Registration No. 333-14625
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-3
AMENDMENT NO. 1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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OPTION ONE MORTGAGE ACCEPTANCE CORPORATION
(Exact name of Registrant as specified in its Charter)
Delaware
(State of Incorporation)
33-0727357
(I.R.S. Employer Identification Number)
2020 East First Street, Suite 100
Santa Ana, California 92705
714-558-7700
(Address and telephone number of Registrant's principal executive offices)
William O'Neill
Option One Mortgage Acceptance Corporation
2020 East First Street, Suite 100
Santa Ana, California 92705
714-558-7700
(Name, address and telephone number of agent for service)
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Copies to:
Richard M. Horowitz, Esq.
Thacher Proffitt & Wood
Two World Trade Center
New York, New York 10048
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Approximate date of commencement of proposed sale to the public: From
time to time on or after the effective date of 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, please check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. |_|
<TABLE>
CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
MAXIMUM MAXIMUM
OFFERING AGGREGATE AMOUNT OF
AMOUNT PRICE OFFERING REGISTRATION
TITLE OF SECURITIES BEING REGISTERED TO BE REGISTERED(1) PER UNIT (2) PRICE (2) FEE(3)
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<S> <C> <C> <C> <C>
Pass-Through Certificates, issued in $1,000,000 100% $1,000,000 $303.03
series
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</TABLE>
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(1) $1,000,000 was registered with the initial filing of the Registration
Statement. No additional amount is being registered in connection with
this Amendment No. 1.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) A filing fee of $303.03 was paid in connection with the initial filing.
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The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission acting pursuant to said Section 8(a),
may determine.
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EXPLANATORY NOTE
This Registration Statement includes (i) a basic prospectus, (ii) an
illustrative form of prospectus supplement for use in an offering of Mortgage
Pass-Through Certificates consisting of senior and subordinate certificate
classes ("Version 1") and (iii) an illustrative form of prospectus supplement
for use in an offering of Mortgage Pass-Through Certificates which provides for
credit support in the form of a letter of credit ("Version 2").
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PRELIMINARY PROSPECTUS SUPPLEMENT 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.
VERSION 1
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS SUPPLEMENT DATED JANUARY 3, 1997
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED ____________, 19__)
$________________
OPTION ONE MORTGAGE ACCEPTANCE CORPORATION
COMPANY
[NAME OF MASTER SERVICER]
MASTER SERVICER
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 19__-__
$__________ ____% Class A-1 Certificates
$__________ ____% Class A-2 Certificates
$__________ ____% Class A-3 Certificates
$__________ ____% Class A-4 Certificates
$ 0 ____%* Class A-5 Certificates
$__________ ____% Class A-6 Certificates
$ 0 Variable Rate* Class A-7 Certificates
*Accrual of interest based on the related Notional Amount as described herein.
The Series 19__-__ Mortgage Pass-Through Certificates will include the
following seven classes (the "Senior Certificates"): (i) Class A-1 Certificates,
Class A-2 Certificates, Class A-3 Certificates, Class A-4 Certificates, (ii)
Class A-5 Certificates (the "Fixed Strip Certificates"), (iii) Class A-6
Certificates and (iv) Class A-7 Certificates (the "Variable Strip
Certificates"). In addition to the Senior Certificates, the Series 19__-__
Mortgage Pass-Through Certificates will also consist of one class of subordinate
certificates which is designated as the Class B Certificates (the "Subordinate
Certificates") and one class of residual certificates which is designated as the
Class R Certificates (the "Residual Certificates" and, collectively with the
Senior Certificates and the Subordinate Certificates, the "Certificates"). Only
the Senior Certificates (the "Offered Certificates") are offered hereby.
The Senior Certificates in the aggregate will evidence an initial
undivided interest of approximately _____% in a trust fund (the "Trust Fund")
consisting primarily of a pool of certain conventional fixed-rate one- to
four-family first lien mortgage loans (the "Mortgage Loans") to be deposited by
Option One Mortgage Acceptance Corporation (the "Company") into the Trust Fund
for the benefit of the Certificateholders. Certain characteristics of the
Mortgage Loans are described herein under "Description of the Mortgage Pool."
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Distributions on the Senior Certificates will be made on the 25th day
of each month or, if such day is not a business day, then on the next business
day, commencing on ____________, 19__ (each, a "Distribution Date"). As more
fully described herein, interest distributions on the Senior Certificates will
be based on the Certificate Principal Balance thereof (or the Notional Amount
(as defined herein) in the case of the Fixed Strip Certificates and Variable
Strip Certificates) and the then applicable Pass-Through Rate thereof, which
will be variable for the Variable Strip Certificates and fixed for all other
classes of Certificates. Distributions in respect of principal of the Senior
Certificates will be allocated among the various classes of the Senior
Certificates as described herein under "Description of the
Certificates--Principal Distributions." The rights of the holders of the
Subordinate Certificates to receive distributions with respect to the Mortgage
Loans will be subordinate to the rights of the holders of the Senior
Certificates. Certain losses incurred due to defaults on the Mortgage Loans and
not covered by the Subordinate Certificates will be allocated on a pro rata
basis among the Senior Certificates; provided, however, that such losses
otherwise allocable to the Class A-1, Class A-5 and Class A-6 Certificates
(collectively, the "Tiered Certificates"), will be allocated first to the Class
A-6 Certificates until the Certificate Principal Balance thereof is reduced to
zero, and then on a pro rata basis to the Class A-1 Certificates and Class A-5
Certificates, as more particularly described herein.
There is currently no secondary market for the Senior Certificates.
__________________________________ (the "Underwriter") intends to make a
secondary market in the Senior Certificates, but is not obligated to do so.
There can be no assurance that a secondary market for the Senior Certificates
will develop or, if it does develop, that it will continue. The Senior
Certificates will not be listed on any securities exchange.
It is a condition of the issuance of the Senior Certificates that they
be rated "___" by _____________________________ and "____" by
____________________________________.
As described herein, a "real estate mortgage investment conduit"
("REMIC") election will be made in connection with the Trust Fund for federal
income tax purposes. Each class of Senior Certificates will constitute "regular
interests" in the REMIC. See "Federal Income Tax Consequences" herein and in the
Prospectus.
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION SET FORTH UNDER
"RISK FACTORS" ON PAGE S-__ OF THE PROSPECTUS SUPPLEMENT AND THE INFORMATION SET
FORTH UNDER "RISK FACTORS" ON PAGE __ OF THE PROSPECTUS BEFORE PURCHASING ANY OF
THE CLASS A CERTIFICATES.
THE YIELD TO MATURITY ON THE SENIOR CERTIFICATES WILL DEPEND ON THE
RATE AND TIMING OF PRINCIPAL PAYMENTS (INCLUDING AS A RESULT OF PREPAYMENTS,
DEFAULTS AND LIQUIDATIONS) ON THE MORTGAGE LOANS. THE MORTGAGE LOANS GENERALLY
MAY BE PREPAID IN FULL OR IN PART AT ANY TIME WITHOUT PENALTY. THE YIELD TO
INVESTORS ON THE SENIOR CERTIFICATES MAY BE ADVERSELY AFFECTED BY ANY SHORTFALLS
IN INTEREST COLLECTED ON THE MORTGAGE LOANS DUE TO PREPAYMENTS, LIQUIDATIONS OR
OTHERWISE. THE YIELD TO INVESTORS ON THE FIXED STRIP CERTIFICATES AND THE
VARIABLE STRIP CERTIFICATES WILL BE EXTREMELY SENSITIVE TO THE RATE AND TIMING
OF PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS) AND DEFAULTS ON THE MORTGAGE
LOANS, WHICH RATE MAY FLUCTUATE SIGNIFICANTLY OVER TIME. A RAPID RATE OF
PRINCIPAL PAYMENTS ON THE
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MORTGAGE LOANS COULD RESULT IN THE FAILURE OF INVESTORS IN SUCH CERTIFICATES TO
RECOVER THEIR INITIAL INVESTMENTS. SEE "CERTAIN YIELD AND PREPAYMENT
CONSIDERATIONS" HEREIN AND "YIELD CONSIDERATIONS" IN THE PROSPECTUS.
PROCEEDS OF THE ASSETS IN THE TRUST FUND ARE THE SOLE SOURCE OF
PAYMENTS ON THE OFFERED CERTIFICATES. THE OFFERED CERTIFICATES DO NOT REPRESENT
AN INTEREST IN OR OBLIGATION OF THE COMPANY, THE MASTER SERVICER OR ANY OF THEIR
AFFILIATES. NEITHER THE OFFERED CERTIFICATES NOR THE UNDERLYING MORTGAGE LOANS
ARE INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY
THE COMPANY, THE MASTER SERVICER OFFERED OR ANY OF THEIR AFFILIATES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT
PASSED ON OR ENDORSED THE MERITS OF THIS OFFERING. ANY
REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
The Offered Certificates will be purchased from the Company by the
Underwriter and will be offered by the Underwriter from time to time to the
public in negotiated transactions or otherwise at varying prices to be
determined at the time of sale. The proceeds to the Company from the sale of the
Offered Certificates will be equal to _________% of the initial aggregate
principal balance of the Offered Certificates, plus accrued interest thereon
from ___________ 1, 19__ (the "Cut-off Date"), net of any expenses payable by
the Company.
The Offered Certificates are offered by the Underwriter subject to
prior sale, when, as and if delivered to and accepted by the Underwriter and
subject to certain other conditions. The Underwriter reserves the right to
withdraw, cancel or modify such offer and to reject any order in whole or in
part. It is expected that delivery of the Offered Certificates will be made on
or about ____________, 19__ at the office of __________________________________,
_______________, _____________________ against payment therefor in immediately
available funds.
[Name of Underwriter]
[Date of Prospectus Supplement]
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THE CERTIFICATES OFFERED BY THIS PROSPECTUS SUPPLEMENT CONSTITUTE PART
OF A SEPARATE SERIES OF CERTIFICATES BEING OFFERED BY THE COMPANY PURSUANT TO
ITS PROSPECTUS DATED ____________, 19__, OF WHICH THIS PROSPECTUS SUPPLEMENT IS
A PART AND WHICH ACCOMPANIES THIS PROSPECTUS SUPPLEMENT. THE PROSPECTUS CONTAINS
IMPORTANT INFORMATION REGARDING THIS OFFERING WHICH IS NOT CONTAINED HEREIN, AND
PROSPECTIVE INVESTORS ARE URGED TO READ THE PROSPECTUS AND THIS PROSPECTUS
SUPPLEMENT IN FULL. SALES OF THE OFFERED CERTIFICATES MAY NOT BE CONSUMMATED
UNLESS THE PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS.
UNTIL __________, 19__, ALL DEALERS EFFECTING TRANSACTIONS IN THE
OFFERED CERTIFICATES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND THE PROSPECTUS TO WHICH IT
RELATES. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS
TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
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SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere herein and in the Prospectus.
Capitalized terms used herein and not otherwise defined herein have the meanings
assigned in the Prospectus.
Title of Securities................ Mortgage Pass-Through Certificates, Series
19__-__.
Company............................ Option One Mortgage Acceptance Corporation
(the "Company"), a wholly-owned subsidiary
of Option One Mortgage Corporation
("OOMC"). See "The Company" in the
Prospectus.
Seller[s].......................... [Names of Sellers] (the "Seller[s]"). See
[Names of Sellers] herein.
Master Servicer.................... [Name of Master Servicer] (the "Master
Servicer"), [an affiliate of the Company].
See "Pooling and Servicing Agreement--The
Master Servicer" herein.
Trustee............................ _______________, ___________________
___________________ (the "Trustee").
Cut-off Date....................... ____________ 1, 19__ (the "Cut-off Date").
Delivery Date...................... On or about ____________, 19__ (the
"Delivery Date").
Denominations...................... The Senior Certificates will be issued in
registered, certificated form, in minimum
denominations of $______ (or in minimum
Notional Amounts of $_____ in the case of
the Fixed Strip Certificates or Variable
Strip Certificates) and integral multiples
of $_____ in excess thereof.
The Mortgage Pool.................. The Mortgage Pool will consist of a pool
of conventional, fixed-rate, fully
amortizing mortgage loans (the "Mortgage
Loans") with an aggregate principal
balance as of the
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Cut-off Date of approximately
$___________. The Mortgage Loans are
secured by first liens on one- to
four-family residential real properties
(each, a "Mortgaged Property"). The
Mortgage Loans have individual principal
balances at origination of at least
$______ but not more than $_________ with
an average principal balance at
origination of approximately $_________.
The Mortgage Loans have terms to maturity
from the date of origination or
modification of not more than __ years,
and a weighted average remaining term to
stated maturity of approximately ___
months as of the Cut-off Date. The
Mortgage Loans will bear interest at
Mortgage Rates of at least ____% per annum
but not more than _____% per annum, with a
weighted average Mortgage Rate of
approximately _______% per annum as of the
Cut-off Date. For a further description of
the Mortgage Loans, see "Description of
the Mortgage Pool" herein.
The Senior Certificates............ The Senior Certificates in the aggregate
evidence an initial interest of
approximately _____% in a trust fund (the
"Trust Fund") consisting primarily of the
Mortgage Pool. The Senior Certificates
will be issued pursuant to a Pooling and
Servicing Agreement, to be dated as of the
Cut-off Date, among the Company, the
Master Servicer, and the Trustee (the
"Pooling and Servicing Agreement"). The
Senior Certificates will have the
following Pass-Through Rates and
Certificate Principal Balances as of the
Cut-off Date:
Class A-1 Certificates ____% $__________
Class A-2 Certificates ____% $__________
Class A-3 Certificates ____% $__________
Class A-4 Certificates ____% $__________
Class A-5 Certificates ____% $ 0
Class A-6 Certificates ____% $__________
Class A-7 Certificates Variable Rate $ 0
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The Offered Certificates are subject to
various priorities for payment of interest
and principal as described herein. For a
description of the allocation of interest
and principal distributions among the
Senior Certificates, see
"Summary--Interest Distributions,"
"--Principal Distributions," "Description
of the Certificates--Interest
Distributions" and "--Principal
Distributions on the Senior Certificates"
herein.
Interest Distributions............. The Pass-Through Rates on the Senior
Certificates (other than the Variable
Strip Certificates) are fixed and set
forth on the cover hereof. The
Pass-Through Rate on the Variable Strip
Certificates on each Distribution Date
will equal the weighted average, as
determined on the Due Date in the month
preceding the month in which such
Distribution Date occurs, of the Pool
Strip Rates on each of the Mortgage Loans.
The Pool Strip Rate on each Mortgage Loan
is equal to the Net Mortgage Rate thereon
minus ____%. The Net Mortgage Rate on each
Mortgage Loan is equal to the Mortgage
Rate thereon minus the rate per annum at
which the related master servicing fees
accrue (the "Servicing Fee Rate"). The
Pool Strip Rates on the Mortgage Loans
range between _____% and _____%. The
initial Pass-Through Rate on the Variable
Strip Certificates is approximately
_____%. The Fixed Strip Certificates and
Variable Strip Certificates have no
Certificate Principal Balance and will
accrue interest at the then applicable
Pass-Through Rate on the Notional Amount
(as defined herein).
Holders of the Senior Certificates will be
entitled to receive on each Distribution
Date, to the extent of the Available
Distribution
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Amount (as defined herein) for such
Distribution Date, interest distributions
in an amount equal to the aggregate of all
Accrued Certificate Interest (as defined
below) with respect to such Certificates
for such Distribution Date and, to the
extent not previously paid, for all prior
Distribution Dates (the "Senior Interest
Distribution Amount").
With respect to any Distribution Date, the
Accrued Certificate Interest in respect of
each class of Senior Certificates will be
equal to one month's interest accrued at
the applicable Pass-Through Rate on the
Certificate Principal Balance (or, in the
case of the Fixed Strip Certificates and
Variable Strip Certificates, the Notional
Amount (as defined below)) of the
Certificates of such class immediately
prior to such Distribution Date, less any
interest shortfalls not covered by
Subordination (as defined herein) and
allocated to the Certificates of such
class as described herein, including any
Prepayment Interest Shortfall (as defined
herein), if any, for such Distribution
Date.
If the Senior Interest Distribution Amount
for any Distribution Date is less than the
Available Distribution Amount for such
date, then such shortfall shall be
allocated among the respective classes of
Senior Certificates as described herein,
and the unpaid Accrued Certificate
Interest in respect of the Certificates of
each such class will be payable to the
holders thereof on subsequent Distribution
Dates, to the extent of available funds.
The Notional Amount of the Fixed Strip
Certificates and Variable Strip
Certificates as of any date of
determination is equal to the aggregate
Certificate Principal Balance of the
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Certificates of all classes, including the
Subordinate Certificates, as of such date.
See "Description of the
Certificates--Interest Distributions"
herein.
References herein to the Notional Amount
of the Fixed Strip Certificates and
Variable Strip Certificates are used
solely for certain calculations and do not
represent the right of the holders of the
Fixed Strip Certificates and Variable
Strip Certificates to receive
distributions of such amount.
Principal Distributions............ Holders of the Senior Certificates will be
entitled to receive on each Distribution
Date, in the manner and priority set forth
herein, to the extent of the portion of
the Available Distribution Amount
remaining after the Senior Interest
Distribution Amount is distributed to the
holders of the Senior Certificates, a
distribution allocable to principal which
will, as more fully described herein,
include (i) the Senior Percentage (as
defined herein) of scheduled principal
payments due on the Mortgage Loans and of
the principal portion of any unscheduled
collections of principal (other than
mortgagor prepayments and amounts received
in connection with a Final Disposition (as
defined herein) of a Mortgage Loan
described in clause (ii) below), including
repurchases of the Mortgage Loans, (ii) in
connection with the Final Disposition of a
Mortgage Loan that did not incur any
Excess Special Hazard Losses, Excess Fraud
Losses, Excess Bankruptcy Losses or
Extraordinary Losses (each as defined
herein), an amount equal to the lesser of
(a) the Senior Percentage of the Stated
Principal Balance (as defined herein) of
such Mortgage Loan and (b) the Senior
Accelerated Distribution Percentage (as
defined herein) of the related
collections, including any Insurance
Proceeds and
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Liquidation Proceeds, to the extent
applied as recoveries of principal and
(iii) the Senior Accelerated Distribution
Percentage (as defined below) of mortgagor
prepayments on each Mortgage Loan.
Distributions in respect of principal of
the Senior Certificates on any
Distribution Date will be allocated among
the classes then entitled to such
distributions, as described herein. See
"Summary--Special Prepayment
Considerations" and "--Special Yield
Considerations" and "Certain Yield and
Prepayment Considerations" herein. The
Fixed Strip Certificates and Variable
Strip Certificates will not be entitled to
receive any principal distributions.
The Senior Percentage initially will be
approximately _____% and will be
recalculated after each Distribution Date
as described herein to reflect the
entitlement of the holders of the Senior
Certificates to subsequent distributions
allocable to principal. For each
Distribution Date occurring prior to the
Distribution Date in ________, ________,
the Senior Accelerated Distribution
Percentage will equal 100%. Thereafter, as
further described herein, during certain
periods, subject to certain loss and
delinquency criteria described herein, the
Senior Accelerated Distribution Percentage
may be 100% or otherwise
disproportionately large relative to the
Senior Percentage. See "Description of the
Certificates--Principal Distributions on
the Senior Certificates" herein.
Advances........................... The Master Servicer is required to make
advances ("Advances") in respect of
delinquent payments of principal and
interest on the Mortgage Loans, subject to
the limitations described herein. See
"Description
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of the Certificates--Advances" herein and
in the Prospectus.
Allocation of Losses;
Subordination.................... Subject to the limitations set forth
below, Realized Losses (as more
particularly described herein) on the
Mortgage Loans will be allocated first to
the Subordinate Certificates and then to
the Senior Certificates. The subordination
provided by the Subordinate Certificates
will cover Realized Losses on the Mortgage
Loans that constitute Defaulted Mortgage
Losses, Special Hazard Losses, Fraud
Losses and Bankruptcy Losses (each as
defined in the Prospectus) to the extent
described herein. The aggregate amounts of
Special Hazard Losses, Fraud Losses and
Bankruptcy Losses which may be allocated
to the Subordinate Certificates are
initially limited to $__________,
$_________ and $_______, respectively. All
of the foregoing amounts are subject to
periodic reduction as described herein. In
the event the Certificate Principal
Balance of the Subordinate Certificates is
reduced to zero, all additional losses
will be borne by the Senior
Certificateholders. In addition, any
Special Hazard Losses, Fraud Losses and
Bankruptcy Losses, in excess of the
respective amounts of coverage therefor
will be borne by the holders of Senior
Certificates and Subordinate Certificates
on a pro rata basis. Any Default Losses
(as defined herein) incurred on the
Mortgage Loans and not covered by the
Subordinate Certificates will be allocated
on a pro rata basis among the Senior
Certificates; provided, however, that such
losses otherwise allocable to the Class
A-1, Class A-5 and Class A-6 Certificates
(collectively, the "Tiered Certificates"),
will be allocated first to the Class A-6
Certificates until the Certifi- cate
Principal Balance thereof is reduced to
zero, and then on a pro rata basis to the
Class
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A-1 Certificates and Class A-5
Certificates, as more particularly
described herein. Because principal
distributions are paid to certain classes
of Senior Certificates before other
classes, holders of classes of Senior
Certificates having a later priority of
payment bear a greater risk of such losses
than holders of classes of Senior
Certificates having earlier priorities for
distribution of principal. See
"Description of the
Certificates--Allocation of Losses;
Subordination" herein.
Subordinate Certificates........... The Class B Certificates (the "Subordinate
Certificates") have an aggregate initial
Certificate Principal Balance of
approximately $__________, evidencing an
initial Subordinate Percentage of
approximately ____%, and a Pass-Through
Rate of ____%. The Subordinate
Certificates are not being offered hereby.
Optional Termination............... At its option, on any Distribution Date
when the aggregate principal balance of
the Mortgage Loans is less than [__]% of
the aggregate principal balance of the
Mortgage Loans as of the Cut-off Date, the
Master Servicer or the Company may (i)
purchase from the Trust Fund all remaining
Mortgage Loans and other assets thereof,
and thereby effect early retirement of the
Certificates or (ii) purchase in whole,
but not in part, the Certificates. See
"Pooling and Servicing
Agreement--Termination" herein and "The
Pooling Agreement--Termination; Retirement
of Certificates" in the Prospectus.
Special Prepayment
Considerations................... The rate and timing of principal payments
on the Senior Certificates will depend on
the rate and timing of principal payments
(including by reason of prepayments,
defaults and liquidations) on the Mortgage
Loans. As is
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the case with mortgage-backed securities
generally, the Senior Certificates are
subject to substantial inherent cash-flow
uncertainties because the Mortgage Loans
may be prepaid at any time. Generally,
when prevailing interest rates increase,
prepayment rates on mortgage loans tend to
decrease, resulting in a slower return of
principal to investors at a time when
reinvestment at such higher prevailing
rates would be desirable. Conversely, when
prevailing interest rates decline,
prepayment rates on mortgage loans tend to
increase, resulting in a faster return of
principal to investors at a time when
reinvestment at comparable yields may not
be possible.
[The multiple class structure of the
Senior Certificates results in the
allocation of prepayments among certain
classes as follows [TO BE INCLUDED AS
APPROPRIATE]:]
[SEQUENTIALLY PAYING CLASSES: [All]
classes of the Senior Certificates are
subject to various priorities for payment
of principal as described herein.
Distributions of principal on classes
having an earlier priority of payment will
be affected by the rates of prepayments of
the Mortgage Loans early in the life of
the Mortgage Pool. The timing of
commencement of principal distributions
and the weighted average lives of classes
of Certificates with a later priority of
payment will be affected by the rates of
prepayments experienced both before and
after the commencement of principal
distributions on such classes.]
[PAC CERTIFICATES: Principal distributions
on the PAC Certificates generally will be
payable in amounts determined based on
schedules as described herein, assuming
that the prepayments on the Mortgage Loans
occur
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each month at a constant level between
approximately ___% SPA and approximately
___% SPA and based on certain other
assumptions. However, as discussed herein,
actual principal distributions may be
greater or less than the described
amounts. If the prepayments on the
Mortgage Loans occur at a level below or
above the PAC Targeted Range, the amount
of principal distributions may deviate
from the described amounts and the
weighted average lives of the remaining
PAC Certificates may be extended or
shortened. The classes of PAC Certificates
with later priorities of payment are less
likely to benefit from the stabilization
of principal distributions provided by the
Companion Certificates as described
herein) than the PAC Certificates with
earlier priorities of payment. Investors
in the PAC Certificates should be aware
that the stabilization provided by the
Companion Certificates is limited.]
[TAC CERTIFICATES: Principal distributions
on the TAC Certificates generally will be
payable thereon in the amounts determined
by using the schedules described herein,
assuming that prepayments on the Mortgage
Loans occur each month at a constant level
of approximately ___% SPA, and based on
certain other assumption. However, as
discussed herein, actual principal
distributions may be greater or less than
the described amounts, because it is
highly unlikely that the actual prepayment
speed of the Mortgage Loans each month
will remain at or near ___% SPA. If the
Companion Certificates are retired before
all of the TAC Certificates are retired,
the rate of principal distributions and
the weighted average lives of the
remaining TAC Certificates will become
significantly more sensitive to changes in
the prepayment speed of the Mortgage
Loans, and
<PAGE>
-15-
principal distributions thereon will be
more likely to deviate from the described
amounts.]
[COMPANION CERTIFICATES: Because all
amounts available for principal
distributions among the Senior
Certificates in any given month will be
applied first to the [PAC] [TAC]
Certificates up to the described amounts
and any excess other such amounts will be
applied to the Companion Certificates, the
rate of principal distributions on, and
the weighted average lives of the
Companion Certificates will be more
sensitive to changes in the rates of
prepayment of the Mortgage Loans than the
rate of principal distributions on and the
weighted average lives of the [PAC] [TAC]
Certificates.
See "Description of the
Certificates--Principal Distributions on
the Senior Certificates," and "Certain
Yield and Prepayment Considerations"
herein, and "Maturity and Prepayment
Considerations" in the Prospectus.
Special Yield
Considerations................... The yield to maturity on each class of the
Senior Certificates will depend on the
rate and timing of principal payments
(including by reason of prepayments,
defaults and liquidations) on the Mortgage
Loans and the allocation thereof to reduce
the Certificate Principal Balance or
Notional Amount of such class. The yield
to maturity on each class of the Senior
Certificates will also depend on the
Pass-Through Rate and any adjustments
thereto (as applicable) and the purchase
price for such Certificates. The yield to
investors on any class of Senior
Certificates will be adversely affected by
any allocation thereto of Prepayment
Interest Shortfalls on the Mortgage Loans,
which are expected to result from the
distribution of interest only to the
<PAGE>
-16-
date of prepayment (rather than a full
month's interest) in connection with
prepayments in full and the lack of any
distribution of interest on the amount of
any partial prepayments. Prepayment
Interest Shortfalls resulting from
principal prepayments in full in any
calendar month will not adversely affect
the yield to investors in the Offered
Certificates to the extent such prepayment
interest shortfalls are covered by the
Master Servicer as discussed herein.
In general, if a class of Senior
Certificates is purchased at a premium and
principal distributions thereon occur at a
rate faster than anticipated at the time
of purchase, the investor's actual yield
to maturity will be lower than that
assumed at the time of purchase.
Conversely, if a class of Senior
Certificates is purchased at a discount
and principal distributions thereon occur
at a rate slower than that assumed at the
time of purchase, the investor's actual
yield to maturity will be lower than that
assumed at the time of purchase.
The Senior Certificates were structured
based on a number of assumptions,
including a prepayment assumption of ___%
SPA and corresponding weighted average
lives as set forth herein under "Special
Prepayment Considerations." The
prepayment, yield and other assumptions
for the respective classes that are to be
offered hereunder will vary as determined
at the time of sale.
[The multiple class structure of the
Senior Certificates causes the yield of
certain classes to be particularly
sensitive to changes in the prepayment
speed of the Mortgage Loans and other
factors, as follows [TO BE INCLUDED AS
APPROPRIATE]:]
<PAGE>
-17-
[INTEREST STRIP AND INVERSE FLOATER
CLASSES: The yield to investors on the
[identify classes] will be extremely
sensitive to the rate and timing of
principal payments on the Mortgage Loans
(including by reason of prepayments,
defaults and liquidations), which may
fluctuate significantly over time. A rapid
rate of principal payments on the Mortgage
Loans could result in the failure of
investors in the [identify interest strip
and inverse floater strip classes] to
recover their initial investments, and a
slower than anticipated rate of principal
payments on the Mortgage Loans could
adversely affect the yield to investors on
the [identify non-strip inverse floater
classes].]
[VARIABLE STRIP CERTIFICATES: In addition
to the foregoing, the yield on the
Variable Strip Certificates will be
materially adversely affected to a greater
extent than the yields on the other Senior
Certificates if the Mortgage Loans with
higher Mortgage Rates prepay faster than
the Mortgage Loans with lower Mortgage
Rates, because holders of the Variable
Strip Certificates generally have rights
to relatively larger portions of interest
payments on the Mortgage Loans with higher
Mortgage Rates than on Mortgage Loans with
lower Mortgage Rates.]
[ADJUSTABLE RATE (INCLUDING INVERSE
FLOATER) CLASSES: The yield to investors
on the [identify floating rate classes]
will be sensitive, and the yield to
investors on the [identify inverse floater
classes] will be extremely sensitive, to
fluctuations in the level of [the Index].
THE PASS-THROUGH RATE ON THE [IDENTIFY
INVERSE FLOATER CLASSES] WILL VARY
INVERSELY WITH, AND AT A MULTIPLE OF, [THE
INDEX].]
[INVERSE FLOATER COMPANION CLASSES: In
addition to the foregoing, in the event of
<PAGE>
-18-
relatively low prevailing interest rates
(including [the Index]) and relatively
high rates of principal prepayments over
an extended period, while investors in the
[identify inverse floater companion
classes] may then be experiencing a high
current yield on such Certificates, such
yield may be realized only over a
relatively short period, and it is
unlikely that such investors would be able
to reinvest such principal prepayments on
such Certificates at a comparable yield.]
[RESIDUAL CERTIFICATES: Holders of the
Residual Certificates are entitled to
receive distributions of principal and
interest as described herein; however,
holders of such Certificates may have tax
liabilities with respect to their
Certificates during the early years of the
term of the REMIC that substantially
exceed the principal and interest payable
thereon during such periods. See "Certain
Yield and Prepayment Considerations,"
especially "--Additional Yield
Considerations Applicable Solely to the
Residual Certificates" herein, "Federal
Income Tax Consequences" herein and in the
Prospectus and "Yield Considerations" in
the Prospectus.]
See "Certain Yield and Prepayment
Considerations" [, especially "--Yield
Considerations," "--Additional Yield
Considerations Applicable Solely to the
Residual Certificates" and "Federal Income
Tax Consequences"] herein, and "Yield
Considerations" in the Prospectus.
Federal Income
Tax Consequences................. An election will be made to treat the
Trust Fund as a real estate mortgage
investment conduit ("REMIC") for federal
income tax purposes. Upon the issuance of
the Offered Certificates, __________
___________,
<PAGE>
-19-
counsel to the Company, will deliver its
opinion generally to the effect that,
assuming compliance with the Pooling and
Servicing Agreement, for federal income
tax purposes, the Trust Fund will qualify
as a REMIC within the meaning of Sections
860A through 860G of the Internal Revenue
Code of 1986 (the "Code").
For federal income tax purposes, the
Residual Certificates will be the sole
Class of "residual interests" in the Trust
Fund and the Senior Certificates and the
Subordinate Certificates will constitute
the "regular interests" in the Trust Fund
and will generally be treated as
representing ownership of debt instruments
in the Trust Fund.
For federal income tax reporting purposes,
the _______ Certificates will not, and the
___________________ Certificates will, be
treated as having been issued with
original issue discount. The prepayment
assumption that will be used in
determining the rate of accrual of
original issue discount, market discount
and premium, if any, for federal income
tax purposes will be ___% SPA (as defined
herein). No representation is made that
the Mortgage Loans will prepay at that
rate or at any other rate.
[[If Offered] Under the REMIC Regulations,
the Class R Certificates will not be
regarded as having "significant value" for
purposes of applying the rules relating to
"excess inclusions." In addition, the
Class R Certificates may constitute
"noneconomic" residual interests for
purposes of the REMIC Regulations.
Transfers of the Class R Certificates will
be restricted under the Pooling and
Servicing Agreement to United States
Persons in a manner designed to prevent a
transfer of a noneconomic residual
<PAGE>
-20-
interest from being disregarded under the
REMIC Regulations. See "Certain Federal
Income Tax Consequences-Special Tax
Considerations Applicable to REMIC
Residual Certificates" herein and "Certain
Federal Income Tax
Consequences-REMICs-Taxation of Owners of
REMIC Residual Certificates-Excess
Inclusions" and "-Noneconomic REMIC
Residual Certificates" in the Prospectus.
The Class R Certificateholders may be
required to report an amount of taxable
income with respect to the early years of
the Trust Fund's term that significantly
exceeds distributions on the Class R
Certificates during such years, with
corresponding tax deductions or losses
deferred until the later years of the
Trust Fund's term. Accordingly, on a
present value basis, the tax detriments
occurring in the earlier years may
substantially exceed the sum of any tax
benefits in the later years. As a result,
the Class R Certificateholders' after-tax
rate of return may be zero or negative,
event if their pre-tax rate of return is
positive.
See "Certain Yield and Prepayment
Considerations," especially "-Additional
Yield Considerations Applicable Solely to
the Class R Certificates", and "Certain
Federal Income Tax Consequences-Special
Tax Considerations Applicable to REMIC
Residual Certificates" herein.]
For further information regarding the
federal income tax consequences of
investing in the Offered Certificates see
"Federal Income Tax Consequences" herein
and in the Prospectus.
Ratings............................ It is a condition of the issuance of the
Senior Certificates that they be rated
"___" by ________ ________________ and
"___" by
<PAGE>
-21-
_________________________. A security
rating is not a recommendation to buy,
sell or hold securities and may be subject
to revision or withdrawal at any time by
the assigning rating organization. A
security rating does not address the
frequency of prepayments of Mortgage
Loans, or the corresponding effect on
yield to investors. The ratings of the
Fixed Strip Certificates and Variable
Strip Certificates do not address the
possibility that the holders of such
Certificates may fail to fully recover
their initial investments. See "Certain
Yield and Prepayment Considerations" and
"Ratings" herein and "Yield
Considerations" in the Prospectus.
Legal Investment................... The Senior Certificates will constitute
"mortgage related securities" for purposes
of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA") for so
long as they are rated in at least the
second highest rating category by one or
more nationally recognized statistical
rating agencies. Institutions whose
investment activities are subject to legal
investment laws and regulations,
regulatory capital requirements or review
by regulatory authorities may be subject
to restrictions on investment in the
Offered Certificates and should consult
with their legal advisors. See "Legal
Investment" herein and "Legal Investment
Matters" in the Prospectus.
<PAGE>
-22-
[RISK FACTORS]
[Prospective Certificateholders should consider, among other things,
the items discussed under "Risk Factors" in the Prospectus and the following
factors in connection with the purchase of the Certificates:]
[Appropriate Risk Factors as necessary. The following would be risks factors for
this particular structure:
SUBORDINATION RISKS
SUBORDINATION OF CLASS A-6 CERTIFICATES. As and to the extent described
herein, following the Credit Support Depletion Date, the rights of the holders
of the Class A-6 Certificates to receive distributions of amounts collected or
advanced on or in respect of the Mortgage Loans will be subordinated to those of
the holders of the Class A-1 and Class A-5 Certificates. In addition, any
Defaulted Mortgage Losses otherwise allocable to the Class A-1 and Class A-5
Certificates will allocated first to the Class A-6 Certificates. See
"Description of the Certificates-Principal Distributions on the Senior
Certificates" and "-Allocation of Losses; Subordination" herein.]
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
The Mortgage Pool will consist of Mortgage Loans with an aggregate
principal balance outstanding as of the Cut-off Date of $____________. The
Mortgage Loans will consist of conventional, fixed-rate, fully-amortizing, level
monthly payment first lien Mortgage Loans with terms to maturity of not more
than ___ years from the due date of the first monthly payment. On or before the
Delivery Date, the Company will acquire the Mortgage Loans to be included in the
Mortgage Pool from Option One Mortgage Corporation ("OOMC"), an affiliate of the
Company [, which in turn acquired them pursuant to various mortgage loan
purchase agreements between OOMC and [Names of Sellers] (the "Sellers")]. The
Seller[s] will make certain representations and warranties with respect to the
Mortgage Loans and, as more particularly described in the Prospectus, will have
certain repurchase or substitution obligations in connection with a breach of
any such representation and warranty, as well as in connection with an omission
or defect in respect of certain constituent documents required to be delivered
with respect to the Mortgage Loans, in any event if such breach, omission or
defect cannot be cured and it materially and adversely affects the interests of
Certificateholders. Neither the Company nor any other entity or person will have
any responsibility to purchase or replace any Mortgage Loan if a Seller is
obligated but fails to do so. See "Description of the Mortgage
Pool--Representations by Sellers" and "Description of the
Certificates--Assignment of Trust Fund Assets" in the Prospectus and "--The
Seller" below. The Mortgage Loans will have been
<PAGE>
-23-
originated or acquired by the [Sellers] in accordance with the underwriting
criteria described herein. See "--Underwriting" below. All percentages of the
Mortgage Loans described herein are approximate percentages (except as otherwise
indicated) by aggregate principal balance as of the Cut-off Date.
None of the Mortgage Loans will have been originated prior to
__________________ or will have a maturity date later than __________________.
No Mortgage Loan will have a remaining term to maturity as of the Cut-off Date
of less than ____ months. The weighted average remaining term to maturity of the
Mortgage Loans as of the Cut-off Date will be approximately ____ months. The
weighted average original term to maturity of the Mortgage Loans as of the
Cut-off Date will be approximately ____ months.
As of the Cut-off Date, no Mortgage Loan will be one month or more
delinquent in payment of principal and interest.
Approximately _____% of the Mortgage Loans in the Mortgage Pool will
have been purchased from ______________, and each of _______ other Sellers sold
more than ____% but less than ____% of the Mortgage Loans to OOMC. Except as
indicated in the preceding sentence, no Seller sold more than ____% of the
Mortgage Loans to OOMC.
No Mortgage Loan provides for deferred interest or negative
amortization.
None of the Mortgage Loans in the Mortgage Pool will be Buydown
Mortgage Loans.
Set forth below is a description of certain additional characteristics
of the Mortgage Loans as of the Cut-off Date (except as otherwise indicated).
All percentages of the Mortgage Loans are approximate percentages by aggregate
principal balance as of the Cut-off Date.
<PAGE>
-24-
<TABLE>
MORTGAGE RATES
<CAPTION>
NUMBER OF AGGREGATE PERCENTAGE
MORTGAGE RATES (%) MORTGAGE LOANS PRINCIPAL BALANCE OF MORTGAGE POOL
- ------------------ -------------- ----------------- ----------------
<S> <C> <C> <C>
.................................... $ %
....................................
....................................
....................................
....................................
....................................
....................................
....................................
....................................
....................................
....................................
....................................
....................................
Total..................... $ . %
=== ============ ======
</TABLE>
As of the Cut-off Date, the weighted average Mortgage Rate of the Mortgage Loans
was approximately ______% per annum.
<TABLE>
CUT-OFF DATE MORTGAGE LOAN PRINCIPAL BALANCES
<CAPTION>
NUMBER OF AGGREGATE PERCENTAGE OF
PRINCIPAL BALANCE MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE POOL
----------------- -------------- ----------------- -------------
<S> <C> <C> <C>
$................................... $ %
....................................
....................................
....................................
....................................
....................................
....................................
....................................
- -...................................
- -...................................
- -................................... .
---- -------------- -----
Total.................... $ . %
=== ============ ======
</TABLE>
As of the Cut-off Date, the average unpaid principal balance of the
Mortgage Loans will be approximately $_______.
<PAGE>
-25-
<TABLE>
ORIGINAL LOAN-TO-VALUE RATIOS
<CAPTION>
NUMBER OF AGGREGATE PERCENTAGE OF
LOAN-TO-VALUE RATIO MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE POOL
- ------------------- -------------- ----------------- -------------
<S> <C> <C> <C>
.................................... $ %
....................................
....................................
....................................
....................................
....................................
....................................
....................................
.................................... .
Total.......................... $ . %
=== ============ =======
</TABLE>
The weighted average Loan-to-Value Ratio at origination of the Mortgage
Loans will have been approximately ____%.
<TABLE>
GEOGRAPHIC DISTRIBUTIONS OF MORTGAGED PROPERTIES
<CAPTION>
NUMBER OF AGGREGATE PERCENTAGE OF
STATE MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE POOL
- ----- -------------- ----------------- -------------
<S> <C> <C> <C>
[NAME OF STATE]..................... $ %
[NAME OF STATE].....................
[NAME OF STATE].....................
[NAME OF STATE].....................
[NAME OF STATE].....................
Other (1)........................... .
--- ------------- ----
Total..................... $ . %
=== ============ ======
</TABLE>
(1) "Other" includes states and the District of Columbia with less than __%
concentrations individually.
[No more than ____% of the Mortgage Loans will be secured by Mortgaged
Properties located in any one zip code area].
<PAGE>
-26-
<TABLE>
MORTGAGED PROPERTY TYPES
<CAPTION>
NUMBER OF AGGREGATE PERCENTAGE OF
PROPERTY MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE POOL
- -------- -------------- ----------------- -------------
<S> <C> <C> <C>
Single-family detached............... $ %
Planned Unit Developments (detached).
Two- to four-family units............
Condo Low-Rise (less than 5 stories).
Condo Mid-Rise (5 to 8 stories)......
Condo High-Rise (9 stories or more)..
Townhouse............................
Planned Unit Developments (attached).
Leasehold............................ .
---- -------------- ----
Total..................... $ . %
=== ============ =======
</TABLE>
<TABLE>
MORTGAGE LOAN PURPOSES
<CAPTION>
NUMBER OF AGGREGATE PERCENTAGE OF
LOAN PURPOSE MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE POOL
- ------------ -------------- ----------------- -------------
<S> <C> <C> <C>
Purchase............................ $ %
Rate/Term Refinance.................
Equity Refinance.................... .
--- ------------- ----
Total...................... $ . %
=== ============ ======
</TABLE>
The weighted average Loan-to-Value Ratio at origination of equity
refinance Mortgage Loans will have been ____%. The weighted average
Loan-to-Value Ratio at origination of rate and term refinance Mortgage Loans
will have been ____%.
<PAGE>
-27-
<TABLE>
MORTGAGE LOAN DOCUMENTATION
<CAPTION>
NUMBER OF AGGREGATE PERCENTAGE OF
TYPE OF PROGRAM MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE POOL
- --------------- -------------- ----------------- -------------
<S> <C> <C> <C>
Full................................ $ %
Reduced............................. .
--- ------------- ----
Total...................... $ . %
=== ============ ======
</TABLE>
The weighted average Loan-to-Value Ratio at origination of the Mortgage
Loans which were underwritten under a reduced loan documentation program will
have been ____%. No more than ____% of such reduced loan documentation Mortgage
Loans will be secured by Mortgaged Properties located in California.
<TABLE>
OCCUPANCY TYPES
<CAPTION>
NUMBER AGGREGATE PERCENTAGE OF
OCCUPANCY MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE POOL
- --------- -------------- ----------------- -------------
<S> <C> <C> <C>
Primary Residence................................... $ %
Second/Vacation.....................................
Non Owner-occupied.................................. .
---- ---------------- ----
Total..................................... $ . %
=== ============ ======
</TABLE>
[Specific information with respect to the Mortgage Loans will be
available to purchasers of the Certificates on or before the time of issuance of
such Certificates. If not included in the Prospectus Supplement, such
information will be included in the Form 8-K.]
UNDERWRITING
[Underwriting standards as appropriate. The following underwriting
standards are those presently applicable for Option One Mortgage Corporation
("Option One") for mortgage loans.]
The Option One Mortgage Loans will have been originated generally in
accordance with Option One's Guidelines (the "Option One Guidelines"). On a
case-by-case basis, exceptions to the Option One Guidelines are made where
compensating factors exist.
The Option One Guidelines are primarily intended to assess the value of
the mortgaged property and to evaluate the adequacy of such property as
collateral for the mortgage loan. The
<PAGE>
-28-
Option One Mortgage Loans were also generally underwritten with a view toward
the resale thereof in the secondary market. All the Option One Mortgage Loans
generally bear higher rates of interest than mortgage loans that are originated
in accordance with FNMA and FHLMC standards.
