiring the Class R Certificate for the account of a
disqualified organization; (iii) it consents to any amendment of the Pooling and
Servicing Agreement that shall be deemed necessary by the Trustee (upon advice
of counsel) to constitute a reasonable arrangement to ensure that the Class R
Certificates will not be owned directly or indirectly by a disqualified
organization; and (iv) it will not transfer such Class R Certificate unless (a)
it has received from the transferee an affidavit in substantially the same form
as this affidavit containing these same four representations and (b) as of the
time of the transfer, it does not have actual knowledge that such affidavit is
false.
H-1
<PAGE>
IN WITNESS WHEREOF, the Investor has caused this instrument to
be executed on its behalf, pursuant to authority of its Board of Directors, by
its [Title of Officer] and its corporate seal to be hereunto attached, attested
by its [Assistant] Secretary, this _ day of _______, _______.
[NAME OF INVESTOR]
By:___________________________
[Name of Officer]
[Title of Officer]
H-2
<PAGE>
EXHIBIT I
FORM OF NOTICE
TO: [_______________________]
RE: Block Mortgage Finance, Inc., Asset Backed Certificates, Series 1997-1,
Class A-1, A-2, A-3, A-4 and A-5 Policy No.____________
Determination Date:_________________
Distribution Date:_______________________
We refer to that certain Pooling and Servicing Agreement by and among
Block Mortgage Finance, Inc., as depositor, Companion Mortgage Corporation, as
seller, Block Financial Corporation, as Master Servicer, and Bankers Trust
Company of California, N.A., as Trustee (the "Trustee"), relating to Block
Mortgage Finance, Inc., Asset Backed Certificates, Series 1997-1, and dated as
of January 1, 1997; all capitalized terms not otherwise defined herein shall
have the same respective meanings as set forth in such Pooling and Servicing
Agreement.
An Insured Payment, as defined in the Pooling and Servicing Agreement,
is required to be paid and, pursuant to Section 7.08(a) of the Pooling and
Servicing Agreement, this statement constitutes a claim for such Insured Payment
in the amount of $_____ under the Certificate Insurance Policy.
BANKERS TRUST COMPANY OF CALIFORNIA, N.A., as Trustee
By:___________________________________
Name:_________________________________
Title:________________________________
Telephone Number:_____________________
[Corporate Seal]
Attest:
- ----------------------------
[Assistant] Secretary
Personally appeared before me the above-named [Name of Officer], known
or proved to be the same person who executed the foregoing instrument and to be
the [Title of Officer] of the Trustee, and acknowledged to me that he executed
the same as his free act and deed and the free act and deed of the Trustee.
I-1
<PAGE>
Subscribed and sworn before me this _ day of, _.
- ---------------------
NOTARY PUBLIC
COUNTY OF____________
STATE OF_____________
My commission expires the _ day of _____________, _____.
I-2
<PAGE>
EXHIBIT J
RESERVED
J-1
<PAGE>
EXHIBIT K
TERMINATION AUCTION PROCEDURES
The following sets forth the auction procedures to be followed in
connection with a sale effected pursuant to Section 9.03 of the Pooling and
Servicing Agreement (the "Agreement"), dated as of January 1, 1997, among Block
Mortgage Finance, Inc., as Depositor, Companion Mortgage Corporation, as Seller,
Block Financial Corporation, as Master Servicer, and Bankers Trust Company of
California, N.A., as Trustee. Capitalized terms used herein that are not
otherwise defined shall have the meanings described thereto in the Agreement.
1. Pre-Auction Process
(a) Upon receiving notice of the Auction Date, the Advisor will
initiate its general Terminal Auction procedures consisting
of the following: (i) with the assistance of the Master
Servicer, prepare a general solicitation package along with a
confidentiality agreement; (ii) develop a list of qualified
bidders, in a commercially reasonable manner; (iii) initiate
contact with all qualified bidders; (iv) send a
confidentiality agreement to all qualified bidders; (v) upon
receipt of a signed confidentiality agreement, send
solicitation packages to all interested bidders on behalf of
the Trustee; and (vi) notify the Master Servicer of all
potential bidders and anticipated timetable.
(b) The general solicitation package will include: (i) the
prospectus supplement and prospectus from the initial public
offering of any of the Certificates; (ii) a copy of all
monthly servicing reports or a copy of all annual servicing
reports and the prior year's monthly servicing reports; (iii)
a form of a Sale and Servicing Agreement prepared by the
Trustee and the Master Servicer (or prepared by the Advisor
and approved by the Trustee and the Master Servicer); (iv) a
description of the minimum purchase price required to cause
the Trustee to sell the Mortgage Loans as set forth in
Section 9.03 of the Agreement; (v) a formal bidsheet; (vi) a
detailed timetable; and (vii) a preliminary data tape of the
aggregate Loan Balance of the Mortgage Loans as of a recent
Distribution Date reflecting the same data attributes used to
create the Cut-Off Date tables for the prospectus supplement
dated January ___, 1997 relating to the public offering of
certain of the Certificates. None of the Trustee, the Master
Servicer, the Depositor or the Seller shall be required to
produce an updated prospectus or prospectus supplement, and
the auction procedures shall be carried out in a manner that
does not constitute a public offering of securities.
(c) The Trustee, with the assistance of the Master Servicer and
the Advisor, will maintain an auction package beginning at the
time of closing of the transaction, which will contain the
documents listed under clauses (i)-(ii) of the preceding
paragraph. If the Advisor is unable to perform its role as
advisor to the Trustee, the Master Servicer acting in its
capacity under the Agreement will select a successor Advisor
and inform the Trustee of its actions.
K-1
<PAGE>
(d) The Advisor will send solicitation packages to all bidders at
least 15 Business Days before the Auction Date. Bidders will
be required to submit any due diligence questions in writing
to the Advisor for determination of their relevancy, no later
than 10 Business Days before the Auction Date. The Master
Servicer and the Advisor will be required to satisfy all
relevant questions at least five Business Days prior to the
Auction Date and distribute the questions and answers to all
bidders.
2. Auction Process
(a) The Advisor, any underwriter, or any Owner will be allowed to
bid in the Auction, but will not be required to do so.
(b) The Master Servicer will also be allowed to bid in the
Termination Auction if it deems appropriate, but will not be
required to do so.
(c) On the Auction Date, all bids will be due by facsimile to the
offices of the Trustee by 1:00 p.m. New York City time, with
the winning bidder to be notified by 2:00 p.m. New York City
time. All acceptable bids (as described in Section 9.03 of the
Agreement) will be due on a conforming basis on the bid sheet
contained in the solicitation package.
(d) If the Trustee receives fewer than two market value bids from
participants in the market for mortgage loans willing and able
to purchase the Mortgage Loans, the Trustee shall decline to
consummate the sale.
(e) Upon notification to the winning bidder, a good faith deposit
equal to one percent (1%) of the aggregate Loan Balance of
the Mortgage Loans will be required to be wired to the
Trustee upon acceptance of the bid. This deposit, along with
any interest income attributable to it, will be credited to
the purchase price but will not be refundable. The Trustee
will establish a separate account for the acceptance of the
good faith deposit, until such time as the account is fully
funded and all monies are transferred into the Collection
Account, such time not to be later than one Business Day
before the related Distribution Date (as described above).
(f) The winning bidder will receive on the Auction Date a copy of
the draft Sale and Servicing Agreement and Master Servicer's
Representations and Warranties (which shall be substantially
identical to the representations and warranties set forth in
Section 3.02 of the Agreement).
(g) The Advisor will provide to the Trustee a letter concluding
whether or not the winning bid is a fair market value bid. The
Advisor will also provide such letter if it is the winning
bidder. In the case where the Advisor or the Master Servicer
is the winning bidder it will provide for market comparables
and valuations in its letter.
(h) The Auction will stipulate that the Master Servicer be
retained to service the Mortgage Loans sold pursuant to the
terms of the Sale and Servicing Agreement.
K-2
<PAGE>
(i) The Auction will stipulate that such sale and consequent
termination of the Trust must constitute a "qualified
liquidation" of the Trust under Section 860F of the Code,
including the requirement that such liquidation take place
over a period not to exceed 90 days. The Trustee may, in its
discretion, require that the purchaser of the Mortgage Loans
provide the Trustee with an Opinion of Counsel to that effect.