Each applicant completes an application which includes information with
respect to the applicant's liabilities, income, credit history, employment
history and personal information. The Option One Guidelines require a credit
report on each applicant from a credit reporting company. The report typically
contains information relating to such matters as credit history with local and
national merchants and lenders, installment debt payments and any record of
defaults, bankruptcies, repossessions, or judgments. Mortgaged properties that
are to secure mortgage loans generally are appraised by qualified independent
appraisers. Such appraisers inspect and appraise the subject property and verify
that such property is in acceptable condition. Following each appraisal, the
appraiser prepares a report which includes a market value analysis based on
recent sales of comparable homes in the area and, when deemed appropriate,
replacement cost analysis based the current cost of constructing a similar home.
All appraisals are required to conform to the Uniform Standards of Professional
Appraisal Practice adopted by the Appraisal Standards Board of the Appraisal
Foundation and are generally on forms acceptable to FNMA and FHLMC. The Option
One Guidelines require a review of the appraisal by a qualified appraiser
employed or retained by Option One.
The Option One Mortgage Loans were originated consistent with and
generally conform to the Option One Guidelines' "Full Documentation", "Limited
Documentation", and "Stated Income Documentation" residential loan programs.
Under each of the programs, Option One reviews the applicant's source of income,
calculates the amount of income from sources indicated on the loan application
or similar documentation, reviews the credit history of the applicant,
calculates the debt service-to-income ration to determine the applicant's
ability to repay the loan, reviews the type and use of the property being
financed, and reviews the property. In determining the ability of the applicant
to repay the loan, a rate (the "Qualifying Rate") has been created under the
Option One Guidelines that generally is equal to the lesser of the fully indexed
interest rate on the loan being applied for or one percent above the initial
interest rate on such loan. The Option One Guidelines require that mortgage
loans be underwritten in a standardized procedure which complies with applicable
federal and state laws and regulations and requires Option One's underwriters to
be satisfied that the value of the property being financed, as indicated by an
appraisal and a review of the appraisal, currently supports the outstanding loan
balance. In general, the maximum loan amount for mortgage loans originated under
the programs is $325,000. Mortgage loans may, however, be originated generally
up to $400,000 ($500,000 in Hawaii), provided the LTV is at least 15% below the
applicable residential loan program maximum that would otherwise apply. The
Option One Guidelines permit one-to-four-family loans to have LTV's at
origination of generally up to 80%, depending on, among other things, the
purpose of the mortgage loan, a mortgagor's credit
<PAGE>
-29-
history, repayment ability and debt service-to-income ratio, as well as the type
and use of the property. With respect to Option One originated mortgage loans
secured by mortgaged properties acquired by a mortgagor under a "lease option
purchase," the LTV of the related mortgage loan is based on the lower of the
appraised value at the time of origination of such mortgage loan or the sale
price of the related mortgaged property if the "lease option purchase price" was
set less than 12 months prior to origination and is based on the appraised value
at the time of origination if the "lease option purchase price" was set 12
months or more prior to origination.
The Option One Guidelines require that income be verified for each
applicant and that the source of funds (if any) required to be deposited by the
applicant into escrow under its various programs as follows: Under the Full
Documentation program, applicants generally are required to submit two written
forms of verification of stable income for 24 months (or, if the LTV is less
than or equal to 65%, for 12 months). Under the Limited Documentation programs,
one such form of verification is required for 12 months. Under the Stated Income
Documentation program, an applicant may be qualified based upon monthly income
as stated on the mortgage loan application if the applicant meets certain
criteria. All the foregoing programs require that with respect to salaried
employees there be a telephone verification of the applicant's employment.
Verification of the source of funds (if any) required to be deposited by the
applicant into escrow in the case of a purchase money loan is generally required
under the Full Documentation program guidelines. No such verification is
required under the other programs.
The Option One Guidelines have the following categories and criteria
for grading the potential likelihood that an applicant will satisfy the
repayment obligations of a mortgage loan:
"AA" RISK. Under the "AA" risk category, the applicant must
have generally repaid installment or revolving debt according to its
terms. A maximum of one 30-day late payment, and no 60-day late
payments, within the last 12 months is acceptable on an existing
mortgage loan. An existing mortgage loan is not required to be current
at the time the application is submitted. No open collection accounts
or open charge-offs may remain open after the funding of the loan. No
bankruptcy or notice of default filings may have occurred during the
preceding three years; provided, however, that if the borrower's
bankruptcy has been discharged during the past three years and the
borrower has established a credit history otherwise complying with the
credit parameters set forth in this paragraph, then the borrower may
qualify for a mortgage loan. The mortgaged property must be in at least
average condition. A maximum LTV of 80% is permitted for a mortgage
loan on a single family owner-occupied property. A maximum LTV of 75%
is permitted for a mortgage loan on an owner-occupied condominium or a
two-to-four-family residential property. In certain instances, a
maximum LTV of 90% is permitted for a mortgage loan secured by a single
family owner-occupied property originated under the Full Documentation
program. Loans originated under the "AA" risk
<PAGE>
-30-
category must be owner-occupied and originated under the Full
Documentation program. The debt service-to-income ratio generally
ranges from 45% or less to 55% or less depending on the Qualifying Rate
and the LTV.
"A" RISK. Under the "A" risk category, an applicant must have
generally repaid installment or revolving debt according to its terms.
A maximum of two 30-day late payments, and no 60-day late payments,
within the last 12 months is acceptable on an existing mortgage loan.
An existing mortgage loan is not required to be current at the time the
application is submitted. Minor derogatory items are allowed as to
non-mortgage credit, and a letter of explanation may be required under
the Full Documentation program. No open collection accounts or open
charge-offs affecting title may remain open after funding of the loan;
except that under the Option One Guidelines for the Stated Income
Documentation program up to $500 may remain open after funding of the
loan. No bankruptcy or notice of default filings may have occurred
during the preceding three years; provided, however, that if the
borrower's bankruptcy has been discharged during the past three years
and the borrower has re-established a credit history otherwise
complying with the credit parameters set forth in this paragraph, then
the borrower may qualify for a mortgage loan. The mortgaged property
must be in at least average condition. A maximum LTV of 80% (or 75% and
65% for mortgage loans originated under the Limited Documentation and
Stated Income Documentation programs, respectively) is permitted for a
mortgage loan on a single family owner-occupied property. A maximum LTV
of 75% (or 65% and 60% for mortgage loans originated under the Limited
Documentation and Stated Income Documentation programs, respectively)
is permitted for a mortgage loan on a non-owner-occupied property.
However, for most refinance mortgage loans under the Option One
Guidelines' Full Documentation program, a maximum LTV of 80% is
permitted for a mortgage loan on an owner-occupied property, and a
maximum LTV of 70% is permitted only for a mortgage loan on a
non-owner-occupied property. In certain instances, a maximum LTV of 90%
is permitted for a mortgage loan secured by a single family
owner-occupied property originated under the Full Documentation
program. The debt service-to-income ratio generally ranges from 45% or
less to 55% or less depending on the Qualifying Rate and the LTV.
"B" RISK. Under the "B" risk category, an applicant must have
generally repaid installment or revolving debt according to its terms.
A maximum of four 30-day late payments, and no 60-day late payments,
within the last 12 months is acceptable on an existing mortgage loan.
An existing mortgage loan is not required to be current at the time the
application is submitted. As to non-mortgage credit, some prior
defaults may have occurred, and a letter of explanation may be required
under the Full Documentation program. Generally, no more than $500
($2,500 for mortgage loans originated under the Stated income
documentation program) in open charge-offs or collection accounts
<PAGE>
-31-
may remain open after the funding of the loan. No bankruptcy or notice
of default filings by the applicant may have occurred during the
preceding 18 months; provided, however, that if the borrower's
bankruptcy has been discharged during the past 18 months and the
borrower has re-established a credit history otherwise complying with
the credit parameters set forth in this paragraph, then the borrower
may qualify for a mortgage loan. The mortgaged property must be in at
least average condition. A maximum LTV of 80% (or 75% and 65% for
mortgage loans originated under the Limited Documentation and Stated
Income Documentation programs, respectively) is permitted for a
mortgage loan on an owner-occupied detached property for a Full
Documentation program. A maximum LTV of 70%, or 75% for a purchase (or
65% and 60% for mortgage loans originated under the Limited
Documentation and Stated Income Documentation programs, respectively)
is permitted for a mortgage loan on a non-owneroccupied property. In
certain instances, a maximum LTV of 90% is permitted for a mortgage
loan secured by a single family owner-occupied property originated
under the Full Documentation program. The debt service-to-income ratio
generally ranges from 50% or less to 55% or less depending on the
Qualifying Rate and the LTV.
"C" RISK. Under the "C" risk category, an applicant may have
experienced significant credit problems in the past. A maximum of six
30-day late payments, including one 60-day late payment and one 90-day
late payment, within the last 12 months is acceptable on an existing
mortgage loan. However, more than six 30-day late payments within the
last 12 moths are acceptable if there are no 60-day or 90-day late
payments within the last 12 months. An existing mortgage loan is not
required to be current at the time the application is submitted. As to
non-mortgage credit, significant prior defaults may have occurred. No
more than $2,500 (or $5,000 per account for mortgage loans originated
under the Stated Income Documentation program) in open charge-offs or
collection accounts may remain open after the funding of the loan.
Allowances will be made, however, for numerous open medical accounts
with individual balances equal to or less than $2,500. No bankruptcy or
notice of default filings by the applicant may have occurred during the
preceding 18 months; provided, however, that if the borrower's
bankruptcy has been discharged during the past 18 months and the
borrower has established a credit history otherwise complying with the
credit parameters set forth in this paragraph, then the borrower may
qualify for a mortgage loan. The mortgaged property must be in adequate
condition. Generally, a maximum LTV of 70% for a mortgage loan on a
single family, owner occupied property for a Full Documentation program
(or 65% for mortgage loans originated under the Limited Documentation
and Stated Income Documentation programs) is permitted. A maximum LTV
of 75% is permitted on a case by case basis. A maximum LTV of 70% (or
65% and 60% for mortgage loans originated under the Limited
Documentation and the Stated Income Documentation programs,
respectively) is permitted for a mortgage loan on an own-owner-occupied
property or a non-owner-occupied property. The debt service-to-
<PAGE>
-32-
income ratio generally ranges from 55% or less to 60% or less depending
on the Qualifying Rate and the LTV.
"CC" RISK. Under the "CC" risk category, an applicant may have
experienced significant credit problems in the past. As to mortgage
credit, the applicant may have had a history of being generally 30 to
60 days delinquent, and a maximum of two 90-day late payments within
the last 12 months is acceptable on an existing mortgage loan. An
existing mortgage loan is not required to be current at the time the
application is submitted. As to non-mortgage credit, significant prior
defaults may have occurred. Open charge-offs or collection accounts may
remain open after the funding of the loan. A bankruptcy, notice of sale
filing, notice of default filing or foreclosure may be permitted, on a
case-by-case basis. The mortgaged property may exhibit some deferred
maintenance. A maximum LTV of 65% (or 60% non-owner-occupied for
mortgage loans originated under the Stated Income Documentation
program) is permitted for a mortgage loan on either an owner-occupied
property or a non-owner-occupied property. The debt service-to-income
ratio generally is 60% or less depending on the Qualifying Rate and the
LTV.
EXCEPTIONS. As described above, the foregoing categories and
criteria are guidelines only. On a case-by-case basis, it may be
determined that an applicant warrants a risk category upgrade, a debt
service-to-income ratio exception, a pricing exception, a loan-to-value
exception or an exception from certain requirements of a particular
risk category (collectively called an "upgrade" or an "exception"). An
upgrade or exception may generally be allowed if the application
reflects certain compensating factors, among others: low LTV; pride of
ownership; a maximum of one 30-day late payment on all mortgage loans
during the last 12 months; stable employment or ownership of current
residence of five or more years. An upgrade or exception may also be
allowed if the applicant places a down payment through escrow of at
least 20% of the purchase price of the mortgaged property, or if the
new loan reduces the applicant's monthly aggregate mortgage payment by
25% or more. Accordingly, certain mortgagors may qualify in a more
favorable risk category that, in the absence of such compensating
factors, would satisfy only the criteria of a less favorable risk
category.
See "The Mortgage Pools--Underwriting Standards" in the Prospectus.
[The following table sets forth the number and dollar value of Option
One's mortgage loan production using the standards described herein for the
periods indicated.
<TABLE>
MORTGAGE LOAN PRODUCTION
<PAGE>
-33-
<CAPTION>
_____ Months Ended _____ Months Ended
____________, 19__ ____________, 19__
------------------------------ --------------------------------
<S> <C>
Total Loans
Number of Loans.........................
Volume of Loans......................... $ $
Average Loan Balance $ $
</TABLE>
DELINQUENCY AND FORECLOSURE EXPERIENCE
[Delinquency and foreclosure experience as appropriate. The following disclosure
is presently applicable for Option One Mortgage Corporation ("Option One").]
The following tables set forth, as of December 31, 1993, 1994, 1995 and
June 30, 1996, certain information relating to the delinquency experience
(including imminent foreclosures in progress and bankruptcies) of one- to
four-family residential mortgage loans included in Option One's servicing
portfolio of mortgage loans originated under the Option One Guidelines (which
portfolio does not include mortgage loans that are subserviced for others) at
the end of the indicated periods. The indicated periods of delinquency are based
on the number of days past due on a contractual basis. No mortgage loan is
considered delinquent for these purposes until it is one month past due on a
contractual basis. Such tables restate PHMC's (as defined herein) performance
statistics relating only to the non-conforming mortgage loans previously
subserviced by Option One. Such servicing was subsequently transferred to Option
One.
<PAGE>
-34-
<TABLE>
DELINQUENCIES AND FORECLOSURES
(DOLLARS IN THOUSANDS)
<CAPTION>
At December 31, 1993 At December 31, 1994
----------------------------------------------------------------------------------------------
Percent Percent Percent Percent
By No. By Dollar By No. By Dollar By No. By Dollar By No. By Dollar
of Loans Amount of Loans Amount of Loans Amount of Loans Amount
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Portfolio...................... 1,233 $146,352 N/A N/A 6,115 $615,488 N/A N/A
Period of Delinquency
31-59 Days...................... 2 251 .10 .17 32 3,247 .52 .53
60-89 Days...................... 3 265 .24 .18 17 1,637 .28 .27
90 days or more................. 2 282 .16 .19 28 3,556 .46 .58
- --- -- -- -- ----- -- --
Total Delinquent Loans............... 7 798 .56 .54 77 8,440 1.26 1.38
Loans in Foreclosure(1).............. 4 415 .32 .28 50 5,328 .82 .87
<CAPTION>
At December 31, 1995 At June 30, 1996
----------------------------------------------------------------------------------------------
Percent Percent Percent Percent
By No. By Dollar By No. By Dollar By No. By Dollar By No. By Dollar
of Loans Amount of Loans Amount of Loans Amount of Loans Amount
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Portfolio...................... 12,686 $1,153,199 N/A N/A 14,460 $1,286,548 N/A N/A
Period of Delinquency
31-59 Days...................... 126 11,364 .99 .99 205 17,091 1.42 1.33
60-89 Days...................... 87 8,138 .69 .71 118 10,464 .82 .81
90 days or more................. 294 28,982 2.32 2.51 425 38,466 2.94 2.99
--- ------ ---- ---- --- ------ ---- ----
Total Delinquent Loans............... 507 48,484 4.00 4.21 748 66,021 5.18 5.13
Loans in Foreclosure(1).............. 301 28,874 2.37 2.50 383 33,338 2.65 2.59
</TABLE>
(1) Loans in foreclosure are also included under the heading "Total Delinquent
Loans."
----------------------------
<TABLE>
REAL ESTATE OWNED
(DOLLARS IN THOUSANDS)
<CAPTION>
At December 31, At December 31, At December 31,
1993 1994 1995
---------------------------------------------------------------------------------
By Dollar By Dollar By Dollar
By No. Amount By No. Amount By No. Amount
of Loans of Loans of Loans of Loans of Loans of Loans
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Portfolio 1,233 $146,352 6,115 $615,488 12,686 $1,153,199
Foreclosed Loans(1) 0 0 12 1,512 80 7,634
Foreclosed Ratio(2) 0 .00 .20 .25 .63 .66
<CAPTION>
At June 30,
1996
--------------------------------
By Dollar
By No. Amount
of Loans of Loans
--------------------------------
Total Portfolio 14,460 $1,286,548
Foreclosed Loans(1) 149 14,616
Foreclosed Ratio(2) 1.03 1.14
</TABLE>
(1) For the purposes of these tables, Foreclosed Loans means the principal
balance of mortgage loans secured by mortgaged properties the title to
which has been acquired by Option One, by investors or by an insurer
following foreclosure or delivery of a deed in lieu of foreclosure.
(2) The Foreclosure Ratio is equal to the aggregate principal balance or
number of Foreclosed Loans divided by the aggregate principal balance, or
number, as applicable, of mortgage loans in the Total Portfolio at the end
of the indicated period.
----------------------------
<PAGE>
-35-
<TABLE>
LOAN LOSS EXPERIENCE ON OPTION ONE'S
SERVICING PORTFOLIO OF MORTGAGE LOANS
(DOLLARS IN THOUSANDS)
<CAPTION>
Year Ended December 31, Six Months Ended
June 30,
-----------------------------------------------------------------------------------------------------
1993 1994 1995 1996
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Portfolio(1) $146,352 $615,488 $1,153,199 $1,286,548
Gross Losses(2) $0 $17 $1,291 $1,684
Recoveries(3) $0 $0 $0 $0
Net Losses(4) $0 $17 $1,291 $1,684
Net Losses as a Percentage of
Total
Portfolio(5) 0.00% 0.00% 0.11% 0.26%
</TABLE>
(1) "Total Portfolio" on the date stated above is the principal balances of
the mortgage loans outstanding on the last day of the period.
(2) "Gross Losses" are actual losses incurred on liquidated properties for
each respective period. Losses are calculated after repayment of all
principal, foreclosure costs and accrued interest to the date of
liquidation.
(3) "Recoveries" are recoveries from liquidated proceeds and deficiency
judgments.
(4) "Net Losses" means "Gross Losses" minus "Recoveries."
(5) For the Six Months Ending June 30, 1996, "Net Losses as a Percentage of
Total Portfolio" was annualized by multiplying "Net Losses: by 2.0 before
calculating the Percentage of "Net Losses as a Percentage of Total
Portfolio."
<PAGE>
-36
The following tables set forth, as of December 31, 1993, 1994, 1995 and
June 30, 1996 certain information relating to the delinquency experience
(including imminent foreclosures, foreclosures in progress and bankruptcies) of
one- to four-family residential mortgage loans included in Option One's entire
servicing portfolio (which portfolio includes mortgage loans originated under
Option One's Guidelines and mortgage loans that are subserviced for others) at
the end of the indicated periods. The indicated periods of delinquency are based
on the number of days past due on a contractual basis. No mortgage loan is
considered delinquent for these purposes until it is one month past due on a
contractual basis. Such tables restate PHMC's (as defined herein) performance
statistics relating only to the non-conforming mortgage loans previously
subserviced by Option One.
Such servicing was subsequently transferred to Option One.
----------------------------
<TABLE>
DELINQUENCIES AND FORECLOSURES
(DOLLARS IN THOUSANDS)
<CAPTION>
At December 31, At December 31,
1993 1994
----------------------------------------------------------------------------------------------
Percent Percent Percent Percent
By No. By Dollar By No. of By Dollar By No. By Dollar By No. of By Dollar
of Loans Amount Loans Amount of Loans Amount Loans Amount
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Portfolio...................... 1,233 $146,352 N/A N/A 6,115 $615,488 N/A N/A
Period of Delinquency
31-59 Days...................... 2 251 .16 .17 32 3,247 .52 .53
60-89 Days...................... 3 265 .24 .18 17 1,637 .28 .27
90 days or more................. 2 282 .16 .19 28 3,556 .46 .58
- --- -- -- -- ----- -- --
Total Delinquent Loans............... 7 798 .56 .54 77 8,440 1.26 1.38
Loans in Foreclosure(1).............. 4 415 .32 .28 50 5,328 .82 .87
At December 31, At June 30,
1995 1996
----------------------------------------------------------------------------------------------
Percent Percent Percent Percent
By No. By Dollar By No. of By Dollar By No. By Dollar By No. of By Dollar
of Loans Amount Loans Amount of Loans Amount Loans Amount
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Portfolio...................... 14,625 $1,367,031 N/A N/A 16,238 $1,482,965 N/A N/A
Period of Delinquency
31-59 Days...................... 161 16,501 1.10 1.21 242 22,682 1.49 1.53
60-89 Days...................... 104 10,117 .71 .74 144 13,954 .89 .94
90 days or more................. 388 40,275 2.65 2.95 533 52,355 3.28 3.53
--- ------ ---- ---- --- ------ ---- ----
Total Delinquent Loans............... 653 66,893 4.46 4.90 919 88,991 5.66 6.00
Loans in Foreclosure(1).............. 388 38,985 2.65 2.85 483 46,187 2.97 3.11
</TABLE>
(1) Loans in foreclosure are also included under the heading "Total Delinquent
Loans."
----------------------------
<TABLE>
REAL ESTATE OWNED
(DOLLARS IN THOUSANDS)
<CAPTION>
At December 31, At December 31, At December 31, At June 30,
1993 1994 1995 1996
<PAGE>
-37-
---------------------------------------------------------------------------------------------------
By Dollar By Dollar By Dollar By Dollar
By No. Amount By No. Amount By No. Amount By No. Amount
of Loans of Loans of Loans of Loans of Loans of Loans of Loans of Loans
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Portfolio 1,233 $146,352 6,115 $615,488 14,625 $1,367,031 16,238 $1,482,965
Foreclosed Loans(1) 0 0 12 1,512 100 9,632 218 21,846
Loans in Foreclosure(2) 0 .00 .20 .25 .68 .70 1.34 1.47
</TABLE>
(1) For the purposes of these tables, Foreclosed Loans means the principal
balance of mortgage loans secured by mortgaged properties the title to
which has been acquired by Option One, by investors or by an insurer
following foreclosure or delivery of a deed in lieu of foreclosure.
(2) The Foreclosure Ratio is equal to the aggregate principal balance or
number of Foreclosed Loans divided by the aggregate principal balance, or
number, as applicable, of mortgage loans in the Total Portfolio at the end
of the indicated period.
<PAGE>
-38-
<TABLE>
LOAN LOSS EXPERIENCE ON OPTION ONE'S
SERVICING PORTFOLIO OF MORTGAGE LOANS
(DOLLARS IN THOUSANDS)
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
----------------------------------------------------------------------------------------------------
1993 1994 1995 1996
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Portfolio(1) $146,352 $615,488 $1,367,031 $1,482,965
Gross Losses(2) $0 $17 $1,506 $2,303
Recoveries(3) $0 $0 $0 $0
Net Losses(4) $0 $17 $1,506 $2,303
Net Losses as a Percentage of
Total
Portfolio(5) 0.00% 0.00% 0.11% 0.31%
</TABLE>
(1) "Total Portfolio" on the date stated above is the principal balances of
the mortgage loans outstanding on the last day of the period.
(2) "Gross Losses" are actual losses incurred on liquidated properties for
each respective period. Losses are calculated after repayment of all
principal, foreclosure costs and accrued interest to the date of
liquidation.
(3) "Recoveries" are recoveries from liquidated proceeds and deficiency
judgments.
(4) "Net Losses" means "Gross Losses" minus "Recoveries."
(5) For the Six Months Ending June 30, 1996, "Net Losses" as a Percentage of
Total Portfolio" was annualized by multiplying "Net Losses: by 2.0 before
calculating the Percentage of "Net Losses as a Percentage of Total
Portfolio."
----------------------------
It is unlikely that the delinquency experience of the Mortgage Loans
comprising the Mortgage Pool will correspond to the delinquency experience of
the Seller's mortgage portfolio set forth in the foregoing tables. The
statistics shown above represent the delinquency experience for the Seller's
mortgage servicing portfolio only for the periods presented, whereas the
aggregate delinquency experience on the Mortgage Loans comprising the Mortgage
Pool will depend on the results obtained over the life of the Mortgage Pool. The
Seller commenced receiving applications for mortgage loans under in February
1993, and therefore its experience in originating, acquiring and servicing
mortgage loans has been recently gained. There can be no assurance that the
Mortgage Loans comprising the Mortgage Pool will perform consistent with the
delinquency or foreclosure experience described herein. It should be noted that
if the residential real estate market should experience an overall decline in
property values, the actual rates of delinquencies and foreclosures could be
higher than those previously experienced by the Seller. In addition, adverse
economic conditions may affect the timely payment by Mortgagors of scheduled
payments of principal and interest on the Mortgage Loans and, accordingly, the
actual rates of delinquencies and foreclosures with respect to the Mortgage
Pool.
<PAGE>
-39-
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Mortgage Pool and the
Mortgaged Properties is based upon the Mortgage Pool as constituted at the close
of business on the Cut-off Date, as adjusted for the scheduled principal
payments due on or before such date. Prior to the issuance of the Senior
Certificates, Mortgage Loans may be removed from the Mortgage Pool as a result
of incomplete documentation or otherwise, if the Company deems such removal
necessary or appropriate. A limited number of other mortgage loans may be added
to the Mortgage Pool prior to the issuance of the Senior Certificates. The
Company believes that the information set forth herein will be substantially
representative of the characteristics of the Mortgage Pool as it will be
constituted at the time the Senior Certificates are issued although the range of
Mortgage Rates and maturities and certain other characteristics of the Mortgage
Loans in the Mortgage Pool may vary.
A Current Report on Form 8-K will be available to purchasers of the Senior
Certificates and will be filed, together with the Pooling and Servicing
Agreement, with the Securities and Exchange Commission within fifteen days after
the initial issuance of the Senior Certificates. In the event Mortgage Loans are
removed from or added to the Mortgage Pool as set forth in the preceding
paragraph, such removal or addition will be noted in the Current Report on Form
8-K.
See "The Mortgage Pools" and "Certain Legal Aspects of Mortgage Loans" in
the Prospectus.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Series 19__-_ Mortgage Pass-Through Certificates will include the
following seven classes (the "Senior Certificates"): (i) Class A-1 Certificates,
Class A-2 Certificates, Class A-3 Certificates and Class A-4 Certificates, (ii)
Class A-5 Certificates (the "Fixed Strip Certificates"), (iii) Class A-6
Certificates and (iv) Class A-7 Certificates (the "Variable Strip
Certificates"). In addition to the Senior Certificates, the Series 19__-_
Mortgage Pass-Through Certificates will also consist of one class of subordinate
certificates which is designated as the Class B Certificates (the "Subordinate
Certificates") and one class of residual certificates which is designated as the
Class R Certificates (the "Residual Certificates"). Only the Senior Certificates
(the "Offered Certificates") are offered hereby.
The Senior Certificates (together with the Subordinate Certificates and
Residual Certificates) will evidence the entire beneficial ownership interest in
the Trust Fund. The Trust Fund will consist of (i) the Mortgage Loans; (ii) such
assets as from time to time are identified as deposited in respect
<PAGE>
-40-
of the Mortgage Loans in the Certificate Account (as described in the
Prospectus) and belonging to the Trust Fund; (iii) property acquired by
foreclosure of such Mortgage Loans or deed in lieu of foreclosure; and (iv) any
applicable insurance policies and all proceeds thereof.
AVAILABLE DISTRIBUTION AMOUNT
The "Available Distribution Amount" for any Distribution Date will
generally consist of (i) the aggregate amount of scheduled payments on the
Mortgage Loans due on the related Due Date and received on or prior to the
related Determination Date, after deduction of the related master servicing fees
(the "Servicing Fees"), (ii) certain unscheduled payments, including Mortgagor
prepayments on the Mortgage Loans, Insurance Proceeds, Liquidation Proceeds and
proceeds from repurchases of and substitutions for the Mortgage Loans occurring
during the preceding calendar month and (iii) all Advances made for such
Distribution Date, in each case net of amounts reimbursable therefrom to the
Master Servicer. In addition to the foregoing amounts, with respect to
unscheduled collections, not including Mortgagor prepayments, the Master
Servicer may elect to treat such amounts as included in the Available
Distribution Amount for the Distribution Date in the month of receipt, but is
not obligated to do so. With respect to any Distribution Date, (i) the "Due
Date" is the first day of the month in which such Distribution Date occurs and
(ii) the "Determination Date" is the [__th] day of the month in which such
Distribution Date occurs or, if such day is not a business day, the immediately
succeeding business day. See "Description of the Certificates--Distributions" in
the Prospectus.
INTEREST DISTRIBUTIONS
Holders of the Senior Certificates will be entitled to receive on each
Distribution Date, to the extent of the Available Distribution Amount for such
Distribution Date, interest distributions in an amount equal to the aggregate of
all Accrued Certificate Interest with respect to such Certificates for such
Distribution Date and, to the extent not previously paid, for all prior
Distribution Dates (the "Senior Interest Distribution Amount"). On each
Distribution Date, the Available Distribution Amount for such Distribution Date
will be applied to make interest distributions on the various classes of Senior
Certificates pro rata in accordance with the respective amounts of Accrued
Certificate Interest then payable with respect thereto, provided, however, that,
in the case of the Tiered Certificates, following the Credit Support Depletion
Date, such distributions shall be made in the priority set forth in the _____th
paragraph under the heading "Principal Distributions". With respect to any
Distribution Date, the Accrued Certificate Interest in respect of each class of
Senior Certificates will be equal to one month's interest accrued at the
applicable Pass-Through Rate on the Certificate Principal Balance (or, in the
case of the Fixed Strip Certificates and Variable Strip Certificates, the
Notional Amount) of the Certificates of such class immediately prior to such
Distribution Date; in each case less interest shortfalls, if any, for such
Distribution Date not covered by the Subordination provided by the Subordinate
Certificates, including in each case (i) any Prepayment Interest Shortfall (as
defined below), (ii) the interest portions (in each case, adjusted
<PAGE>
-41-
to the related Net Mortgage Rate) of Realized Losses (including Special Hazard
Losses, in excess of the Special Hazard Amount ("Excess Special Hazard Losses"),
Fraud Losses in excess of the Fraud Loss Amount ("Excess Fraud Losses"),
Bankruptcy Losses in excess of the Bankruptcy Amount ("Excess Bankruptcy
Losses") and losses occasioned by war, civil insurrection, certain governmental
actions, nuclear reaction and certain other risks ("Extraordinary Losses")) not
covered by the Subordination (which, with respect to the pro rata portion
thereof otherwise allocable to the Tiered Certificates, to the extent such
losses are Default Losses, will be allocated first to the Class A-6 Certificates
and second to the Class A-1 Certificates and Class A-5 Certificates), (iii) the
interest portion of any Advances that were made with respect to delinquencies
that were ultimately determined to be Excess Special Hazard Losses, Excess Fraud
Losses, Excess Bankruptcy Losses or Extraordinary Losses and (iv) any other
interest shortfalls not covered by Subordination, including interest shortfalls
relating to the Relief Act (as defined in the Prospectus) or similar legislating
on or regulations, all allocated as described below. Accrued Certificate
Interest is calculated on the basis of a 360-day year consisting of twelve
30-day months.
The Prepayment Interest Shortfall for any Distribution Date is equal to the
aggregate shortfall, if any, in collections of interest (adjusted to the related
Net Mortgage Rates) resulting from mortgagor prepayments on the Mortgage Loans
during the preceding calendar month, to the extent not offset by the Master
Servicer's application of servicing compensation as described below. Such
shortfalls will result because interest on prepayments in full is collected only
to the date of prepayment, and because no interest is collected on prepayments
in part, as such prepayments are applied to reduce the outstanding principal
balance of the related Mortgage Loan as of the Due Date in the month of
prepayment.
If the Available Distribution Amount for any Distribution Date is less than
the Accrued Certificate Interest payable on the Senior Certificates for such
Distribution Date, the shortfall will be allocated among the holders of all
classes of Senior Certificates in proportion to the respective amounts of
Accrued Certificate Interest for such Distribution Date on each such class, and
will be distributable to holders of the Certificates of such classes, on
subsequent Distribution Dates, to the extent of available funds, provided,
however, that following the Credit Support Depletion Date, distributions will be
made to the Tiered Certificates in the priority set forth in the _____ paragraph
under the heading "--Principal Distributions on the Senior Certificates" and
therefore the pro rata portion of such shortfall that is allocated to the Tiered
Certificates will be allocated first to the Class A-6 Certificates. Any such
amounts so carried forward will not bear interest.
The Pass-Through Rates on each class of Senior Certificates, other than the
Variable Strip Certificates, are fixed and are set forth on the cover hereof.
The Pass-Through Rate on the Variable Strip Certificates for each Distribution
Date will equal the weighted average, as determined as of the Due Date in the
month preceding the month in which such Distribution Date occurs, of the Pool
Strip Rates on each of the Mortgage Loans in the Mortgage Pool. The "Pool Strip
Rate" on any Mortgage Loan is equal to the Net Mortgage Rate thereon minus ___%.
The "Net Mortgage Rate"
<PAGE>
-42-
on each Mortgage Loan is equal to the Mortgage Rate thereon minus the Servicing
Fee Rate. The initial Pass-Through Rate on the Variable Strip Certificates is
approximately _____% per annum.
As described herein, the Accrued Certificate Interest allocable to each
class of Senior Certificates is based on the Certificate Principal Balance
thereof or, in the case of the Variable Strip Certificates, on the Notional
Amount. The Certificate Principal Balance of any Senior Certificate as of any
date of determination is equal to the initial Certificate Principal Balance
thereof reduced by the aggregate of (a) all amounts allocable to principal
previously distributed with respect to such Certificate and (b) any reductions
in the Certificate Principal Balance thereof deemed to have occurred in
connection with allocations of Realized Losses (as defined herein) in the manner
described herein. The Notional Amount of the Fixed Strip Certificates and
Variable Strip Certificates as of any date of determination is equal to the
aggregate Certificate Principal Balance of the Certificates of all classes
(including the Subordinate Certificates) as of such date. Reference to the
Notional Amount of the Fixed Strip Certificates or Variable Strip Certificates
is solely for convenience in certain calculations and does not represent the
right to receive any distributions allocable to principal.
PRINCIPAL DISTRIBUTIONS ON THE SENIOR CERTIFICATES
Holders of the Senior Certificates will be entitled to receive on each
Distribution Date, to the extent of the portion of the Available Distribution
Amount remaining after the Senior Interest Distribution Amount is distributed to
such holders, a distribution allocable to principal in the following amount (the
"Senior Principal Distribution Amount"):
(i) the product of (A) the then applicable Senior Percentage and (B)
the aggregate of the following amounts:
(1) the principal portion of all scheduled monthly payments on the
Mortgage Loans due on the related Due Date, whether or not received
on or prior to the related Determination Date, less the principal
portion of Debt Service Reductions (as defined below) which together
with other Bankruptcy Losses are in excess of the Bankruptcy Amount;
(2) the principal portion of all proceeds of the repurchase of any
Mortgage Loan (or, in the case of a substitution, certain amounts
representing a principal adjustment) as required by the Pooling and
Servicing Agreement during the preceding calendar month;
(3) the principal portion of all other unscheduled collections
received during the preceding calendar month (other than full and
partial principal prepayments made by the respective mortgagors and
any amounts received in connection with a Final Disposition (as
defined below) of a Mortgage Loan described in clause (ii) below),
to the extent applied as recoveries of principal;
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(ii) in connection with the Final Disposition of a Mortgage Loan (x)
that occurred in the preceding calendar month and (y) that did not result
in any Excess Special Hazard Losses, Excess Fraud Losses, Excess Bankruptcy
Losses or Extraordinary Losses, an amount equal to the lesser of (a) the
then-applicable Senior Percentage of the Stated Principal Balance of such
Mortgage Loan immediately prior to such Distribution Date and (b) the
then-applicable Senior Accelerated Distribution Percentage (as defined
below) of the related collections, including Insurance Proceeds and
Liquidation Proceeds, to the extent applied as recoveries of principal;
(iii) the then applicable Senior Accelerated Distribution Percentage of
the aggregate of all full and partial principal prepayments made by the
respective mortgagors during the preceding calendar month; and
(iv) any amounts allocable to principal for any previous Distribution
Date (calculated pursuant to clauses (i) through (iii) above) that remain
undistributed to the extent that any such amounts are not attributable to
Realized Losses which were allocated to the Subordinate Certificates.
A "Final Disposition" of a defaulted Mortgage Loan is deemed to have
occurred upon a determination by the Master Servicer that it has received all
Insurance Proceeds, Liquidation Proceeds and other payments or cash recoveries
which the Master Servicer reasonably and in good faith expects to be finally
recoverable with respect to such Mortgage Loan.
The "Stated Principal Balance" of any Mortgage Loan as of any date of
determination is equal to the principal balance thereof as of the Cut-off Date,
after application of all scheduled principal payments due on or before the
Cut-off Date, whether or not received, reduced by all amounts allocable to
principal that have been distributed to Certificateholders with respect to such
Mortgage Loan on or before such date, and as further reduced to the extent that
the principal portion of any Realized Loss thereon has been allocated to one or
more classes of Certificates on or before the date of determination.
The Senior Percentage, which initially will equal approximately _____% and
will in no event exceed 100%, will be adjusted for each Distribution Date to be
the percentage equal to the aggregate Certificate Principal Balance of the
Senior Certificates immediately prior to such Distribution Date divided by the
aggregate Stated Principal Balance of all of the Mortgage Loans immediately
prior to such Distribution Date. The Subordinate Percentage as of any date of
determination is equal to 100% minus the Senior Percentage as of such date.
The Senior Accelerated Distribution Percentage for any Distribution Date
occurring prior to the Distribution Date in _________, _________ will be 100%.
The Senior Accelerated Distribution Percentage for any Distribution Date
occurring after _____, ____ will be as follows: for any Distribution Date during
in the sixth year after the Delivery Date, the Senior Percentage for such
Distribution Date plus 70% of the Subordinate Percentage for such Distribution
Date; for any
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Distribution Date during the seventh year after the Delivery Date, the Senior
Percentage for such Distribution Date plus 60% of the Subordinate Percentage for
such Distribution Date; for any Distribution Date during the eighth year after
the Delivery Date, the Senior Percentage for such Distribution Date plus 40% of
the Subordinate Percentage for such Distribution Date; for any Distribution Date
during the ninth year after the Delivery Date, the Senior Percentage for such
Distribution Date plus 20% of the Subordinate Percentage for such Distribution
Date; and for any Distribution Date thereafter, the Senior Percentage for such
Distribution Date (unless on any such Distribution Date the Senior Percentage
exceeds the initial Senior Percentage, in which case the Senior Accelerated
Distribution Percentage for such Distribution Date will once again equal 100%).
Any scheduled reduction to the Senior Prepayment Percentage described above
shall not be made as of any Distribution Date unless either (a)(i) the
outstanding principal balance of the Mortgage Loans delinquent __ days or more
(including foreclosure and REO Property) averaged over the last ___ months, as a
percentage of the aggregate outstanding principal balance of all Mortgage Loans
averaged over the last ___ months, does not exceed _% and (ii) Realized Losses
on the Mortgage Loans to date for such Distribution Date, if occurring during
the sixth, seventh, eighth, ninth or tenth year (or any year thereafter) after
__________ 19__, are less than __%, __%, __%, __% or __%, respectively, of the
initial Certificate Principal Balance of the Subordinate Certificates or (b)(i)
the aggregate outstanding principal balance of the Mortgage Loans delinquent __
days or more (including foreclosure and REO Property) averaged over the last ___
months, as a percentage of the aggregate outstanding principal balance of all
Mortgage Loans averaged over the last ___ months, does not exceed __% and (ii)
Realized Losses on the Mortgage Loans to date are less than __% of the initial
Certificate Principal Balance of the Subordinate Certificates.]
Distributions of the Senior Principal Distribution Amount to the Senior
Certificates (other than the Fixed Strip Certificates and Variable Strip
Certificates) will be made (to the extent of the Available Distribution Amount
remaining after distributions of the Senior Interest Distribution Amount as
described under "--Interest Distributions"), as follows:
(a) prior to the occurrence of the Credit Support Depletion Date
(as defined below):
(i) first, concurrently, to the Class A-1 and Class A-6
Certificates, with the amount to be distributed allocated as between
such classes on a pro rata basis in proportion to the respective
Certificate Principal Balances thereof, until the Certificate
Principal Balance of each such class is reduced to zero;
(ii) second, to the Class A-2 Certificates until the Certificate
Principal Balance thereof is reduced to zero;
(iii) third, to the Class A-3 Certificates until the Certificate
Principal Balance thereof is reduced to zero; and
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(iv) fourth, to the Class A-4 Certificates until the Certificate
Principal Balance thereof is reduced to zero.
(b) On each Distribution Date occurring on or after the Credit
Support Depletion Date, all priorities relating to sequential distributions
in respect of principal among the various classes of Senior Certificates
will be disregarded, and the Senior Principal Distribution Amount will be
distributed to all classes of Senior Certificates pro rata in accordance
with their respective outstanding Certificate Principal Balances; provided,
that the aggregate amount distributable to the Class A-1, Class A-5 and
Class A-6 Certificates (the "Tiered Certificates") in respect of Accrued
Certificate Interest thereon and in respect of their pro rata portion of
the Senior Principal Distribution Amount shall be distributed among the
Tiered Certificates in the amounts and priority as follows: first, to the
Class A-1 Certificates and the Class A-5 Certificates, up to an amount
equal to, and pro rata based on, the Accrued Certificate Interest thereon;
second to the Class A-1 Certificates, up to an amount equal to the Optimal
Principal Distribution Amount thereof (as defined below), in reduction of
the Certificate Principal Balances thereof; third to the Class A-6
Certificates, up to an amount equal to the Accrued Certificate Interest
thereon; and fourth to the Class A-6 Certificates the remainder of the
amount so distributable among the Tiered Certificates.
(c) The "Optimal Principal Distribution Amount" is equal to the
product of (i) the then applicable Optimal Percentage and (ii) the Senior
Principal Distribution Amount. The "Optimal Percentage" is equal to a
fraction, expressed as a percentage, the numerator of which is the
aggregate Certificate Principal Balance of the Class A-1 Certificates
immediately prior to the applicable Distribution Date and the denominator
of which is the aggregate Certificate Principal Balance of all of the
Senior Certificates immediately prior to such Distribution Date.
The "Credit Support Depletion Date" is the first Distribution Date on which
the Senior Percentage equals 100%.
The Master Servicer may elect to treat Insurance Proceeds, Liquidation
Proceeds and other unscheduled collections (not including prepayments by the
Mortgagors) received in any calendar month as included in the Available
Distribution Amount and the Senior Principal Distribution Amount for the
Distribution Date in the month of receipt, but is not obligated to do so. If the
Master Servicer so elects, such amounts will be deemed to have been received
(and any related Realized Loss shall be deemed to have occurred) on the last day
of the month prior to the receipt thereof.
ALLOCATION OF LOSSES; SUBORDINATION
The Subordination provided to the Senior Certificates by the Subordinate
Certificates will cover Realized Losses on the Mortgage Loans that are Defaulted
Mortgage Losses, Fraud Losses,
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Bankruptcy Losses (each as defined in the Prospectus) and Special Hazard Losses
(as defined herein) to the extent described herein. Any such Realized Losses
which do not constitute Excess Special Hazard Losses, Excess Fraud Losses,
Excess Bankruptcy Losses or Extraordinary Losses will be allocated first to the
Subordinate Certificates until the Certificate Principal Balance of the
Subordinate Certificates has been reduced to zero, and then except as provided
below on a pro rata basis to the Senior Certificates based on their then
outstanding Certificate Principal Balance or the Accrued Certificate Interest
thereon, as applicable. Any allocation of a Realized Loss (other than a Debt
Service Reduction) to a Senior Certificate will be made by reducing the
Certificate Principal Balance thereof, in the case of the principal portion of
such Realized Loss, and the Accrued Certificate Interest thereon, in the case of
the interest portion of such Realized Loss, by the amount so allocated as of the
Distribution Date occurring in the month following the calendar month in which
such Realized Loss was incurred. Allocations of Realized Losses which are
Default Losses (as defined below) to Senior Certificates will be made on a pro
rata basis among the Senior Certificates, based on their then outstanding
Certificate Principal Balances, or the Accrued Certificate Interest thereon, as
applicable; provided, however, that any such Realized Losses otherwise allocable
to the Tiered Certificates will be allocated first to the Class A-6 Certificates
until the Certificate Principal Balance thereof or the Accrued Certificate
Interest thereon, as appropriate, is reduced to zero and then to the Class A-1
Certificates and Class A-5 Certificates on a pro rata basis. "Default Losses"
are Realized Losses that are attributable to the mortgagor's failure to make any
payment of principal or interest as required under the Mortgage Note, and do not
include Special Hazard Losses (or any other loss resulting from damage to a
Mortgaged Property), Bankruptcy Losses, Fraud Losses, or other losses of a type
not covered by the Subordination. Allocations of Debt Service Reductions to the
Subordinate Certificates will result from the priority of distributions to the
Senior Certificateholders of the Available Distribution Amount as described
under the captions "--Interest Distributions" and "--Principal Distributions on
the Senior Certificates" herein. Any Excess Special Hazard Losses, Excess Fraud
Losses, Excess Bankruptcy Losses or Extraordinary Losses will be allocated on a
pro rata basis between the Senior Certificates and the Subordinate Certificates
(any such Realized Losses so allocated to the Senior Certificates, as well as
any Realized Losses that are not Default Losses which are allocated to the
Senior Certificates, will be allocated without priority among the various
classes of Senior Certificates).
With respect to any defaulted Mortgage Loan that is finally liquidated,
through foreclosure sale, disposition of the related Mortgaged Property if
acquired on behalf of the Certificateholders by deed in lieu of foreclosure, or
otherwise, the amount of loss realized, if any, will generally equal the portion
of the unpaid principal balance remaining, if any, plus interest thereon through
the last day of the month in which such Mortgage Loan was finally liquidated,
after application of all amounts recovered (net of amounts reimbursable to the
Master Servicer for Advances and certain expenses, including attorneys' fees)
towards interest and principal owing on the Mortgage Loan. Such amount of loss
realized and any Special Hazard Losses, Fraud Losses and Bankruptcy Losses are
referred to herein as "Realized Losses." As used herein, "Debt Service
Reductions" means reductions in the
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amount of monthly payments due to certain bankruptcy proceedings, but does not
include any forgiveness of principal.
In order to maximize the likelihood of distribution in full of the Senior
Interest Distribution Amount and the Senior Principal Distribution Amount,
holders of Senior Certificates will have a prior right, on each Distribution
Date, to the Available Distribution Amount, to the extent necessary to satisfy
the Senior Interest Distribution Amount and the Senior Principal Distribution
Amount. The Senior Principal Distribution Amount is subject to adjustment on
each Distribution Date to reflect the then applicable Senior Percentage and the
Senior Accelerated Distribution Percentage, as described herein under
"--Principal Distributions" on the Senior Certificates, each of which may be
increased (to not more than 100%) in the event of delinquencies or Realized
Losses on the Mortgage Loans. The application of the Senior Accelerated
Distribution Percentage (when it exceeds the Senior Percentage) to determine the
Senior Principal Distribution Amount will accelerate the amortization of the
Senior Certificates relative to the actual amortization of the Mortgage Loans.
To the extent that the Senior Certificates are amortized faster than the
Mortgage Loans, the percentage interest evidenced by the Senior Certificates in
the Trust Fund will be decreased (with a corresponding increase in the interest
in the Trust Fund evidenced by the Subordinate Certificates), thereby
increasing, as a relative matter, the Subordination afforded by the Subordinate
Certificates. Similarly, holders of Class A-1 Certificates and Class A-5
Certificates will have a prior right, on each Distribution Date occurring on or
after the Credit Support Depletion Date, to that portion of the Available
Distribution Amount allocated to the Tiered Certificates, to the extent
necessary to satisfy the Accrued Certificate Interest on the Class A-1
Certificates and Class A-5 Certificates. Therefore, any shortfalls in the
amounts that would otherwise be distributable to Class A-1 Certificateholders
and Class A-5 Certificateholders, whether resulting from Mortgage Loan
delinquencies or Realized Losses, will be borne by the holders of the Class A-6
Certificates for so long as the Class A-6 Certificates are outstanding.
The aggregate amount of Realized Losses which may be allocated in
connection with Special Hazard Losses (the "Special Hazard Amount") through
Subordination shall initially be equal to $_________. As of any date of
determination following the Cut-off Date, the Special Hazard Amount shall equal
$_________ less the sum of (i) any amounts allocated through Subordination in
respect of Special Hazard Losses and (ii) the Adjustment Amount. The Adjustment
Amount will be equal to an amount calculated pursuant to the terms of the
Pooling and Servicing Agreement. As used in this Prospectus Supplement, "Special
Hazard Losses" has the same meaning set forth in the Prospectus, except that
Special Hazard Losses will not include and the Subordination will not cover
Extraordinary Losses, and Special Hazard Losses will not exceed the lesser of
the cost of repair or replacement of the related Mortgaged Properties.
The aggregate amount of Realized Losses which may be allocated to the
Subordinate Certificates in connection with Fraud Losses (the "Fraud Loss
Amount") through Subordination shall initially be equal to $_________. As of any
date of determination after the Cut-off Date the Fraud Loss
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Amount shall equal (i) up to and including the [first] anniversary of the
Cut-off Date, an amount equal to ____% of the aggregate principal balance of all
of the Mortgage Loans as of the Cut-off Date minus the aggregate amounts
allocated solely to the Subordinate Certificates through Subordination with
respect to Fraud Losses up to such date of determination, and (ii) from the
[first] through [fifth] anniversary of the Cut-off Date, an amount equal to (a)
the lesser of (1) the Fraud Loss Amount as of the most recent anniversary of the
Cut-off Date and (2) ____% of the aggregate principal balance of all of the
Mortgage Loans as of the most recent anniversary of the Cut-off Date minus (b)
the aggregate amounts allocated solely to the Subordinate Certificates through
Subordination with respect to Fraud Losses since the most recent anniversary of
the Cut-off Date up to such date of determination. On or after the fifth
anniversary of the Cut-off Date, the Fraud Loss Amount shall be zero and Fraud
Losses shall not be allocated through Subordination.
The aggregate amount of Realized Losses which may be allocated solely to
the Subordinate Certificates in connection with Bankruptcy Losses (the
"Bankruptcy Amount") Subordination will initially be equal to $_________. As of
any day of determination on or after the [first] anniversary of the Cut-off
Date, the Bankruptcy Amount will equal the excess, if any, of (i) the lesser of
(a) the Bankruptcy Amount as of the business day next preceding the most recent
anniversary of the Cut-off Date (the "Relevant Anniversary") and (b) an amount
calculated pursuant to the terms of the Pooling and Servicing Agreement, which
amount as calculated will provide for a reduction in the Bankruptcy Amount, over
(ii) the aggregate amount of Bankruptcy Losses allocated solely to the
Subordinate Certificates through Subordination since the Relevant Anniversary.
Notwithstanding the foregoing, the provisions relating to Subordination
will not be applicable in connection with a Bankruptcy Loss so long as the
Master Servicer has notified the Trustee in writing that the Master Servicer is
diligently pursuing any remedies that may exist in connection with the
representations and warranties made regarding the related Mortgage Loan and
either (i) the related Mortgage Loan is not in default with regard to payments
due thereunder or (ii) delinquent payments of principal and interest under the
related Mortgage Loan and any premiums on any applicable Primary Hazard
Insurance Policy and any related escrow payments in respect of such Mortgage
Loan are being advanced on a current basis by the Master Servicer, in either
case without giving effect to the particular Bankruptcy Loss.
The Special Hazard Amount, Fraud Amount and Bankruptcy Amount are subject
to further reduction with the consent of the Rating Agencies.
ADVANCES
Prior to each Distribution Date, the Master Servicer is required to make
advances (each an "Advance") for the benefit of Certificateholders (out of its
own funds or funds held in the Certificate Account (as described in the
Prospectus) for future distribution or withdrawal) with respect to any payments
of principal and interest (net of the related Servicing Fees) which were due on
the
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Mortgage Loans on the immediately preceding Due Date and delinquent on the
business day next preceding the related Determination Date.
Such Advances are required to be made only to the extent they are deemed by
the Master Servicer to be recoverable from related late collections, Insurance
Proceeds, Liquidation Proceeds or amounts otherwise payable to the holders of
the Subordinate Certificates as described below. The purpose of making such
Advances is to maintain a regular cash flow to the Certificateholders, rather
than to guarantee or insure against losses. The Master Servicer will not be
required to make any Advances with respect to reductions in the amount of the
monthly payments on the Mortgage Loans due to Debt Service Reductions or the
application of the Relief Act or similar legislation or regulations. Any failure
by the Master Servicer to make an Advance as required under the Pooling and
Servicing Agreement will constitute an Event of Default thereunder, in which
case the Trustee, as successor Master Servicer, will be obligated to make any
such Advance, in accordance with the terms of the Pooling and Servicing
Agreement.
All Advances will be reimbursable to the Master Servicer on a first
priority basis from either (a) late collections, Insurance Proceeds and
Liquidation Proceeds from the Mortgage Loan as to which such unreimbursed
Advance was made or (b) as to any Advance that remains unreimbursed in whole or
in part following the final liquidation of the related Mortgage Loan, from any
amounts otherwise distributable on the Subordinate Certificates; provided,
however, that only the Subordinate Percentage of such Advances are reimbursable
from amounts otherwise distributable on the Subordinate Certificates in the
event that such Advances were made with respect to delinquencies which
ultimately were determined to be Excess Special Hazard Losses, Excess Fraud
Losses, Excess Bankruptcy Losses or Extraordinary Losses and the Senior
Percentage of such Advances which may not be so reimbursed from amounts
otherwise distributable on the Subordinate Certificates may be reimbursed to the
Master Servicer out of any funds in the related Certificate Account prior to
distributions on the Senior Certificates. In the latter event, the aggregate
amount otherwise distributable on the Senior Certificates will be reduced by an
amount equal to the Senior Percentage of such Advances. In addition, if the
Certificate Principal Balance of the Subordinate Certificates has been reduced
to zero, any Advances previously made which are deemed by the Master Servicer to
be nonrecoverable from related late collections, Insurance Proceeds and
Liquidation Proceeds may be reimbursed to the Master Servicer out of any funds
in the related Certificate Account prior to distributions on the Senior
Certificates.
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CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
GENERAL
The effective yield to the holders of the Offered Certificates will be
lower than the yield otherwise produced by the applicable Pass-Through Rate and
purchase price because monthly distributions will not be made to such holders
until the 25th day (or if such day is not a business day, then on the next
succeeding business day) of the month following the month in which interest
accrues on the Mortgage Loans (without any additional distributions of interest
or earnings thereon in respect of such delay). See "Yield Considerations" in the
Prospectus.
The yields to maturity and the aggregate amount of distributions on the
Offered Certificates will be affected by the rate and timing of principal
payments on the Mortgage Loans and the amount and timing of mortgagor defaults
resulting in Realized Losses. Such yields may be adversely affected by a higher
or lower than anticipated rate of principal payments on the Mortgage Loans in
the Trust Fund. The rate of principal payments on such Mortgage Loans will in
turn be affected by the amortization schedules of the Mortgage Loans, the rate
and timing of principal prepayments thereon by the mortgagors, liquidations of
defaulted Mortgage Loans and purchases of Mortgage Loans due to certain breaches
of representations and warranties. The timing of changes in the rate of
prepayments, liquidations and purchases of the Mortgage Loans may, and the
timing of Realized Losses will, significantly affect the yield to an investor,
even if the average rate of principal payments experienced over time is
consistent with an investor's expectation. Since the rate and timing of
principal payments on the Mortgage Loans will depend on future events and on a
variety of factors (as described herein and in the Prospectus under "Yield
Considerations" and "Maturity and Prepayment Considerations"), no assurance can
be given as to such rate or the timing of principal payments on the Offered
Certificates.
The Mortgage Loans generally may be prepaid by the Mortgagors at any time
without payment of any prepayment fee or penalty. The Mortgage Loans generally
contain due-on-sale clauses. As described under "Description of the
Certificates--Principal Distributions on the Senior Certificates" herein, during
certain periods all or a disproportionately large percentage of principal
prepayments on the Mortgage Loans will be allocated among the Senior
Certificates. Prepayments, liquidations and purchases of the Mortgage Loans will
result in distributions to holders of the Offered Certificates of principal
amounts which would otherwise be distributed over the remaining terms of the
Mortgage Loans. Factors affecting prepayment (including defaults and
liquidations) of mortgage loans include changes in mortgagors' housing needs,
job transfers, unemployment, mortgagors' net equity in the mortgaged properties,
changes in the value of the mortgaged properties, mortgage market interest
rates, solicitations and servicing decisions. In addition, if prevailing
mortgage rates fell significantly below the Mortgage Rates on the Mortgage
Loans, the rate of prepayments (including refinancings) would be expected to
increase. Conversely, if prevailing mortgage rates rose
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significantly above the Mortgage Rates on the Mortgage Loans, the rate of
prepayments on the Mortgage Loans would be expected to decrease.
The rate of defaults on the Mortgage Loans will also affect the rate and
timing of principal payments on the Mortgage Loans. In general, defaults on
mortgage loans are expected to occur with greater frequency in their early
years. The rate of default on Mortgage Loans which are refinance or limited
documentation mortgage loans, and on Mortgage Loans with high Loan-to-Value
Ratios, may be higher than for other types of Mortgage Loans. Furthermore, the
rate and timing of prepayments, defaults and liquidations on the Mortgage Loans
will be affected by the general economic condition of the region of the country
in which the related Mortgaged Properties are located. The risk of delinquencies
and loss is greater and prepayments are less likely in regions where a weak or
deteriorating economy exists, as may be evidenced by, among other factors,
increasing unemployment or falling property values. See "Maturity and Prepayment
Considerations" in the Prospectus.
Because the Mortgage Rates on the Mortgage Loans and the Pass-Through Rates
on the Senior Certificates (other than the Variable Strip Certificates) are
fixed, such rates will not change in response to changes in market interest
rates. The Pass-Through Rate on the Variable Strip Certificates is based on the
weighted average of the Pool Strip Rates on the Mortgage Loans, and such rates
will also not change in response to changes in market interest rates.
Accordingly, if market interest rates or market yields for securities similar to
the Senior Certificates were to rise, the market value of the Senior
Certificates may decline. In addition, if prevailing mortgage rates fell
significantly below the Mortgage Rates on the Mortgage Loans, the rate of
prepayments (including refinancings) would be expected to increase. Conversely,
if prevailing mortgage rates rose significantly above the Mortgage Rates on the
Mortgage Loans, the rate of prepayment on the Mortgage Loans would be expected
to decrease.
The amount of interest otherwise payable to holders of the Senior
Certificates will be reduced by any interest shortfalls not covered by
Subordination, including Prepayment Interest Shortfalls. Such shortfalls will
not be offset by a reduction in the Servicing Fees payable to the Master
Servicer or otherwise. See "Yield Considerations" in the Prospectus and
"Description of the Certificates--Interest Distributions" herein for a
discussion of the effect that principal prepayments on the Mortgage Loans may
have on the yield to maturity of the Senior Certificates and certain possible
shortfalls in the collection of interest.
The timing of changes in the rate of prepayments, liquidations and
repurchases of the Mortgage Loans may significantly affect an investor's actual
yield to maturity, even if the average rate of principal payments experienced
over time is consistent with an investor's expectation. Because all or a
disproportionate percentage of principal prepayments will be allocated to the
Senior Certificates during not less than the first nine years after the Delivery
Date, the rate of prepayments on the
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Mortgage Loans during this period may significantly affect the yield to maturity
of the Senior Certificates.
In addition, the yield to maturity of the Senior Certificates will depend
on the price paid by the holders of the Senior Certificates and the related
Pass-Through Rate. The extent to which the yield to maturity of a Senior
Certificate may vary from the anticipated yield thereon will depend upon the
degree to which it is purchased at a discount or premium and the degree to which
the timing of payments thereon is sensitive to prepayments.
Because principal distributions are paid to certain classes of Senior
Certificates before other classes, holders of classes of Senior Certificates
having a later priority of payment bear a greater risk of losses than holders of
classes of Senior Certificates having earlier priorities for distribution of
principal. In addition, the Class A-6 Certificates bear a greater risk of losses
than the other Tiered Certificates because Default Losses on the Mortgage Loans
not covered by the Subordination which are allocated to the Tiered Certificates
are allocated first to the Class A-6 Certificates prior to allocation to the
Class A-1 and Class A-5 Certificates to the extent described herein. For
additional considerations relating to the yield on the Certificates, see "Yield
Considerations" and "Maturity and Prepayment Considerations" in the Prospectus.
The assumed final Distribution Date with respect to each class of Senior
Certificates is _____ __, 20__. The assumed final Distribution Date is the
Distribution Date immediately following the latest scheduled maturity date of
any Mortgage Loan in the Mortgage Pool.
Weighted average life refers to the average amount of time that will elapse
from the date of issuance of a security until a dollar amount in payment of
principal equal to the original principal balance of such security (less losses)
is distributed to the investor. The weighted average life of the Senior
Certificates will be influenced by among other things, the rate at which
principal of the Mortgage Loans is paid, which may be in the form of scheduled
amortization, prepayments or liquidations.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement, the
standard prepayment assumption ("SPA"), represents an assumed rate of prepayment
each month relative to the then outstanding principal balance of a pool of new
mortgage loans. A prepayment assumption of 100% SPA assumes constant prepayment
rates of 0.2% per annum of the then outstanding principal balance of such
mortgage loans in the first month of the life of the mortgage loans and an
additional 0.2% per annum in each month thereafter until the thirtieth month.
Beginning in the thirtieth month and in each month thereafter during the life of
the mortgage loans, 100% SPA assumes a constant prepayment rate of 6% per annum
each month. As used in the table below, "0% SPA" assumes prepayment rates equal
to 0% of SPA (no prepayments). Correspondingly, "___% SPA" assumes prepayment
rates equal to ___% of SPA, and so forth. SPA does not purport to be a
historical
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description of prepayment experience or a prediction of the anticipated rate of
prepayment of any pool of mortgage loans, including the Mortgage Loans.
The table set forth below has been prepared on the basis of certain
assumptions as described below regarding the weighted average characteristics of
the Mortgage Loans that are expected to be included in the Trust Fund as
described under "Description of the Mortgage Pool" herein and the performance
thereof. The table assumes, among other things, that: (i) as of the date of
issuance of the Senior Certificates, the aggregate principal balance of the
Mortgage Loans is approximately $____________ and each Mortgage Loan has a
Mortgage Rate of _____% per annum, an original term of ___ months, a remaining
term to maturity of ___ months and a related Servicing Fee calculated at ___%
per annum, (ii) the scheduled monthly payment for each Mortgage Loan has been
based on its outstanding balance, Mortgage Rate and remaining term to maturity,
such that the Mortgage Loan will amortize in amounts sufficient for repayment
thereof over its remaining term to maturity, (iii) none of the Sellers, the
Master Servicer or the Company will repurchase any Mortgage Loan, as described
under "The Mortgage Loan Pools--Representations by Sellers" and "Description of
the Certificates--Assignment of the Trust Fund Assets" in the Prospectus, and
the Master Servicer will not exercise its option to purchase the Mortgage Loans
and thereby cause a termination of the Trust Fund, (iv) there are no
delinquencies or Realized Losses on the Mortgage Loans, and scheduled monthly
payments on the Mortgage Loans will be timely received together with
prepayments, if any, at the respective constant percentages of SPA set forth in
the table, (v) there is no Prepayment Interest Shortfall or any other interest
shortfall in any month, (vi) payments on the Mortgage Loans earn no reinvestment
return; (vii) there are no additional ongoing Trust Fund expenses payable out of
the Trust Fund; and (viii) the Certificates will be purchased on _____________
__, 199_.
The actual characteristics and performance of the Mortgage Loans will
differ from the assumptions used in constructing the table set forth below,
which is hypothetical in nature and is provided only to give a general sense of
how the principal cash flows might behave under varying prepayment scenarios.
For example, it is very unlikely that the Mortgage Loans will prepay at a
constant level of SPA until maturity or that all of the Mortgage Loans will
prepay at the same level of SPA. Moreover, the diverse remaining terms to
maturity of the Mortgage Loans could produce slower or faster principal
distributions than indicated in the table at the various constant percentages of
SPA specified, even if the weighted average remaining term to maturity of the
Mortgage Loans is as assumed. Any difference between such assumptions and the
actual characteristics and performance of the Mortgage Loans, or actual
prepayment or loss experience, will affect the percentages of initial
Certificate Principal Balances outstanding over time and the weighted average
lives of the classes of Offered Certificates.
Subject to the foregoing discussion and assumptions, the following table
indicates the weighted average life of each class of Offered Certificates (other
than the Fixed Strip Certificates and Variable Strip Certificates), and sets
forth the percentages of the initial Certificate Principal Balance of each
<PAGE>
-54-
such class of Offered Certificates that would be outstanding after each of the
dates shown at various percentages of SPA.
<PAGE>
-55-
<TABLE>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF SPA
<CAPTION>
Class A-1 Class A-2 Class A-3
------------------------------------------------------------------------------------------
DISTRIBUTION DATE % % % % % % % % % % % % % % %
----- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage
</TABLE>
Weighted Average Life in Years (**)....
* Indicates a number that is greater than zero but less than .5%.
** The weighted average life of a Certificate of any class is determined
by (i) multiplying the amount of each net distribution in reduction of
Certificate Principal Balance by the number of years from the date of
issuance of the Certificate to the related Distribution Date, (ii)
adding the results, and (iii) dividing the sum by the aggregate of the
net distributions described in (i) above.
THIS TABLE HAS BEEN PREPARED BASED ON THE ASSUMPTIONS DESCRIBED IN THE
THIRD PARAGRAPH PRECEDING THIS TABLE (INCLUDING THE ASSUMPTIONS REGARDING THE
CHARACTERISTICS AND PERFORMANCE OF THE MORTGAGE LOANS WHICH DIFFER FROM THE
ACTUAL CHARACTERISTICS AND PERFORMANCE THEREOF) AND SHOULD BE READ IN
CONJUNCTION THEREWITH.
<PAGE>
-56-
<TABLE>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF SPA
<CAPTION>
Class A-4 Class A-6
------------------------------------ ------------------------------
DISTRIBUTION DATE % % % % % % % % % %
------------------------------------ ------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage
</TABLE>
Weighted Avg. Life in Years (**)
* Indicates a number that is greater than zero but less than .5%.
** The weighted average life of a Certificate of any class is determined
by (i) multiplying the amount of each net distribution in reduction of
Certificate Principal Balance by the number of years from the date of
issuance of the Certificate to the related Distribution Date, (ii)
adding the results, and (iii) dividing the sum by the aggregate of the
net distributions described in (i) above.
THIS TABLE HAS BEEN PREPARED BASED ON THE ASSUMPTIONS DESCRIBED IN THE
THIRD PARAGRAPH PRECEDING THIS TABLE (INCLUDING THE ASSUMPTIONS REGARDING THE
CHARACTERISTICS AND PERFORMANCE OF THE MORTGAGE LOANS WHICH DIFFER FROM THE
ACTUAL CHARACTERISTICS AND PERFORMANCE THEREOF) AND SHOULD BE READ IN
CONJUNCTION THEREWITH.
(TABLE CONTINUED FROM PREVIOUS PAGE.)
<PAGE>
-57-
FIXED STRIP CERTIFICATES AND VARIABLE STRIP CERTIFICATES YIELD CONSIDERATIONS
The following tables indicate the sensitivity of the pre-tax yield to
maturity on the Fixed Strip Certificates and Variable Strip Certificates to
various rates of prepayment on the Mortgage Loans by projecting the monthly
aggregate payments of interest on the Fixed Strip Certificates and Variable
Strip Certificates and the corresponding pre-tax yields on a corporate bond
equivalent basis, based on distributions being made with respect to the Mortgage
Loans that are assumed to be included in the Trust Fund, as described in the
assumptions stated in clauses (i) through (viii) of the third paragraph
preceding the table entitled "Percent of Initial Certificate Principal Balance
Outstanding at the Following Percentages of SPA" under the heading "Certain
Yield and Prepayment Considerations--General" herein, including the assumptions
regarding the characteristics and performance of the Mortgage Loans which differ
from the actual characteristics and performance thereof and assuming the
aggregate purchase prices set forth below and assuming further that the
Pass-Through Rate and Notional Amount of the Fixed Strip Certificates and
Variable Strip Certificates are as set forth herein. Any differences between
such assumptions and the actual characteristics and performance of the Mortgage
Loans and of the Certificates may result in yields being different from those
shown in such tables. Discrepancies between assumed and actual characteristics
and performance underscore the hypothetical nature of the tables, which are
provided only to give a general sense of the sensitivity of yields in varying
prepayment scenarios.
PRE-TAX YIELD TO MATURITY ON THE FIXED
STRIP CERTIFICATES AND THE VARIABLE STRIP CERTIFICATES
AT THE FOLLOWING PERCENTAGES OF SPA
Assumed FIXED STRIP CERTIFICATES
Purchase --------------------------------
Price* % % % % %
- ------ --- --- --- ---------
*Expressed as a percentage of the Initial Notional Amount
<PAGE>
-58-
Assumed VARIABLE STRIP CERTIFICATES
Purchase -----------------------------------
Price* % % % % %
- ------ --- --- --- ---------
*Expressed as a percentage of the Initial Notional Amount
The pre-tax yields set forth in the preceding tables were calculated by
determining the monthly discount rates which, when applied to the assumed
streams of cash flows to be paid on the Fixed Strip Certificates and Variable
Strip Certificates, would cause the discounted present value of such assumed
streams of cash flows to equal the assumed purchase prices listed as percentages
of the initial Notional Amounts in the table for the Fixed Strip Certificates
and Variable Strip Certificates, respectively. Yields shown are corporate bond
equivalent and are based on the assumed prices given in the tables. The prices
shown do not include accrued interest but an amount of accrued interest
consistent with the assumptions was computed and was used to arrive at these
yields. Implicit in the use of any discounted present value or internal rate of
return calculation such as these is the assumption that cash flows are
reinvested at the discount rate or internal rate of return. Thus these
calculations do not take into account the different interest rates at which
investors may be able to reinvest funds received by them as distributed on the
Fixed Strip Certificates or Variable Strip Certificates. Consequently these
yields do not purport to reflect the return on any investment in the Fixed Strip
Certificates or Variable Strip Certificates when such reinvestment rates are
considered.
The preceding tables are based on a set of assumptions that vary from
other information provided herein. The differences between such assumptions and
the actual characteristics of the Mortgage Loans and of the Certificates may
result in actual yields being different from those shown in such tables. For
example, the Pass-Through Rate on the Variable Strip Certificates, which is
assumed to be fixed throughout the life of the Certificates, will actually be
likely to change from one period to the next, and the rate assumed may be
different from the actual initial Pass-Through Rate on the Variable Strip
Certificates. Such discrepancies between assumed and actual characteristics
underscore the hypothetical nature of the tables, which are provided to give a
general sense of the sensitivity of yields in varying prepayment scenarios.
Notwithstanding the assumed prepayment rates reflected in the preceding
tables, it is highly unlikely that the Mortgage Loans will prepay at a constant
rate until maturity or that all of the Mortgage Loans will be prepaid according
to one particular pattern. For this reason, and because the timing of cash flows
is critical to determining yields, the pre-tax yields on the Fixed Strip
Certificates and Variable Strip Certificates are likely to differ from those
shown in such
<PAGE>
-59-
table, even if all of the Mortgage Loans prepay at the indicated percentages of
SPA over any given time period or over the entire life of the Certificates. No
representation is made as to the actual rate of principal payment on the
Mortgage Loans for any period or over the life of the Senior Certificates or as
to the yield on the Senior Certificates. In addition, the various remaining
terms to maturity of the Mortgage Loans could produce slower or faster principal
distributions than indicated in the preceding tables at the various constant
percentages of SPA specified, even if the weighted average remaining term to
maturity of the Mortgage Loans is ___ months. Investors are urged to make their
investment decisions based on their determinations as to anticipated rates of
prepayment under a variety of scenarios.
For additional considerations relating to the yield on the
Certificates, see "Yield Considerations" and "Maturity and Prepayment
Considerations" in the Prospectus.
POOLING AND SERVICING AGREEMENT
GENERAL
The Certificates will be issued, and the Mortgage Loans serviced and
administered, pursuant to a Pooling and Servicing Agreement (the "Pooling and
Servicing Agreement") dated as of __________ 1, 19__, among the Company, the
Master Servicer, and _____________________, as trustee (the "Trustee").
Reference is made to the Prospectus for important information in addition to
that set forth herein regarding the terms and conditions of the Pooling and
Servicing Agreement and the Senior Certificates. The Trustee will appoint
____________________ to serve as Custodian in connection with the Certificates.
The Senior Certificates will be transferable and exchangeable at the corporate
trust office of the Trustee, which will serve as Certificate Registrar and will
be responsible for making distributions on the Senior Certificates and
forwarding monthly reports with respect thereto to the holders of such
Certificates. In addition to the circumstances described in the Prospectus, the
Company may terminate the Trustee for cause under certain circumstances. The
fees payable to the Trustee will be payable directly from the Certificate
Account. The Company will provide a prospective or actual Certificateholder
without charge, on written request, a copy (without exhibits) of the Pooling and
Servicing Agreement. Requests should be addressed to the President, Option One
Mortgage Acceptance Corporation, 2020 East First Street, Suite 100, Santa Ana,
California 92705. See "Description of the Certificates," "Servicing of Mortgage
Loans" and "The Pooling Agreement" in the Prospectus.
THE MASTER SERVICER
[Name of Master Servicer], will act as master servicer (in such
capacity, the "Master Servicer") for the Certificates pursuant to the Pooling
and Servicing Agreement.
<PAGE>
-60-
[Further disclosure as appropriate. The following disclosure is for
Option One Mortgage Corporation only, but will be similar to the disclosure if
the Master Servicer is a different entity.]
The information set forth in the following paragraphs has been provided
by the Master Servicer. None of Option One Mortgage Acceptance Corporation, the
Seller, the Trustee or any of their respective affiliates has made or will make
any representation as to the accuracy or completeness of such information.
Option One Mortgage Corporation, a California corporation,
headquartered in Santa Ana, California ("Option One"), will serve as the Master
Servicer for the Mortgage Loans pursuant to the Agreement (in such capacity, the
"Master Servicer").
Option One was incorporated in 1992, commenced receiving applications
for mortgage loans under its regular lending program in February 1993 and began
funding such mortgage loans indirectly in the same month. The principal business
of Option One is the origination, sale and servicing of non-conforming mortgage
loans.
As of December 31, 1994, Option One was a wholly-owned subsidiary of
Plaza Home Mortgage Bank, which was in turn a wholly-owned subsidiary of Plaza
Home Mortgage Corporation ("PHMC"). On March 3, 1995, Fleet National Bank, Rhode
Island acquired 100% of the outstanding stock of PHMC. Following such
acquisition, Option One became a subsidiary of Fleet National Bank, Rhode
Island, which is in turn a subsidiary of Fleet Financial Group, Inc. As of
December 31, 1995, Option One had three loan origination centers in California
and one loan origination center in each of Florida, Georgia, Illinois, Ohio,
Texas and Virginia.
Option One operates as a stand-alone mortgage banking company with
functional reporting responsibility to Fleet Financial Group, Inc. Option One is
a FNMA approved servicer. Option One assumed full servicing responsibilities for
the non-conforming credit servicing portfolio of PHMC on May 4, 1995, all of
which portfolio had been originated by Option One. Prior to such acquisition,
Option One acted as subservicer on such portfolio performing the functions of
delinquency advancing, investor reporting, remitting cash collected, preparing
pertinent reports and making collections on delinquent mortgage loans,
foreclosures and real estate owned.
<PAGE>
-61-
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------------- ------------
1990 1991 1992 1993 1994
------ ------ ------ ------ -----
(DOLLARS IN MILLIONS, EXCEPT AVERAGE LOAN SIZE)
<S> <C> <C> <C> <C> <C>
Beginning servicing portfolio(1)......... $ $ $ $ $
Add:
Loans originated or acquired....
Bulk purchase of servicing......
Deduct:
Sale of servicing rights........
Loans sold, servicing released..
Run-off(2)......................
Ending servicing portfolio(1)............ $ $ $ $ $
========== ========== ========== ========== ===========
Number of loans serviced.................
Average loan size........................ $ $ $ $ $
</TABLE>
(1) Includes mortgage loans held for investment originated or acquired as
part of the Servicer's mortgage banking operations which totalled $____
million, $____ million, $____ million, $____ million and $_____ million
at ________ __, 1990, 1991, 1992, 1993, and June 30, 1994,
respectively.
(2) Includes amortization, prepayments and foreclosures.
The information set forth in this section concerning the Master
Servicer has been provided by the Master Servicer.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The Servicing Fees for each Mortgage Loan are payable out of the
interest payments on such Mortgage Loan. The Servicing Fees in respect of each
Mortgage Loan will accrue at _____% per annum (the "Servicing Fee Rate") on the
outstanding principal balance of each Mortgage Loan. The Master Servicer is
obligated to pay certain ongoing expenses associated with the Trust Fund and
incurred by the Master Servicer in connection with its responsibilities under
the Pooling and Servicing Agreement. See "Servicing of Mortgage Loans--Servicing
and Other Compensation and Payment of Expenses; Spread" in the Prospectus for
information
<PAGE>
-62-
regarding other possible compensation to the Master Servicer and for information
regarding expenses payable by the Master Servicer.
VOTING RIGHTS
Certain actions specified in the Prospectus that may be taken by
holders of Certificates evidencing a specified percentage of all undivided
interests in the Trust Fund may be taken by holders of Certificates entitled in
the aggregate to such percentage of the Voting Rights. __% of all Voting Rights
will be allocated among all holders of the Certificates (other than the Fixed
Strip Certificates, Variable Strip Certificates and Residual Certificates) in
proportion to their then outstanding Certificate Principal Balances, and _%, _%
and _% of all Voting Rights will be allocated among holders of the Fixed Strip
Certificates, Variable Strip Certificates and Class R Certificates,
respectively, in proportion to the percentage interests evidenced by their
respective Certificates. The Pooling and Servicing Agreement will be subject to
amendment without the consent of the holders of the Residual Certificates in
certain circumstances.
TERMINATION
The circumstances under which the obligations created by the Pooling
and Servicing Agreement will terminate in respect of the Senior Certificates are
described in "The Pooling Agreement--Termination; Retirement of Certificates" in
the Prospectus. The Master Servicer or the Company will have the option on any
Distribution Date on which the aggregate principal balance of the Mortgage Loans
is less than ___% of the aggregate principal balance of the Mortgage Loans as of
the Cut-off Date either (i) to purchase all remaining Mortgage Loans and other
assets in the Trust Fund, thereby effecting early retirement of the Senior
Certificates or (ii) purchase in whole, but not in part, the Certificates other
than the Residual Certificates. Any such purchase of Mortgage Loans and other
assets of the Trust Fund shall be made at a price equal to the sum of (a) 100%
of the unpaid principal balance of each Mortgage Loan (or, the fair market value
of the related underlying Mortgaged Properties with respect to defaulted
Mortgage Loans as to which title to such underlying Mortgaged Properties has
been acquired if such fair market value is less than such unpaid principal
balance) (net of any unreimbursed Advance attributable to principal) as of the
Distribution Date on which the purchase proceeds are to be distributed plus (b)
accrued interest thereon at the Net Mortgage Rate to, but not including, the
first day of the month of repurchase.
Upon presentation and surrender of the Senior Certificates in
connection with the termination of the Trust Fund or a purchase of Certificates
under the circumstances described above, the holders of the Senior Certificates
will receive an amount equal to the Certificate Principal Balance of such class
plus one month's interest thereon (or with respect to the Variable Strip
Certificates, one month's interest on the Notional Amount) at the applicable
Pass-Through Rate plus any previously unpaid Accrued Certificate Interest
subject to the priority in
<PAGE>
-63-
"Description of the Certificates--Interest Distributions" and "--Principal
Distributions on the Senior Certificates".
FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Offered Certificates, Thacher Proffitt & Wood,
counsel to the Company, will deliver the following opinion: assuming compliance
with the Pooling and Servicing Agreement, for federal income tax purposes, the
Trust Fund will qualify as a REMIC under Sections 860A through 860G (the "REMIC
Provisions") of the Internal Revenue Code of 1986 (the "Code"), (i) the Residual
Certificates are the sole Class of "residual interests" in the Trust Fund; and
(ii) the Offered Certificates constitute the "regular interests" in the Trust
Fund, each within the meaning of the REMIC Provisions in effect on the date
hereof. See "Federal Income Tax Consequences--REMICs" in the Prospectus.
For federal income tax reporting purposes, the _________ Certificates
will not and the __________ Certificates will be treated as having been issued
with original issue discount. The prepayment assumption that will be used in
determining the rate of accrual of original issue discount, market discount and
premium, if any, for federal income tax purposes will be based on the assumption
that subsequent to the date of any determination the Mortgage Loans will prepay
at a rate equal to ___% SPA. No representation is made that the Mortgage Loans
will prepay at that rate or at any other rate. See "Federal Income Tax
Consequences-REMICs-Taxation of Owners of REMIC Regular Certificates--Original
Issue Discount," "--Market Discount" and "--Premium" in the Prospectus.
The ___________________ Certificates may be treated for federal income
tax purposes as having been issued at a premium. Whether any holder of [either]
such Class of Certificates will be treated as holding a Certificate with
amortizable bond premium will depend on such Certificateholder's purchase price
and the distributions remaining to be made on such Certificate at the time of
its acquisition by such Certificateholder. Holders of [each] such Class of
Certificates should consult their tax advisors regarding the possibility of
making an election to amortize such premium. See "Certain Federal Income Tax
Consequences-REMICs-Taxation of Owners of REMIC Regular Certificates-Premium" in
the Prospectus.
________________________, a _______________, will act as REMIC
Administrator for the Trust Fund. [The Master Servicer will be responsible for
the fees and normal disbursements of the REMIC Administrator.] See "Certain
Federal Income Tax Consequences-REMICs-Reporting and Other Administrative
Matters" and "The Pooling and Servicing Agreements-Certain Matters Regarding the
Master Servicer, the Special Servicer, the REMIC Administrator and the
Depositor", "-Events of Default" and "-Rights Upon Event of Default" in the
Prospectus.
<PAGE>
-64-
The Offered Certificates will be treated as assets described in Section
7701(a)(19)(C) of the Code and "real estate assets" within the meaning of
Section 856(c)(5)(A) of the Code. In addition, interest (including original
issue discount, if any) on the Offered 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. Moreover, the Offered Certificates (other than the Residual
Certificates) will be "qualified mortgages" within the meaning of Section
860G(a)(3) of the Code. See "Federal Income Tax
Consequences-REMICs-Characterization of Investments in REMIC Certificates" in
the Prospectus.
For further information regarding the federal income tax consequences
of investing in the Offered Certificates, see "Federal Income Tax
Consequences--REMICs" in the Prospectus.
[SPECIAL TAX CONSIDERATIONS APPLICABLE TO RESIDUAL CERTIFICATES [If Offered]
The Residual Certificates will be subject to tax rules that differ
significantly from those that would apply if the Residual Certificates were
treated for federal income tax purposes as direct ownership interest in the
Mortgage Loans or as debt instruments issued by the Trust Fund. For further
information regarding the federal income tax consequences of investing in the
Residual Certificates, see "Federal Income Tax Consequences--REMICS--Taxation of
Owners of REMIC Residual Certificates" in the Prospectus.
The IRS has issued regulations under the provisions of the Code related
to REMICs (the "REMIC Regulations") that significantly affect holders of the
Residual Certificates. The REMIC Regulations impose restrictions on the transfer
or acquisition of certain residual interests, including the Residual
Certificates. The REMIC Regulations include restrictions that apply to the
transfer of "noneconomic" residual interests to United States persons. Pursuant
to the Pooling and Servicing Agreement, the Residual Certificates may not be
transferred to non-United States persons. See "Certain Federal Income Tax
Consequences--REMICS--Taxation of Owners of REMIC Residual Certificates" in the
Prospectus.
The REMIC Regulations provide for the determination of whether a
residual interest has "significant value" for purposes of applying the rules
relating to "excess inclusions" with respect to residual interests. Based on the
REMIC Regulations, the Residual Certificates do not have significant value and,
accordingly, thrift institutions and their affiliates will be prevented from
using their unrelated losses or loss carryovers to offset any excess inclusions
with respect to the Residual Certificates, which will be in an amount equal to
all or virtually all of the taxable income includible by holders of the Residual
Certificates. See "Federal Income Tax Consequences--Taxation of Owners of REMIC
Residual Certificates--Excess Inclusions" in the Prospectus.
<PAGE>
-65-
The REMIC Regulations also provide that a transfer to a United States
person of "noneconomic" residual interests will be disregarded for all federal
income tax purposes, and that the purported transferor of "noneconomic" residual
interests will continue to remain liable for any taxes due with respect to the
taxable income on such residual interests, if "a significant purpose of the
transfer was to enable the transferor to impede the assessment or collection of
tax." Based on the REMIC Regulations, the Residual Certificates may constitute
"noneconomic" residual interests during some or all of their term for purposes
of the REMIC Regulations and, accordingly, if a significant purpose of a
transfer is to enable the transferor to impede the assessment or collection of
tax, transfers of the Residual Certificates may be disregarded and purported
transferors may remain liable for any taxes due with respect to the income on
the Residual Certificates. All transfers of the Residual Certificates will be
subject to certain restrictions under the terms of the Pooling and Servicing
Agreement that are intended to reduce the possibility of any such transfer being
disregarded to the extent that the Residual Certificates constitute noneconomic
residual interests. See "Federal Income Tax Consequences--Taxation of Owners of
REMIC Residual Certificates--Noneconomic REMIC Residual Certificates" in the
Prospectus.
The Residual Certificateholders may be required to report an amount of
taxable income with respect to the earlier accrual periods of the term of the
Trust Fund that significantly exceeds the amount of cash distributions received
by such Residual Certificateholders from the Trust Fund with respect to such
periods. Furthermore, the tax on such income will exceed the cash distributions
with respect to such periods. Consequently, Residual Certificateholders should
have other sources of funds sufficient to pay any federal income taxes due in
the earlier years of the Trust Fund's term as a result of their ownership of
Residual Certificates. In addition, the required inclusion of this amount of
income during the REMIC's earlier accrual periods and the deferral of
corresponding tax losses or deductions until later accrual periods or until the
ultimate sale or disposition of a Residual Certificate (or possibly later under
the "wash sale" rules of Section 1091 of the Code) may cause the Residual
Certificateholders' after-tax rate of return to be zero or negative even if the
Residual Certificateholder's pre-tax rate of return is positive. That is, on a
present value basis, the Residual Certificateholders' resulting tax liabilities
could substantially exceed the sum of any tax benefits and the amount of any
cash distributions on such Residual Certificates over their life.
Potential investors in the Residual Certificates should be aware that
under the Pooling and Servicing Agreement, the holder of the largest Percentage
Interest in the Residual Certificates shall, by its acceptance of such
Certificates, agree to irrevocably appoint the [Master Servicer][Trustee], as
REMIC Administrator, as its agent to perform all of the duties of the tax
matters person for the REMIC. See "Certain Federal Income Tax
Consequences--REMICs-Reporting and Other Administrative Matters" in the
Prospectus.
<PAGE>
-66-
Purchasers of the Residual Certificates are strongly advised to consult
their tax advisors as to the economic and tax consequences of investment in such
Residual Certificates.
For further information regarding the federal income tax consequences
of investing in the Residual Certificates, see "Yield Considerations--Additional
Yield Considerations Applicable
Solely to the Residual Certificates" herein and "Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Residual Certificates" in the
Prospectus.]
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement dated __________, 19__, the Underwriter has agreed to purchase and the
Company has agreed to sell to the Underwriter each class of Senior Certificates.
The Underwriting Agreement provides that the obligation of the
Underwriter to pay for and accept delivery of the Senior Certificates is subject
to, among other things, the receipt of certain legal opinions and to the
conditions, among others, that no stop order suspending the effectiveness of the
Company's Registration Statement shall be in effect, and that no proceedings for
such purpose shall be pending before or threatened by the Securities and
Exchange Commission.
The distribution of the Senior Certificates by the Underwriter may be
effected from time to time in one or more negotiated transactions, or otherwise,
at varying prices to be determined at the time of sale. Proceeds to the Company
from the sale of the Senior Certificates, before deducting expenses payable by
the Company, will be _________% of the aggregate Certificate Principal Balance
of the Senior Certificates plus accrued interest thereon from the Cut-off Date.
The Underwriter may effect such transactions by selling the Senior Certificates
to or through dealers, and such dealers may receive compensation in the form of
underwriting discounts, concessions or commissions from the Underwriter for whom
they act as agent. In connection with the sale of the Senior Certificates, the
Underwriter may be deemed to have received compensation from the Company in the
form of underwriting compensation. The Underwriter and any dealers that
participate with the Underwriter in the distribution of the Senior Certificates
may be deemed to be underwriters and any profit on the resale of the Senior
Certificates positioned by them may be deemed to be underwriting discounts and
commissions under the Securities Act of 1933.
The Underwriting Agreement provides that the Company will indemnify the
Underwriter, and that under limited circumstances the Underwriter will indemnify
the Company, against certain civil liabilities under the Securities Act of 1933,
or contribute to payments required to be made in respect thereof.
<PAGE>
-67-
There can be no assurance that a secondary market for the Senior
Certificates will develop or, if it does develop, that it will continue. The
primary source of information available to investors concerning the Senior
Certificates will be the monthly statements discussed in the Prospectus under
"Description of the Certificates - Reports to Certificateholders," which will
include information as to the outstanding principal balance of the Senior
Certificates and the status of the applicable form of credit enhancement. There
can be no assurance that any additional information regarding the Senior
Certificates will be available through any other source. In addition, the
Company is not aware of any source through which price information about the
Senior Certificates will be generally available on an ongoing basis. The limited
nature of such information regarding the Senior Certificates may adversely
affect the liquidity of the Senior Certificates, even if a secondary market for
the Senior Certificates becomes available.
LEGAL OPINIONS
Certain legal matters relating to the Certificates will be passed upon
for the Company by _________________________________, ________ and for the
Underwriter by
_______________________________.
RATINGS
It is a condition to the issuance of the Senior Certificates that they
be rated not lower than "___" by _________________ ___________
("_________________") and "___" by ___________________________ ("__________").
The ratings of _______ on mortgage pass-through certificates address
the likelihood of the receipt by Certificateholders of all distributions on the
underlying mortgage loans to which they are entitled. _______ ratings on
pass-through certificates do not represent any assessment of the likelihood that
principal prepayments will be made by mortgagors or the degree to which such
prepayments might differ from that originally anticipated. The rating does not
address the possibility that Certificateholders might suffer a lower than
anticipated yield.
_________________ ratings on mortgage pass-through certificates also
address the likelihood of the receipt by Certificateholders of payments required
under the Pooling and Servicing Agreement. _________________ ratings take into
consideration the credit quality of the mortgage pool, structural and legal
aspects associated with the Certificates, and the extent to which the payment
stream in the mortgage pool is adequate to make payments required under the
Certificates. _________________ rating on the Certificates does not, however,
constitute a statement regarding frequency of prepayments on the mortgages. See
"Certain Yield and Prepayment Considerations" herein.
<PAGE>
-68-
The Company has not requested a rating on the Senior Certificates by
any rating agency other than _______ and ________. However, there can be no
assurance as to whether any other rating agency will rate the Senior
Certificates, or, if it does, what rating would be assigned by any such other
rating agency. A rating on the Certificates by another rating agency, if
assigned at all, may be lower than the ratings assigned to the Senior
Certificates by _______ and
______________.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating. The rating of the Fixed Strip
Certificates or Variable Strip Certificates does not address the possibility
that the holders of such Certificates may fail to fully recover their initial
investment. In the event that the rating initially assigned to the Senior
Certificates is subsequently lowered for any reason, no person or entity is
obligated to provide any additional support or credit enhancement with respect
to the Senior Certificates.
LEGAL INVESTMENT
The Senior Certificates will constitute "mortgage related securities"
for purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA")
so long as they are rated in at least the second highest rating category by one
of the Rating Agencies, and, as such, are legal investments for certain entities
to the extent provided in SMMEA. SMMEA provides, however, that states could
override its provisions on legal investment and restrict or condition investment
in mortgage related securities by taking statutory action on or prior to October
3, 1991. Certain states have enacted legislation which overrides the preemption
provisions of SMMEA.
The Company makes no representations as to the proper characterization
of any class of the Offered Certificates for legal investment or other purposes,
or as to the ability of particular investors to purchase any class of the
Offered Certificates under applicable legal investment restrictions. These
uncertainties may adversely affect the liquidity of any class of Offered
Certificates. Accordingly, all institutions whose investment activities are
subject to legal investment laws and regulations, regulatory capital
requirements or review by regulatory authorities should consult with their legal
advisors in determining whether and to what extent any class of the Offered
Certificates constitutes a legal investment or is subject to investment, capital
or other restrictions.
See "Legal Investment Matters" in the Prospectus.
<PAGE>
======================================= OPTION ONE MORTGAGE ACCEPTANCE
CORPORATION
No dealer, salesman or other person $___________________
has been authorized to give any
information or to make any
representations not contained in this
Prospectus Supplement and the Prospectus
and, if given or made, such information
or representations must not be relied MORTGAGE PASS-THROUGH
upon as having been authorized by the CERTIFICATES
Company or by the Underwriter. This
Prospectus Supplement and the Prospectus
do not constitute an offer to sell, or a
solicitation of an offer to buy, the
securities offered hereby to anyone in
any jurisdiction in which the person
making such offer or solicitation is not
qualified to do so or to anyone to whom
it is unlawful to make any such offer or SERIES 199__-__
solicitation. Neither the delivery of
this Prospectus Supplement and the
Prospectus nor any sale made hereunder
shall, under any circumstances, create
an implication that information herein
or therein is correct as of any time
since the date of this Prospectus
Supplement or the Prospectus.
$ _____% Class A-1 Certificates
------------------ $ _____% Class A-2 Certificates
$ _____% Class A-3 Certificates
$ _____% Class A-4 Certificates
TABLE OF CONTENTS $ _____% Class A-5 Certificates
Page $ _____% Class A-6 Certificates
---- $ Variable Rate Class A-7 Certificates
Prospectus Supplement
Summary............................ S-
Description of the Mortgage Pool... S-
Description of the Certificates.... S-
Certain Yield and Prepayment
Considerations................ S-
Pooling and Servicing Agreement.... S-
Federal Income Tax
Consequences.................. S-
Method of Distribution............. S-
Legal Opinions..................... S-
Ratings............................ S-
Legal Investment................... S- ------------------
Prospectus
Summary of Prospectus.............. PROSPECTUS SUPPLEMENT
Risk Factors.......................
The Mortgage Pools................. ------------------
Servicing of Mortgage Loans........
Description of the Certificates....
Subordination......................
Description of Credit Enhancement..
Purchase Obligations...............
Primary Mortgage Insurance, Hazard
Insurance; Claims Thereunder.. ----------------------------
The Company........................
The Pooling Agreement..............
Yield Considerations...............
Maturity and Prepayment
Considerations................ ________, 19___
Certain Legal Aspects of Mortgage
Loans.........................
Federal Income Tax
Consequences..................
State and Other Tax Consequences...
ERISA Considerations...............
Legal Investment Matters...........
Use of Proceeds....................
Methods of Distribution............
Legal Matters......................
Financial Information..............
Rating.............................
Index of Principal Definitions.....
======================================= ===================================
<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 PRELIMINARY PROSPECTUS SUPPLEMENT 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.
VERSION 2
---------
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS SUPPLEMENT DATED JANUARY 3, 1997
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED ______________, 19__)
$---------------
OPTION ONE MORTGAGE ACCEPTANCE CORPORATION
COMPANY
[NAME OF MASTER SERVICER]
MASTER SERVICER
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 19__-__
WEIGHTED AVERAGE ADJUSTABLE PASS-THROUGH RATE
The Series 19__-__ Mortgage Pass-Through Certificates (the
"Certificates") will evidence the entire beneficial ownership interest in a
trust fund (the "Trust Fund") consisting primarily of a pool of conventional
adjustable-rate one- to four-family first lien mortgage loans (the "Mortgage
Loans"), exclusive of the Spread (as defined herein), to be deposited by Option
One Mortgage Acceptance Corporation (the "Company") into the Trust Fund for the
benefit of the Certificateholders. Certain characteristics of the Mortgage Loans
are described herein under "Description of the Mortgage Pool."
A limited amount of losses on the Mortgage Loans will initially be
covered by an irrevocable letter of credit (the "Letter of Credit") to be issued
by ________________ (the "Letter of Credit Bank"). The maximum amount available
to be drawn under the Letter of Credit will initially be equal to approximately
_____% of the aggregate principal balance of the Mortgage Loans as of
_______________, 19__ (the "Cut-off Date").
The interest rates on the Mortgage Loans (each, a "Mortgage Rate") will
change semi-annually based on the Index (as defined herein) and the respective
Note Margins described herein, subject to certain periodic and lifetime
limitations as described more fully herein.
Distributions on the Certificates will be made on the 25th day of each
month or, if such day is not a business day, then on the next succeeding
business day commencing on ____________, 19__ (each, a "Distribution Date"). As
more fully described herein, interest distributions on the Certificates will be
based on the principal balance of the Mortgage Loans and the then applicable
Weighted Average Adjustable Pass-Through Rate, which will equal the weighted
average of the Net Mortgage Rates on the Mortgage Loans for the month preceding
such Distribution Date, as described more fully herein. The "Net Mortgage Rate"
for each Mortgage Loan is generally equal the Mortgage Rate thereon from time to
time, net of the per annum rates applicable to the calculation of the related
servicing fee and Spread. The initial
<PAGE>
Weighted Average Adjustable Pass-Through Rate for the Certificates will be
_______% per annum. The Weighted Average Adjustable Pass-Through Rate on the
Certificates may increase or decrease from month to month. Distributions in
respect of principal of the Certificates will be made as described herein under
"Description of the Certificates--Distributions."
Certain Mortgage Loans provide that, at the option of the related
Mortgagors, the adjustable rate on such Mortgage Loans may be converted to a
fixed rate (the "Convertible Mortgage Loans"), provided that certain conditions
have been satisfied. Upon notification from a Mortgagor of such Mortgagor's
intent to convert from an adjustable rate to a fixed rate and prior to the
conversion of any such Mortgage Loan (a "Converting Mortgage Loan"), the Master
Servicer [or the related Subservicer] will be obligated to purchase the
Converting Mortgage Loan at a net price of par plus accrued interest thereon
(the "Conversion Price"). [In the event of a failure by a Subservicer to
purchase a Converting Mortgage Loan, the Master Servicer shall use its best
efforts to purchase any Converted Mortgage Loan (as defined herein) from the
Mortgage Pool at the Conversion Price during the one month period following the
date of conversion to a Converted Mortgage Loan.] In the event that neither the
Master Servicer [nor the related Subservicer] purchases a Converting or
Converted Mortgage Loan, the Mortgage Pool will thereafter include both fixed
rate and adjustable rate Mortgage Loans. See "Certain Yield and Prepayment
Considerations" herein. Except as set forth herein, the Master Servicer's only
obligations with respect to the Certificates are its contractual obligations as
Master Servicer under the terms of the Pooling and Servicing Agreement (as
defined herein).
As described herein, the Trust Fund will be treated as a grantor trust
for federal income tax purposes.
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION SET FORTH UNDER
"RISK FACTORS" ON PAGE S-__ OF THE PROSPECTUS SUPPLEMENT AND THE INFORMATION SET
FORTH UNDER "RISK FACTORS" ON PAGE __ OF THE PROSPECTUS BEFORE PURCHASING ANY OF
THE CLASS A CERTIFICATES.
THE YIELD TO MATURITY ON THE CERTIFICATES WILL DEPEND ON THE RATE OF
PAYMENT OF PRINCIPAL (INCLUDING AS A RESULT OF PREPAYMENTS, DEFAULTS,
LIQUIDATIONS AND PURCHASES OF CONVERTING MORTGAGE LOANS AND CONVERTED MORTGAGE
LOANS) ON THE MORTGAGE LOANS. THE MORTGAGE LOANS MAY BE PREPAID IN FULL OR IN
PART AT ANY TIME WITHOUT PENALTY. THE YIELD TO INVESTORS ON THE CERTIFICATES
WILL BE ADVERSELY AFFECTED BY ANY SHORTFALLS IN INTEREST COLLECTED ON THE
MORTGAGE LOANS DUE TO PREPAYMENTS, LIQUIDATIONS OR OTHERWISE. SEE "CERTAIN YIELD
AND PREPAYMENT CONSIDERATIONS" HEREIN AND "YIELD CONSIDERATIONS" IN THE
PROSPECTUS.
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 COMPANY, THE MASTER SERVICER OR ANY OF THEIR AFFILIATES.
NEITHER THE CERTIFICATES NOR THE UNDERLYING MORTGAGE LOANS ARE INSURED OR
GUARANTEED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY THE COMPANY, THE
MASTER SERVICER OFFERED OR ANY OF THEIR AFFILIATES.
-2-
<PAGE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR
ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS
UNLAWFUL.
The Certificates will be purchased from the Company by the Underwriter
and will be offered by the Underwriter from time to time to the public in
negotiated transactions or otherwise at varying prices to be determined at the
time of sale. The proceeds to the Company from the sale of the Certificates will
be equal to _________% of the initial aggregate principal balance of the
Certificates, plus accrued interest thereon from ___________ 1, 19__ (the
"Cut-off Date"), net of any expenses payable by the Company.
The Certificates are offered by the Underwriter subject to prior sale,
when, as and if delivered to and accepted by the Underwriter and subject to
certain other conditions. The Underwriter reserves the right to withdraw, cancel
or modify such offer and to reject any order in whole or in part. It is expected
that delivery of the Certificates will be made on or about ____________, 19__ at
the office of __________________________________, _______________,
_____________________ against payment therefor in immediately available funds.
[Name of Underwriter]
[Date of Prospectus Supplement]
-3-
<PAGE>
THE CERTIFICATES OFFERED BY THIS PROSPECTUS SUPPLEMENT CONSTITUTE A
SEPARATE SERIES OF CERTIFICATES BEING OFFERED BY THE COMPANY PURSUANT TO ITS
PROSPECTUS DATED _____________, 19__, OF WHICH THIS PROSPECTUS SUPPLEMENT IS A
PART AND WHICH ACCOMPANIES THIS PROSPECTUS SUPPLEMENT. THE PROSPECTUS CONTAINS
IMPORTANT INFORMATION REGARDING THIS OFFERING WHICH IS NOT CONTAINED HEREIN, AND
PROSPECTIVE INVESTORS ARE URGED TO READ THE PROSPECTUS AND THIS PROSPECTUS
SUPPLEMENT IN FULL. SALES OF THE CERTIFICATES MAY NOT BE CONSUMMATED UNLESS THE
PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS.
UNTIL _____________, 19__, ALL DEALERS EFFECTING TRANSACTIONS IN THE
CERTIFICATES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS SUPPLEMENT AND THE PROSPECTUS TO WHICH IT RELATES. THIS
DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH
RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
-4-
<PAGE>
SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere herein and in the Prospectus.
Capitalized terms used herein and not otherwise defined herein have the meanings
assigned in the Prospectus.
Title of Securities.............. Mortgage Pass-Through Certificates, Weighted
Average Adjustable Pass-Through Rate, Series
19__-__.
Company.......................... Option One Mortgage Acceptance Corporation
(the "Company"), a wholly-owned subsidiary of
Option One Mortgage Company ("OOMC"). See "The
Company" in the Prospectus.
Master Servicer.................. [Name of Master Servicer] (the "Master
Servicer"), [an affiliate of the Company]. See
"Pooling and Servicing Agreement--The Master
Servicer" herein.
Trustee.......................... ___________, ______________ (the "Trustee").
Cut-off Date..................... ___________, 19__ (the "Cut-off Date").
Delivery Date.................... On or about __________, 19__ (the "Delivery
Date").
Denominations.................... The Certificates will be issued in registered,
certificated form, in minimum denominations of
$______ and integral multiples of $_____ in
excess thereof.
The Mortgage Pool................ The Mortgage Pool will consist of a pool of
adjustable rate, fully-amortizing mortgage
loans (the "Mortgage Loans"), exclusive of the
Spread (as defined herein). The aggregate
principal balance of the Mortgage Loans as of
the Cut-off Date will be approximately
$______________.
The Mortgage Loans are secured by first liens
on one- to four-family residential real
properties (each, a "Mortgaged Property"). The
Mortgage Loans have individual principal
balances at origination of at least $______
but not more than $_________ with an average
principal balance at origination of
approximately $_________. The Mortgage Loans
have terms to maturity of __ years from the
date of origination and a weighted average
remaining term to stated maturity of
approximately ____ years and __ months as of
the Cut-off Date. The Mortgage Rate on each
Mortgage Loan will adjust semi-annually on its
Adjustment Date (as defined herein), with
corresponding adjustments in the
-5-
<PAGE>
amount of monthly payments, to equal the sum
(rounded as described herein) of the Index
described below and a fixed percentage set
forth in the related Mortgage Note (the "Note
Margin"). However, (i) on any Adjustment Date
such Mortgage Rate may not increase or
decrease by more than 1% (the "Periodic Rate
Cap"), (ii) over the life of such Mortgage
Loan, such Mortgage Rate may not exceed the
related maximum Mortgage Rate (such maximum
Mortgage Rate is equal to the Mortgage Rate at
origination plus a lifetime rate cap (the
"Lifetime Rate Cap")), which maximum Mortgage
Rates will range from ______% to ______% and
(iii) with respect to approximately ____% of
the Mortgage Loans, by aggregate principal
balance as of the Cut-off Date, over the life
of such Mortgage Loan, such Mortgage Rate may
not be lower than the minimum Mortgage Rate.
The difference between the Mortgage Rate on
each Mortgage Loan at origination and the
minimum Mortgage Rate on such Mortgage Loan
will equal the lifetime rate floor (the
"Lifetime Rate Floor"). The minimum Mortgage
Rates will range from _____% to ______% per
annum.
Accordingly, changes in the Weighted Average
Adjustable Pass-Through Rate will not
necessarily correspond to changes in the Index
or other prevailing interest rates.
Additionally, the initial Mortgage Rates in
effect on the Mortgage Loans will likely be
lower than the sum of the Index and related
Note Margin that would have been applicable at
origination. Because the maximum Mortgage Rate
on any Mortgage Loan is determined by adding
the Lifetime Rate Cap to the Mortgage Rate at
origination, the maximum rate on a Mortgage
Loan will likely be less than the sum of the
Index and the Note Margin that would have been
applicable at origination plus the Lifetime
Rate Cap. No Mortgage Loan provides for
payment caps on any Adjustment Date which
would result in deferred interest or negative
amortization. The Mortgage Loans will bear
interest at Mortgage Rates of at least _____%
per annum but not more than ______% per annum,
as of the Cut-off Date. For a further
description of the Mortgage Loans, see
"Description of the Mortgage Pool" herein.
The Index...................... As of any Adjustment Date with respect to any
Mortgage Loan, the Index applicable to the
determination of the related Mortgage Rate
will be a rate equal to the monthly weighted
average cost of funds for members of the
Federal
-6-
<PAGE>
Home Loan Bank of San Francisco as most
recently available 45 days prior to the
Adjustment Date (the "Cost of Funds Index" or
"Index").
Conversion of Mortgage Loans... Approximately _____% of the Mortgage Loans, by
aggregate principal balance as of the Cut-off
Date, are Convertible Mortgage Loans. Upon
notification from a Mortgagor of such
Mortgagor's intent to convert from an
adjustable rate to a fixed rate and prior to
the conversion thereof, the Master Servicer
[or the related Subservicer] will be obligated
to purchase the Converting Mortgage Loan at a
net price of par plus accrued interest thereon
(the "Conversion Price"). [In the event of a
failure by a Subservicer to purchase a
Converting Mortgage Loan, the Master Servicer
shall use its best efforts to purchase any
Converted Mortgage Loan (as defined herein)
from the Mortgage Pool at the Conversion Price
during the one- month period following the
date of conversion to a Converted Mortgage
Loan.] In the event that neither the Master
Servicer [nor the related Subservicer]
purchases a Converting or Converted Mortgage
Loan, the Mortgage Pool will thereafter
include both fixed-rate and adjustable- rate
Mortgage Loans. See "Certain Yield and
Prepayment Considerations" herein.
The Certificates............... The Certificates evidence the entire
beneficial ownership interest in a trust fund
(the "Trust Fund") consisting primarily of the
Mortgage Pool, exclusive of the Spread. The
Certificates will be issued pursuant to a
Pooling and Servicing Agreement, to be dated
as of the Cut-off Date, among the Company, the
Master Servicer, and the Trustee (the "Pooling
and Servicing Agreement").
Interest Distributions......... The Weighted Average Adjustable Pass-Through
Rate applicable to the Certificates in respect
of each Distribution Date will equal the
weighted average of the Net Mortgage Rates on
the Mortgage Loans for the month preceding
such Distribution Date. The initial Weighted
Average Adjustable Pass-Through Rate will be
______% per annum. The Net Mortgage Rate on
each Mortgage Loan is generally equal to the
Mortgage Rate thereon minus the rate per annum
at which the related servicing fee accrues
(the "Servicing Fee Rate") and the per annum
rate at which the Spread referred to below
under "Pooling and Servicing
Agreement--Servicing and Other Compensation
and Payment of Expenses; Spread" accrues.
-7-
<PAGE>
Holders of the Certificates will be entitled
to receive distributions allocable to interest
in proportion to their respective Percentage
Interests (as defined herein) on each
Distribution Date, to the extent of available
funds, in an aggregate amount equal to one
month's interest, at the then applicable
Weighted Average Adjustable Pass-Through Rate,
on the principal balance of the Certificates
outstanding as of the close of business on the
immediately preceding Distribution Date,
subject to reduction in the event of any full
and partial prepayments or any interest
shortfalls not covered by the Letter of Credit
(as defined herein) as well as certain losses
and delinquencies on the Mortgage Loans as
described herein. See "Description of the
Certificates--Distributions" herein and in the
Prospectus.
Principal Distributions........ Principal payments (including prepayments)
received on the Mortgage Loans will be passed
through on each Distribution Date to holders
of the Certificates in proportion to their
respective Percentage Interests. See
"Description of the
Certificates--Distributions" herein and in the
Prospectus.
Advances....................... The Master Servicer is required to make
advances ("Advances") to holders of the
Certificates in respect of delinquent payments
of principal and interest on the Mortgage
Loans, subject to the limitations described
herein. See "Description of the
Certificates--Advances" herein and in the
Prospectus.
Credit Enhancement............. Neither the Certificates nor the Mortgage
Loans are insured or guaranteed by any
governmental agency or instrumentality or by
the Company, the Master Servicer or any
affiliate thereof. However, a limited amount
of losses on the Mortgage Loans will be
covered initially by an irrevocable letter of
credit (the "Letter of Credit") to be issued
by ________________ (the "Letter of Credit
Bank") in favor of the Trustee for the benefit
of the holders of the Certificates. The
maximum amount available under the Letter of
Credit to cover losses with respect to the
Mortgage Loans will initially equal $_________
(the initial "Available Amount") which is
equal to approximately _____% of the aggregate
principal balance of the Mortgage Loans as of
the Cut-off Date. The Available Amount is
subject to periodic reduction as described
herein.
-8-
<PAGE>
The Letter of Credit will cover losses on the
Mortgage Loans that constitute Defaulted
Mortgage Losses, Special Hazard Losses, Fraud
Losses and Bankruptcy Losses (each as defined
in the Prospectus), to the extent described
herein. Amounts that may be drawn under the
Letter of Credit to cover Special Hazard
Losses, Fraud Losses and Bankruptcy Losses are
initially limited to $___________,
$___________ and $______________,
respectively. All of the foregoing amounts are
subject to periodic reduction as described
herein. Any draws under the Letter of Credit,
including draws for Special Hazard Losses,
Fraud Losses and Bankruptcy Losses, will
reduce the Available Amount. The Letter of
Credit will expire on ______________, 19__,
unless earlier terminated or extended in
accordance with its terms or replaced in a
manner as herein described.
In the event losses on Mortgage Loans occur
which are not covered by the Letter of Credit
or any replacement credit enhancement, such
losses will be borne by the
Certificateholders. See "Description of Credit
Enhancement" herein.
Optional Termination........... At its option, on any Distribution Date when
the principal balance of the Mortgage Loans is
less than [___]% of the aggregate principal
balance of the Mortgage Loans as of the
Cut-off Date, the Master Servicer or the
Company may (i) purchase from the Trust Fund
all remaining Mortgage Loans and other assets
thereof and thereby effect early retirement of
the Certificates or (ii) purchase in whole,
but not in part, the Certificates. See
"Pooling and Servicing Agreement--Termination"
herein and "The Pooling
Agreement--Termination; Retirement of
Certificates" in the Prospectus.
Special Prepayment
Considerations.............. The rate of principal payments on the
Certificates collectively will depend on the
rate and timing of principal payments
(including by reason of prepayments, defaults
and liquidations) on the Mortgage Loans. As is
the case with mortgage-backed securities
generally, the Certificates are subject to
substantial inherent cash-flow uncertainties
because the Mortgage Loans may be prepaid at
any time. Generally, when prevailing interest
rates are increasing, prepayment rates on
mortgage loans tend to decrease, resulting in
a reduced return of principal to investors at
a time when reinvestment at such higher
prevailing rates
-9-
<PAGE>
would be desirable. Conversely, when
prevailing interest rates are declining,
prepayment rates on mortgage loans tend to
increase, resulting in a greater return of
principal to investors at a time when
reinvestment at comparable yields may not be
possible.
See "Description of the
Certificates--Distributions" and "Certain
Yield and Prepayment Considerations" herein,
and "Maturity and Prepayment Considerations"
in the Prospectus.
Special Yield
Considerations.............. The yield to maturity on the Certificates will
depend on the rate and timing of principal
payments (including by reason of prepayments,
defaults, liquidations [and purchases of
Mortgage Loans converting to a fixed rate]) on
the Mortgage Loans, as well as other factors
such as changes in the Index, provisions of
the Mortgage Loans limiting changes in the
Mortgage Rates and the purchase price for such
Certificates, as described herein. The
Weighted Average Adjustable Pass-Through Rate
will be reduced to the extent that
prepayments, liquidations and purchases occur
at a faster rate for Mortgage Loans having
higher Net Mortgage Rates than for Mortgage
Loans having lower Net Mortgage Rates. The
yield to investors on the Certificates will be
adversely affected by any allocation thereto
of prepayment interest shortfalls on the
Mortgage Loans, which are expected to result
from the distribution of interest only to the
date of prepayment (rather than a full month's
interest) in connection with prepayments in
full, and the lack of any distribution of
interest on the amount of any partial
prepayments.
See "Certain Yield and Prepayment
Considerations" herein, and "Yield
Considerations" in the Prospectus.
Federal Income Tax
Consequences.................. No election will be made to treat the Trust
Fund as a real estate mortgage investment
conduit for federal income tax purposes.
_______________________, counsel to the
Company, will deliver its opinion generally to
the effect that, assuming compliance with the
Pooling and Servicing Agreement, for federal
income tax purposes the Trust Fund will be
classified as a grantor trust under the
Internal Revenue Code of 1986 (the "Code"),
and not as a partnership or an association
taxable as a corporation.
-10-
<PAGE>
For further information regarding the federal
income tax consequences of investing in the
Certificates see "Federal Income Tax
Consequences" herein and "Federal Income Tax
Consequences--Grantor Trust Funds" in the
Prospectus.
Rating......................... It is a condition of the issuance of the
Certificates that they be rated at least "___"
by __________________. _________ RATING OF THE
CERTIFICATES WILL NOT REPRESENT ANY ASSESSMENT
OF THE MASTER SERVICER'S [NOR THE RELATED
SUBSERVICER'S] ABILITY TO PURCHASE CONVERTING
MORTGAGE LOANS, OR THE REMARKETING AGENT'S
ABILITY TO ARRANGE FOR THE PURCHASE OF
CONVERTED MORTGAGE LOANS. In the event that
neither the Master Servicer [nor the related
Subservicer] purchases a Converting or
Converted Mortgage Loan, investors in the
Certificates might suffer a lower than
anticipated yield. A security rating is not a
recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal
at any time by the assigning rating
organization. A security rating does not
address the frequency of prepayments of
Mortgage Loans, or the corresponding effect on
yield to investors. See "Certain Yield and
Prepayment Considerations" and "Rating" herein
and "Yield Considerations" in the Prospectus.
Legal Investment............... The Certificates will constitute "mortgage
related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA") for so long as they are rated
in at least the second highest rating category
by one or more nationally recognized
statistical rating agencies. Institutions
whose investment activities are subject to
legal investment laws and regulations,
regulatory capital requirements or review by
regulatory authorities may be subject to
restrictions on investment in the Certificates
and should consult with their legal advisors.
See "Legal Investment" herein and "Legal
Investment Matters" in the Prospectus.
-11-
<PAGE>
[RISK FACTORS]
[Prospective Certificateholders should consider, among other things,
the items discussed under "Risk Factors" in the Prospectus and the following
factors in connection with the purchase of the Certificates:]
[Appropriate Risk Factors as necessary.]
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
The Mortgage Pool will consist of Mortgage Loans with an aggregate
principal balance outstanding as of the Cut-off Date of approximately
$___________. The Mortgage Pool will consist of conventional, adjustable-rate,
fully-amortizing Mortgage Loans with terms to maturity of not more than 30 years
from the due date of the first monthly payment. On or before the Delivery Date,
the Company will acquire the Mortgage Loans to be included in Mortgage Pool from
Option One Mortgage Corporation ("OOMC"), an affiliate of the Company [, which
in turn acquired them pursuant to various mortgage loan purchase agreements
between OOMC and [Names of Sellers] (the "Sellers")]. The Seller[s] will make
certain representations and warranties with respect to the Mortgage Loans and,
as more particularly described in the Prospectus, will have certain repurchase
or substitution obligations in connection with a breach of any such
representation and warranty, as well as in connection with an omission or defect
in respect of certain constituent documents required to be delivered with
respect to the Mortgage Loans, in any event if such breach, omission or defect
cannot be cured and it materially and adversely affects the interests of
Certificateholders. Neither the Company nor any other entity or person will have
any responsibility to purchase or replace any Mortgage Loan if a Seller is
obligated but fails to do so. See "Description of the Mortgage
Pool--Representations by Sellers" and "Description of the
Certificates--Assignment of Trust Fund Assets" in the Prospectus and "--The
Seller" below. The Mortgage Loans will have been originated or acquired by the
[Sellers] in accordance with the underwriting criteria described herein. See
"--Underwriting" below. All percentages of the Mortgage Loans described herein
are approximate percentages (except as otherwise indicated) by aggregate
principal balance as of the Cut-off Date.
The Mortgage Rate on each Mortgage Loan will adjust semi-annually on a
date specified in the related Mortgage Note (the "Adjustment Date"). For
approximately ____% of the Mortgage Loans, by aggregate principal balance as of
the Cut-off Date, the first Adjustment Date occurred prior to the Cut-off Date.
On each Adjustment Date, the Mortgage Rate on a Mortgage Loan will be
adjusted to equal the sum (rounded to either the nearest or next highest
multiple of _____%) of (a) a rate per annum equal to the monthly weighted
average cost of funds for members of the Federal Home Loan Bank of San Francisco
(the "FHLB of San Francisco") as published by the FHLB of San Francisco (the
"Cost of Funds Index" or "Index") and as most recently available as of
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the day 45 days prior to such Adjustment Date or, in the event that such Index
is no longer available, an index selected by the Master Servicer and reasonably
acceptable to the Trustee that is based on comparable information, and (b) the
related Note Margin, subject to the following limitations. The Mortgage Rate on
the Mortgage Loan on any Adjustment Date may not increase or decrease by more
than the Periodic Rate Cap applicable to such Mortgage Loan and, over the life
of such Mortgage Loan, generally may not exceed the Mortgage Rate at origination
plus the Lifetime Rate Cap, or be less than the Mortgage Rate at origination
minus any Lifetime Rate Floor, applicable to such Mortgage Loan. No Mortgage
Loan provides for payment caps on any Adjustment Date which would result in
deferred interest or negative amortization. Effective with the first payment due
date on a Mortgage Loan after an Adjustment Date therefor, the monthly principal
and interest payment will be adjusted to an amount that will fully amortize the
then outstanding principal balance of such Mortgage Loan at its stated maturity
and pay interest at the adjusted Mortgage Rate. Because the amortization
schedule of each Mortgage Loan will be recalculated semi-annually, any partial
prepayments thereof will not reduce the term to maturity of such Mortgage Loan.
An increase in the Mortgage Rate on a Mortgage Loan will result in a larger
monthly payment and in a larger percentage of such monthly payment being
allocated to interest and a smaller percentage being allocated to principal, and
conversely, a decrease in the Mortgage Rate on the Mortgage Loan will result in
a lower monthly payment and in a larger percentage of each monthly payment being
allocated to principal and a smaller percentage being allocated to interest.
The Cost of Funds Index reflects the monthly weighted average cost of
funds of savings and loan associations and savings banks, the home offices of
which are located in Arizona, California and Nevada, that are member
institutions of the FHLB of San Francisco, as computed from statistics tabulated
and published by the FHLB of San Francisco. The FHLB of San Francisco normally
announces the Cost of Funds Index on or near the last working day of the month
following the month in which the cost of funds was incurred. The Index is
available through a variety of sources, including, without limitation, Telerate,
The Wall Street Journal and USA Today.
Listed below are the historical values of the Cost of Funds Index since
1988. Such values may fluctuate significantly over time and may not increase or
decrease in a constant pattern from period to period. The following does not
purport to be representative of future values of the Index. No assurance can be
given as to the Index value to be applied on any future Adjustment Date.
COST OF FUNDS INDEX
Month 1990 1991 1992 1993 1994 1995
===== ===== ===== ====== ====== ====== =====
January...........
February..........
March.............
April.............
May...............
June..............
July..............
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August..................
September...............
October.................
November................
December................
The initial Mortgage Rate in effect on a Mortgage Loan generally will
be lower than the sum of the Index that would have been applicable at
origination and the Note Margin. Absent a decline in the Index subsequent to
origination of a Mortgage Loan, the related Mortgage Rate will generally
increase on the first Adjustment Date following origination of such Mortgage
Loan. The repayment of such Mortgage Loans will be dependent on the ability of
the Mortgagor to make larger Monthly Payments following adjustments of the
Mortgage Rate. Moreover, because the maximum Mortgage Rate on any Mortgage Loan
is determined by adding the Lifetime Rate Cap to the Mortgage Rate at
origination, irrespective of the Index that would have been applicable at
origination, the maximum Mortgage Rate on a Mortgage Loan will generally be less
than the sum of the Index and the Note Margin that would have been applicable at
origination plus the Lifetime Rate Cap. Mortgage Loans that have the same
initial Mortgage Rate may not always bear interest at the same Mortgage Rate
because the Mortgage Loans may have different Adjustment Dates (and the Mortgage
Rate therefore may reflect different Index values), different Note Margins,
different Lifetime Rate Caps and different Lifetime Rate Floors, if any.
Approximately ____% of the Mortgage Loans, by aggregate principal
balance as of the Cut-off Date, are Convertible Mortgage Loans. The first month
in which any of the Mortgage Loans could convert is _______, 19__ and the last
month in which any of the Mortgage Loans may convert is ________ 1, 19__. Upon
conversion, the monthly payments of principal and interest will be adjusted to
provide for full amortization at scheduled maturity. Upon notification from a
Mortgagor of such Mortgagor's intent to convert from an adjustable rate to a
fixed rate and prior to the conversion thereof, the Master Servicer [or the
related Subservicer] will be obligated to purchase the Converting Mortgage Loan
at the Conversion Price. [In the event of a failure by a Subservicer to purchase
a Converting Mortgage Loan, the Master Servicer shall use its best efforts to
purchase such Mortgage Loan following its conversion (a "Converted Mortgage
Loan") at the Conversion Price during the one-month period following the date of
conversion to a Converted Mortgage Loan.]
In the event that the Master Servicer [nor the related Subservicer]
fails to purchase a Converting Mortgage Loan and the Master Servicer does not
purchase a Converted Mortgage Loan, neither the Company nor any of its
affiliates nor any other entity is obligated to purchase or arrange for the
purchase of any Converted Mortgage Loan. Any such Converted Mortgage Loan will
remain in the Mortgage Pool as a fixed-rate Mortgage Loan and will result in the
Mortgage Pool having both fixed rate and adjustable rate Mortgage Loans. See
"Certain Yield and Prepayment Considerations" herein.
Following the purchase of any Converted Mortgage Loan as described
above, the purchaser will be entitled to receive an assignment from the Trustee
of such Mortgage Loan and
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the purchaser will thereafter own such Mortgage Loan free of any further
obligation to the Trustee or the Certificateholders with respect thereto.
The Principal Balance of any Mortgage Loan as of any time of
determination is the principal balance of such Mortgage Loan remaining to be
paid by the Mortgagor at the close of business on the Cut-off Date, after
deduction of all payments due on or before the Cut-off Date whether or not paid,
reduced by all amounts distributed to Certificateholders with respect to such
Mortgage Loan and reported to them as allocable to principal, including the
principal components of any Advances (as described below under "Description of
the Certificates--Advances").
The Mortgage Loans will have approximately the following
characteristics as of the Cut-off Date:
Number of Mortgage Loans.........................
Weighted Average Adjustable Pass-Through Rate(1).
Mortgage Rates:
Weighted Average.............................
Range........................................
Range of Net Mortgage Rates.......................
Note Margins:
Weighted Average.............................
Range........................................
Net Note Margin(2)................................
Maximum Mortgage Rates:
Weighted Average.............................
Range........................................
Maximum Net Mortgage Rates (3):
Weighted Average.............................
Range........................................
Weighted Average Months to Next Adjustment Date after ____________, 19__
(4)......
=============
(1) The Weighted Average Adjustable Pass-Through Rate is equal to the
weighted average of the Net Mortgage Rates on the Mortgage Loans.
(2) The Net Note Margin is the Note Margin on each Mortgage Loan minus the
Servicing Fee Rate and the rate at which the Spread accrues.
(3) The difference between the maximum Net Mortgage Rate and the Net
Mortgage Rate as of the Cut-off Date may be less than the Lifetime Rate
Cap.
(4) The Weighted Average Months to the next Adjustment Date is equal to the
weighted average of the number of months until the Adjustment Date next
following _____________, 19__.
The Mortgage Loans in the Mortgage Pool will have the following
characteristics as of the Cut-off Date (expressed as a percentage of the
aggregate principal balance of the Mortgage
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Loans having such characteristics relative to the aggregate principal balance of
all Mortgage Loans in the Mortgage Pool):
The Mortgage Loans will have had individual principal balances
at origination of at least $__________ but not more than $__________.
None of the Mortgage Loans in the Mortgage Pool will have been
originated prior to _____________, 19__ or will have a scheduled
maturity later than ____________, ____. No Mortgage Loan in the
Mortgage Pool will have an unexpired term to stated maturity as of the
Cut-off Date of less than __ years and __ months. The weighted average
remaining term to stated maturity of the Mortgage Loans in the Mortgage
Pool as of the Cut-off Date will be approximately ____ years and __
months. The weighted average Adjustment Date of the Mortgage Loans in
the Mortgage Pool next following the Cut-off Date is ____________,
19__.
Approximately _____% of the Mortgage Loans will have
Loan-to-Value Ratios at origination exceeding 80% but less than or
equal to 90%, and approximately ____% of the Mortgage Loans will have
Loan-to-Value Ratios exceeding 90%. The weighted average Loan-to-Value
Ratio at origination, as of the Cut-off Date, is approximately
-----%.
At least _____% of such Mortgage Loans will be secured by fee
simple interests in detached one- to four-family dwelling units with
the remaining units being secured by fee simple interests in attached
planned unit developments, condominiums or townhouses.
Approximately _____% of the Mortgage Loans in the Mortgage
Pool will be secured by Mortgaged Properties located in California.
No more than _____% of the Mortgage Loans in the Mortgage Pool
will be secured by Mortgaged Properties located in any one zip code
area in California, and no more than ____% will be secured by Mortgaged
Properties located in any one zip code area outside California.
No more than _____% of the Mortgage Loans were equity
refinance mortgage loans made to mortgagors who used less than the
entire amount of the proceeds to refinance an existing mortgage loan.
The weighted average Loan-to-Value Ratio at origination of such
Mortgage Loans, as of the Cut-off Date, is approximately ______%.
Approximately ____% of the Mortgage Loans were made to Mortgagors who
used the entire proceeds to refinance an existing Mortgage Loan.
No Mortgage Loan provides for deferred interest or negative
amortization.
Approximately ____% of the Mortgage Loans in the Mortgage Pool
will have been underwritten under a reduced loan documentation program.
The weighted average Loan-to-Value Ratio at origination of the Mortgage
Loans in the Mortgage Pool which were underwritten under such reduced
loan documentation program will be approximately
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____% and no more than approximately ____% of such Mortgage Loans will
be secured by Mortgaged Properties located in California. See "Pooling
and Servicing Agreement--The Master Servicer" herein.
No more than ____% of the Mortgage Loans will be secured by
vacation or second homes. No more than ____% of the Mortgage Loans will
be secured by one- to four-story condominium units. No Mortgage Loans
will be secured by condominium units in buildings of five or more
stories.
None of the Mortgage Loans in the Mortgage Pool will be
Buydown Mortgage Loans.
The following table sets forth the number and aggregate principal
balance as of the Cut-off Date of Mortgage Loans having their next Adjustment
Dates in the month described therein. The table also indicates the approximate
percentage of Mortgage Loans in the Mortgage Pool with an Adjustment Date in
each such month.
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MONTH OF NUMBER OF AGGREGATE PERCENTAGE OF
ADJUSTMENT DATE MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE POOL
--------------- -------------- ----------------- -------------
Total..................
The following table sets forth the number and aggregate principal
balance of Mortgage Loans having unpaid principal balances in the ranges
described therein as of the Cut-off Date. The table also indicates the
approximate weighted average Mortgage Rate and the approximate weighted average
Loan-to-Value Ratio at origination of the Mortgage Loans in each given range, as
of the Cut-off Date.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER WEIGHTED ORIGINAL
OF AGGREGATE AVERAGE LOAN-TO-
MORTGAGE PRINCIPAL MORTGAGE VALUE
PRINCIPAL BALANCE LOANS BALANCE RATE RATIO
- ----------------- ----- ------- ---- -----
<S> <C> <C> <C> <C>
Total, Average or Weighted Average................. _______ $____________ ________% _______%
</TABLE>
[See Version 1 for additional tables which would be included in this Version 2.]
UNDERWRITING STANDARDS
[Additional disclosure as necessary. See Version 1 for
underwriting disclosure for Option One Mortgage Corporation.]
DELINQUENCY AND FORECLOSURE EXPERIENCE
[Additional disclosure as necessary. See Version 1 for sample
disclosure for this section.]
The information set forth in the preceding paragraphs concerning
Option One Mortgage Corporation has been provided by Option One Mortgage
Corporation.
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ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Mortgage Pool
and the Mortgaged Properties is based upon the Mortgage Pool as constituted at
the close of business on the Cut-off Date, as adjusted for the scheduled
principal payments due before such date. Prior to the issuance of the
Certificates, Mortgage Loans may be removed from the Mortgage Pool as a result
of incomplete documentation or otherwise, if the Company deems such removal
necessary or appropriate. A limited number of other mortgage loans may be
included in the Mortgage Pool prior to the issuance of the Certificates. The
Company believes that the information set forth herein will be substantially
representative of the characteristics of the Mortgage Pool as they will be
constituted at the time the Certificates are issued although the range of
Mortgage Rates and maturities and certain other characteristics of the Mortgage
Loans in the Mortgage Pool may vary.
A Current Report on Form 8-K containing a detailed description of
the Mortgage Loans will be available to purchasers of the Certificates and will
be filed, together with the Pooling and Servicing Agreement, with the Securities
and Exchange Commission within fifteen days after initial issuance. The Current
Report on Form 8-K will specify the aggregate principal balance of the Mortgage
Loans in the Mortgage Pool outstanding as of the Cut-off Date and will set forth
the other approximate information presented in this Prospectus Supplement.
See also "The Mortgage Pools" and "Certain Legal Aspects of
Mortgage Loans" in the Prospectus.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates evidence in the aggregate the entire beneficial
ownership of the Trust Fund. The Trust Fund will consist of (i) the Mortgage
Loans, exclusive of the Company's rights in and to the Spread with respect to
each Mortgage Loan; (ii) such assets as from time to time are identified as
deposited in respect of the Mortgage Loans in the Certificate Account (as
described in the Prospectus) and belonging to the Trust Fund; (iii) property
acquired by foreclosure of such Mortgage Loans or deed in lieu of foreclosure;
(iv) any applicable insurance policies and all proceeds thereof; and (v) the
Letter of Credit (or any alternate form of credit support substituted therefor)
and all proceeds thereof, other than any amount drawn thereunder and deposited
in a reserve fund.
DISTRIBUTIONS
Distributions to holders of Certificates will be made on each
Distribution Date based on their respective Percentage Interests. The undivided
Percentage Interest of a Certificate will be equal to the percentage obtained by
dividing the initial principal balance of such Certificate by the aggregate
initial principal balance of all Certificates, which will equal the aggregate
principal balance of the Mortgage Loans as of the Cut-off Date.
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The "Available Distribution Amount" for any Distribution Date will
generally consist of (i) the aggregate amount of scheduled payments on the
Mortgage Loans due on the related Due Date and received on or prior to the
related Determination Date, after deduction of the related master servicing fees
(the "Servicing Fees"), (ii) certain unscheduled payments, including Mortgagor
prepayments on the Mortgage Loans, Insurance Proceeds, Liquidation Proceeds and
proceeds from repurchases of and substitutions for the Mortgage Loans occurring
during the preceding calendar month and (iii) all Advances made for such
Distribution Date, in each case net of amounts reimbursable therefrom to the
Master Servicer. In addition to the foregoing amounts, with respect to
unscheduled collections, not including Mortgagor prepayments, the Master
Servicer may elect to treat such amounts as included in the Available
Distribution Amount for the Distribution Date in the month of receipt, but is
not obligated to do so. With respect to any Distribution Date, (i) the "Due
Date" is the first day of the month in which such Distribution Date occurs and
(ii) the "Determination Date" is the [__th] day of the month in which such
Distribution Date occurs or, if such day is not a business day, the immediately
succeeding business day. See "Description of the Certificates--Distributions" in
the Prospectus.
Holders of Certificates will be entitled to receive distributions
of interest on each Distribution Date, to the extent of the Available
Distribution Amount for such Distribution Date, in an aggregate amount equal to
one month's interest, at the then applicable Weighted Average Adjustable
Pass-Through Rate on the principal balance of the Mortgage Loans outstanding as
of the close of business on the immediately preceding Distribution Date (or, in
the case of the first Distribution Date, outstanding as of the Delivery Date),
subject to reduction in the event of any interest shortfalls not covered by the
Letter of Credit, including any Prepayment Interest Shortfalls (as defined
below) resulting from full and partial prepayments, as well as certain losses
and delinquencies on the Mortgage Loans as described below. The Weighted Average
Adjustable Pass-Through Rate for any Distribution Date will equal the average of
the Net Mortgage Rates on the Mortgage Loans (weighted by the principal balances
of such Mortgage Loans as of the Due Date occurring in the preceding month).
Subject to the following limitations, for each period beginning on the related
Adjustment Date therefor, the Net Mortgage Rate on a Mortgage Loan will equal
the sum of the Cost of Funds Index (rounded to the nearest multiple of ______%)
and the Net Note Margin. The Net Note Margin for each Mortgage Loan will be
______%. The Net Mortgage Rate on any Mortgage Loan on any Adjustment Date may
not increase or decrease by more than the Periodic Rate Cap, and the Net
Mortgage Rate on any Mortgage Loan will not exceed the maximum Net Mortgage Rate
(the "Maximum Net Mortgage Rate") applicable to such Mortgage Loan as specified
in the Pooling and Servicing Agreement. The difference between the Net Mortgage
Rate as of the Cut-off Date and the Maximum Net Mortgage Rate will not exceed,
and may be less than, the Lifetime Rate Cap. With respect to each Mortgage Loan,
the Net Mortgage Rate is the rate per annum equal to the Mortgage Rate for such
Mortgage Loan, net of the Servicing Fee Rate and the per annum rate at which the
Spread accrues. See "Description of the Mortgage Pool" and "Pooling and
Servicing Agreement--Servicing and Other Compensation and Payment of Expenses;
Spread" herein.
Holders of the Certificates will be entitled to receive on each
Distribution Date, to the extent of the Available Distribution Amount for such
Distribution Date after distributions of interest as set forth above, an amount
equal to the "Principal Distribution Amount" for such
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Distribution Date, which will equal the sum of: (a) the principal portion of any
Advances for such Distribution Date; (b) any amount required to be paid by the
Master Servicer due to the operation of a deductible clause in any blanket
policy maintained by it to cover hazard losses on the Mortgage Loans as
described in the Prospectus under "Primary Mortgage Insurance, Hazard Insurance;
Claims Thereunder"; (c) all payments in respect of the Mortgage Loans on account
of principal (including, without limitation, principal prepayments, the
principal portion of any Liquidation Proceeds and Insurance Proceeds, the
principal portion of proceeds from repurchased Mortgage Loans and the principal
portion of proceeds from the purchase of Converting Mortgage Loans and the sale
of Converted Mortgage Loans) on deposit in the Certificate Account on the
Determination Date immediately preceding such Distribution Date, exclusive or
net of (i) Liquidation Proceeds, Insurance Proceeds and principal prepayments
received during the month in which such Distribution Date occurs (unless such
amounts are deemed to have been received in the prior month pursuant to the
Pooling and Servicing Agreement as described below), (ii) scheduled payments of
principal due on a date or dates subsequent to the first day of the month in
which such Distribution Date occurs, (iii) late payments of principal which have
been the subject of a previous Advance or Advances that have not been reimbursed
to the Master Servicer and (iv) an amount equal to liquidation expenses incurred
by the Master Servicer to the extent not reimbursed from related Liquidation
Proceeds; and (d) all amounts required to be deposited in the Certificate
Account on the Business Day immediately preceding such Distribution Date, with
respect to draws or payments under the Letter of Credit which are allocable to
payments on account of principal of the Mortgage Loans, except for payments of
principal which have been the subject of a previous Advance or Advances and
which are eligible for withdrawal in reimbursement to the Master Servicer.
The Prepayment Interest Shortfall for any Distribution Date is
equal to the aggregate shortfall, if any, in collections of interest (adjusted
to the related Net Mortgage Rates) resulting from mortgagor prepayments on the
Mortgage Loans during the preceding calendar month. Such shortfalls will result
because interest on prepayments in full is collected only to the date of
prepayment, and no interest is collected on prepayments in part, as such
prepayments are applied to reduce the outstanding principal balance of the
related Mortgage Loan as of the Due Date in the month of prepayment. The
Prepayment Interest Shortfall and other interest shortfalls (such as those
resulting from the application of the Relief Act (as defined herein)) not
covered by the Letter of Credit on any Distribution Date will be allocated to
the holders of the Certificates pro rata based on distributions of interest to
be made on such Distribution Date, before taking into account any such
reduction. Prepayment Interest Shortfalls and other interest shortfalls will not
be offset by a reduction of the servicing compensation of the Master Servicer or
otherwise.
Distributions for any Distribution Date will also be reduced if
net Liquidation Proceeds or net Insurance Proceeds (together with any net
amounts payable as described below under "Description of Credit Enhancement")
received on a defaulted Mortgage Loan liquidated during the month preceding the
month in which such Distribution Date occurs are less than the outstanding
principal balance of such Mortgage Loan, plus interest thereon at the related
Net Mortgage Rate. If an Advance by the Master Servicer was previously made in
respect thereof, late payments of principal and interest, if any, remitted to
the Master Servicer for deposit into the Certificate Account will not be passed
through to Certificateholders but rather will be subject
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to withdrawal by the Master Servicer from the Certificate Account in
reimbursement to itself for such Advance. To the extent that an Advance is not
made, the distributions for such Distribution Date will be reduced accordingly.
Reimbursement of the Master Servicer or the Company for any other advances or
expenses reimbursable to either as described in the Prospectus, out of amounts
otherwise distributable to the Certificateholders, will also reduce the
distributions for the related Distribution Date. Distributions for any
Distribution Date will be reduced to the extent that losses on any Mortgage
Loans in the Mortgage Pool are not covered by the Letter of Credit or any
substitute form of credit enhancement.
With respect to Insurance Proceeds, Liquidation Proceeds and other
unscheduled collections (not including prepayments by the mortgagors) received
in any calendar month, the Master Servicer may elect to treat such amounts as
part of the distribution to be made on the Distribution Date in the month of
receipt, but is not obligated to do so. If the Master Servicer so elects, such
amounts will be deemed to have been received (and any related loss which
requires a draw on the Letter of Credit shall be deemed to have occurred) on the
last day of the month prior to the receipt thereof.
ADVANCES
Prior to each Distribution Date, the Master Servicer is required
to make Advances for the benefit of the Certificateholders (out of its own funds
or funds held in the Custodial Account (as described in the Prospectus) for
future distribution or withdrawal) with respect to any payments of principal and
interest (net of the related Servicing Fees and the Spread) which were due on
the Mortgage Loans on the immediately preceding Due Date and delinquent on the
business day next preceding the related Determination Date.
Such Advances are required to be made only to the extent they are
deemed by the Master Servicer to be recoverable from related late collections,
Insurance Proceeds, Liquidation Proceeds or draws on the Letter of Credit. The
purpose of making such Advances is to maintain a regular cash flow to the
Certificateholders, rather than to guarantee or insure against losses. The
Master Servicer will not be required to make any Advances with respect to
reductions in the amount of the monthly payments on the Mortgage Loans due to
bankruptcy proceedings or the application of the Relief Act or similar
legislation or regulations.
All Advances will be reimbursable to the Master Servicer on a
first priority basis from late collections, Insurance Proceeds, Liquidation
Proceeds and draws on the Letter of Credit on or in respect of the Mortgage Loan
as to which such unreimbursed Advance was made. In addition, any Advances
previously made which are deemed by the Master Servicer to be nonrecoverable
from related late collections, Insurance Proceeds, Liquidation Proceeds or draws
on the Letter of Credit may be reimbursed to the Master Servicer out of any
funds in the Custodial Account or Certificate Account prior to distributions on
the Certificates.
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CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
The effective yield to the holders of Certificates will be lower
than the yield otherwise produced by the applicable Weighted Average Adjustable
Pass-Through Rate and purchase price because monthly distributions will not be
made to such holders until the 25th day (or if such day is not a business day,
then on the next succeeding business day) of the month following the month in
which interest accrues on the Mortgage Loans (without any additional
distributions of interest or earnings thereon in respect of such delay). See
"Yield Considerations" in the Prospectus.
The yield to maturity and the aggregate amount of distributions on
the Certificates will be directly related to the rate of payment of principal on
the Mortgage Loans. Such yield may be adversely affected by a higher or lower
than anticipated rate of payment of principal on the Mortgage Loans in the Trust
Fund. The rate of payment of principal on such Mortgage Loans will in turn be
affected by the amortization schedules of the Mortgage Loans (which will change
periodically as described above), the rate of principal prepayments thereon by
the Mortgagors, liquidations of defaulted Mortgage Loans and purchases of
Mortgage Loans due to certain breaches of representations or the conversion of
Convertible Mortgage Loans. The principal component of the monthly payments on
the Mortgage Loans may change on each related Adjustment Date. In addition, the
amortization schedule of a Mortgage Loan may be changed in connection with the
receipt of a partial prepayment thereon, provided however that such changes will
not include a change in the maturity date of the related Mortgage Loan. See
"Description of the Mortgage Pool--General" herein.
Other factors affecting prepayment of mortgage loans include
changes in mortgagors' housing needs, job transfers, mortgage market interest
rates, unemployment, mortgagors' net equity in the mortgaged properties, changes
in the value of the mortgaged properties and servicing decisions. If prevailing
mortgage rates fell significantly below the Mortgage Rates on the Mortgage
Loans, the rate of prepayment (and refinancing) would be expected to increase.
Conversely, if prevailing mortgage rates rose significantly above the Mortgage
Rates on the Mortgage Loans, the rate of prepayment on the Mortgage Loans would
be expected to decrease. There can be no certainty as to the rate of prepayments
on, or conversions of, the Mortgage Loans during any period or over the life of
the Certificates. However, in the event that substantial numbers of Mortgagors
exercise their conversion rights, and [the related Subservicers and] the Master
Servicer purchase the Converting and Converted Mortgage Loans, the Mortgage Pool
will experience substantial prepayment of principal.
The Mortgage Loans may be prepaid by the Mortgagors at any time
without payment of any prepayment fee or penalty. In addition, certain of the
Mortgage Loans provide that the Mortgagors may, during a specified period of
time, convert the adjustable rate of such Mortgage Loans to a fixed rate. The
Company is not aware of any publicly available statistics that set forth
principal prepayment or conversion experience or prepayment or conversion
forecasts of comparable adjustable rate mortgage loans over an extended period
of time, and its experience with respect to comparable adjustable rate mortgages
is insufficient to draw any conclusions with respect to the expected prepayment
or conversion rates on the Mortgage Loans included in the Mortgage Pool. The
rate of payments (including prepayments) on pools of mortgage loans is
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influenced by a variety of economic, geographic, social and other factors. As is
the case with conventional fixed rate mortgage loans, adjustable rate mortgage
loans may be subject to a greater rate of principal prepayments or purchases due
to their conversion to fixed interest rate loans in a low interest rate
environment. For example, if prevailing interest rates fall significantly,
adjustable rate mortgage loans could be subject to higher prepayment and
conversion rates than if prevailing interest rates remain constant because the
availability of fixed rate or other adjustable rate mortgage loans at
competitive interest rates may encourage Mortgagors to refinance their
adjustable rate mortgages to "lock in" a lower fixed interest rate or take
advantage of the availability of such other adjustable rate mortgage loans, or,
in the case of convertible adjustable rate mortgage loans, to exercise their
option to convert the adjustable interest rates to fixed interest rates. The
conversion feature may also be exercised in a rising interest rate environment
as Mortgagors attempt to limit their risk of higher rates. Such a rising
interest rate environment may also result in an increase in the rate of defaults
on the Mortgage Loans. In the event that [the Subservicers or] the Master
Servicer purchases Converting or Converted Mortgage Loans, a Mortgagor's
exercise of the conversion option will result in a pro rata distribution of the
principal portion thereof to the Certificateholders, as described herein.
Alternatively, to the extent Subservicers fail in their obligation to purchase
Converting Mortgage Loans and the Master Servicer does not purchase Converted
Mortgage Loans, as described herein, the Mortgage Pool will include fixed rate
Mortgage Loans, which will have the effect of limiting the extent to which the
Weighted Average Adjustable Pass-Through Rate can increase or decrease in
accordance with changes in the Index and accordingly may affect the yield to
Certificateholders.
The existence of Periodic Rate Caps, Lifetime Rate Caps and any
Lifetime Rate Floors also will affect the likelihood of prepayments resulting
from refinancing and the exercise of the conversion option. Although the
Mortgage Rates on the Mortgage Loans will adjust periodically, such increases
and decreases will be limited by the Periodic Rate Caps, Lifetime Rate Caps and
any Lifetime Rate Floors on each Mortgage Loan and will be based on the Index
(which may not rise and fall consistently with mortgage interest rates) plus the
related Note Margins (which may be different from the prevailing margins on
other mortgage loans). As a result, the Mortgage Rates on the Mortgage Loans at
any time may not equal the prevailing rates for other adjustable rate loans and
accordingly, the rate of prepayment may be lower or higher than would otherwise
be anticipated.
With respect to those Mortgage Loans having Lifetime Rate Floors,
if prevailing mortgage rates were to fall below the minimum Mortgage Rates, the
rate of prepayment on such Mortgage Loans may be expected to increase and such
Mortgage Loans may prepay at a rate higher than would otherwise be anticipated
for adjustable rate mortgage loans.
All of the Mortgage Loans are assumable under certain
circumstances if, in the sole judgment of the Master Servicer, the prospective
purchaser of a Mortgaged Property is creditworthy and the security for such
Mortgage Loan is not impaired by the assumption. The extent to which the
Mortgage Loans are assumed by purchasers of the Mortgaged Properties rather than
prepaid by the related mortgagors in connection with the sales of the Mortgaged
Properties will affect the weighted average life of the Certificates and may
result in a
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prepayment experience on the Mortgage Loans that differs from that on other
conventional mortgage loans.
The yield to maturity of the Certificates will depend on the rate
of payment of principal (including by reason of principal prepayments, purchases
of Mortgage Loans in the Mortgage Pool which are Converting Mortgage Loans or
Converted Mortgage Loans or in respect of which a breach of a representation or
warranty has occurred, and liquidation of defaulted Mortgage Loans) on the
Mortgage Loans, the price paid by the holders of Certificates and the Weighted
Average Adjustable Pass-Through Rate in effect from time to time. Such yield may
be adversely affected by a higher or lower than anticipated rate of prepayments
on the Mortgage Loans. Because the Weighted Average Adjustable Pass-Through Rate
at any time is the weighted average of the Net Mortgage Rates on the Mortgage
Loans, the Weighted Average Adjustable Pass Through Rate (and the yield on the
Certificates) will be reduced as a result of prepayments, liquidations and
purchases at a faster rate for Mortgage Loans having higher Net Mortgage Rates
as opposed to Mortgage Loans having lower Net Mortgage Rates. Because Mortgage
Loans having higher Net Mortgage Rates generally have higher Mortgage Rates,
such Mortgage Loans are generally more likely to be prepaid at a faster rate
under most circumstances than are Mortgage Loans having lower Net Mortgage
Rates.
The rate of default on the Mortgage Loans will also affect the
rate of payment of principal on the Mortgage Loans. In general, defaults on
mortgage loans are expected to occur with greater frequency in their early
years, although little data is available with respect to the rate of default on
adjustable rate mortgage loans. Increases in the monthly payments to an amount
in excess of the preceding monthly payment required at the time of origination
may result in a default rate higher than that on level payment mortgage loans.
Furthermore, the Mortgagor under each Mortgage Loan was qualified on the basis
of the Mortgage Rate in effect at origination. The repayment of such Mortgage
Loans will be dependent on the ability of the Mortgagor to make larger monthly
payments following adjustments of the Mortgage Rate. The rate of default on
Mortgage Loans which are equity refinance or limited documentation mortgage
loans may be higher than for other types of Mortgage Loans.
Prepayments, liquidations and purchases of the Mortgage Loans will
result in distributions to Certificateholders of principal amounts which would
otherwise be distributed over the remaining terms of the Mortgage Loans.
Furthermore, the rate of prepayments, defaults and liquidations on, or
conversions of, the Mortgage Loans will be affected by the general economic
condition of the region of the country where the related Mortgaged Properties
are located. The risk of delinquencies and loss is greater and prepayments are
less likely in regions where a weak or deteriorating economy exists, as may be
evidenced by increasing unemployment or falling property values. See "Maturity
and Prepayment Considerations" in the Prospectus. Since the rates of payment of
principal on the Mortgage Loans will depend on future events and a variety of
factors (as described more fully herein and in the Prospectus under "Yield
Considerations" and "Maturity and Prepayment Considerations"), no assurance can
be given as to such rate or the rate of principal prepayments on the
Certificates.
The amount of interest passed through to holders of the
Certificates will be reduced by shortfalls in collections of interest resulting
from full or partial principal prepayments or
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otherwise, which will not be offset by a reduction in the Servicing Fees payable
to the Master Servicer or otherwise. See "Yield Considerations" in the
Prospectus and "Description of the Certificates--Distributions" herein for a
discussion of the effect of principal prepayments on the Mortgage Loans on the
yield to maturity of the Certificates.
The timing of changes in the rate of prepayments, liquidations and
purchases of the Mortgage Loans may significantly affect an investor's actual
yield to maturity, even if the average rate of principal payments experienced
over time is consistent with an investor's expectation.
In addition, the yield to maturity of the Certificates will depend
on the price paid by holders of the Certificates. If any Certificate is
purchased at initial issuance at a discount and the rate of prepayments on the
Mortgage Loans is lower than that originally anticipated, the purchaser's yield
to maturity will be lower than that assumed at the time of purchase. Conversely,
if any Certificate is purchased at initial issuance at a premium and the rate of
prepayments on the Mortgage Loans is higher than that originally anticipated,
the purchaser's yield to maturity will be lower than that assumed at the time of
purchase.
The first distribution on the Certificates reflecting an
adjustment to the scheduled monthly payments on a related Mortgage Loan will be
passed through to holders of Certificates on the second Distribution Date
following the date on which the adjustment to such Mortgage Rate was made.
Furthermore, adjustments in the Net Mortgage Rates are based on the Index as
reported 45 days prior to the Adjustment Date. Accordingly, the yield to
Certificateholders will be adjusted on a delayed basis relative to movements in
the Index. Although the Net Mortgage Rate of each Mortgage Loan will be adjusted
pursuant to the Index, such rate is subject to the Periodic Rate Cap and is also
limited by the Lifetime Rate Cap and any Lifetime Rate Floor applicable to such
Mortgage Loan. With respect to certain Mortgage Loans the difference between the
Net Mortgage Rate as of the Cut-off Date and the maximum Net Mortgage Rate will
be less than the Lifetime Rate Cap. Therefore, if the Index changes
substantially between Adjustment Dates, the Net Mortgage Rate may be lower than
if the Net Mortgage Rate could be adjusted based on the Index without such caps.
A number of factors affect the performance of the Index and may
cause the Index to move in a manner different from other indices. To the extent
that the Index may reflect changes in the general level of interest rates less
quickly than other indices, in a period of rising interest rates, increases in
the yield to Certificateholders due to such rising interest rates may occur
later than that which would be produced by other indices, and in a period of
declining rates, the Index may remain higher than other market interest rates
which may result in a higher level of prepayments of Mortgage Loans which adjust
in accordance with the Index than mortgage loans which adjust in accordance with
other indices.
For additional considerations relating to the yield on the
Certificates, see "Yield Considerations" and "Maturity and Prepayment
Considerations" in the Prospectus.
POOLING AND SERVICING AGREEMENT
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GENERAL
The Certificates will be issued, and the Mortgage Loans serviced
and administered, pursuant to a Pooling and Servicing Agreement (the "Pooling
and Servicing Agreement") dated as of __________ 1, 19__, among the Company, the
Master Servicer, and _____________________, as trustee (the "Trustee").
Reference is made to the Prospectus for important information in addition to
that set forth herein regarding the terms and conditions of the Pooling and
Servicing Agreement and the Certificates. The Trustee will appoint
____________________ to serve as Custodian in connection with the Certificates.
The Certificates will be transferable and exchangeable at the corporate trust
office of the Trustee, which will serve as Certificate Registrar and will be
responsible for making distributions on the Certificates and forwarding monthly
reports with respect thereto to the holders thereof. In addition to the
circumstances described in the Prospectus, the Company may terminate the Trustee
for cause under certain circumstances. The Company will provide a prospective or
actual Certificateholder without charge, on written request, a copy (without
exhibits) of the Pooling and Servicing Agreement. Requests should be addressed
to the President, Option One Mortgage Acceptance Corporation, 2020 East First
Street, Suite 100, Santa Ana, California 92705. See "Description of the
Certificates," "Servicing of Mortgage Loans" and "The Pooling Agreement" in the
Prospectus.
THE MASTER SERVICER
[Name of Master Servicer] will act as master servicer (in such
capacity, the "Master Servicer") for the Certificates pursuant to the Pooling
and Servicing Agreement.
[Further disclosure as appropriate. See Version 1 for disclosure
for [Name of Master Servicer]].
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES; SPREAD
The Servicing Fees for each Mortgage Loan are payable out of the
interest payments on such Mortgage Loan. The Servicing Fees in respect of each
Mortgage Loan will accrue at ____% per annum (the "Servicing Fee Rate") on the
outstanding principal balance of each Mortgage Loan. The Master Servicer is
obligated to pay certain ongoing expenses associated with the Trust Fund and
incurred by the Master Servicer in connection with its responsibilities under
the Pooling and Servicing Agreement, including the expenses of the Letter of
Credit and any substitute credit support and the fees of the Trustee. See
"Servicing of Mortgage Loans -Servicing and Other Compensation and Payment of
Expenses; Spread" in the Prospectus for information regarding other possible
compensation to the Master Servicer and for information regarding expenses
payable by the Master Servicer.
Pursuant to the terms of the Pooling and Servicing Agreement, the
Master Servicer will be obligated to remit to the Company or its designee, a
portion of the interest collected on each Mortgage Loan (the "Spread"). The rate
at which the Spread on each Mortgage Loan accrues will be equal to ____% per
annum.
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TERMINATION
The circumstances under which the obligations created by the
Pooling and Servicing Agreement will terminate in respect of the Certificates
are described in "Description of the Certificates--Termination; Retirement of
Certificates" in the Prospectus. The Master Servicer or the Company will have
the option (i) to purchase all remaining Mortgage Loans and other assets in the
Trust Fund, thereby effecting early retirement of the Certificates or (ii) to
purchase in whole, but not in part, the Certificates, but either such option
will not be exercisable until such time as the aggregate principal balance of
the Mortgage Loans as of the Distribution Date on which the purchase proceeds
are to be distributed to the Certificateholders is less than __% of the
aggregate principal balance of the Mortgage Loans as of the Cut-off Date. Any
such purchase of Mortgage Loans and other assets of the Trust Fund shall be made
at a price equal to the aggregate principal balance of all the Mortgage Loans
(or the fair market value of the related underlying Mortgaged Properties with
respect to defaulted Mortgage Loans as to which title to such Mortgaged
Properties has been acquired if such fair market value is less than such unpaid
principal balance) (net of any unreimbursed Advance attributable to principal),
together with one month's interest on such aggregate amount at the then
applicable Weighted Average Adjustable Pass-Through Rate.
Upon presentation and surrender of the Certificates in connection
with the termination of the Trust Fund or a purchase of Certificates under the
circumstances described above, the holders of the Certificates will receive, in
proportion to their respective Percentage Interests, an amount equal to the sum
of the principal balances of the Mortgage Loans plus one month's accrued
interest thereon at the then applicable Weighted Average Adjustable Pass-Through
Rate.
DESCRIPTION OF CREDIT ENHANCEMENT
GENERAL
All of the Mortgage Loans are the subject of credit support
coverage provided by the Letter of Credit. In addition, each Mortgage Loan is
covered by a Primary Hazard Insurance Policy as described under "Primary
Mortgage Insurance, Hazard Insurance; Claims Thereunder" in the Prospectus. See
also "Description of the Mortgage Pool--Primary Mortgage Insurance" herein.
LETTER OF CREDIT
The Letter of Credit Bank will issue the Letter of Credit to the
Trustee for the benefit of the holders of the Certificates. Subject to the
limitations described below, the Letter of Credit will be available to cover
Defaulted Mortgage Losses, Special Hazard Losses, Fraud Losses and Bankruptcy
Losses. The maximum amount available to be drawn under the Letter of Credit with
respect to all losses will initially be equal to $_________ (the initial
"Available Amount") which is equal to approximately ____% of the aggregate
principal balance of the Mortgage Loans as of the Cut-off Date. The Available
Amount at any time will be reduced by any amounts previously drawn under the
Letter of Credit (net of any amounts received or collected by the
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Master Servicer following each respective draw as subsequent recoveries on the
Mortgage Loans with respect to which such draws were made and, if appropriate,
such draws were reimbursed to the Letter of Credit Bank). The Available Amount
will be reinstated with respect to the subsequent recoveries described in the
preceding sentence, however in no event will the Available Amount be reinstated
to an amount in excess of the initial Available Amount. The Available Amount
under the Letter of Credit (if the Letter of Credit is extended in accordance
with its terms) is also subject to reduction pursuant to the terms of the
Pooling and Servicing Agreement annually beginning on the tenth anniversary of
the Cut-off Date and each anniversary thereafter, such that, beginning with the
fourteenth anniversary of the Cut-off Date and on each anniversary thereafter,
the Available Amount will not exceed ____% of the aggregate outstanding
principal balance of the Mortgage Loans, provided that such scheduled reductions
will not reduce the Available Amount below three times the principal balance of
the largest single Mortgage Loan outstanding on such anniversary, and further
provided that the Available Amount will not be reduced in accordance with the
preceding sentence if delinquency rates and losses on the Mortgage Loans exceed
certain levels as specified by the Rating Agency as set forth in the Pooling and
Servicing Agreement. The Amount Available may be further reduced from time to
time by such amounts as the Master Servicer may determine and direct the
Trustee, provided the then current rating of the Certificates is not adversely
affected.
Notwithstanding the foregoing, the maximum amount available under
the Letter of Credit in connection with Fraud Losses (the "Fraud Loss Amount")
shall initially be equal to $___________. As of any date of determination after
the Cut-off Date the Fraud Loss Amount shall equal (X) prior to the first
anniversary of the Cut-off Date an amount equal to ____% of the aggregate
principal balance of all of the Mortgage Loans as of the Cut-off Date minus the
aggregate amount of draws made under the Letter of Credit with respect to Fraud
Losses up to such date of determination, and (Y) from the first through fifth
anniversary of the Cut-off Date, an amount equal to (1) the lesser of (a) the
Fraud Loss Amount as of the most recent anniversary of the Cut-off Date and (b)
____% of the aggregate principal balance of all of the Mortgage Loans as of the
most recent anniversary of the Cut-off Date minus (2) the aggregate amount of
draws made under the Letter of Credit with respect to Fraud Losses since the
most recent anniversary of the Cut-off Date up to such date of determination.
After the fifth anniversary of the Cut-off Date the Fraud Loss Amount shall be
zero and no draws shall be made under the Letter of Credit with respect to Fraud
Losses.
The maximum amount available under the Letter of Credit in respect
of Special Hazard Losses (the "Special Hazard Amount") will equal $__________
less the sum of (A) any amounts drawn under the Letter of Credit in respect of
Special Hazard Losses (to the extent that such amounts do not exceed the lesser
of the cost of repair or replacement of the related Mortgaged Properties) and
(B) the Adjustment Amount. The Adjustment Amount on each anniversary of the
Cut-off Date will be equal to the amount, if any, by which the Special Hazard
Amount, without giving effect to the deduction of the Adjustment Amount for such
anniversary, exceeds the greater of (i) 1% (or, if greater than 1%, the highest
percentage of Mortgage Loans by principal balance in any California zip code
area) times the aggregate principal balance of all of the Mortgage Loans in the
Mortgage Pool on such anniversary and (ii) twice the principal balance of the
single Mortgage Loan in the Mortgage Pool having the largest principal balance.
As used in this Prospectus Supplement, "Special Hazard Losses" has the same
meaning set forth
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in the Prospectus except that Special Hazard Losses will not include and the
Letter of Credit will not cover losses occasioned by war, civil insurrection,
certain governmental actions, nuclear reaction and certain other risks.
As of any date of determination prior to the first anniversary of
the Cut-off Date, the maximum amount available under the Letter of Credit in
respect of Bankruptcy Losses (the "Bankruptcy Amount") will equal $__________
less the sum of any amounts drawn under the Letter of Credit for such losses up
to such date of determination. As of any day of determination on or after the
first anniversary of the Cut-off Date, the Bankruptcy Amount will equal the
excess, if any, of (1) the lesser of (a) the Bankruptcy Amount as of the
business day next preceding the most recent anniversary of the Cut-off Date (the
"Relevant Anniversary") and (b) an amount calculated pursuant to the terms of
the Pooling and Servicing Agreement, which amount as calculated will provide for
a reduction in the Bankruptcy Amount, provided that delinquency rates and losses
on all of the Mortgage Loans do not exceed certain levels as set forth in the
Pooling and Servicing Agreement, over (2) the aggregate amount of draws made
under the Letter of Credit since the Relevant Anniversary in connection with
Bankruptcy Losses. The Bankruptcy Amount and the related automatic reductions
described above may be reduced or modified upon written confirmation from the
Rating Agency that such reduction or modification will not adversely affect the
then current rating assigned to the Certificates by such Rating Agency. Such a
reduction or modification may adversely affect the coverage provided by the
Letter of Credit with respect to Bankruptcy Losses.
[Described manner in which payments will be made under the Letter
of Credit.] See "Description of Credit Enhancement--Letter of Credit" in the
Prospectus. However, the Trustee shall not make such draws under the Letter of
Credit in connection with a Bankruptcy Loss so long as the Master Servicer has
notified the Trustee in writing that the Master Servicer is diligently pursuing
any remedies that may exist in connection with the representations and
warranties made regarding the related Mortgage Loan and either (A) the related
Mortgage Loan is not in default with regard to payments due thereunder or (B)
delinquent payments of principal and interest under the related Mortgage Loan
and any premiums on any applicable Primary Hazard Insurance Policy and any
related escrow payments in respect of such Mortgage Loan are being advanced on a
current basis by the Master Servicer [or a Subservicer].
Any Mortgage Loan the unpaid principal balance of which is paid
pursuant to a draw under the Letter of Credit will be assigned to the Company
and will no longer be subject to the Pooling and Servicing Agreement. Any
subsequent recoveries with respect to such Mortgage Loans will be paid to the
Company and, following notice and, if appropriate, reimbursement of such draw to
the Letter of Credit Bank, the Available Amount under the Letter of Credit (and
the Special Hazard Amount, Fraud Loss Amount or Bankruptcy Amount, if
applicable) will be reinstated to the extent of such recovery.
The Master Servicer, in lieu of maintaining the Letter of Credit,
may reduce the coverage thereunder (including accelerating the manner in which
such coverage is reduced pursuant to the related automatic reductions),
terminate such coverage or obtain and maintain alternate forms of credit support
(including, but not limited to, other letters of credit, insurance policies,
surety bonds, reserve funds, and secured or unsecured corporate guaranties),
with
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respect to Defaulted Mortgage Losses, Special Hazard Losses, Fraud Losses and
Bankruptcy Losses, provided that prior to any such reduction, termination or
substitution the Master Servicer shall have obtained written confirmation from
the Rating Agency that such reduction, termination or substitution will not
adversely affect the then current rating assigned to the Certificates by such
Rating Agency and shall provide a copy of each confirmation to the Trustee. In
the event that the long-term debt obligations of the Letter of Credit Bank are
at any time downgraded by the Rating Agency, the Company may request the Master
Servicer to obtain alternate forms of credit support, in accordance with the
preceding sentence, but the Master Servicer is under no obligation to do so. In
lieu of making a draw under the Letter of Credit for Defaulted Mortgage Losses,
Special Hazard Losses, Fraud Losses or Bankruptcy Losses as provided above, the
Master Servicer, at its sole option, may pay the amount otherwise required to be
drawn, in which case the amount so paid will reduce the related coverage under
the Letter of Credit.
As to any Mortgage Loan which is delinquent in payment by 90 days
or more, the Master Servicer may, at its sole option, purchase such Mortgage
Loan at a price equal to 100% of the unpaid principal balance thereof plus all
accrued and unpaid interest thereon through the last day of the month in which
such purchase occurs. To the extent that the Master Servicer subsequently
experiences losses with respect to such purchased Mortgage Loans which would
have been covered by the Letter of Credit had such Mortgage Loans remained in
the Trust Fund, the Available Amount (and the Special Hazard Amount, Fraud Loss
Amount or Bankruptcy Amount, to the extent that such losses constitute Special
Hazard Losses, Fraud Losses or Bankruptcy Losses) will be reduced by an amount
equal to the entire amount of such losses.
The Letter of Credit will expire on ___________, 19__ unless
earlier terminated or extended in accordance with its terms. The Letter of
Credit contains provisions to the effect that on or before the first day of the
sixth month immediately preceding the expiration date a request may be made to
extend the expiration date. It is within the Letter of Credit Bank's sole
discretion whether to agree to such an extension. If, as of the date 30 days
prior to the expiration date, or the expiration date thereof as so extended, a
replacement Letter of Credit or alternate form of credit support has not been
delivered to the Trustee, then, pursuant to the terms of the Pooling and
Servicing Agreement, the entire remaining amount of the Letter of Credit will be
drawn by the Trustee prior to such expiration date. In that event, the amount so
paid will be held by the Trustee in the form of a reserve fund held outside of
the Trust Fund (but pledged to the Trustee and held by it in trust for the
benefit of the Certificateholders), pending the substitution of any other form
of credit support therefor, and will be applied in the same manner as described
herein regarding draws under the Letter of Credit.
LETTER OF CREDIT BANK
The Letter of Credit will be issued by the Letter of Credit Bank,
which will be the ________________________________, a _________________________.
_____________ principal executive offices are located at
________________________________.
____________________ is engaged in a broad range of banking and
financial services activities, including deposit-taking, lending and leasing,
securities brokerage services, investment
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management, investment banking, capital markets activities and foreign exchange
transactions.
[Additional disclosure as appropriate.]
The information set forth in the preceding paragraphs concerning
the Letter of Credit Bank has been provided by the Letter of Credit Bank as of
the date hereof.
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FEDERAL INCOME TAX CONSEQUENCES
Upon issuance of the Certificates, Thacher Proffitt &
Wood, counsel to the Company, will deliver the following opinion: assuming
compliance with the Pooling and Servicing Agreement, the Trust Fund will be
classified as a grantor trust under subpart E, part I of subchapter J of the
Code and not as an association taxable as a corporation or as a partnership.
The Certificates will represent interests in (i) "loans
secured by an interest in real property" within the meaning of Section
7701(a)(19)(C) of the Code; (ii) "obligations (including any participation or
certificate of beneficial ownership therein) which . . . are principally secured
by an interest in real property" within the meaning of Section 860G(a)(3)(A) of
the Code; and (iii) "real estate assets" within the meaning of Section
856(c)(5)(A) of the Code generally in the same proportion that the assets of the
Trust Fund would be so treated. In addition, interest on the Certificates will
to the same extent be considered "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.
For federal income tax purposes, the Certificates will be subject
to the "stripped bond" rules of Section 1286 of the Code. Holders of
Certificates will be required to report interest income from their Certificates
for each month in an amount equal to the income that accrues on such Certificate
in that month under a constant yield method, in accordance with the rules of the
Code relating to original issue discount. See "Certain Federal Income Tax
Consequences--Grantor Trust Funds--If Stripped Bond Rules Apply" in the
Prospectus.
In the absence of statutory or administrative clarification, it is
currently intended to base information reports or returns to the IRS and
Certificateholders using a prepayment assumption of ____ % SPA (the "Prepayment
Assumption") and on a constant yield using a representative initial offering
price for each class of Certificates. However, neither the Company, the Master
Servicer nor the Trustee will make any representation that the Mortgage Loans
will in fact prepay at a rate conforming to such Prepayment Assumption or any
other rate and Certificateholders should bear in mind that the use of a
representative initial offering price will mean that such information returns or
reports, even if otherwise accepted as accurate by the IRS, will in any event be
accurate only as to the initial holders of Certificates who bought such
Certificates at that price. See "Certain Federal Income Tax
Consequences--Grantor Trust Funds--Grantor Trust Reporting" in the Prospectus.
The Trustee will furnish, within a reasonable time after
the end of each calendar year, to each person who was a holder of a Certificate
at any time during such year, information regarding the amount of servicing
compensation received by the Master Servicer and Trustee and such other
customary factual information as it deems necessary or desirable to enable each
such person to prepare its tax returns and will furnish comparable information
to the IRS as and when required by law to do so. There is no assurance the IRS
will agree with the Trustee's information reports of such items of income and
expense. Neither the Company nor its affiliates will have any responsibility
with respect to the foregoing.
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Because all of the Mortgage Loans were originated after July 18,
1984, a holder of a Certificate 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 Certificate will not be
subject to United States federal income or withholding tax in respect of a
distribution on a 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). See "Certain Federal
Income Tax Consequences--REMICs--Foreign Investors in REMIC Certificates" in the
Prospectus for a definition of "United States person".
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement dated ______________, 19__ the Underwriter has agreed to purchase and
the Company has agreed to sell to the Underwriter the Certificates.
The Underwriting Agreement provides that the obligation of the
Underwriter to pay for and accept delivery of the Certificates is subject to,
among other things, the receipt of certain legal opinions and to the conditions,
among others, that no stop order suspending the effectiveness of the Company's
Registration Statement shall be in effect, and that no proceedings for such
purpose shall be pending before or threatened by the Securities and Exchange
Commission.
The distribution of the Certificates by the Underwriter may be
effected from time to time in one or more negotiated transactions, or otherwise,
at varying prices to be determined at the time of sale. Proceeds to the Company
from the sale of the Certificates, before deducting expenses payable by the
Company, will be _____% of the aggregate principal balance of the Certificates
plus accrued interest thereon from the Cut-off Date. The Underwriter may effect
such transactions by selling the Certificates to or through dealers, and such
dealers may receive compensation in the form of underwriting discounts,
concessions or commissions from the Underwriter for whom they act as agent. In
connection with the sale of the Certificates, the Underwriter may be deemed to
have received compensation from the Company in the form of underwriting
compensation. The Underwriter and any dealers that participate with the
Underwriter in the distribution of the Certificates may be deemed to be
underwriters and any profit on the resale of the Certificates positioned by them
may be deemed to be underwriting discounts and commissions under the Securities
Act of 1933.
The Underwriting Agreement provides that the Company will
indemnify the Underwriter, and under limited circumstances the Underwriter will
indemnify the Company, against certain civil liabilities under the Securities
Act of 1933, or contribute to payments required to be made in respect thereof.
There can be no assurance that a secondary market for the
Certificates will develop or, if it does develop, that it will continue. The
primary source of information available to
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investors concerning the Certificates will be the monthly statements discussed
in the Prospectus under "Description of the Certificates--Reports to
Certificateholders," which will include information as to the outstanding
principal balance of the Certificates and the status of the applicable form of
credit enhancement. There can be no assurance that any additional information
regarding the Certificates will be available through any other source. In
addition, the Company is not aware of any source through which price information
about the Certificates will be generally available on an ongoing basis. The
limited nature of such information regarding the Certificates may adversely
affect the liquidity of the Certificates, even if a secondary market for the
Certificates becomes available.
LEGAL OPINIONS
Certain legal matters relating to the Certificates will be passed
upon for the Company by _____________________ and for the Underwriter by
_________________________.
RATING
It is a condition to the issuance of the Certificates that they be
rated not lower than "___" by _________________________ ___________.
The ratings of _______ on mortgage pass-through certificates
address the likelihood of the receipt by certificateholders of all distributions
on the underlying mortgage loans to which they are entitled. _______ ratings on
pass-through certificates do not represent any assessment of the likelihood that
principal prepayments will be made by mortgagors or the degree to which such
prepayments might differ from that originally anticipated. _______ ratings on
pass-through certificates do not represent any assessment of the Master
Servicer's [or the related Subservicer's] ability to purchase Converting
Mortgage Loans, or the Master Servicer's ability to purchase Converted Mortgage
Loans. In the event that neither the related Subservicer nor the Master Servicer
purchases a Converting or Converted Mortgage Loan, investors might suffer a
lower than anticipated yield. The rating does not address the possibility that
Certificateholders might suffer a lower than anticipated yield.
The Company has not requested a rating on the Certificates by any
rating agency other than _______. However, there can be no assurance as to
whether any other rating agency will rate the Certificates, or, if it does, what
rating would be assigned by any such other rating agency. A rating on the
Certificates by another rating agency, if assigned at all, may be lower than the
rating assigned to the Certificates by _______.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating. In the event that the rating
initially assigned to the Certificates is subsequently lowered for any reason,
no person or entity is obligated to provide any additional support or credit
enhancement with respect to the Certificates.
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<PAGE>
LEGAL INVESTMENT
The Certificates will constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA") so long as they are rated in at least the second highest rating
category by one of the Rating Agencies, and, as such, are legal investments for
certain entities to the extent provided in SMMEA. SMMEA provides, however, that
states could override its provisions on legal investment and restrict or
condition investment in mortgage related securities by taking statutory action
on or prior to October 3, 1991. Certain states have enacted legislation which
overrides the preemption provisions of SMMEA.
The Company makes no representations as to the proper
characterization of the Certificates for legal investment or other purposes, or
as to the ability of particular investors to purchase the Certificates under
applicable legal investment restrictions. These uncertainties may adversely
affect the liquidity of the Certificates. Accordingly, all institutions whose
investment activities are subject to legal investment laws and regulations,
regulatory capital requirements or review by regulatory authorities should
consult with their legal advisors in determining whether and to what extent the
Certificates constitutes a legal investment or is subject to investment, capital
or other restrictions.
See "Legal Investment Matters" in the Prospectus.
-36-
<PAGE>
======================================= ======================================
No dealer, salesman or other person
has been authorized to give any
information or to make any
representations not contained in this OPTION ONE MORTGAGE ACCEPTANCE
Prospectus Supplement and the Prospectus CORPORATION
and, if given or made, such information
or representations must not be relied
upon as having been authorized by the $________________
Company or by the Underwriter. This
Prospectus Supplement and the Prospectus
do not constitute an offer to sell, or a
solicitation of an offer to buy, the
securities offered hereby to anyone in MORTGAGE PASS-THROUGH
any jurisdiction in which the person CERTIFICATES
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 SERIES 199__-__
this Prospectus Supplement and the
Prospectus nor any sale made hereunder
shall, under any circumstances, create
an implication that information herein
or therein is correct as of any time
since the date of this Prospectus
Supplement or the Prospectus.
----------------
TABLE OF CONTENTS
Page
----
Prospectus Supplement
Summary............................ S-
Description of the Mortgage Pool... S-
Description of the Certificates.... S-
Certain Yield and Prepayment
Considerations................ S-
Pooling and Servicing Agreement.... S-
Federal Income Tax
Consequences.................. S- ------------------
Method of Distribution............. S-
Legal Opinions..................... S- PROSPECTUS SUPPLEMENT
Rating............................. S-
Legal Investment................... S- ------------------
Prospectus
Summary of Prospectus..............
Risk Factors.......................
The Mortgage Pools.................
Servicing of Mortgage Loans........ -----------------------------
Description of the Certificates....
Subordination......................
Description of Credit Enhancement..
Purchase Obligations...............
Primary Mortgage Insurance, Hazard
Insurance; Claims Thereunder..
The Company........................
The Pooling Agreement.............. _______, 19___
Yield Considerations...............
Maturity and Prepayment
Considerations................
Certain Legal Aspects of Mortgage
Loans ........................
Federal Income Tax
Consequences..................
State and Other Tax Consequences...
ERISA Considerations...............
Legal Investment Matters...........
Use of Proceeds....................
Methods of Distribution............
Legal Matters......................
Financial Information..............
Rating.............................
Index of Principal Definitions.....
======================================= ======================================
<PAGE>
Subject to Completion Dated January 3, 1997
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 PRELIMINARY 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.
PROSPECTUS
Mortgage Pass-Through Certificates
Option One Mortgage Acceptance Corporation
The mortgage pass-through certificates (the "Offered Certificates") offered
hereby and by the supplements hereto (each, a "Prospectus Supplement") will be
offered from time to time in series. The Offered Certificates of each series,
together with any other mortgage pass-through certificates of such series, are
collectively referred to herein as the "Certificates."
Each series of Certificates will represent in the aggregate the entire
beneficial ownership interest in a trust fund (with respect to any series, the
"Trust Fund") to be established by Option One Mortgage Acceptance Corporation
(the "Company"). Each Trust Fund will consist primarily of a segregated pool (a
"Mortgage Pool") of one- to four-family residential first and/or junior mortgage
loans or manufactured housing conditional sales contracts and installment loan
agreements (collectively, the "Mortgage Loans"), acquired by the Company from
one or more affiliated or unaffiliated institutions (the "Sellers"). See "The
Company" and "The Mortgage Pools." The Mortgage Loans and other assets in each
Trust Fund, which may only include, if applicable, reinvestment income, reserve
funds, cash accounts and various forms of credit enhancement as described herein
(collectively, the "Trust Fund Assets") will be held in trust for the benefit of
the holders of the related series of Certificates (the "Certificateholders")
pursuant to a pooling and servicing agreement or other agreement (in either
case, a "Pooling Agreement") as more fully described herein under "The Pooling
Agreement" and in the related Prospectus Supplement. Information regarding the
Offered Certificates of a series, and the general characteristics of the
Mortgage Loans and other Trust Fund Assets in the related Trust Fund, will be
set forth in the related Prospectus Supplement.
Each series of Certificates will include one or more classes. Each class of
Certificates of any series will represent the right, which right may be senior
or subordinate to the rights of one or more of the other classes of the
Certificates, to receive a specified portion of payments of principal or
interest (or both) on the Mortgage Loans and the other Trust Fund Assets in the
related Trust Fund in the manner described herein under "Description of the
Certificates" and in the related Prospectus Supplement. A series may include one
or more classes of Certificates entitled to principal distributions, with
disproportionate, nominal or no interest distributions, or to interest
distributions, with disproportionate, nominal or no principal distributions. A
series may include two or more classes of Certificates which differ as to the
timing, sequential order, priority of payment, pass-through rate or amount of
distributions of principal or interest or both.
THE COMPANY'S ONLY OBLIGATIONS WITH RESPECT TO A SERIES OF CERTIFICATES WILL BE
PURSUANT TO CERTAIN REPRESENTATIONS AND WARRANTIES MADE BY THE COMPANY, EXCEPT
AS PROVIDED IN THE RELATED PROSPECTUS SUPPLEMENT. THE MASTER SERVICER (THE
"MASTER SERVICER") FOR ANY SERIES OF CERTIFICATES WILL BE NAMED IN THE RELATED
PROSPECTUS SUPPLEMENT. THE PRINCIPAL OBLIGATIONS OF THE MASTER SERVICER WILL BE
PURSUANT TO ITS CONTRACTUAL SERVICING OBLIGATIONS (WHICH INCLUDE ITS LIMITED
OBLIGATION TO MAKE CERTAIN ADVANCES IN THE EVENT OF DELINQUENCIES IN PAYMENTS ON
THE RELATED MORTGAGE LOANS). SEE "DESCRIPTION OF THE CERTIFICATES."
If so specified in the related Prospectus Supplement, the Trust Fund for a
series of Certificates may include any one or any combination of a financial
guaranty insurance policy, mortgage pool insurance policy, letter of credit,
bankruptcy bond, special hazard insurance policy or reserve fund. In addition to
or in lieu of the foregoing, credit enhancement may be provided by means of
subordination of one or more classes of Certificates or by Overcollateralization
(as defined herein). See "Description of Credit Enhancement."
The rate of payment of principal of each class of Certificates entitled to a
portion of principal payments on the Mortgage Loans in the related Mortgage Pool
and the Trust Fund Assets will depend on the priority of payment of such class
and the rate and timing of principal payments (including by reason of
prepayments, defaults, liquidations and repurchases of Mortgage Loans) on such
Mortgage Loans and other Trust Fund Assets. A rate of principal payment slower
or faster than that anticipated may affect the yield on a class of Certificates
in the manner described herein and in the related Prospectus Supplement. See
"Yield Considerations."
One or more separate elections may be made to treat a Trust Fund or a designated
portion thereof as a real estate mortgage investment conduit ("REMIC") for
federal income tax purposes. If applicable, the Prospectus Supplement for a
series of Certificates will specify which class or classes of the related series
of Certificates will be considered to be regular interests in the related REMIC
and which class of Certificates or other interests will be designated as the
residual interest in the related REMIC. See "Federal Income Tax Consequences"
herein.
SEE "RISK FACTORS" BEGINNING ON PAGE __ HEREIN AND ON PAGE S-__ IN THE RELATED
PROSPECTUS SUPPLEMENT FOR A DISCUSSION OF SIGNIFICANT MATTERS AFFECTING
INVESTMENTS IN THE CERTIFICATES.
PROCEEDS OF THE ASSETS IN THE RELATED TRUST FUND AND PAYMENTS UNDER ANY
CERTIFICATE INSURANCE POLICY ARE THE SOLE SOURCE OF PAYMENTS ON THE
CERTIFICATES. THE CERTIFICATES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF
THE COMPANY, THE MASTER SERVICER OR ANY OF THEIR RESPECTIVE AFFILIATES. NEITHER
THE CERTIFICATES OF ANY SERIES NOR THE UNDERLYING MORTGAGE LOANS WILL BE
GUARANTEED OR INSURED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY THE
COMPANY, THE MASTER SERVICER OR ANY OF THEIR RESPECTIVE AFFILIATES, EXCEPT AS
SET FORTH IN THE RELATED PROSPECTUS SUPPLEMENT.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The Offered Certificates may be offered through one or more different methods,
including offerings through underwriters, as more fully described under "Methods
of Distribution" and in the related Prospectus Supplement.
There will be no secondary market for the Offered Certificates of any series
prior to the offering thereof. There can be no assurance that a secondary market
for any of the Offered Certificates will develop or, if it does develop, that it
will continue. The Offered Certificates will not be listed on any securities
exchange.
-1-
<PAGE>
Retain this Prospectus for future reference. This Prospectus may not be used to
consummate sales of securities offered hereby unless accompanied by a Prospectus
Supplement.
The date of this Prospectus is January __, 1997.
-2-
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND ANY PROSPECTUS
SUPPLEMENT WITH RESPECT HERETO AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON. THIS PROSPECTUS AND ANY PROSPECTUS
SUPPLEMENT WITH RESPECT HERETO DO NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE CERTIFICATES
OFFERED HEREBY AND THEREBY OR AN OFFER OF SUCH CERTIFICATES TO ANY PERSON IN ANY
STATE OR OTHER JURISDICTION IN WHICH SUCH OFFER WOULD BE UNLAWFUL. THE DELIVERY
OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT INFORMATION HEREIN IS CORRECT
AS OF ANY TIME SUBSEQUENT TO ITS DATE; HOWEVER, IF ANY MATERIAL CHANGE OCCURS
WHILE THIS PROSPECTUS IS REQUIRED BY LAW TO BE DELIVERED, THIS PROSPECTUS WILL
BE AMENDED OR SUPPLEMENTED ACCORDINGLY.
TABLE OF CONTENTS
CAPTION PAGE
SUMMARY OF PROSPECTUS........................................................ 5
RISK FACTORS................................................................. 14
THE MORTGAGE POOLS........................................................... 19
General............................................................. 19
The Mortgage Loans.................................................. 20
Underwriting Standards.............................................. 24
Qualifications of Originators and Sellers........................... 26
Representations by Sellers.......................................... 26
SERVICING OF MORTGAGE LOANS.................................................. 28
General............................................................. 28
The Master Servicer................................................. 28
Collection and Other Servicing Procedures;
Mortgage Loan Modifications......................................... 29
Subservicers........................................................ 30
Special Servicers................................................... 31
Servicing and Other Compensation and
Payment of Expenses; Spread......................................... 33
Evidence as to Compliance........................................... 34
DESCRIPTION OF THE CERTIFICATES.............................................. 34
General............................................................. 34
Form of Certificates................................................ 36
Assignment of Trust Fund Assets..................................... 37
Certificate Account................................................. 39
Distributions....................................................... 43
Distributions of Interest and Principal on the
Certificates........................................................ 43
Pre-Funding Account................................................. 44
Distributions on the Certificates in Respect of
Prepayment Premiums................................................. 45
Allocation of Losses and Shortfalls................................. 45
Advances............................................................ 45
Reports to Certificateholders....................................... 46
DESCRIPTION OF CREDIT ENHANCEMENT............................................ 48
General............................................................. 48
Subordinate Certificates............................................ 49
Overcollateralization............................................... 49
Financial Guaranty Insurance Policy................................. 49
Mortgage Pool Insurance Policies.................................... 50
Letter of Credit.................................................... 51
Special Hazard Insurance Policies................................... 52
Bankruptcy Bonds.................................................... 53
Reserve Funds....................................................... 53
Maintenance of Credit Enhancement................................... 54
Reduction or Substitution of Credit
Enhancement......................................................... 56
PURCHASE OBLIGATIONS......................................................... 56
PRIMARY MORTGAGE INSURANCE, HAZARD
INSURANCE;
CLAIMS THEREUNDER............................................................ 57
General............................................................. 57
Primary Mortgage Insurance Policies................................. 57
Hazard Insurance Policies........................................... 59
FHA Insurance....................................................... 60
THE COMPANY.................................................................. 60
THE POOLING AGREEMENT........................................................ 61
General............................................................. 61
Certain Matters Regarding the Master
Servicer and the Company............................................ 61
Events of Default................................................... 62
Rights Upon Event of Default........................................ 62
Amendment........................................................... 63
Termination; Retirement of Certificates............................. 63
The Trustee......................................................... 64
Duties of the Trustee............................................... 65
Certain Matters Regarding the Trustee............................... 65
Resignation and Removal of the Trustee.............................. 65
YIELD CONSIDERATIONS......................................................... 65
MATURITY AND PREPAYMENT
CONSIDERATIONS............................................................... 68
CERTAIN LEGAL ASPECTS OF MORTGAGE
LOANS........................................................................ 70
Single Family Loans................................................. 70
Contracts........................................................... 70
Foreclosure on Mortgages............................................ 72
Repossession with respect to Contracts.............................. 74
Rights of Redemption................................................ 75
Anti-Deficiency Legislation and Other
Limitations on Lenders.............................................. 76
Junior Mortgages.................................................... 77
Consumer Protection Laws with respect to
Contracts........................................................... 78
Environmental Legislation........................................... 78
Enforceability of Certain Provisions................................ 78
Subordinate Financing............................................... 79
Applicability of Usury Laws......................................... 80
Alternative Mortgage Instruments.................................... 80
Formaldehyde Litigation with respect to
Contracts........................................................... 81
Soldiers' and Sailors' Civil Relief Act of
1940................................................................ 81
FEDERAL INCOME TAX CONSEQUENCES.............................................. 82
General............................................................. 82
REMICS.............................................................. 83
Grantor Trust Funds.................................................100
STATE AND OTHER TAX CONSEQUENCES.............................................109
ERISA CONSIDERATIONS.........................................................110
Tax-Exempt Investors................................................111
LEGAL INVESTMENT MATTERS.....................................................111
USE OF PROCEEDS..............................................................112
METHODS OF DISTRIBUTION......................................................112
LEGAL MATTERS................................................................114
FINANCIAL INFORMATION........................................................114
RATING.......................................................................114
INDEX OF PRINCIPAL DEFINITIONS...............................................115
-3-
<PAGE>
UNTIL 90 DAYS AFTER THE DATE OF EACH PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE RELATED OFFERED CERTIFICATES, WHETHER OR NOT
PARTICIPATING IN THE DISTRIBUTION THEREOF, MAY BE REQUIRED TO DELIVER THIS
PROSPECTUS AND THE RELATED PROSPECTUS SUPPLEMENT. THIS DELIVERY REQUIREMENT IS
IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934 (the "Exchange Act") and in accordance therewith
files reports and other information with the Securities and Exchange Commission
(the "Commission"). Such reports and other information filed by the Company can
be inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and its Regional
Offices located as follows: Chicago Regional Office, 500 West Madison, 14th
Floor, Chicago, Illinois 60661; New York Regional Office, Seven World Trade
Center, New York, New York 10048. Copies of such material can also be obtained
from the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates and electronically through the
Commission's Electronic Data Gathering, Analysis and Retrieval system at the
Commission's Web site (http:\\www.sec.gov). The Company does not intend to send
any financial reports to Certificateholders.
This Prospectus does not contain all of the information set forth in
the Registration Statement (of which this Prospectus forms a part) and exhibits
thereto which the Company has filed with the Commission under the Securities Act
of 1933 (the "Securities Act") and to which reference is hereby made.
REPORTS TO CERTIFICATEHOLDERS
The Master Servicer or other designated person will be required to
provide periodic unaudited reports concerning each Trust Fund to all registered
holders of Offered Certificates of the related series as are required under the
Exchange Act and the rules and regulations of the Commission thereunder. See
"Description of the Certificates--Reports to Certificateholders."
The Company intends to make a written request to the staff of the
Commission that the staff either (i) issue an order pursuant to Section 12(h) of
the Exchange Act exempting the Company from certain reporting requirements under
the Exchange Act with respect to each Trust Fund or (ii) state that the staff
will not recommend that the Commission take enforcement action if the Company
fulfills its reporting obligations as described in its written request. If such
request is granted, the Company will file or cause to be filed with the
Commission as to each Trust Fund the periodic unaudited reports to holders of
the Offered Certificates referenced in the preceding paragraph; however, because
of the nature of the Trust Funds, it is unlikely that any significant additional
information will be filed. In addition, because of the limited number of
Certificateholders expected for each series, the Company anticipates that a
significant portion of such reporting requirements will be permanently suspended
following the first fiscal year for the related Trust Fund.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
There are incorporated herein and in the related Prospectus Supplement
by reference all documents and reports filed or caused to be filed by the
Company with respect to a Trust Fund pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act, prior to the termination of the offering of the
Offered Certificates of the related series. The Company will provide or cause to
be provided without charge to each person to whom this Prospectus is delivered
in connection with the offering of one or more classes of Offered Certificates,
upon written or oral request of such person, a copy of any or all such reports
incorporated herein by reference, in each case to the extent such reports relate
to one or more of such classes of such Offered Certificates, other than the
exhibits to such documents, unless such exhibits are specifically incorporated
by reference in such documents. Requests should be directed in writing to Option
One Mortgage Acceptance Corporation, 2020 East First Street, Suite 100, Santa
Ana Heights, California 92705, or by telephone at (714) 558-7700. The Company
has determined that its financial statements will not be material to the
offering of any Offered Certificates.
-4-
<PAGE>
SUMMARY OF PROSPECTUS
The following summary 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
Prospectus Supplement to be prepared and delivered in connection with the
offering of Offered Certificates of such series. Capitalized terms used in this
summary that are not otherwise defined shall have the meanings ascribed thereto
elsewhere in this Prospectus. An index indicating where certain capitalized
terms used herein are defined appears at the end of this Prospectus.
Securities Offered.....................Mortgage pass-through certificates. The
mortgage pass-through certificates (the
"Offered Certificates") offered hereby
and by the various Prospectus Supplements
with respect hereto will be offered from
time to time in series. The Offered
Certificates of each series, together
with any other mortgage pass-through
certificates of such series, are
collectively referred to herein as the
"Certificates."
Risk Factors...........................There are material risks associated with
an investment in the Offered
Certificates. See "Risk Factors" herein.
Company................................Option One Mortgage Acceptance
Corporation (the "Company"), a
wholly-owned subsidiary of Option One
Mortgage Corporation ("OOMC"). See "The
Company."
Master Servicer........................The master servicer (the "Master
Servicer"), if any, for a series of
Certificates will be specified in the
related Prospectus Supplement and may be
OOMC or another affiliate of the Company.
See "Servicing of Mortgage Loans--The
Master Servicer."
Special Servicer.......................The special servicer (the "Special
Servicer"), if any, for a series of
Certificates will be specified, or the
circumstances under which a Special
Servicer will be appointed will be
described, in the related Prospectus
Supplement. Any Special Servicer may be
an affiliate of the Company. See
"Servicing of Mortgage Loans--Special
Servicers."
-5-
<PAGE>
Trustee................................The trustee (the "Trustee") for each
series of Certificates will be specified
in the related Prospectus Supplement. See
"The Pooling Agreement--The Trustee."
The Certificates.......................Each series of Certificates will include
one or more classes of Certificates which
will represent in the aggregate the
entire beneficial ownership interest in a
segregated pool of Mortgage Loans
(exclusive of any portion of interest
payments (the "Spread") relating to each
Mortgage Loan retained by the Company or
any of its affiliates), and certain other
assets, which may only include, if
applicable, reinvestment income, reserve
funds, cash accounts and various forms of
credit enhancement as described herein
(collectively, the "Trust Fund Assets,"
and the related trust fund, the "Trust
Fund") and will be issued pursuant to a
pooling and servicing agreement or other
agreement specified in the related
Prospectus Supplement (in either case, a
"Pooling Agreement"). Except for certain
Strip Certificates and REMIC Residual
Certificates (each as hereinafter
described), each series of Certificates,
or class of Certificates in the case of a
series consisting of two or more classes,
will have a stated principal balance and
will be entitled to distributions of
interest based on a specified interest
rate or rates (each, a "Pass-Through
Rate"). Each series or class of
Certificates may have a different
Pass-Through Rate, which may be a fixed,
variable or adjustable Pass-Through Rate,
or any combination of two or more such
Pass- Through Rates. The related
Prospectus Supplement will specify the
Pass-Through Rate or Rates for each
series or class of Certificates, or the
initial Pass-Through Rate or Rates and
the method for determining subsequent
changes to the Pass-Through Rate or
Rates.
A series may include one or more classes
of Certificates ("Strip Certificates")
entitled (i) to principal distributions,
with disproportionate, nominal or no
interest distributions, or (ii) to
interest distributions, with
disproportionate, nominal or no principal
distributions. In addition,
-6-
<PAGE>
a series may include two or more classes
of Certificates which differ as to
timing, sequential order, priority of
payment, pass-through rate or amount of
distributions of principal or interest or
both, or as to which distributions of
principal or interest or both on any
class may be made upon the occurrence of
specified events, in accordance with a
schedule or formula, or on the basis of
collections from designated portions of
the Mortgage Pool, which series may
include one or more classes of
Certificates ("Accrual Certificates"), as
to which certain accrued interest will
not be distributed but rather will be
added to the principal balance thereof on
each Distribution Date, as hereinafter
defined, in the manner described in the
related Prospectus Supplement.
If so provided in the related Prospectus
Supplement, a series of Certificates may
include one or more classes of
Certificates (collectively, the "Senior
Certificates") which are senior to one or
more classes of Certificates
(collectively, the "Subordinate
Certificates") in respect of certain
distributions of principal and interest
and allocations of losses on Mortgage
Loans. In addition, certain classes of
Senior (or Subordinate) Certificates may
be senior to other classes of Senior (or
Subordinate) Certificates in respect of
such distributions or losses. As to each
series, one or more elections may be made
to treat the related Trust Fund or a
designated portion thereof as a "real
estate mortgage investment conduit" or
"REMIC" as defined in the Internal
Revenue Code of 1986, as amended (the
"Code"). See "Description of the
Certificates."
The Certificates will not be guaranteed
or insured by any governmental agency or
instrumentality, by the Company, the
Master Servicer or any of their
respective affiliates or by any other
person, except as set forth in the
related Prospectus Supplement.
Certificates of one or more classes of a
series may be issued in book-entry form.
See "Description of the
Certificates--Form of Certificates."
-7-
<PAGE>
The Mortgage Pools.....................Each Trust Fund will consist primarily of
a segregated pool (a "Mortgage Pool") of
mortgage loans and/or manufactured
housing conditional sales and installment
loan agreements (collectively, the
"Mortgage Loans") or interests therein.
Each Mortgage Loan will be secured by a
first or junior lien on or security
interest in (i) a one- to four- family
residential property or (ii) a new or
used manufactured home (each, a
"Mortgaged Property"). The Mortgaged
Properties may be located in any one of
the 50 states, the District of Columbia
or the Commonwealth of Puerto Rico. For a
description of the types of Mortgage
Loans that may be included in the
Mortgage Pools, see "The Mortgage
Pools--The Mortgage Loans." The Mortgage
Loans will not be guaranteed or insured
by the Company, any of its affiliates or,
except as set forth in the related
Prospectus Supplement, by any
governmental agency or instrumentality or
any other person.
If specified in the related Prospectus
Supplement, Mortgage Loans which are
converting or converted from an
adjustable-rate to a fixed-rate or
certain Mortgage Loans for which the
Mortgage Rate has been reset may be
repurchased by the Company or purchased
by the related Master Servicer, the
applicable Seller or another party, or a
designated remarketing agent will use its
best efforts to arrange the sale thereof
as further described herein under "The
Mortgage Pool--The Mortgage Loans."
If so specified in the related Prospectus
Supplement, some Mortgage Loans may be
delinquent or non-performing as of the
date of their deposit in the related
Trust Fund.
Each Mortgage Loan included in a Trust
Fund will have been selected by the
Company from among those purchased,
either directly or indirectly, from a
prior holder thereof (a "Seller"), which
prior holder may or may not be the
originator of such Mortgage Loan and may
be an affiliate of the Company.
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A Current Report on Form 8-K will be
available upon request to purchasers of
the Offered Certificates of the related
series and will be filed, together with
the related Pooling Agreement, with the
Securities and Exchange Commission within
fifteen days after such initial issuance.
Interest Distributions.................Except as otherwise specified herein or
in the related Prospectus Supplement,
interest on each class of Offered
Certificates of each series, other than
Strip Certificates or Accrual
Certificates (prior to the time when
accrued interest becomes payable
thereon), will accrue at the applicable
Pass-Through Rate (which may be a fixed,
variable or adjustable rate or any
combination thereof) on such class's
principal balance outstanding from time
to time and will be remitted on the 25th
day (or, if such day is not a business
day, on the next succeeding business day)
of each month, commencing with the month
following the month in which the Cut-off
Date (as defined in the applicable
Prospectus Supplement) occurs (each, a
"Distribution Date"). Distributions, if
any, with respect to interest on Strip
Certificates will be calculated and made
on each Distribution Date as described
herein under "Description of the
Certificates--Distribution of Interest
and Principal on the Certificates" and 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 of such
class on each Distribution Date, and will
thereafter bear interest at the
applicable Pass-Through Rate.
Distributions of interest with respect to
one or more classes of Offered
Certificates (or, in the case of a class
of Accrual Certificates, accrued interest
to be added to the principal balance
thereof) may be reduced as a result of
the occurrence of certain delinquencies
not covered by advances, losses,
prepayments and other contingencies
described herein and in the related
Prospectus Supplement. See "Yield
Considerations" and "Description of the
Certificates--Distribution of Interest
and Principal on the Certificates."
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Principal Distributions................Except as otherwise specified in the
related Prospectus Supplement, principal
distributions on the Certificates of each
series will be payable on each
Distribution Date, commencing with the
Distribution Date in the month following
the month in which the Cut-off Date
occurs, to the holders of the
Certificates of such series, or of the
class or classes of Certificates then
entitled there- to, on a pro rata basis
among all such Certificates or among the
Certificates of any such class, in
proportion to their respective
outstanding principal balances, or in the
priority and manner otherwise specified
in the related Prospectus Supplement.
Strip Certificates with no principal
balance will not receive distributions in
respect of principal. Distributions of
principal with respect to any series of
Certificates, or with respect to one or
more classes included therein, may be
reduced to the extent of certain
delinquencies not covered by advances or
losses not covered by the applicable form
of credit enhancement. See "The Mortgage
Pools," "Maturity and Prepayment
Considera- tions" and "Description of the
Certificates."
Pre-Funding Account....................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 to be applied to
acquire additional Mortgage Loans from
the Sellers, subject to the limitations
set forth herein under "Description of
the Certificates-Pre- Funding Account."
Monies on deposit in the Pre- Funding
Account and not applied to acquire such
additional Mortgage Loans within the time
set forth in the related Pooling
Agreement or other applicable agreement
may be treated as principal and applied
in the manner described in the related
Prospectus Supplement.
Credit Enhancement.....................If so specified in the Prospectus
Supplement, the Trust Fund with respect
to any series of Certificates may include
any one or any combination of a financial
guaranty insurance policy, mortgage pool
insurance policy, letter of credit,
special hazard insurance policy,
bankruptcy bond or reserve fund to
provide full or partial
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coverage for certain defaults and losses
relating to the Mortgage Loans. Credit
support also may be provided in the form
of subordination of one or more classes
of Certificates in a series under which
losses are first allocated to any
Subordinate Certificates up to a
specified limit or in the form of
Overcollateralization . Any form of
credit enhancement may have certain
limitations and exclusions from coverage
thereunder, which will be described in
the related Prospectus Supplement. Losses
not covered by any form of credit
enhancement will be borne by the holders
of the related Certificates (or certain
classes thereof). To the extent not set
forth herein, the amount and types of
coverage, the identification of any
entity providing the coverage, the terms
of any subordination and related
information will be set forth in the
Prospectus Supplement relating to a
series of Certificates. See "Description
of Credit Enhancement" and
"Subordination."
Advances...............................If and to the extent described in the
related Prospectus Supplement, and
subject to any limitations specified
therein, the Master Servicer for any
Trust Fund will be obligated to make, or
have the option of making, certain
advances with respect to delinquent
scheduled payments on the Mortgage Loans
in such Trust Fund. Any such advance made
by the Master Servicer with respect to a
Mortgage Loan is recoverable by it as
described herein under "Description of
the Certificates--Advances" either from
recoveries on or in respect of the
specific Mortgage Loan or, with respect
to any advance subsequently determined to
be nonrecoverable from recoveries on or
in respect of the specific Mortgage Loan,
out of funds otherwise distributable to
the holders of the related series of
Certificates, which may include the
holders of any Senior Certificates of
such series. If and to the extent
provided in the Prospectus Supplement for
a series of Certificates, the Master
Servicer will be entitled to receive
interest on its advances for the period
that they are outstanding payable from
amounts in the related Trust Fund.
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<PAGE>
Optional Termination...................The Master Servicer, the Company or a
person specified in the related
Prospectus Supplement (other than the
holder of any Class of Offered
Certificates, other than the REMIC
Residual Certificates, if offered) may at
its option either (i) effect early
retirement of a series of Certificates
through the purchase of the assets in the
related Trust Fund or (ii) purchase, in
whole but not in part, the Certificates
specified in the related Prospectus
Supplement; in each case under the
circumstances and in the manner set forth
herein under "The Pooling
Agreement--Termination; Retirement of
Certificates" and in the related
Prospectus Supplement.
Legal Investment......................At the date of issuance, as to each
series, each class of Offered
Certificates will be rated at the request
of the Company in one of the four highest
rating categories by one or more
nationally recognized statistical rating
agencies (each, a "Rating Agency"). If so
specified in the related Prospectus
Supplement, each class of Offered
Certificates that is rated in one of the
two highest rating categories by at least
one Rating Agency will constitute
"mortgage related securities" for
purposes of the Secondary Mortgage Market
Enhancement Act of 1984, as amended
("SMMEA"). Investors whose investment
authority is subject to legal
restrictions should consult their own
legal advisors to determine whether and
to what extent the Offered Certificates
of any series constitute legal
investments for them. See "Legal
Investment Matters."
ERISA Considerations...................A fiduciary of an employee benefit plan
and certain other retirement plans and
arrangements, including individual
retirement accounts and annuities, Keogh
plans, and collective investment funds
and separate accounts in which such
plans, accounts, annuities or
arrangements are invested, that is
subject to the Employee Retirement Income
Security Act of 1974, as amended
("ERISA"), or Section 4975 of the Code
(each, a "Plan") should carefully review
with its legal advisors whether the
purchase or holding of Offered
Certificates
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<PAGE>
could give rise to a transaction that is
prohibited or is not otherwise
permissible either under ERISA or Section
4975 of the Code. Investors are advised
to consult their counsel and to review
"ERISA Considerations" herein and in the
related Prospectus Supplement.
Federal Income
Tax Consequences.....................Offered Certificates of each series will
constitute or evidence ownership of
either (i) interests ("Grantor Trust
Certificates") in a Trust Fund treated as
a grantor trust under applicable
provisions of the Code, or (ii) "regular
interests" ("REMIC Regular Certificates")
or "residual interests" ("REMIC Residual
Certificates") in a Trust Fund, or a
portion thereof, treated as a REMIC under
Sections 860A through 860G of the Code.
Investors are advised to consult their
tax advisors and to review "Federal
Income Tax Conse- quences" herein and in
the related Prospectus Supplement.
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RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Offered Certificates:
LIMITED LIQUIDITY. There can be no assurance that a secondary market
for the Offered Certificates of any series will develop or, if it does develop,
that it will provide Certificateholders with liquidity of investment or that it
will continue for the life of the Offered Certificates of any series. The
Prospectus Supplement for any series of Offered Certificates may indicate that
an underwriter specified therein intends to establish a secondary market in such
Certificates, however no underwriter will be obligated to do so. As a result,
any resale prices that may be available for any Certificate in any market that
may develop may be at a discount from the initial offering price or the fair
market value thereof. The Offered Certificates will not be listed on any
securities exchange.
LIMITED OBLIGATIONS. The Offered Certificates will not represent an
interest in or obligation of the Company, the Master Servicer or any of their
respective affiliates. The only obligations of the foregoing entities with
respect to the Certificates or the Mortgage Loans will be the obligations (if
any) of the Company pursuant to certain limited representations and warranties
made with respect to the Mortgage Loans, the Master Servicer's servicing
obligations under the related Pooling Agreement (including, if and to the extent
described in the related Prospectus Supplement, its limited obligation to make
certain advances in the event of delinquencies on the Mortgage Loans) and, if
and to the extent expressly described in the related Prospectus Supplement,
certain limited obligations of the Master Servicer in connection with a Purchase
Obligation or an agreement to purchase or act as remarketing agent with respect
to a Convertible Mortgage Loan upon conversion to a fixed rate. Except as set
forth in the related Prospectus Supplement, neither the Certificates nor the
underlying Mortgage Loans will be guaranteed or insured by any governmental
agency or instrumentality, by the Company, the Master Servicer or any of their
respective affiliates or by any other person. Proceeds of the assets included in
the related Trust Fund for each series of Certificates (including the Mortgage
Loans and any form of credit enhancement) will be the sole source of payments on
the Certificates, and there will be no recourse to the Company, the Master
Servicer or any other entity in the event that such proceeds are insufficient or
otherwise unavailable to make all payments provided for under the Certificates.
LIMITATIONS, REDUCTION AND SUBSTITUTION OF CREDIT ENHANCEMENT. With
respect to each series of Certificates, credit enhancement will be provided in
limited amounts to cover certain types of losses on the underlying Mortgage
Loans. Credit enhancement will be provided in one or more of the forms referred
to herein, including, but not limited to: subordination of other classes of
Certificates of the same series; a Financial Guaranty Insurance Policy; a
Mortgage Pool Insurance Policy; a Letter of Credit; a Purchase Obligation; a
Special Hazard Insurance Policy; a Bankruptcy Bond; a Reserve Fund;
Overcollateralization; or any combination thereof. See "Subordination" and
"Description of Credit Enhancement" herein. Regardless of the form of credit
enhancement provided, the amount of coverage will be limited in amount and in
most cases will be subject to periodic reduction in accordance with a schedule
or formula. Furthermore, such credit enhancements may provide only very limited
coverage as to certain types of losses or risks, and may provide no coverage as
to certain other types of losses or risks. In the event losses exceed the amount
of coverage provided by any credit enhancement or losses of a type not covered
by any credit enhancement occur, such losses will be borne by the holders of the
related Certificates (or certain classes thereof). The Company, the Master
Servicer or other specified person will generally be permitted to reduce,
terminate or substitute all or a portion of the credit enhancement for any
series of Certificates, if each applicable Rating Agency indicates that the
then-current rating(s) thereof will not be adversely affected. The rating(s) of
any series of Certificates by any applicable Rating Agency may be lowered
following the initial issuance thereof as a result of the downgrading of the
obligations of any applicable credit support provider, or as a result of losses
on the related Mortgage Loans in excess of the levels contemplated by such
Rating Agency at the time of its
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initial rating analysis. Neither the Company, the Master Servicer nor any of
their respective affiliates will have any obligation to replace or supplement
any credit enhancement, or to take any other action to maintain any rating(s) of
any series of Certificates. See "Description of Credit Enhancement--Reduction of
Credit Enhancement."
LIMITED NATURE OF RATINGS. It is a condition to the issuance of the
Certificates that each class of Certificates be rated in one of the four highest
rating categories by a nationally recognized statistical 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 the rating on any Certificate, and, accordingly, there can be no
assurance that the ratings assigned to any Certificate 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 or the market value of the related Certificates may be adversely
affected. See "Rating" herein.
FORECLOSURE RISKS OF THE MORTGAGE LOANS. Statutory and judicial
limitations on foreclosure procedures may delay recovery in respect of the
mortgaged property and, in some instances, limit the amount that may be
recovered by the foreclosing lender. Foreclosure procedures may vary from state
to state. Two primary methods of foreclosing a mortgage instrument are judicial
foreclosure, involving court proceedings, and non-judicial foreclosure pursuant
to a power of sale granted in the mortgage instrument. A foreclosure action is
subject to most of the delays and expenses of other lawsuits if defenses are
raised or counterclaims are asserted. Delays may also result from difficulties
in locating necessary defendants. Non-judicial foreclosures may be subject to
delays resulting from state laws mandating the recording of notice of default
and notice of sale and, in certain states, notice to any party
having an interest of record in the real property, including junior lienholders.
Certain states have adopted "anti-deficiency" statutes that limit the ability of
a lender to realize upon assets securing a mortgage loan. In addition, United
States courts have traditionally imposed general equitable principles to limit
the remedies available to lenders in foreclosure actions that are perceived by
the court as harsh or unfair. The effect of such statutes and judicial
principles may be to delay and/or reduce distributions in respect of the
Certificates. See "Certain Legal Aspects of Mortgage Loans--Foreclosure on
Mortgage Loans."
RISKS OF MORTGAGE LOANS AND PROPERTY VALUE. An investment in securities
such as the Certificates that are secured by mortgage loans and/or manufactured
housing conditional sales contracts and installment loan agreements may be
affected by, among other things, a decline in real estate values and changes in
the borrowers' financial condition. No assurance can be given that values of the
Mortgaged Properties have remained or will remain at their levels on the dates
of origination of the related Mortgage Loans. If the residential real estate
market should experience an overall decline in property values such that the
outstanding balances of the Mortgage Loans, and any secondary financing on the
Mortgaged Properties, in a particular Mortgage Pool 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. In particular, Mortgage Loans with high
Loanto-Value Ratios will be affected by any decline in real estate values. Any
decrease in the value of such Mortgage Loans may result in the allocation of
losses which are not covered by credit enhancement to the Certificates.
RISKS OF NON-CONFORMING MORTGAGE LOANS. Certain Mortgage Loans may be
underwritten in accordance with underwriting standards which are primarily
intended to provide single family mortgage loans for non-conforming credits. A
"non-conforming credit" means a mortgage loan which is ineligible for purchase
by FNMA or FHLMC due to credit characteristics that do not meet the FNMA or
FHLMC underwriting guidelines, including mortgagors whose creditworthiness and
repayment ability do not satisfy such FNMA or FHLMC underwriting guidelines and
mortgagors who may have a record of credit write-offs, outstanding judgments,
prior bankruptcies and other credit items that do not satisfy such FNMA or FHLMC
underwriting guidelines. Accordingly, Mortgage Loans underwritten under the
Originators'
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<PAGE>
non-conforming credit underwriting standards are likely to experience rates of
delinquency, foreclosure and loss that are higher, and may be substantially
higher, than mortgage loans originated in accordance with the FNMA or FHLMC
underwriting guidelines. Any such losses, to the extent not covered by credit
enhancement, may affect the yield to maturity of the Certificates.
RISKS OF MORTGAGE LOANS WITH VARIABLE PAYMENTS. Certain of the types of
loans which may be included in the Mortgage Pools may involve additional
uncertainties not present in traditional types of loans. In the case of Mortgage
Loans that are subject to negative amortization, due to the addition to
principal balance of Deferred Interest, the principal balances of such Mortgage
Loans could be increased to an amount equal to or in excess of the value of the
underlying Mortgaged Properties, thereby increasing the likelihood of default.
In the case of Buydown Loans, the increase in the Monthly Payment by the
Mortgagor during and following the Buydown Period may result in an increased
risk of default on such Buydown Loan. Certain of the Mortgage Loans provide for
escalating or variable payments by the borrower under the Mortgage Loan (the
"Mortgagor"), as to which the Mortgagor is generally qualified on the basis of
the initial payment amount. In some instances, Mortgagors may not be able to
make their loan payments as such payments increase and thus the likelihood of
default will increase. Any risks associated with the variable payments of such
Mortgage Loans may affect the yield to maturity of the Certificates to the
extent losses caused by such risks which are not covered by credit enhancement
are allocated to the Certificates.
RISKS OF MORTGAGE LOANS WITH JUNIOR LIENS. Certain Mortgage Loans may
be secured by second liens on the related Mortgaged Properties. As to Mortgage
Loans secured by second mortgages, the proceeds from any liquidation, insurance
or condemnation proceedings will be available to satisfy the outstanding balance
of such Mortgage Loans only to the extent that the claims of such senior
mortgages have been satisfied in full, including any related foreclosure costs.
In addition, the holder of a Mortgage Loan secured by a junior mortgage may not
foreclose on the Mortgaged Property unless it forecloses subject to the senior
mortgages, in which case it must either pay the entire amount due on the senior
mortgages to the senior mortgagees at or prior to the foreclosure sale or
undertake the obligation to make payments on the senior mortgages in the event
the mortgagor is in default thereunder. The Trust Fund will not have any source
of funds to satisfy the senior mortgages or make payments due to the senior
mortgagees, although the Master Servicer or Subservicer may, at its option,
advance such amounts to the extent deemed recoverable and prudent. In the event
that such proceeds from a foreclosure or similar sale of the related Mortgaged
Property are insufficient to satisfy all senior liens and the Mortgage Loan in
the aggregate, the Trust Fund, as the holder of the junior lien, and,
accordingly, Holders of one or more classes of the Certificates, to the extent
not covered by credit enhancement, are likely to (i) incur losses in
jurisdictions in which a deficiency judgment against the borrower is not
available, and (ii) incur losses if any deficiency judgment obtained is not
realized upon. In addition, the rate of default of second mortgage loans may be
greater than that of mortgage loans secured by first liens on comparable
properties.
RISKS OF MORTGAGE LOAN 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 than will be experienced on mortgage loans generally.
For example, a region's economic condition and housing market may be directly,
or indirectly, adversely affected by natural disasters or civil disturbances
such as earthquakes, hurricanes, floods, eruptions or riots. The economic impact
of any of these types of events may also be felt in areas beyond the region
immediately affected by the disaster or disturbance. The Mortgage Loans securing
certain series of Certificates may be concentrated in these regions, and such
concentration may present risk considerations in addition to those generally
present for similar mortgage-backed securities without such concentration.
Moreover, as described below, any Mortgage Loan for which a breach of a
representation or warranty exists will remain in the related Trust Fund in the
event that a Seller is unable, or disputes its obligation, to repurchase such
Mortgage Loan and such a breach does not also constitute
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a breach of any representation made by any other person. In such event, any
resulting losses will be borne by the related form of credit enhancement, to the
extent available. Any risks associated with Mortgage Loan concentration may
affect the yield to maturity of the Certificates to the extent losses caused by
such risks which are not covered by credit enhancement are allocated to the
Certificates.
RISKS ASSOCIATED WITH BALLOON LOANS. Certain of the Mortgage Loans
included in a Trust Fund may not be fully amortizing (or may not amortize at
all) over their terms to maturity and, thus, will require substantial payments
of principal and interest (that is, balloon payments) at their stated maturity.
Mortgage Loans of this type involve a greater degree of risk than
self-amortizing loans because the ability of a Mortgagor to make a balloon
payment typically will depend upon its ability either to fully refinance the
loan or to sell the related Mortgaged Property at a price sufficient to permit
the Mortgagor to make the balloon payment. The ability of a Mortgagor to
accomplish either of these goals will be affected by a number of factors,
including the value of the related Mortgaged Property, the level of available
mortgage rates at the time of sale or refinancing, the Mortgagor's equity in the
related Mortgaged Property, prevailing general economic conditions and the
availability of credit for loans secured by comparable real properties. Any
risks associated with the Balloon Loans may affect the yield to maturity of the
Certificates to the extent losses caused by such risks which are not covered by
credit enhancement are allocated to the Certificates.
RISKS WITH RESPECT TO MORTGAGE LOANS WITH LIMITED RECOURSE. It is
anticipated that some or all of the Mortgage Loans included in any Trust Fund
will be nonrecourse loans or loans for which recourse may be restricted or
unenforceable. As to those Mortgage Loans, recourse in the event of Mortgagor
default will be limited to the specific real property and other assets, if any,
that were pledged to secure the Mortgage Loan. However, even with respect to
those Mortgage Loans that provide for recourse against the Mortgagor and its
assets generally, there can be no assurance that enforcement of such recourse
provisions will be practicable, or that the other assets of the Mortgagor will
be sufficient to permit a recovery in respect of a defaulted Mortgage Loan in
excess of the liquidation value of the related Mortgaged Property. Any risks
associated with Mortgage Loans with no or limited recourse may affect the yield
to maturity of the Certificates to the extent losses caused by such risks which
are not covered by credit enhancement are allocated to the Certificates.
RISKS OF UNDERWRITING STANDARDS OF UNAFFILIATED SELLERS. Mortgage Loans
to be included in a Mortgage Pool will have been purchased by the Company,
either directly or indirectly from Sellers. Such Mortgage Loans will generally
have been originated in accordance with underwriting standards acceptable to the
Company and generally described herein under "The Mortgage Pools--Underwriting
Standards" or such alternative underwriting criteria as may be described in the
related Prospectus Supplement. However, in some cases, particularly those
involving Unaffiliated Sellers, the Company may not be able to establish the
underwriting standards used in the origination of the related Mortgage Loans. In
those cases, the related Prospectus Supplement will include a statement to such
effect, will describe any related risks, and will reflect what, if any,
reunderwriting of the related Mortgage Loans was done by the Company or any of
its affiliates. To the extent the Mortgage Loans cannot be reunderwritten or the
underwriting criteria cannot be verified, the Mortgage Loans may suffer losses
greater than they would had they been directly underwritten by the Company or an
affiliate thereof. Any such losses, to the extent not covered by credit
enhancement, may affect the yield to maturity of the Certificates.