K-3
<PAGE>
-----------------------
MORRISON & HECKER L.L.P.
ATTORNEYS AT LAW
2600 Grand Avenue
Kansas City, Missouri 64108-4606
Telephone 816-691-2600
Telefax 816-474-4208
January 21, 1997
Block Mortgage Finance, Inc.
One Main Street Plaza
4435 Main Street, Suite 500
Kansas City, Missouri 64111
Re: Block Mortgage Finance, Inc.
Registration Statement on Form S-3 (No. 333-14041)
Ladies and Gentlemen:
We have acted as your counsel in connection with the preparation of a
Registration Statement on Form S-3 (Registration No. 333-14041) (the
"Registration Statement") to be filed with the Securities and Exchange
Commission pursuant to the Securities Act of 1933, as amended (the "Act"). The
Registration Statement covers asset backed certificates ("Certificates") to be
sold by Block Mortgage Finance, Inc. (the "Company") in one or more series
(each, a "Series") of Certificates. Each Series of Certificates will be issued
by a trust (each, a "Trust") formed by the Company pursuant to a pooling and
servicing agreement (each, a "Pooling and Servicing Agreement") among the
Company and a master servicer (the "Master Servicer"), a seller (the "Seller")
and a trustee (the "Trustee") to be identified in the Prospectus Supplement for
such Series of Certificates. A form of Pooling and Servicing Agreement is
included as an exhibit to the Registration Statement. Each Series of
Certificates issued by a Trust may include one or more classes of Certificates.
Capitalized terms used and not otherwise defined herein have the respective
meanings given them in the Registration Statement or the Accord identified in
the following paragraph.
This Opinion Letter is governed by, and shall be interpreted in accordance
with, the Legal Opinion Accord (the "Accord") of the ABA Section of Business Law
(1991). As a consequence, it is subject to a number of qualifications,
exceptions, definitions, limitations on coverage and other limitations, all as
more particularly described in the Accord, and this Opinion Letter should be
read in conjunction therewith. The opinions expressed herein are given only with
respect to the present status of the substantive laws of the state of Missouri
Washington, D.C./Phoenix, Arizona/Overland Park, Kansas/Wichita, Kansas
<PAGE>
Block Mortgage Finance, Inc.
January 21, 1997
Page 2
(not including the choice-of-law rules under Missouri law). We express
no opinion as to any matter arising under the laws of any other
jurisdiction.
In rendering the opinions set forth below, we have examined and
relied on the following: (1) the Registration Statement and the
Prospectus and the form of Prospectus Supplement included therein; (2)
the form of the Pooling and Servicing Agreement included as an exhibit
to the Registration Statement; and (3) such other documents, materials,
and authorities as we have deemed necessary in order to enable us to
render our opinions set forth below.
Based on and subject to the foregoing and other qualifications set
forth below, we are of the opinion that:
1. When a Pooling and Servicing Agreement for a Series of
Certificates has been duly and validly authorized by all necessary
action on behalf of the Company and has been duly executed and delivered
by the Company, the Master Servicer, the Seller, the Trustee and, if
applicable, and any other party thereto, such Pooling and Servicing
Agreement will constitute a valid and legally binding agreement of the
Company, enforceable against the Company in accordance with its terms.
2. When (a) a Pooling and Servicing Agreement for a Series of
Certificates has been duly and validly authorized by all necessary
action on behalf of the Company (subject to the terms of such Pooling
and Servicing Agreement being otherwise in compliance with applicable
law at such time) and has been duly executed and delivered by the
Company, the Master Servicer, the Seller, the Trustee and, if
applicable, and any other party thereto, (b) the Mortgage Loans and
other consideration constituting the Trust Fund for the Series have been
deposited with the Trustee, (c) the Certificates of such Series have
been duly executed, authenticated, delivered and sold as contemplated in
the Registration Statement and (d) the consideration for the sale of
such Certificates has been fully paid to the Company, such Certificates
will be legally and validly issued, fully paid and nonassessable, and
the duly registered holders of such Certificates will be entitled to the
benefits of such Pooling and Servicing Agreement.