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LEGAL AND REGULATORY RISKS. Applicable federal and state laws generally
regulate interest rates and other charges, require certain disclosures, prohibit
unfair and deceptive practices, regulate debt collection, and require licensing
of the originators of the mortgage loans and contracts. Depending on the
provisions of the applicable law and the specified facts and circumstances
involved, violations of those laws, policies and principles may limit the
ability to collect all or part of the principal of or interest on the Mortgage
Loans and may entitle the borrower to a refund of amounts previously paid. See
"Certain Legal Aspects of Mortgage Loans" herein. To the extent such laws and
regulations result in losses on the mortgage loans, the yield to maturity of the
Certificates, to the extent not covered by credit enhancement, may be affected.
YIELD AND PREPAYMENT CONSIDERATIONS. The yield to maturity of the
Offered Certificates of each series will depend on, among other things, the rate
and timing of principal payments (including prepayments, liquidations due to
defaults, and repurchases due to conversion of ARM Loans to fixed interest rate
loans or breaches of representations and warranties) on the related Mortgage
Loans and the price paid by Certificateholders. Such yield may be adversely
affected by a higher or lower than anticipated rate of prepayments on the
related Mortgage Loans. The yield to maturity on Strip Certificates will be
extremely sensitive to the rate of prepayments on the related Mortgage Loans. In
addition, the yield to maturity on certain other types of classes of
Certificates, including Accrual Certificates, Certificates with a Pass-Through
Rate which fluctuates inversely with an index or certain other classes in a
series including more than one class of Certificates, may be relatively more
sensitive to the rate of prepayment on the related Mortgage Loans than other
classes of Certificates. In addition, to the extent amounts in any Pre-Funding
Account have not been used to purchase additional Mortgage Loans, holders of the
Certificates may receive an additional prepayment. Prepayments are influenced by
a number of factors, including prevailing mortgage market interest rates, local
and regional economic conditions and homeowner mobility. See "Yield
Considerations" and "Maturity and Prepayment Considerations" herein.
ENVIRONMENTAL RISKS OF THE MORTGAGE LOANS. To the extent the Master
Servicer acquires title to any Mortgaged Property with contaminated with or
affected by hazardous wastes or hazardous substances, the Mortgage Loans may
incur losses. See "Servicing of Mortgage Loans--Realization Upon or Sale of
Defaulted Mortgage Loans" and "Certain Legal Aspects of Mortgage
Loans--Environmental Legislation." To the extent such environmental risks result
in losses on the mortgage loans, the yield to maturity of the Certificates, to
the extent not covered by credit enhancement, may be affected.
ERISA CONSIDERATIONS. Generally, ERISA applies to investments made by
employee benefit plans and transactions involving the assets of such plans. Due
to the complexity of regulations that govern such plans, prospective investors
that are subject to ERISA are urged to consult their own counsel regarding
consequences under ERISA of acquisition, ownership and disposition of the
Offered Certificates of any series. See "ERISA Considerations".
FEDERAL TAX CONSIDERATIONS REGARDING REMIC RESIDUAL CERTIFICATES.
Holders of REMIC Residual Certificates will be required to report on their
federal income tax returns as ordinary income their PRO RATA share of the
taxable income of the REMIC, regardless of the amount or timing of their receipt
of cash payments, as described under "Federal Income Tax Consequences--REMICs".
Accordingly, under certain circumstances, holders of Offered Certificates that
constitute REMIC Residual Certificates may have taxable income and tax
liabilities arising from such investment during a taxable year in excess of the
cash received during such period. The requirement that holders of REMIC Residual
Certificates report their PRO RATA share of the taxable income and net loss of
the REMIC will continue until the principal balances of all classes of
Certificates of the related series have been reduced to zero, even though
holders of REMIC Residual Certificates have received full payment of their
stated interest and principal. A portion (or, in certain circumstances, all) of
such Certificateholder's share of the REMIC taxable income may be treated as
"excess inclusion" income to such holder, which (i) generally
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will not be subject to offset by losses from other activities, (ii) for a
tax-exempt holder, will be treated as unrelated business taxable income and
(iii) for a foreign holder, will not qualify for exemption from withholding tax.
Individual holders of REMIC Residual Certificates may be limited in their
ability to deduct servicing fees and other expenses of the REMIC. In addition,
REMIC Residual Certificates are subject to certain restrictions on transfer.
Because of the special tax treatment of REMIC Residual Certificates, the taxable
income arising in a given year on a REMIC Residual Certificate will not be equal
to the taxable income associated with investment in a corporate bond or stripped
instrument having similar cash flow characteristics and pre-tax yield.
Therefore, the after-tax yield on a REMIC Residual Certificate may be
significantly less than that of a corporate bond or stripped instrument having
similar cash flow characteristics.
THE MORTGAGE POOLS
GENERAL
Each Mortgage Pool will consist primarily of Mortgage Loans, minus the
Spread, if any, or any other interest retained by the Company or any affiliate
of the Company. The Mortgage Loans may consist of Single Family Loans and
Contracts, each as described below.
The Mortgage Loans (other than the Contracts) will be evidenced by
promissory notes ("Mortgage Notes") and secured by mortgages, deeds of trust or
other similar security instruments ("Mortgages") that, in each case, create a
first or junior lien on the related Mortgagor's fee or leasehold interest in the
related Mortgaged Property. The Mortgaged Properties for such loans may consist
of attached or detached one-family dwelling units, two- to four-family dwelling
units, condominiums, townhouses, row houses, individual units in planned-unit
developments and certain other individual dwelling units (a "Single Family
Property" and the related loans, "Single Family Loans"), which in each case may
be owner-occupied or may be a vacation, second or non-owner-occupied home.
The "Contracts" will consist of manufactured housing conditional sales
contracts and installment loan agreements each secured by a Manufactured Home.
The "Manufactured Homes" securing the Contracts will consist of manufactured
homes within the meaning of 42 United States Code, Section 5402(6), which
defines a "manufactured home" as "a structure, transportable in one or more
sections, which in the traveling mode, is eight body feet or more in width or
forty body feet or more in length, or, when erected on site, is three hundred
twenty or more square feet, and which is built on a permanent chassis and
designed to be used as a dwelling with or without a permanent foundation when
connected to the required utilities, and includes the plumbing, heating, air
conditioning, and electrical systems contained therein; except that such term
shall include any structure which meets all the requirements of this paragraph
except the size requirements and with respect to which the manufacturer
voluntarily files a certification required by the Secretary of Housing and Urban
Development and complies with the standards established under this chapter."
Mortgaged Properties may be located in any one of the 50 states, the
District of Columbia or the Commonwealth of Puerto Rico.
The Mortgage Loans will not be guaranteed or insured by the Company,
any of its affiliates or, except as set forth in the related Prospectus
Supplement, by any governmental agency or instrumentality or other person.
However, if so specified in the related Prospectus Supplement, the Mortgage
Loans may be insured by the Federal Housing Administration (the "FHA" and such
loans, "FHA Loans"). See "Description of Primary Insurance Policies--FHA
Insurance."
A Mortgage Pool may include Mortgage Loans that are delinquent or
non-performing as of the date the related series of Certificates is issued. In
that case, the related Prospectus Supplement will set
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forth, as to each such Mortgage Loan, available information as to the period of
such delinquency or non-performance and any other information relevant for a
prospective purchaser to make an investment decision.
Each Mortgage Loan will be selected by the Company for inclusion in a
Mortgage Pool from among those purchased by the Company, either directly or
through its affiliates, from banks, savings and loan associations, mortgage
bankers, investment banking firms, the Resolution Trust Corporation (the "RTC"),
the Federal Deposit Insurance Corporation (the "FDIC") and other mortgage loan
originators or sellers not affiliated with the Company ("Unaffiliated Sellers")
or from OOMC, the parent of the Company, and its affiliates ("Affiliated
Sellers"; Unaffiliated Sellers and Affiliated Sellers are collectively referred
to herein as "Sellers"). If a Mortgage Pool is composed of Mortgage Loans
acquired by the Company directly from Unaffiliated Sellers, the related
Prospectus Supplement will specify the extent of Mortgage Loans so acquired. The
characteristics of the Mortgage Loans are as described in the related Prospectus
Supplement. Other mortgage loans available for purchase by the Company may have
characteristics which would make them eligible for inclusion in a Mortgage Pool
but were not selected for inclusion in such Mortgage Pool.
Under certain circumstances, the Mortgage Loans to be included in a
Mortgage Pool will be delivered either directly or indirectly to the Company by
one or more Sellers identified in the related Prospectus Supplement,
concurrently with the issuance of the related series of Certificates (a
"Designated Seller Transaction"). Such Certificates may be sold in whole or in
part to any such Seller in exchange for the related Mortgage Loans, or may be
offered under any of the other methods described herein under "Methods of
Distribution." The related Prospectus Supplement for a Mortgage Pool composed of
Mortgage Loans acquired by the Company pursuant to a Designated Seller
Transaction will generally include information, provided by the related Seller,
about the Seller, the Mortgage Loans and the underwriting standards applicable
to the Mortgage Loans. None of the Company or, unless it is the Seller, OOMC or
any of their affiliates will make any representation or warranty with respect to
such Mortgage Loans, or any representation as to the accuracy or completeness of
such information provided by the Seller.
THE MORTGAGE LOANS
Each of the Mortgage Loans will be a type of mortgage loan described or
referred to in paragraphs numbered (1) through (7) below, with any variations
described in the Prospectus Supplement:
(1) Fixed-rate, fully-amortizing mortgage loans (which may
include mortgage loans converted from adjustable-rate mortgage loans or
otherwise modified) providing for level monthly payments of principal
and interest and terms at origination or modification of not more than
approximately 15 years;
(2) Fixed-rate, fully-amortizing mortgage loans (which may
include mortgage loans converted from adjustable-rate mortgage loans or
otherwise modified) providing for level monthly payments of principal
and interest and terms at origination or modification of more than 15
years, but not more than approximately 25 or 30 years;
(3) Fully-amortizing adjustable-rate mortgage loans ("ARM
Loans") having an original or modified term to maturity of not more
than approximately 25 or 30 years with a related interest rate (a
"Mortgage Rate") which generally adjusts initially either three months,
six months or one, three, five or seven years subsequent to the initial
payment date, and thereafter at either three-month, six-month, one-year
or other intervals (with corresponding adjustments in the amount of
monthly payments) over the term of the mortgage loan to equal the sum
of a fixed
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percentage set forth in the related Mortgage Note (the "Note Margin")
and an index*. The related Prospectus Supplement will set forth the
relevant index and the highest, lowest and weighted average Note Margin
with respect to the ARM Loans in the related Mortgage Pool. The related
Prospectus Supplement will also indicate any periodic or lifetime
limitations on changes in any per annum Mortgage Rate at the time of
any adjustment. If specified in the related Prospectus Supplement, an
ARM Loan may include a provision that allows the Mortgagor to convert
the adjustable Mortgage Rate to a fixed rate at some point during the
term of such ARM Loan generally not later than six to ten years
subsequent to the initial payment date;
(4) Negatively-amortizing ARM Loans having original or
modified terms to maturity of not more than approximately 25 or 30
years with Mortgage Rates which generally adjust initially on the
payment date referred to in the related Prospectus Supplement, and on
each of certain periodic payment dates thereafter, to equal the sum of
the Note Margin and the index. The scheduled monthly payment will be
adjusted as and when described in the related Prospectus Supplement to
an amount that would fully amortize the Mortgage Loan over its
remaining term on a level debt service basis; provided that increases
in the scheduled monthly payment may be subject to certain limitations
as specified in the related Prospectus Supplement. If an adjustment to
the Mortgage Rate on a Mortgage Loan causes the amount of interest
accrued thereon in any month to exceed the scheduled monthly payment on
such mortgage loan, the resulting amount of interest that has accrued
but is not then payable ("Deferred Interest") will be added to the
principal balance of such Mortgage Loan;
(5) Fixed-rate, graduated payment mortgage loans having
original or modified terms to maturity of not more than approximately
15 years with monthly payments during the first year calculated on the
basis of an assumed interest rate which is a specified percentage below
the Mortgage Rate on such mortgage loan. Such monthly payments increase
at the beginning of the second year by a specified percentage of the
monthly payment during the preceding year and each year thereafter to
the extent necessary to amortize the mortgage loan over the remainder
of its approximately 15-year term. Deferred Interest, if any, will be
added to the principal balance of such mortgage loans;
(6) Fixed-rate, graduated payment mortgage loans having
original or modified terms to maturity of not more than approximately
25 or 30 years with monthly payments during the first year calculated
on the basis of an assumed interest rate which is a specified
percentage below the Mortgage Rate. Such monthly payments increase at
the beginning of the second year by a specified percentage of the
monthly payment during the preceding year and each year thereafter to
the extent necessary to fully amortize the mortgage loan within its
approximately 25- or 30-year term. Deferred Interest, if any, will be
added to the principal balance of such mortgage loan; or
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* The index (the "Index") for a particular Mortgage Pool will be specified
in the related Prospectus Supplement and may include one of the following
indexes: (i) the weekly average yield on U.S. Treasury securities adjusted to a
constant maturity of either six months or one year, (ii) the weekly auction
average investment yield of U.S. Treasury bills of six months, (iii) the daily
Bank Prime Loan rate made available by the Federal Reserve Board, (iv) the cost
of funds of member institutions for the Federal Home Loan Bank of San Francisco,
(v) the interbank offered rates for U.S. dollar deposits in the London market,
each calculated as of a date prior to each scheduled interest rate adjustment
date which will be specified in the related Prospectus Supplement or (vi) any
other index described in the related Prospectus Supplement.
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(7) Mortgage loans ("Balloon Loans") having payment terms
similar to those described in one of the preceding paragraphs numbered
(1) through (6), calculated on the basis of an assumed amortization
term, but providing for a payment (a "Balloon Payment") of all
outstanding principal and interest to be made at the end of a specified
term that is shorter than such assumed amortization term.
If provided in the related Prospectus Supplement, certain of the
Mortgage Pools may contain Single Family Loans secured by junior liens, and the
related senior liens ("Senior Liens") may not be included in the Mortgage Pool.
The primary risk to holders of such Mortgage Loans secured by junior liens is
the possibility that adequate funds will not be received in connection with a
foreclosure of the related Senior Liens to satisfy fully both the Senior Liens
and the Mortgage Loan. In the event that a holder of a Senior Lien forecloses on
a Mortgaged Property, the proceeds of the foreclosure or similar sale will be
applied first to the payment of court costs and fees in connection with the
foreclosure, second to real estate taxes, third in satisfaction of all
principal, interest, prepayment or acceleration penalties, if any, and any other
sums due and owing to the holder of the Senior Liens. The claims of the holders
of the Senior Liens will be satisfied in full out of proceeds of the liquidation
of the related Mortgaged Property, if such proceeds are sufficient, before the
Trust Fund as holder of the junior lien receives any payments in respect of the
Mortgage Loan. If the Master Servicer were to foreclose on any such Mortgage
Loan, it would do so subject to any related Senior Liens. In order for the debt
related to the Mortgage Loan to be paid in full at such sale, a bidder at the
foreclosure sale of such Mortgage Loan would have to bid an amount sufficient to
pay off all sums due under the Mortgage Loan and the Senior Liens or purchase
the Mortgaged Property subject to the Senior Liens. In the event that such
proceeds from a foreclosure or similar sale of the related Mortgaged Property
are insufficient to satisfy all Senior Liens and the Mortgage Loan in the
aggregate, the Trust Fund, as the holder of the junior lien, and, accordingly,
holders of one or more classes of the Certificates of the related series bear
(i) the risk of delay in distributions while a deficiency judgment against the
borrower is obtained and (ii) the risk of loss if the deficiency judgment is not
realized upon. Moreover, deficiency judgments may not be available in certain
jurisdictions or the Mortgage Loan may be nonrecourse. In addition, a junior
mortgagee may not foreclose on the property securing a junior mortgage unless it
forecloses subject to the senior mortgages.
If so specified in the related Prospectus Supplement, a Mortgage Loan
may contain a prohibition on prepayment (the period of such prohibition, a
"Lock-out Period" and its date of expiration, a "Lockout Expiration Date") or
require payment of a premium or a yield maintenance penalty (a "Prepayment
Penalty").
Certain information, including information regarding loan-to-value
ratios (each, a "Loan-to-Value Ratio") at origination of the Mortgage Loans
underlying each series of Certificates, will be supplied in the related
Prospectus Supplement. In the case of most Mortgage Loans, the "Loan-to-Value
Ratio" at origination is defined generally as the ratio, expressed as a
percentage, of the principal amount of the Mortgage Loan at origination (or, if
appropriate, at the time of an appraisal subsequent to origination), plus, in
the case of a Mortgage Loan secured by a junior lien, the outstanding principal
balance of the related Senior Liens, to the Value of the related Mortgaged
Property. The "Value" of a Mortgaged Property securing a Single Family Loan will
generally be equal to the lesser of (x) the appraised value determined in an
appraisal obtained at origination of such Mortgage Loan, if any, or, if the
related Mortgaged Property has been appraised subsequent to origination, the
value determined in such subsequent appraisal and (y) the sales price for the
related Mortgaged Property (except in certain circumstances in which there has
been a subsequent appraisal). In the case of certain refinanced, modified or
converted Single Family Loans, the "Value" of the related Mortgaged Property
will be equal to the lesser of (x) the appraised value of the related Mortgaged
Property determined at origination or in an appraisal, if any, obtained at the
time of refinancing, modification or conversion and (y) the sales price of the
related Mortgage Property or, if the Mortgage Loan is not a rate and term
refinance
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Mortgage Loan and if the Mortgaged Property was owned for a relatively short
period of time prior to refinancing, modification or conversion, the sum of the
sales price of the related Mortgaged Property plus the added value of any
improvements. Certain Mortgage Loans which are subject to negative amortization
will have Loan-to-Value Ratios which will increase after origination as a result
of such negative amortization. For purposes of calculating the Loan-to-Value
Ratio of a Contract relating to a new Manufactured Home, the "Value" is no
greater than the sum of a fixed percentage of the list price of the unit
actually billed by the manufacturer to the dealer (exclusive of freight to the
dealer site), including "accessories" identified in the invoice (the
"Manufacturer's Invoice Price"), plus the actual cost of any accessories
purchased from the dealer, a delivery and set-up allowance, depending on the
size of the unit, and the cost of state and local taxes, filing fees and up to
three years prepaid hazard insurance premiums. With respect to a used
Manufactured Home, the "Value" is the least of the sale price, the appraised
value, and the National Automobile Dealer's Association book value plus prepaid
taxes and hazard insurance premiums. The appraised value of a Manufactured Home
is based upon the age and condition of the manufactured housing unit and the
quality and condition of the mobile home park in which it is situated, if
applicable. Manufactured Homes are less likely than other types of housing to
experience appreciation in value and more likely to experience depreciation in
value over time.
The Mortgage Loans may be "equity refinance" Mortgage Loans, as to
which a portion of the proceeds are used to refinance an existing mortgage loan,
and the remaining proceeds may be retained by the Mortgagor or used for purposes
unrelated to the Mortgaged Property. Alternatively, the Mortgage Loans may be
"rate and term refinance" Mortgage Loans, as to which substantially all of the
proceeds (net of related costs incurred by the Mortgagor) are used to refinance
an existing mortgage loan or loans (which may include a junior lien) primarily
in order to change the interest rate or other terms thereof. The Mortgage Loans
may be mortgage loans which have been consolidated and/or have had various terms
changed, mortgage loans which have been converted from adjustable rate mortgage
loans to fixed rate mortgage loans, or construction loans which have been
converted to permanent mortgage loans. In addition, a Mortgaged Property may be
subject to secondary financing at the time of origination of the Mortgage Loan
or thereafter.
If provided for in the related Prospectus Supplement, a Mortgage Pool
may contain ARM Loans which allow the Mortgagors to convert the adjustable rates
on such Mortgage Loans to a fixed rate at some point during the life of such
Mortgage Loans (each such Mortgage Loan, a "Convertible Mortgage Loan"),
generally not later than six to ten years subsequent to the date of origination,
depending upon the length of the initial adjustment period. If specified in the
related Prospectus Supplement, upon any conversion, the Company, the related
Master Servicer, the applicable Seller or a third party will purchase the
converted Mortgage Loan as and to the extent set forth in the related Prospectus
Supplement. Alternatively, if specified in the related Prospectus Supplement,
the Company or the related Master Servicer (or another party specified therein)
may agree to act as remarketing agent with respect to such converted Mortgage
Loans and, in such capacity, to use its best efforts to arrange for the sale of
converted Mortgage Loans under specified conditions. Upon the failure of any
party so obligated to purchase any such converted Mortgage Loan, the inability
of any remarketing agent to arrange for the sale of the converted Mortgage Loan
and the unwillingness of such remarketing agent to exercise any election to
purchase the converted Mortgage Loan for its own account, the related Mortgage
Pool will thereafter include both fixed rate and adjustable rate Mortgage Loans.
If provided for in the related Prospectus Supplement, certain of the
Mortgage Loans may be subject to temporary buydown plans ("Buydown Mortgage
Loans") pursuant to which the monthly payments made by the Mortgagor during the
early years of the Mortgage Loan (the "Buydown Period") will be less than the
scheduled monthly payments on the Mortgage Loan, the resulting difference to be
made up from (i) an amount (such amount, exclusive of investment earnings
thereon, being hereinafter referred to as "Buydown Funds") contributed by the
seller of the Mortgaged Property or another source and placed in a custodial
account (the "Buydown Account"), (ii) if the Buydown Funds are contributed
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on a present value basis, investment earnings on such Buydown Funds or (iii)
additional buydown funds to be contributed over time by the Mortgagor's employer
or another source. See "Description of the Certificates--Payments on Mortgage
Loans; Deposits to Certificate Account." Generally, the Mortgagor under each
Buydown Mortgage Loan will be qualified at the applicable lower monthly payment.
Accordingly, the repayment of a Buydown Mortgage Loan is dependent on the
ability of the Mortgagor to make larger level monthly payments after the Buydown
Funds have been depleted and, for certain Buydown Mortgage Loans, during the
Buydown Period.
The Prospectus Supplement for each series of Certificates will contain
information as to the type of Mortgage Loans that will be included in the
related Mortgage Pool. Each Prospectus Supplement applicable to a series of
Certificates will include certain information, generally as of the Cut-off Date
and to the extent then available to the Company, on an approximate basis, as to
(i) the aggregate principal balance of the Mortgage Loans, (ii) the type of
property securing the Mortgage Loans, (iii) the original or modified terms to
maturity of the Mortgage Loans, (iv) the range of principal balances of the
Mortgage Loans at origination or modification, (v) the earliest origination or
modification date and latest maturity date of the Mortgage Loans, (vi) the
Loan-to-Value Ratios of the Mortgage Loans, (vii) the Mortgage Rate or range of
Mortgage Rates borne by the Mortgage Loans, (viii) if any of the Mortgage Loans
are ARM Loans, the applicable Index, the range of Note Margins and the weighted
average Note Margin, (ix) the geographical distribution of the Mortgage Loans,
(x) the number of Buydown Mortgage Loans, if applicable, and (xi) the percent of
ARM Loans which are convertible to fixed-rate mortgage loans, if applicable. A
Current Report on Form 8-K will be available upon request to holders of the
related series of Certificates and will be filed, together with the related
Pooling Agreement, with the Securities and Exchange Commission within fifteen
days after the initial issuance of such Certificates. In the event that Mortgage
Loans are added to or deleted from the Trust Fund after the date of the related
Prospectus Supplement, such addition or deletion will be noted in the Current
Report on Form 8-K.
The Company will cause the Mortgage Loans constituting each Mortgage
Pool to be assigned, without recourse, to the Trustee named in the related
Prospectus Supplement, for the benefit of the holders of all of the Certificates
of a series. Except to the extent that servicing of any Mortgage Loan is to be
transferred to a Special Servicer, the Master Servicer named in the related
Prospectus Supplement will service the Mortgage Loans, directly or through other
mortgage servicing institutions ("Subservicers"), pursuant to a Pooling
Agreement and will receive a fee for such services. See "Servicing of Mortgage
Loans," "Description of the Certificates" and "The Pooling Agreement." With
respect to those Mortgage Loans serviced by the Master Servicer through a
Subservicer, the Master Servicer will remain liable for its servicing
obligations under the related Pooling Agreement as if the Master Servicer alone
were servicing such Mortgage Loans. The Master Servicer's obligations with
respect to the Mortgage Loans will consist principally of its contractual
servicing obligations under the related Pooling Agreement (including its
obligation to enforce certain purchase and other obligations of Subservicers and
Sellers, as more fully described herein under "--Representations by Sellers"
below, "Servicing of Mortgage Loans--Subservicers," and "Description of the
Certificates--Assignment of Trust Fund Assets," and, if and to the extent set
forth in the related Prospectus Supplement, its obligation to make certain cash
advances in the event of delinquencies in payments on or with respect to the
Mortgage Loans as described herein under "Description of the
Certificates--Advances").
UNDERWRITING STANDARDS
Mortgage Loans to be included in a Mortgage Pool will have been
purchased by the Company, either directly or indirectly from Sellers. Such
Mortgage Loans will generally have been originated in accordance with
underwriting standards acceptable to the Company and generally described below
or such alternative underwriting criteria as may be described in the related
Prospectus Supplement. However, in some cases, particularly those involving
Unaffiliated Sellers, the Company may not be able to establish the underwriting
standards used in the origination of the related Mortgage Loans. In those cases,
the
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related Prospectus Supplement will include a statement to such effect, will
describe any related risks, and will reflect what, if any, reunderwriting of the
related Mortgage Loans was done by the Company or any of its affiliates. The
reunderwriting standards for such Mortgage Loans generally will be in accordance
with the same standards as those for Mortgage Loans directly underwritten, with
any variations described in the related Prospectus Supplement.
The underwriting standards to be used in originating the Mortgage Loans
are primarily intended to assess the creditworthiness of the Mortgagor, the
value of the Mortgaged Property and the adequacy of such property as collateral
for the Mortgage Loan.
The primary considerations in underwriting a Single Family Loan or
Contract are the Mortgagor's employment stability and whether the Mortgagor has
sufficient monthly income available (i) to meet the Mortgagor's monthly
obligations on the proposed Mortgage Loan (generally determined on the basis of
the monthly payments due in the year of origination) and other expenses related
to the home (such as property taxes and hazard insurance) and (ii) to meet
monthly housing expenses and other financial obligations and monthly living
expenses. However, the Loan-to-Value Ratio of the Mortgage Loan is another
critical factor. In addition, a Mortgagor's credit history and repayment
ability, as well as the type and use of the Mortgaged Property, are also
considerations.
It is expected that each prospective Mortgagor will complete a mortgage
loan application that includes information with respect to the applicant's
liabilities, income, credit history, employment history and personal
information. One or more credit reports on each applicant from national credit
reporting companies will generally be required. The report typically contains
information relating to such matters as credit history with local and national
merchants and lenders, installment debt payments and any record of defaults,
bankruptcies, repossessions, or judgments.
Mortgaged Properties will be appraised by licensed appraisers. The
appraiser will generally address neighborhood conditions, site and zoning status
and condition and valuation of improvements. In the case of Single Family
Properties, the appraisal report will generally include a reproduction cost
analysis (when appropriate) based on the current cost of constructing a similar
home and a market value analysis based on recent sales of comparable homes in
the area. An appraisal employing the income approach to value analyzes a
property's projected net cash flow, capitalization and other operational
information in determining the property's value. The market approach to value
analyzes the prices paid for the purchase of similar properties in the
property's area, with adjustments made for variations between those other
properties and the property being appraised. The cost approach to value requires
the appraiser to make an estimate of land value and then determine the current
cost of reproducing the improvements less any accrued depreciation. In any case,
the value of the property being financed, as indicated by the appraisal, must be
such that it currently supports, and is anticipated to support in the future,
the outstanding loan balance. All appraisals are required to conform to the
Uniform Standards of Professional Appraisal Practice and the Financial
Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") and must be
on forms acceptable to the Federal National Mortgage Association ("FNMA") and/or
the Federal Home Loan Mortgage Corporation ("FHLMC").
Notwithstanding the foregoing, Loan-to-Value Ratios will not
necessarily constitute an accurate measure of the risk of liquidation loss in a
pool of Mortgage Loans. For example, the value of a Mortgaged Property as of the
date of initial issuance of the related series of Certificates may be less than
the Value determined at loan origination, and will likely continue to fluctuate
from time to time based upon changes in economic conditions and the real estate
market.
With respect to any FHA Loan the Mortgage Loan Seller will be required
to represent that it has complied with the applicable underwriting policies of
the FHA. See "Description of Primary Insurance Policies--FHA Insurance".
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QUALIFICATIONS OF ORIGINATORS AND SELLERS
Each Mortgage Loan will generally be originated, directly or through
mortgage brokers and correspondents, by a savings and loan association, savings
bank, commercial bank, credit union, insurance company, or similar institution
which is supervised and examined by a federal or state authority, or by a
mortgagee approved by the Secretary of Housing and Urban Development pursuant to
sections 203 and 211 of the National Housing Act of 1934, as amended (the
"Housing Act"). Except with respect to Designated Seller Transactions, each
Seller must satisfy certain criteria as to financial stability evaluated on a
case-by-case basis by the Company.
REPRESENTATIONS BY SELLERS
Each Seller will have made representations and warranties in respect of
the Mortgage Loans sold by such Seller and evidenced by a series of
Certificates. In the case of Mortgage Loans, such representations and warranties
will generally include, among other things, that as to each such Mortgage Loan:
(i) any required hazard and primary mortgage insurance policies were effective
at the origination of such Mortgage Loan, and each such policy remained in
effect on the date of purchase of such Mortgage Loan from the Seller by or on
behalf of the Company; (ii) with respect to each Mortgage Loan other than a
Contract, either (A) a title insurance policy insuring (subject only to
permissible title insurance exceptions) the lien status of the Mortgage was
effective at the origination of such Mortgage Loan and such policy remained in
effect on the date of purchase of the Mortgage Loan from the Seller by or on
behalf of the Company or (B) if the Mortgaged Property securing such Mortgage
Loan is located in an area where such policies are generally not available,
there is in the related mortgage file an attorney's certificate of title
indicating (subject to such permissible exceptions set forth therein) the first
lien status of the mortgage; (iii) the Seller has good title to such Mortgage
Loan and such Mortgage Loan was subject to no offsets, defenses or counterclaims
except as may be provided under the Relief Act and except to the extent that any
buydown agreement exists for a Buydown Mortgage Loan; (iv) there are no
mechanics' liens or claims for work, labor or material affecting the related
Mortgaged Property which are, or may be a lien prior to, or equal with, the lien
of the related Mortgage (subject only to permissible title insurance
exceptions); (v) the related Mortgaged Property is free from damage and in good
repair; (vi) there are no delinquent tax or assessment liens against the related
Mortgaged Property; (vii) such Mortgage Loan is not more than 60 days'
delinquent as to any scheduled payment of principal and/or interest; (viii) if a
Primary Insurance Policy is required with respect to such Mortgage Loan, such
Mortgage Loan is the subject of such a policy; and (ix) such Mortgage Loan was
made in compliance with, and is enforceable under, all applicable local, state
and federal laws in all material respects. In the event of a breach of a
Seller's representation or warranty that materially adversely affects the
interests of the Certificateholders in a Mortgage Loan, the related Seller will
be obligated to cure the breach or repurchase or, if permitted, replace such
Mortgage Loan as described below. However, there can be no assurance that a
Seller will honor its obligation to repurchase or, if permitted, replace any
Mortgage Loan as to which such a breach of a representation or warranty arises.
All of the representations and warranties of a Seller in respect of a
Mortgage Loan will have been made as of the date on which such Mortgage Loan was
purchased from the Seller by or on behalf of the Company; the date as of which
such representations and warranties were made will be a date prior to the date
of initial issuance of the related series of Certificates or, in the case of a
Designated Seller Transaction, will be the date of closing of the related sale
by the applicable Seller. A substantial period of time may have elapsed between
the date as of which the representations and warranties were made and the later
date of initial issuance of the related series of Certificates. Accordingly, the
Seller's purchase obligation (or, if specified in the related Prospectus
Supplement, limited replacement option) described below will not arise if,
during the period commencing on the date of sale of a Mortgage Loan by the
Seller, an event occurs that would have given rise to such an obligation had the
event occurred prior to sale of the affected Mortgage Loan. The only
representations and warranties to be made for the benefit
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of holders of Certificates in respect of any related Mortgage Loan relating to
the period commencing on the date of sale of such Mortgage Loan by the Seller to
or on behalf of the Company will be certain limited representations of the
Company and the Master Servicer described under "Description of the
Certificates--Assignment of Trust Fund Assets" below.
The Company will assign to the Trustee for the benefit of the holders
of the related series of Certificates all of its right, title and interest in
each agreement by which it purchased a Mortgage Loan from a Seller insofar as
such agreement relates to the representations and warranties made by such Seller
in respect of such Mortgage Loan and any remedies provided for with respect to
any breach of such representations and warranties. If a Seller cannot cure a
breach of any representation or warranty made by it in respect of a Mortgage
Loan which materially and adversely affects the interests of the
Certificateholders therein within a specified period after having discovered or
received notice of such breach, then, such Seller will be obligated to purchase
such Mortgage Loan at a price (the "Purchase Price") set forth in the related
Pooling Agreement which Purchase Price will generally be equal to the principal
balance thereof as of the date of purchase plus accrued and unpaid interest
through or about the date of purchase at the related Mortgage Rate or
pass-through rate, as applicable (net of any portion of such interest payable to
such Seller in respect of master servicing compensation, special servicing
compensation or subservicing compensation, as applicable, and the Spread, if
any).
As to any Mortgage Loan required to be purchased by an Affiliated
Seller as provided above, rather than repurchase the Mortgage Loan, the Seller
will be entitled, at its sole option, to remove such Mortgage Loan (a "Deleted
Mortgage Loan") from the Trust Fund and substitute in its place another Mortgage
Loan of like kind (a "Qualified Substitute Mortgage Loan"); however, such
substitution must be effected within 120 days of the date of the initial
issuance of the related series of Certificates with respect to a Trust Fund for
which no REMIC election is to be made. With respect to a Trust Fund for which a
REMIC election is to be made, except as otherwise provided in the related
Prospectus Supplement, such substitution of a defective Mortgage Loan must be
effected within two years of the date of the initial issuance of the related
series of Certificates, and may not be made if such substitution would cause the
Trust Fund, or any portion thereof, to fail to qualify as a REMIC or result in a
prohibited transaction tax under the Code. Except as otherwise provided in the
related Prospectus Supplement, any Qualified Substitute Mortgage Loan generally
will, on the date of substitution, (i) have an outstanding principal balance,
after deduction of the principal portion of the monthly payment due in the month
of substitution, not in excess of the outstanding principal balance of the
Deleted Mortgage Loan (the amount of any shortfall to be deposited in the
Certificate Account by the Master Servicer in the month of substitution for
distribution to the Certificateholders), (ii) have a Mortgage Rate and a Net
Mortgage Rate not less than (and not more than one percentage point greater
than) the Mortgage Rate and Net Mortgage Rate, respectively, of the Deleted
Mortgage Loan as of the date of substitution, (iii) have a Loan-to-Value Ratio
at the time of substitution no higher than that of the Deleted Mortgage Loan at
the time of substitution, (iv) have a remaining term to maturity not greater
than (and not more than one year less than) that of the Deleted Mortgage Loan,
and (v) comply with all of the representations and warranties made by such
Affiliated Seller as of the date of substitution. The related purchase agreement
may include additional requirements relating to ARM Loans or other specific
types of Mortgage Loans, or additional provisions relating to meeting the
foregoing requirements on an aggregate basis where a number of substitutions
occur contemporaneously. An Unaffiliated Seller will have no option to
substitute for a Mortgage Loan that it is obligated to repurchase in connection
with a breach of a representation and warranty.
The Master Servicer will be required under the applicable Pooling
Agreement to use reasonable efforts to enforce this purchase or substitution
obligation for the benefit of the Trustee and the Certificateholders, following
such practices it would employ in its good faith business judgment and which are
normal and usual in its general mortgage servicing activities; provided,
however, that this purchase or substitution obligation will not become an
obligation of the Master Servicer in the event the
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applicable Seller fails to honor such obligation. In instances where a Seller is
unable, or disputes its obligation, to purchase affected Mortgage Loans, the
Master Servicer, employing the standards set forth in the preceding sentence,
may negotiate and enter into one or more settlement agreements with such Seller
that could provide for, among other things, the purchase of only a portion of
the affected Mortgage Loans. Any such settlement could lead to losses on the
Mortgage Loans which would be borne by the related Certificates. In accordance
with the above described practices, the Master Servicer will not be required to
enforce any purchase obligation of a Seller arising from any misrepresentation
by the Seller, if the Master Servicer determines in the reasonable exercise of
its business judgment that the matters related to such misrepresentation did not
directly cause or are not likely to directly cause a loss on the related
Mortgage Loan. If the Seller fails to repurchase and no breach of any other
party's representations has occurred, the Seller's purchase obligation will not
become an obligation of the Company or any other party. In the case of a
Designated Seller Transaction where the Seller fails to repurchase a Mortgage
Loan and neither the Company nor any other entity has assumed the
representations and warranties, such repurchase obligation of the Seller will
not become an obligation of the Company or any other party. The foregoing
obligations will constitute the sole remedies available to Certificateholders or
the Trustee for a breach of any representation by a Seller or for any other
event giving rise to such obligations as described above.
Neither the Company nor the Master Servicer will be obligated to
purchase a Mortgage Loan if a Seller defaults on its obligation to do so, and no
assurance can be given that the Sellers will carry out such purchase
obligations. Such a default by a Seller is not a default by the Company or by
the Master Servicer. However, to the extent that a breach of the representations
and warranties of a Seller also constitutes a breach of a representation made by
the Company or the Master Servicer, as described below under "Description of the
Certificates--Assignment of Trust Fund Assets," the Company or the Master
Servicer may have a purchase or substitution obligation. Any Mortgage Loan not
so purchased or substituted for shall remain in the related Trust Fund and any
losses related thereto shall be allocated to the related credit enhancement, to
the extent available, and otherwise to one or more classes of the related series
of Certificates.
If a person other than a Seller makes the representations and
warranties referred to in the first paragraph of this "--Representations by
Sellers" section, or a person other than a Seller is responsible for
repurchasing or replacing any Mortgage Loan in connection with a breach of such
representations and warranties, the identity of such person will be specified in
the related Prospectus Supplement.
SERVICING OF MORTGAGE LOANS
GENERAL
The Mortgage Loans included in each Mortgage Pool will be serviced and
administered pursuant to a Pooling Agreement. Forms of Pooling Agreements have
been filed as an exhibit to the Registration Statement of which this Prospectus
is a part. However, the provisions of each Pooling Agreement will vary depending
upon the nature of the related Mortgage Pool. The following summaries describe
certain material servicing-related provisions that may appear in a Pooling
Agreement for a Mortgage Pool. The related Prospectus Supplement will describe
any servicing-related provision of such a Pooling Agreement that materially
differs from the description thereof contained in this Prospectus.
THE MASTER SERVICER
The master servicer (the "Master Servicer"), if any, for a series of
Certificates will be named in the related Prospectus Supplement and may be OOMC
or another affiliate of the Company. The Master Servicer is required to maintain
a fidelity bond and errors and omissions policy with respect to its officers
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and employees and other persons acting on behalf of the Master Servicer in
connection with its activities under a Pooling Agreement.
COLLECTION AND OTHER SERVICING PROCEDURES; MORTGAGE LOAN MODIFICATIONS
The Master Servicer for any Mortgage Pool, directly or through
Subservicers, will be obligated under the Pooling Agreement to service and
administer the Mortgage Loans in such Mortgage Pool for the benefit of the
related Certificateholders, in accordance with applicable law and the terms of
such Pooling Agreement, such Mortgage Loans and any instrument of credit
enhancement included in the related Trust Fund, and, to the extent consistent
with the foregoing, in the same manner as would prudent institutional mortgage
lenders servicing comparable mortgage loans for their own account in the
jurisdictions where the related Mortgaged Properties are located. Subject to the
foregoing, the Master Servicer will have full power and authority to do any and
all things in connection with such servicing and administration that it may deem
necessary and desirable.
As part of its servicing duties, a Master Servicer will be required to
make reasonable efforts to collect all payments called for under the terms and
provisions of the Mortgage Loans that it services and will be obligated to
follow such collection procedures as it would follow with respect to mortgage
loans that are comparable to such Mortgage Loans and held for its own account,
provided such procedures are consistent with the terms of the related Pooling
Agreement, including the servicing standard specified therein and generally
described in the preceding paragraph (as such may be more particularly described
in the related Prospectus Supplement, the "Servicing Standard"), and do not
impair recovery under any instrument of credit enhancement included in the
related Trust Fund. Consistent with the foregoing, the Master Servicer will be
permitted, in its discretion, to waive any Prepayment Premium, late payment
charge or other charge in connection with any Mortgage Loan.
Under a Pooling Agreement, a Master Servicer will be granted certain
discretion to extend relief to Mortgagors whose payments become delinquent. In
the case of Single Family Loans and Contracts, a Master Servicer may, among
other things, grant a period of temporary indulgence (generally up to four
months) to a Mortgagor or may enter into a liquidating plan providing for
repayment by such Mortgagor of delinquent amounts within a specified period
(generally up to one year) from the date of execution of the plan. However, the
Master Servicer must first determine that any such waiver or extension will not
impair the coverage of any related insurance policy or materially adversely
affect the security for such Mortgage Loan.
Certain of the Mortgage Loans in a Mortgage Pool may contain a
due-on-sale clause that entitles the lender to accelerate payment of the
Mortgage Loan upon any sale or other transfer of the related Mortgaged Property
made without the lender's consent. In any case in which property subject to a
Single Family Loan or Contract is being conveyed by the Mortgagor, unless the
related Prospectus Supplement provides otherwise, the Master Servicer will in
general be obligated, to the extent it has knowledge of such conveyance, to
exercise its rights to accelerate the maturity of such Mortgage Loan under any
due-on-sale clause applicable thereto, but only if the exercise of such rights
is permitted by applicable law and only to the extent it would not adversely
affect or jeopardize coverage under any Primary Insurance Policy or applicable
credit enhancement arrangements. If the Master Servicer is prevented from
enforcing such due-on-sale clause under applicable law or if the Master Servicer
determines that it is reasonably likely that a legal action would be instituted
by the related Mortgagor to avoid enforcement of such due-on-sale clause, the
Master Servicer will 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 Loan subject to certain
specified conditions. The original Mortgagor may be released from liability on a
Single Family Loan or Contract if the Master Servicer shall have determined in
good faith that such release will not adversely affect the collectability of the
Mortgage Loan. The Master Servicer will generally be entitled to retain as
additional servicing
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compensation any fee collected in connection with the permitted transfer of a
Mortgaged Property. See "Certain Legal Aspects of Mortgage Loans--Enforceability
of Certain Provisions." FHA Loans contain no such clause and may be assumed by
the purchaser of the mortgaged property.
Mortgagors may, from time to time, request partial releases of the
Mortgaged Properties, easements, consents to alteration or demolition and other
similar matters. The Master Servicer may approve such a request if it has
determined, exercising its good faith business judgment in the same manner as it
would if it were the owner of the related Mortgage Loan, that such approval will
not adversely affect the security for, or the timely and full collectability of,
the related Mortgage Loan. Any fee collected by the Master Servicer for
processing such request will be retained by the Master Servicer as additional
servicing compensation.
In the case of Single Family Loans secured by junior liens on the
related Mortgaged Properties, the Master Servicer will be required to file (or
cause to be filed) of record a request for notice of any action by a superior
lienholder under the Senior Lien for the protection of the related Trustee's
interest, where permitted by local law and whenever applicable state law does
not require that a junior lienholder be named as a party defendant in
foreclosure proceedings in order to foreclose such junior lienholder's equity of
redemption. The Master Servicer also will be required to notify any superior
lienholder in writing of the existence of the Mortgage Loan and request
notification of any action (as described below) to be taken against the
Mortgagor or the Mortgaged Property by the superior lienholder. If the Master
Servicer is notified that any superior lienholder has accelerated or intends to
accelerate the obligations secured by the related Senior Lien, or has declared
or intends to declare a default under the mortgage or the promissory note
secured thereby, or has filed or intends to file an election to have the related
Mortgaged Property sold or foreclosed, then the Master Servicer will be required
to take, on behalf of the related Trust Fund, whatever actions are necessary to
protect the interests of the related Certificateholders, and/or to preserve the
security of the related Mortgage Loan, subject to the application of the REMIC
Provisions. The Master Servicer will be required to advance the necessary funds
to cure the default or reinstate the superior lien, if such advance is in the
best interests of the related Certificateholders and the Master Servicer
determines such advances are recoverable out of payments on or proceeds of the
related Mortgage Loan.
The Master Servicer for any Mortgage Pool will also be required to
perform other customary functions of a servicer of comparable loans, including
maintaining escrow or impound accounts for payment of taxes, insurance premiums
and similar items, or otherwise monitoring the timely payment of those items;
adjusting Mortgage Rates on ARM Loans; maintaining Buydown Accounts; supervising
foreclosures and similar proceedings; managing Mortgage Properties acquired
through or in lieu of foreclosure (each, an "REO Property"); and maintaining
servicing records relating to the Mortgage Loans in such Mortgage Pool. The
Master Servicer will be responsible for filing and settling claims in respect of
particular Mortgage Loans under any applicable instrument of credit enhancement.
See "Description of Credit Enhancement."
SUBSERVICERS
A Master Servicer may delegate its servicing obligations in respect of
the Mortgage Loans serviced by it to one or more third-party servicers (each, a
"Subservicer"), but the Master Servicer will remain liable for such obligations
under the related Pooling Agreement. The Master Servicer will be solely liable
for all fees owed by it to any Subservicer, irrespective of whether the Master
Servicer's compensation pursuant to the related Pooling Agreement is sufficient
to pay such fees. Each Subservicer will be entitled to reimbursement for certain
expenditures which it makes, generally to the same extent as would the Master
Servicer for making the same expenditures. See "--Servicing and Other
Compensation and Payment of Expenses; Spread" below and "Description of the
Certificates--The Certificate Account."
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SPECIAL SERVICERS
If and to the extent specified in the related Prospectus Supplement, a
special servicer (a "Special Servicer") may be a party to the related Pooling
Agreement or may be appointed by the Master Servicer or another specified party
to perform certain specified duties in respect of servicing the related Mortgage
Loans that would otherwise be performed by the Master Servicer (for example, the
workout and/or foreclosure of defaulted Mortgage Loans). The rights and
obligations of any Special Servicer will be specified in the related Prospectus
Supplement, and the Master Servicer will be liable for the performance of a
Special Servicer only if, and to the extent, set forth in such Prospectus
Supplement.
REALIZATION UPON OR SALE OF DEFAULTED MORTGAGE LOANS
Except as described below or in the related Prospectus Supplement, the
Master Servicer will be required, in a manner consistent with the Servicing
Standard, to foreclose upon or otherwise comparably convert the ownership of
properties securing such of the Mortgage Loans in the related Mortgage Pool as
come into and continue in default and as to which no satisfactory arrangements
can be made for collection of delinquent payments. In connection therewith, the
Master Servicer will be authorized to institute foreclosure proceedings,
exercise any power of sale contained in the related Mortgage, obtain a deed in
lieu of foreclosure, or otherwise acquire title to the related Mortgaged
Property, by operation of law or otherwise, if such action is consistent with
the Servicing Standard. The Master Servicer's actions in this regard must be
conducted, however, in a manner that will permit recovery under any instrument
of credit enhancement included in the related Trust Fund. In addition, the
Master Servicer will not be required to expend its own funds in connection with
any foreclosure or to restore any damaged property unless it shall determine
that (i) such foreclosure and/or restoration will increase the proceeds of
liquidation of the Mortgage Loan to the related Certificateholders after
reimbursement to itself for such expenses and (ii) such expenses will be
recoverable to it from related Insurance Proceeds, Liquidation Proceeds or
amounts drawn out of any fund or under any instrument constituting credit
enhancement (respecting which it shall have priority for purposes of withdrawal
from the Certificate Account in accordance with the Pooling Agreement).
Notwithstanding the foregoing, the Master Servicer will not be
obligated to foreclose upon or otherwise convert the ownership of any Single
Family Property securing a Mortgage Loan if it has received notice or has actual
knowledge that such property may be contaminated with or affected by hazardous
wastes or hazardous substances; however, no environmental testing will generally
be required. The Master Servicer will not be liable to the Certificateholders of
the related series if, based on its belief that no such contamination or effect
exists, the Master Servicer forecloses on a Mortgaged Property and takes title
to such Mortgaged Property, and thereafter such Mortgaged Property is determined
to be so contaminated or affected.
With respect to a Mortgage Loan in default, the Master Servicer may
pursue foreclosure (or similar remedies) concurrently with pursuing any remedy
for a breach of a representation and warranty. However, the Master Servicer is
not required to continue to pursue both such remedies if it determines that one
such remedy is more likely to result in a greater recovery. Upon the first to
occur of final liquidation (by foreclosure or otherwise) and a repurchase or
substitution pursuant to a breach of a representation and warranty, such
Mortgage Loan will be removed from the related Trust Fund if it has not been
removed previously. The Master Servicer may elect to treat a defaulted Mortgage
Loan as having been finally liquidated if substantially all amounts expected to
be received in connection therewith have been received. Any additional
liquidation expenses relating to such Mortgage Loan thereafter incurred will be
reimbursable to the Master Servicer (or any Subservicer) from any amounts
otherwise distributable to holders of Certificates of the related series, or may
be offset by any subsequent recovery related to such Mortgage Loan.
Alternatively, for purposes of determining the amount of related Liquidation
Proceeds to be distributed to Certificateholders, the amount of any Realized
Loss or the
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amount required to be drawn under any applicable form of credit support, the
Master Servicer may take into account minimal amounts of additional receipts
expected to be received, as well as estimated additional liquidation expenses
expected to be incurred in connection with such defaulted Mortgage Loan. With
respect to certain series of Certificates, if so provided in the related
Prospectus Supplement, the applicable form of credit enhancement may provide, to
the extent of coverage thereunder, that a defaulted Mortgage Loan will be
removed from the Trust Fund prior to the final liquidation thereof. In addition,
a Pooling Agreement may grant to the Master Servicer, a Special Servicer, a
provider of credit enhancement and/or the holder or holders of certain classes
of Certificates of the related series a right of first refusal to purchase from
the Trust Fund, at a predetermined purchase price (which, if insufficient to
fully fund the entitlements of Certificateholders to principal and interest
thereon, will be specified in the related Prospectus Supplement), any Mortgage
Loan as to which a specified number of scheduled payments are delinquent.
Furthermore, a Pooling Agreement may authorize the Master Servicer to sell any
defaulted Mortgage Loan if and when the Master Servicer determines, consistent
with the Servicing Standard, that such a sale would produce a greater recovery
to Certificateholders on a present value basis than would liquidation of the
related Mortgaged Property.
In the event that title to any Mortgaged Property is acquired in
foreclosure, deed in lieu of foreclosure or otherwise, the deed or certificate
of sale will be issued to the Trustee or to its nominee on behalf of
Certificateholders of the related series. Notwithstanding any such acquisition
of title and cancellation of the related Mortgage Loan, such Mortgage Loan (an
"REO Mortgage Loan") will be considered for most purposes to be an outstanding
Mortgage Loan held in the Trust Fund until such time as the Mortgaged Property
is sold and all recoverable Liquidation Proceeds and Insurance Proceeds have
been received with respect to such defaulted Mortgage Loan (a "Liquidated
Mortgage Loan"). For purposes of calculations of amounts distributable to
Certificateholders in respect of an REO Mortgage Loan, the amortization schedule
in effect at the time of any such acquisition of title (before any adjustment
thereto by reason of any bankruptcy or any similar proceeding or any moratorium
or similar waiver or grace period) will be deemed to have continued in effect
(and, in the case of an ARM Loan, such amortization schedule will be deemed to
have adjusted in accordance with any interest rate changes occurring on any
adjustment date therefor) so long as such REO Mortgage Loan is considered to
remain in the Trust Fund.
If title to any Mortgaged Property is acquired by a Trust Fund as to
which a REMIC election has been made, the Master Servicer, on behalf of the
Trust Fund, will be required to sell the Mortgaged Property within two years of
acquisition, unless (i) the Internal Revenue Service grants an extension of time
to sell such property or (ii) the Trustee receives an opinion of independent
counsel to the effect that the holding of the property by the Trust Fund for
more than two years after its acquisition will not result in the imposition of a
tax on the Trust Fund or cause the Trust Fund to fail to qualify as a REMIC
under the Code at any time that any Certificate is outstanding. Subject to the
foregoing and any other taxrelated constraints, the Master Servicer will
generally be required to solicit bids for any Mortgaged Property so acquired in
such a manner as will be reasonably likely to realize a fair price for such
property. If title to any Mortgaged Property is acquired by a Trust Fund as to
which a REMIC election has been made, the Master Servicer will also be required
to ensure that the Mortgaged Property is administered so that it constitutes
"foreclosure property" within the meaning of Code Section 860G(a)(8) at all
times, that the sale of such property does not result in the receipt by the
Trust Fund of any income from non-permitted assets as described in Code Section
860F(a)(2)(B), and that the Trust Fund does not derive any "net income from
foreclosure property" within the meaning of Code Section 860G(c)(2), with
respect to such property.
If Liquidation Proceeds collected with respect to a defaulted Mortgage
Loan are less than the outstanding principal balance of the defaulted Mortgage
Loan plus interest accrued thereon plus the aggregate amount of reimbursable
expenses incurred by the Master Servicer with respect to such Mortgage Loan, and
the shortfall is not covered under any applicable instrument or fund
constituting
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credit enhancement, the Trust Fund will realize a loss in the amount of such
difference. The Master Servicer will be entitled to reimburse itself from the
Liquidation Proceeds recovered on any defaulted Mortgage Loan, prior to the
distribution of such Liquidation Proceeds to Certificateholders, amounts that
represent unpaid servicing compensation in respect of the Mortgage Loan,
unreimbursed servicing expenses incurred with respect to the Mortgage Loan and
any unreimbursed advances of delinquent payments made with respect to the
Mortgage Loan. If so provided in the related Prospectus Supplement, the
applicable form of credit enhancement may provide for reinstatement subject to
certain conditions in the event that, following the final liquidation of a
Mortgage Loan and a draw under such credit enhancement, subsequent recoveries
are received. In addition, if a gain results from the final liquidation of a
defaulted Mortgage Loan or an REO Mortgage Loan which is not required by law to
be remitted to the related Mortgagor, the Master Servicer will be entitled to
retain such gain as additional servicing compensation unless the related
Prospectus Supplement provides otherwise. For a description of the Master
Servicer's (or other specified person's) obligations to maintain and make claims
under applicable forms of credit enhancement and insurance relating to the
Mortgage Loans, see "Description of Credit Enhancement" and "Primary Mortgage
Insurance, Hazard Insurance; Claims Thereunder."
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES; SPREAD
The principal servicing compensation to be paid to the Master Servicer
in respect of its master servicing activities for a series of Certificates will
be equal to the percentage per annum described in the related Prospectus
Supplement (which may vary under certain circumstances) of the outstanding
principal balance of each Mortgage Loan, and such compensation will be retained
by it on a monthly or other periodic basis from collections of interest on such
Mortgage Loan in the related Trust Fund at the time such collections are
deposited into the applicable Certificate Account. This portion of the servicing
fee will be calculated with respect to each Mortgage Loan by multiplying such
fee by the principal balance of such Mortgage Loan. In addition, the Master
Servicer will retain all Prepayment Premiums, assumption fees and late payment
charges, to the extent collected from Mortgagors, and any benefit which may
accrue as a result of the investment of funds in the applicable Certificate
Account. Any additional servicing compensation will be described in the related
Prospectus Supplement. Any Subservicer will receive a portion of the Master
Servicer's compensation as its sub-servicing compensation.
In addition to amounts payable to any Subservicer, the Master Servicer
will pay or cause to be paid certain ongoing expenses associated with each Trust
Fund and incurred by it in connection with its responsibilities under the
Pooling Agreement, including, if so specified in the related Prospectus
Supplement, payment of any fee or other amount payable in respect of any
alternative credit enhancement arrangements, payment of the fees and
disbursements of the Trustee, any custodian appointed by the Trustee and the
Certificate Registrar, and payment of expenses incurred in enforcing the
obligations of Subservicers and Sellers. The Master Servicer will be entitled to
reimbursement of expenses incurred in enforcing the obligations of Subservicers
and Sellers under certain limited circumstances. In addition, the Master
Servicer will be entitled to reimbursements for certain expenses incurred by it
in connection with Liquidated Mortgage Loans and in connection with the
restoration of Mortgaged Properties, such right of reimbursement being prior to
the rights of Certificateholders to receive any related Liquidation Proceeds or
Insurance Proceeds. If and to the extent so provided in the related Prospectus
Supplement, the Master Servicer will be entitled to receive interest on amounts
advanced to cover such reimbursable expenses for the period that such advances
are outstanding at the rate specified in such Prospectus Supplement, and the
Master Servicer will be entitled to payment of such interest periodically from
general collections on the Mortgage Loans in the related Trust Fund prior to any
payment to Certificateholders or as otherwise provided in the related Pooling
Agreement and described in such Prospectus Supplement.
The Prospectus Supplement for a series of Certificates will specify
whether there will be any Spread retained. Any such Spread will be a specified
portion of the interest payable on each Mortgage Loan in a Mortgage Pool and
will not be part of the related Trust Fund. Any such Spread will be
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established on a loan-by-loan basis and the amount thereof with respect to each
Mortgage Loan in a Mortgage Pool will be specified on an exhibit to the related
Pooling Agreement. Any partial recovery of interest in respect of a Mortgage
Loan will be allocated between the owners of any Spread and the holders of
classes of Certificates entitled to payments of interest as provided in the
related Prospectus Supplement and the applicable Pooling Agreement.
If and to the extent provided in the related Prospectus Supplement, the
Master Servicer may be required to apply a portion of the servicing compensation
otherwise payable to it in respect of any period to any Prepayment Interest
Shortfalls resulting from Mortgagor prepayments during such period. See "Yield
Considerations."
EVIDENCE AS TO COMPLIANCE
Each Pooling Agreement will 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, a firm of independent public accountants will
furnish a statement to the Company and the Trustee to the effect that, on the
basis of an examination by such firm conducted substantially in compliance with
the Uniform Single Attestation Program for Mortgage Bankers or the Audit Program
for Mortgages serviced for FHLMC, the servicing of mortgage loans under
agreements (including the related Pooling Agreement) substantially similar to
each other was conducted in compliance with such agreements except for such
significant exceptions or errors in records that, in the opinion of the firm,
the Uniform Single Attestation Program for Mortgage Bankers or the Audit Program
for Mortgages serviced for FHLMC requires it to report. In rendering its
statement such firm may rely, as to the matters relating to the direct servicing
of mortgage loans by Subservicers, upon comparable statements for examinations
conducted substantially in compliance with the Uniform Single Attestation
Program for Mortgage Bankers or the Audit Program for Mortgages serviced for
FHLMC (rendered within one year of such statement) of firms of independent
public accountants with respect to those Subservicers which also have been the
subject of such an examination.
Each Pooling Agreement will also provide for delivery to the Trustee,
on or before a specified date in each year, of an annual statement signed by one
or more officers of the Master Servicer to the effect that, to the best
knowledge of each such officer, the Master Servicer has fulfilled in all
material respects its obligations under the Pooling Agreement throughout the
preceding year or, if there has been a material default in the fulfillment of
any such obligation, such statement shall specify each such known default and
the nature and status thereof. Such statement may be provided as a single form
making the required statements as to more than one Pooling Agreement.
Copies of the annual accountants' statement and the annual statement of
officers of a Master Servicer may be obtained by Certificateholders without
charge upon written request to the Master Servicer or Trustee.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates will be issued in series. Each series of Certificates
(or, in certain instances, two or more series of Certificates) will be issued
pursuant to a Pooling Agreement, similar to one of the forms filed as an exhibit
to the Registration Statement of which this Prospectus is a part. Each Pooling
Agreement will be filed with the Securities and Exchange Commission as an
exhibit to a Current Report on Form 8-K. The following summaries (together with
additional summaries under "The Pooling Agreement" below) describe certain
material provisions relating to the Certificates common to each
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Pooling Agreement. Wherever particular sections or defined terms of the Pooling
Agreement are referred to herein, such sections or defined terms are thereby
incorporated herein by reference.
Certificates of each series covered by a particular Pooling Agreement
will evidence specified beneficial ownership interests in a separate Trust Fund
created pursuant to such Pooling Agreement. A Trust Fund will consist of, to the
extent provided in the Pooling Agreement: (i) such Mortgage Loans (and the
related mortgage documents) or interests therein underlying a particular series
of Certificates as from time to time are subject to the Pooling Agreement,
exclusive of, if specified in the related Prospectus Supplement, any Spread or
other interest retained by the Company or any of its affiliates with respect to
each such Mortgage Loan; (ii) such assets including, without limitation, all
payments and collections in respect of the Mortgage Loans due after the related
Cut-off Date, as from time to time are identified as deposited in respect
thereof in the related Certificate Account as described below; (iii) any
property acquired in respect of Mortgage Loans in the Trust Fund, whether
through foreclosure of such Mortgage Loans or by deed in lieu of foreclosure or
otherwise; (iv) hazard insurance policies, Primary Insurance Policies and FHA
insurance policies, if any, maintained in respect of Mortgage Loans in the Trust
Fund and certain proceeds of such policies; (v) certain rights of the Company
under any Mortgage Loan Purchase Agreement, including in respect of any
representations and warranties therein; and (vi) any combination, as and to the
extent specified in the related Prospectus Supplement, of a Financial Guaranty
Insurance Policy, Mortgage Pool Insurance Policy, Letter of Credit, Purchase
Obligation, Special Hazard Insurance Policy or Bankruptcy Bond as described
under "Description of Credit Enhancement." To the extent that any Trust Fund
includes certificates of interest or participations in Mortgage Loans, the
related Prospectus Supplement will describe the material terms and conditions of
such certificates or participations.
Each series of Certificates may consist of any one or a combination of
the following: (i) a single class of Certificates; (ii) two or more classes of
Certificates, one or more classes of which will be senior ("Senior
Certificates") in right of payment to one or more of the other classes
("Subordinate Certificates"), and as to which certain classes of Senior (or
Subordinate) Certificates may be senior to other classes of Senior (or
Subordinate) Certificates, as described in the respective Prospectus Supplement
(any such series, a "Senior/Subordinate Series"); (iii) two or more classes of
Certificates, one or more classes ("Strip Certificates") of which will be
entitled to (a) principal distributions, with disproportionate, nominal or no
interest distributions or (b) interest distributions, with disproportionate,
nominal or no principal distributions; (iv) two or more classes of Certificates
which differ as to the timing, sequential order, rate, pass-through rate or
amount of distributions of principal or interest or both, or as to which
distributions of principal or interest or both on any such class may be made
upon the occurrence of specified events, in accordance with a schedule or
formula (including "planned amortization classes" and "targeted amortization
classes"), or on the basis of collections from designated portions of the
Mortgage Pool, and which classes may include one or more classes of Certificates
("Accrual Certificates") with respect to which certain accrued interest will not
be distributed but rather will be added to the principal balance thereof on each
Distribution Date for the period described in the related Prospectus Supplement;
or (v) other types of classes of Certificates, as described in the related
Prospectus Supplement. As to each series, all Certificates offered hereby (the
"Offered Certificates") will be rated in one of the four highest rating
categories by one or more Rating Agencies. Credit support for the Offered
Certificates of each series may be provided by a Financial Guaranty Insurance
Policy, Mortgage Pool Insurance Policy, Letter of Credit, Special Hazard
Insurance Policy, Bankruptcy Bond, Purchase Obligation, Reserve Fund or
Overcollateralization, as described under "Description of Credit Enhancement,"
by the subordination of one or more other classes of Certificates as described
under "Subordination" or by any combination of the foregoing.
If so specified in the Prospectus Supplement relating to a series of
Certificates, one or more elections may be made to treat the related Trust Fund,
or a designated portion thereof, as a REMIC. If such an election is made with
respect to a series of Certificates, one of the classes of Certificates in such
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series will be designated as evidencing the sole class of "residual interests"
in each related REMIC, as defined in the Code; alternatively, a separate class
of ownership interests will evidence such residual interests. All other classes
of Certificates in such series will constitute "regular interests" in the
related REMIC, as defined in the Code and will be designated as such. As to each
series of Certificates as to which a REMIC election is to be made, the Master
Servicer, Trustee or other specified person will be obligated to take certain
specified actions required in order to comply with applicable laws and
regulations.
FORM OF CERTIFICATES
Except as described below, the Offered Certificates of each series will
be issued as physical certificates in fully registered form only in the
denominations specified in the related Prospectus Supplement, and will be
transferrable and exchangeable at the corporate trust office of the registrar
(the "Certificate Registrar") named in the related Prospectus Supplement. No
service charge will be made for any registration of exchange or transfer of
Offered Certificates, but the Trustee may require payment of a sum sufficient to
cover any tax or other governmental charge. The term "Certificateholder" or
"Holder" as used herein refers to the entity whose name appears on the records
of the Certificate Registrar (consisting of or including the "Certificate
Register") as the registered holder of a Certificate, except as otherwise
indicated in the related Prospectus Supplement.
If so specified in the related Prospectus Supplement, specified classes
of a series of Certificates will be initially issued through the book-entry
facilities of The Depository Trust Company ("DTC"). As to any such class of
Certificates ("DTC Registered Certificates"), the record Holder of such
Certificates will be DTC's nominee. DTC is a limited-purpose trust company
organized under the laws of the State of New York, which holds securities for
its participating organizations ("Participants") and facilitates the clearance
and settlement of securities transactions between Participants through
electronic book-entry changes in the accounts of Participants. Participants
include securities brokers and dealers, banks, trust companies and clearing
corporations and may include certain other organizations. Other institutions
that are not Participants but clear through or maintain a custodial relationship
with Participants (such institutions, "Intermediaries") have indirect access to
DTC's clearance system.
No person acquiring an interest in any DTC Registered Certificates
(each such person, a "Beneficial Owner") will be entitled to receive a
Certificate representing such interest in registered, certificated form, unless
either (i) DTC ceases to act as depository in respect thereof and a successor
depository is not obtained, or (ii) the Company elects in its sole discretion to
discontinue the registration of such Certificates through DTC. Prior to any such
event, Beneficial Owners will not be recognized by the Trustee or the Master
Servicer as Holders of the related Certificates for purposes of the related
Pooling Agreement, and Beneficial Owners will be able to exercise their rights
as owners of such Certificates only indirectly through DTC, Participants and
Intermediaries. Any Beneficial Owner that desires to purchase, sell or otherwise
transfer any interest in DTC Registered Certificates may do so only through DTC,
either directly if such Beneficial Owner is a Participant or indirectly through
Participants and, if applicable, Intermediaries. Pursuant to the procedures of
DTC, transfers of the beneficial ownership of any DTC Registered Certificates
will be required to be made in minimum denominations specified in the related
Prospectus Supplement. The ability of a Beneficial Owner to pledge DTC
Registered Certificates to persons or entities that are not Participants in the
DTC system, or to otherwise act with respect to such Certificates, may be
limited because of the lack of physical certificates evidencing such
Certificates and because DTC may act only on behalf of Participants.
Distributions in respect of the DTC Registered Certificates will be
forwarded by the Trustee or other specified person to DTC, and DTC will be
responsible for forwarding such payments to Participants, each of which will be
responsible for disbursing such payments to the Beneficial Owners it represents
or, if applicable, to Intermediaries. Accordingly, Beneficial Owners may
experience delays
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in the receipt of payments in respect of their Certificates. Under DTC's
procedures, DTC will take actions permitted to be taken by Holders of any class
of DTC Registered Certificates under the Pooling Agreement only at the direction
of one or more Participants to whose account the DTC Registered Certificates are
credited and whose aggregate holdings represent no less than any minimum amount
of Percentage Interests or voting rights required therefor. DTC may take
conflicting actions with respect to any action of Holders of Certificates of any
Class to the extent that Participants authorize such actions. None of the Master
Servicer, the Company, the Trustee or any of their respective affiliates will
have any liability for any aspect of the records relating to or payments made on
account of beneficial ownership interests in the DTC Registered Certificates, or
for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
ASSIGNMENT OF TRUST FUND ASSETS
At the time of issuance of a series of Certificates, the Company will
assign, or cause to be assigned, to the related Trustee (or its nominee),
without recourse, the Mortgage Loans being included in the related Trust Fund,
together with all principal and interest received on or with respect to such
Mortgage Loans after the Cut-off Date, other than principal and interest due on
or before the Cut-off Date. If specified in the related Prospectus Supplement,
the Company or any of its affiliates may retain the Spread, if any, for itself
or transfer the same to others. The Trustee will, concurrently with such
assignment, deliver the Certificates of such series to or at the direction of
the Company in exchange for the Mortgage Loans in the related Trust Fund. Each
Mortgage Loan will be identified in a schedule appearing as an exhibit to the
related Pooling Agreement. Such schedule will include, among other things,
information as to the principal balance of each Mortgage Loan in the related
Trust Fund as of the Cut-off Date, as well as information respecting the
Mortgage Rate, the currently scheduled monthly payment of principal and
interest, the maturity of the Mortgage Note and the Loan-to-Value Ratio at
origination or modification (without regard to any secondary financing).
In addition, the Company will, as to each Mortgage Loan (other than
Contracts), deliver, or cause to be delivered, to the related Trustee (or to the
custodian described below) the Mortgage Note endorsed, without recourse, either
in blank or to the order of such Trustee (or its nominee), the Mortgage with
evidence of recording indicated thereon (except for any Mortgage not returned
from the public recording office), an assignment of the Mortgage in blank or to
the Trustee (or its nominee) in recordable form, together with any intervening
assignments of the Mortgage with evidence of recording thereon (except for any
such assignment not returned from the public recording office), and, if
applicable, any riders or modifications to such Mortgage Note and Mortgage,
together with certain other documents at such times as set forth in the related
Pooling Agreement. Such assignments may be blanket assignments covering
Mortgages on Mortgaged Properties located in the same county, if permitted by
law. Notwithstanding the foregoing, a Trust Fund may include Mortgage Loans
where the original Mortgage Note is not delivered to the Trustee if the Company
delivers, or causes to be delivered, to the related Trustee (or the custodian) a
copy or a duplicate original of the Mortgage Note, together with an affidavit
certifying that the original thereof has been lost or destroyed. In addition, if
the Company cannot deliver, with respect to any Mortgage Loan, the Mortgage or
any intervening assignment with evidence of recording thereon concurrently with
the execution and delivery of the related Pooling Agreement because of a delay
caused by the public recording office, the Company will deliver, or cause to be
delivered, to the related Trustee (or the custodian) a true and correct
photocopy of such Mortgage or assignment as submitted for recording. The Company
will deliver, or cause to be delivered, to the related Trustee (or the
custodian) such Mortgage or assignment with evidence of recording indicated
thereon after receipt thereof from the public recording office. If the Company
cannot deliver, with respect to any Mortgage Loan, the Mortgage or any
intervening assignment with evidence of recording thereon concurrently with the
execution and delivery of the related Pooling Agreement because such Mortgage or
assignment has been lost, the Company will deliver, or cause to be delivered, to
the related Trustee (or the custodian) a true and correct photocopy of such
Mortgage or assignment with evidence of recording thereon. Assignments
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of the Mortgage Loans to the Trustee (or its nominee) will be recorded in the
appropriate public recording office, except in states where, in the opinion of
counsel acceptable to the Trustee, such recording is not required to protect the
Trustee's interests in the Mortgage Loan against the claim of any subsequent
transferee or any successor to or creditor of the Company or the originator of
such Mortgage Loan, or except as otherwise specified in the related Prospectus
Supplement as to any series of Certificates. In addition, unless specified in
the related Prospectus Supplement, the Company will, as to each Contract,
deliver, or cause to be delivered, the original Contract endorsed, without
recourse, to the order of the Trustee and copies of documents and instruments
related to the Contract and the security interest in the Manufactured Home
securing the Contract, together with a blanket assignment to the Trustee of all
Contracts in the related Trust Fund and such documents and instruments. In order
to give notice of the right, title and interest of the Certificateholders to the
Contracts, the Company will cause to be executed and delivered to the Trustee a
UCC-1 financing statement identifying the Trustee as the secured party and
identifying all Contracts as collateral.
The Trustee (or the custodian hereinafter referred to) will hold such
documents in trust for the benefit of the related Certificateholders, and
generally will review such documents within 90 days after receipt thereof in the
case of documents delivered concurrently with the execution and delivery of the
related Pooling Agreement, and within the time period specified in the related
Pooling Agreement in the case of all other documents delivered. If any such
document is found to be missing or defective in any material respect, the
Trustee (or such custodian) will be required to promptly so notify the Master
Servicer, the Company, and the related Seller. If the related Seller does not
cure the omission or defect within a specified period after notice is given
thereto by the Trustee, and such omission or defect materially and adversely
affects the interests of Certificateholders in the affected Mortgage Loan, then
the related Seller will be obligated to purchase such Mortgage Loan from the
Trustee at its Purchase Price (or, if and to the extent it would otherwise be
permitted to do so for a breach of representation and warranty as described
under "The Mortgage Pools--Representations of Sellers," to substitute for such
Mortgage Loan). The Trustee will be obligated to enforce this obligation of the
Seller to the extent described above under "The Mortgage Pools--Representations
by Sellers," but there can be no assurance that the applicable Seller will
fulfill its obligation to purchase (or substitute for) the affected Mortgage
Loan as described above. The Company will not be obligated to purchase or
substitute for such Mortgage Loan if the Seller defaults on its obligation to do
so. This purchase or substitution obligation constitutes the sole remedy
available to the related Certificateholders and the related Trustee for omission
of, or a material defect in, a constituent document. Any affected Mortgage Loan
not so purchased or substituted for shall remain in the related Trust Fund.
The Trustee will be authorized at any time to appoint one or more
custodians pursuant to a custodial agreement to hold title to the Mortgage Loans
in any Mortgage Pool, and to maintain possession of and, if applicable, to
review, the documents relating to such Mortgage Loans, as the agent of the
Trustee. The identity of any such custodian to be appointed on the date of
initial issuance of the Certificates will be set forth in the related Prospectus
Supplement. Any such custodian may be an affiliate of the Company or the Master
Servicer.
With respect to the Mortgage Loans in a Mortgage Pool, except in the
case of a Designated Seller Transaction, the Company will make certain
representations and warranties as to the types and geographical concentrations
of such Mortgage Loans and as to the accuracy, in all material respects, of
certain identifying information furnished to the related Trustee in respect of
each such Mortgage Loan (E.G., original Loan-to-Value Ratio, principal balance
as of the Cut-off Date, Mortgage Rate and maturity). Upon a breach of any such
representation which materially and adversely affects the interests of the
Certificateholders in a Mortgage Loan, the Company will be obligated to cure the
breach in all material respects, to purchase the Mortgage Loan at its Purchase
Price or to substitute for such Mortgage Loan a Qualified Substitute Mortgage
Loan in accordance with the provisions for such substitution by Affiliated
Sellers as described above under "The Mortgage Pools--Representations by
Sellers." However,
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the Company will not be required to repurchase or substitute for any Mortgage
Loan in connection with a breach of a representation and warranty if the
substance of any such breach also constitutes fraud in the origination of the
related Mortgage Loan. This purchase or substitution obligation constitutes the
sole remedy available to Certificateholders or the Trustee for such a breach of
representation by the Company. Any Mortgage Loan not so purchased or substituted
for shall remain in the related Trust Fund.
Pursuant to the related Pooling Agreement, the Master Servicer for any
Mortgage Pool, either directly or through Subservicers, will service and
administer the Mortgage Loans included in such Mortgage Pool and assigned to the
related Trustee as more fully set forth under "Servicing of Mortgage Loans." The
Master Servicer will make certain representations and warranties regarding its
authority to enter into, and its ability to perform its obligations under, the
Pooling Agreement.
CERTIFICATE ACCOUNT
GENERAL. The Master Servicer and/or the Trustee will, as to each Trust
Fund, establish and maintain or cause to be established and maintained one or
more separate accounts for the collection of payments on the related Mortgage
Loans constituting such Trust Fund (collectively, the "Certificate Account"),
which will be established so as to comply with the standards of each Rating
Agency that has rated any one or more classes of Certificates of the related
series. A Certificate Account may be maintained either as an interest-bearing or
a non-interest-bearing account, and the funds held therein may be held as cash
or invested in United States government securities and other investment grade
obligations specified in the related Pooling Agreement ("Permitted
Investments"). Any interest or other income earned on funds in the Certificate
Account will be paid to the related Master Servicer or Trustee as additional
compensation. If permitted by such Rating Agency or Agencies and so specified in
the related Prospectus Supplement, a Certificate Account may contain funds
relating to more than one series of mortgage pass-through certificates and may
contain other funds representing payments on mortgage loans owned by the related
Master Servicer or serviced by it on behalf of others.
DEPOSITS. Except as set forth in the related Pooling Agreement and
described in the related Prospectus Supplement, the related Master Servicer,
Trustee or Special Servicer will be required to deposit or cause to be deposited
in the Certificate Account for each Trust Fund within a certain period following
receipt (in the case of collections and payments), the following payments and
collections received, or advances made, by the Master Servicer, the Trustee or
any Special Servicer subsequent to the Cut-off Date with respect to the Mortgage
Loans in such Trust Fund (other than payments due on or before the Cut-off
Date):
(i) all payments on account of principal, including principal
prepayments, on the Mortgage Loans;
(ii) all payments on account of interest on the Mortgage
Loans, including any default interest collected, in each case net of
any portion thereof retained by the Master Servicer, any Special
Servicer or Sub-Servicer as its servicing compensation or as
compensation to the Trustee, and further net of any Spread;
(iii) all proceeds received under any hazard, title, primary
mortgage, FHA or other insurance policy that provides coverage with
respect to a particular Mortgaged Property or the related Mortgage Loan
(other than proceeds applied to the restoration of the property or
released to the related borrower in accordance with the customary
servicing practices of the Master Servicer (or, if applicable, a
Special Servicer) and/or the terms and conditions of the related
Mortgage (collectively, "Insurance Proceeds") and all other amounts
received and retained in connection with the liquidation of defaulted
Mortgage Loans or property acquired in respect thereof, by foreclosure
or otherwise ("Liquidation Proceeds"), together with the net operating
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income (less reasonable reserves for future expenses) derived from the
operation of any Mortgaged Properties acquired by the Trust Fund
through foreclosure or otherwise;
(iv) any amounts paid under any instrument or drawn from any
fund that constitutes credit enhancement for the related series of
Certificates as described under "Description of Credit Enhancement";
(v) any advances made as described under "--Advances" below;
(vi) any Buydown Funds (and, if applicable, investment
earnings thereon) required to be paid to Certificateholders, as
described below;
(vii) all proceeds of any Mortgage Loan purchased (or, in the
case of a substitution, certain amounts representing a principal
adjustment) by the Master Servicer, the Company, a Seller or any other
person pursuant to the terms of the related Pooling Agreement as
described under "The Mortgage Pools--Representations by Sellers,"
"Servicing of Mortgage Loans--Realization Upon and Sale of Defaulted
Mortgage Loans," "--Assignment of Trust Fund Assets" above, "The
Pooling Agreement--Termination" and "Purchase Obligations" (all of the
foregoing, also "Liquidation Proceeds");
(viii) any amounts paid by the Master Servicer to cover
Prepayment Interest Shortfalls arising out of the prepayment of
Mortgage Loans as described under "Servicing of Mortgage
Loans--Servicing and Other Compensation and Payment of Expenses;
Spread";
(ix) to the extent that any such item does not constitute
additional servicing compensation to the Master Servicer or a Special
Servicer, any payments on account of modification or assumption fees,
late payment charges or Prepayment Premiums on the Mortgage Loans;
(x) any amount required to be deposited by the Master Servicer
or the Trustee in connection with losses realized on investments for
the benefit of the Master Servicer or the Trustee, as the case may be,
of funds held in the Certificate Account; and
(xi) any other amounts required to be deposited in the
Certificate Account as provided in the related Pooling Agreement and
described herein or in the related Prospectus Supplement.
With respect to each Buydown Mortgage Loan, the Master Servicer will be
required to deposit the related Buydown Funds provided to it in a Buydown
Account which will comply with the requirements set forth herein with respect to
the Certificate Account. The terms of all Buydown Mortgage Loans provide for the
contribution of Buydown Funds in an amount equal to or exceeding either (i) the
total payments to be made from such funds pursuant to the related buydown plan
or (ii) if such Buydown Funds are to be deposited on a discounted basis, that
amount of Buydown Funds which, together with investment earnings thereon at a
rate as will support the scheduled level of payments due under the Buydown
Mortgage Loan. Neither the Master Servicer nor the Company will be obligated to
add to any such discounted Buydown Funds any of its own funds should investment
earnings prove insufficient to maintain the scheduled level of payments. To the
extent that any such insufficiency is not recoverable from the Mortgagor or, in
an appropriate case, from the Seller, distributions to Certificateholders may be
affected. With respect to each Buydown Mortgage Loan, the Master Servicer will
be required monthly to withdraw from the Buydown Account and deposit in the
Certificate Account as described above the amount, if any, of the Buydown Funds
(and, if applicable, investment earnings thereon) for each Buydown Mortgage Loan
that, when added to the amount due from the Mortgagor on such Buydown Mortgage
Loan, equals the full monthly payment which would be due on the Buydown
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Mortgage Loan if it were not subject to the buydown plan. The Buydown Funds will
in no event be a part of the related Trust Fund.
If the Mortgagor on a Buydown Mortgage Loan prepays such Mortgage Loan
in its entirety during the Buydown Period, the Master Servicer will be required
to withdraw from the Buydown Account and remit to the Mortgagor or such other
designated party in accordance with the related buydown plan any Buydown Funds
remaining in the Buydown Account. If a prepayment by a Mortgagor during the
Buydown Period together with Buydown Funds will result in full prepayment of a
Buydown Mortgage Loan, the Master Servicer will generally be required to
withdraw from the Buydown Account and deposit in the Certificate Account the
Buydown Funds and investment earnings thereon, if any, which together with such
prepayment will result in a prepayment in full; provided that Buydown Funds may
not be available to cover a prepayment under certain Mortgage Loan programs. Any
Buydown Funds so remitted to the Master Servicer in connection with a prepayment
described in the preceding sentence will be deemed to reduce the amount that
would be required to be paid by the Mortgagor to repay fully the related
Mortgage Loan if the Mortgage Loan were not subject to the buydown plan. Any
investment earnings remaining in the Buydown Account after prepayment or after
termination of the Buydown Period will be remitted to the related Mortgagor or
such other designated party pursuant to the agreement relating to each Buydown
Mortgage Loan (the "Buydown Agreement"). If the Mortgagor defaults during the
Buydown Period with respect to a Buydown Mortgage Loan and the property securing
such Buydown Mortgage Loan is sold in liquidation (either by the Master
Servicer, the Primary Insurer, the insurer under the Mortgage Pool Insurance
Policy (the "Pool Insurer") or any other insurer), the Master Servicer will be
required to withdraw from the Buydown Account the Buydown Funds and all
investment earnings thereon, if any, and either deposit the same in the
Certificate Account or, alternatively, pay the same to the Primary Insurer or
the Pool Insurer, as the case may be, if the Mortgaged Property is transferred
to such insurer and such insurer pays all of the loss incurred in respect of
such default.
WITHDRAWALS. Except as set forth in the related Pooling Agreement and
described in the related Prospectus Supplement, a Master Servicer, Trustee or
Special Servicer may make withdrawals from the Certificate Account for each
Trust Fund for any of the following purposes:
(i) to make distributions to the related Certificateholders on
each Distribution Date;
(ii) to reimburse the Master Servicer or any other specified
person for unreimbursed amounts advanced by it as described under
"--Advances" below in respect of Mortgage Loans in the Trust Fund, such
reimbursement to be made out of amounts received which were identified
and applied by the Master Servicer as late collections of interest (net
of related servicing fees) on and principal of the particular Mortgage
Loans with respect to which the advances were made or out of amounts
drawn under any form of credit enhancement with respect to such
Mortgage Loans;
(iii) to reimburse the Master Servicer or a Special Servicer
for unpaid servicing fees earned by it and certain unreimbursed
servicing expenses incurred by it with respect to Mortgage Loans in the
Trust Fund and properties acquired in respect thereof, such
reimbursement to be made out of amounts that represent Liquidation
Proceeds and Insurance Proceeds collected on the particular Mortgage
Loans and properties, and net income collected on the particular
properties, with respect to which such fees were earned or such
expenses were incurred or out of amounts drawn under any form of credit
enhancement with respect to such Mortgage Loans and properties;
(iv) to reimburse the Master Servicer or any other specified
person for any advances described in clause (ii) above made by it and
any servicing expenses referred to in clause (iii) above incurred by it
which, in the good faith judgment of the Master Servicer or such other
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person, will not be recoverable from the amounts described in clauses
(ii) and (iii), respectively, such reimbursement to be made from
amounts collected on other Mortgage Loans in the Trust Fund or, if and
to the extent so provided by the related Pooling Agreement and
described in the related Prospectus Supplement, only from that portion
of amounts collected on such other Mortgage Loans that is otherwise
distributable on one or more classes of Subordinate Certificates of the
related series;
(v) if and to the extent described in the related
Prospectus Supplement, to pay the Master Servicer, a Special Servicer
or another specified entity (including a provider of credit
enhancement) interest accrued on the advances described in clause (ii)
above made by it and the servicing expenses described in clause (iii)
above incurred by it while such remain outstanding and unreimbursed;
(vi) to reimburse the Master Servicer, the Company, or any
of their respective directors, officers, employees and agents, as the
case may be, for certain expenses, costs and liabilities incurred
thereby, as and to the extent described under "The Pooling
Agreement--Certain Matters Regarding the Master Servicer and the
Company";
(vii) if and to the extent described in the related Prospectus
Supplement, to pay the fees of the Trustee;
(viii) to reimburse the Trustee or any of its directors,
officers, employees and agents, as the case may be, for certain
expenses, costs and liabilities incurred thereby, as and to the extent
described under "The Pooling Agreement--Certain Matters Regarding the
Trustee";
(ix) to pay the Master Servicer or the Trustee, as
additional compensation, interest and investment income earned in
respect of amounts held in the Certificate Account;
(x) to pay (generally from related income) for costs
incurred in connection with the operation, management and maintenance
of any Mortgaged Property acquired by the Trust Fund by foreclosure or
otherwise;
(xi) if one or more elections have been made to treat the
Trust Fund or designated portions thereof as a REMIC, to pay any
federal, state or local taxes imposed on the Trust Fund or its assets
or transactions, as and to the extent described under "Federal Income
Tax Consequences--REMICS--Prohibited Transactions and Other Possible
REMIC Taxes";
(xii) to pay for the cost of an independent appraiser or
other expert in real estate matters retained to determine a fair sale
price for a defaulted Mortgage Loan or a property acquired in respect
thereof in connection with the liquidation of such Mortgage Loan or
property;
(xiii) to pay for the cost of various opinions of counsel
obtained pursuant to the related Pooling Agreement for the benefit of
the related Certificateholders;
(xiv) to pay to itself, the Company, a Seller or any other
appropriate person all amounts received with respect to each Mortgage
Loan purchased, repurchased or removed from the Trust Fund pursuant to
the terms of the related Pooling Agreement and not required to be
distributed as of the date on which the related Purchase Price is
determined;
(xv) to make any other withdrawals permitted by the related
Pooling Agreement and described in the related Prospectus Supplement;
and
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(xvi) to clear and terminate the Certificate Account upon the
termination of the Trust Fund.
DISTRIBUTIONS
Distributions on the Certificates of each series will be made by or on
behalf of the related Trustee or Master Servicer on each Distribution Date as
specified in the related Prospectus Supplement from the Available Distribution
Amount for such series and such Distribution Date. The "Available Distribution
Amount" for any series of Certificates and any Distribution Date will generally
refer to the total of all payments or other collections (or advances in lieu
thereof) on, under or in respect of the Mortgage Loans and any other assets
included in the related Trust Fund that are available for distribution to the
Certificateholders of such series on such date. The particular components of the
Available Distribution Amount for any series on each Distribution Date will be
more specifically described in the related Prospectus Supplement.
Except as otherwise specified in the related Prospectus