The General Qualifications apply to the opinions set forth in
paragraphs 1 and 2 above, and in addition, such opinions are subject to
the qualification that certain remedial, waiver and other similar
provisions of a Pooling and Servicing Agreement for a Series of
Certificates or of the Certificates of such Series may be rendered
unenforceable or limited by applicable laws, regulations or judicial
decisions, but such laws, regulations and judicial decisions will not
render such Pooling and Servicing Agreement or such Certificates invalid
as a whole and will not make the remedies available thereunder
inadequate for the practical realization of the principal benefits
intended to be provided thereby, except for the
<PAGE>
Block Mortgage Finance, Inc.
January 21, 1997
Page 3
economic consequences of any judicial, administrative or other delay or
procedure which may be imposed by applicable law.
We hereby consent to the filing of this letter as an Exhibit to the
Registration Statement and to the references to this firm under the heading
"Legal Matters" in the Prospectus forming a part of the Registration Statement.
This consent is not to be construed as an admission that we are a person whose
consent is required to be filed with the Registration Statement under the
provisions of the Act.
Very truly yours,
MORRISON & HECKER L.L.P.
/s/ Morrison & Hecker L.L.P.
<PAGE>
Exhibit 8.1
Opinion of Brown & Wood LLP
with respect to Tax Matters
January 21, 1997
Block Mortgage Finance, Inc.
4435 Main Street, Suite 500
Kansas City, Missouri 64111
Re: Block Mortgage Finance, Inc.
Registration Statement on Form S-3 (No: 333-14041)
Ladies and Gentlemen:
We have acted as federal tax counsel to Block Mortgage Finance, Inc.,
a Delaware corporation (the "Registrant"), in connection with the proposed
issuance and sale of its mortgage pass-through certificates (the
"Certificates"), to be issued from time to time in one or more series. Each
series of Certificates will be issued, in one or more classes, by a trust
formed pursuant to a pooling and servicing agreement (each, a "Pooling and
Servicing Agreement") among the Registrant, a master servicer, a seller and a
trustee. The property of each trust will include mortgage loans and certain
other property.
We have advised the Registrant with respect to certain federal income
tax consequences of the proposed issuance of the Certificates. This advice is
summarized under the headings "Summary of Prospectus -- Federal Income Tax
Consequences", and "Federal Income Tax Consequences" in the prospectus relating
to the Certificates (the "Prospectus"), all a part of the Registration
Statement on Form S-3 (the "Registration Statement") filed with the Securities
and Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended (the "Act"), for the registration of the Certificates under the Act.
Such description does not purport to discuss all possible federal income tax
ramifications of the proposed issuance, but with respect to those tax
consequences that are discussed, in our opinion, the description is accurate in
all material respects. Furthermore, we hereby confirm that, as specified in the
Prospectus, we will provide an opinion to the trust specified in the related
prospectus supplement that:
<PAGE>
(i) with respect to a trust as to which a REMIC election is made, the trust
will qualify as a REMIC and the related Certificates will qualify as "regular
interests" or "residual interests" in the REMIC and (ii) with respect to a
trust as to which no REMIC election is made, the trust will be classified as a
grantor trust under subpart E, Part I of Subchapter J of the Internal Revenue
Code of 1986, as amended.
We hereby consent to the filing of this letter as an exhibit to the
Registration Statement and to a reference to this firm (as counsel to the
Registrant) under the headings "Legal Matters" in the Prospectus forming a part
of the Registration Statement, without implying or admitting that we are
"experts" within the meaning of the Act or the rules and regulations of the
Commission issued thereunder, with respect to any part of the Registration
Statement, including this exhibit.
Very truly yours,
/s/ BROWN & WOOD LLP
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this Prospectus Supplement of
our report dated January 22, 1996, on our audits of the consolidated financial
statements of MBIA Insurance Corporation and Subsidiaries as of December 31,
1995 and 1994 and for the three years ended December 31, 1995. We also consent
to the reference to our firm under the caption "Report of Experts".
/s/ COOPERS & LYBRAND L.L.P.
------------------------------
Coopers & Lybrand L.L.P.
January 21, 1997
New York, New York
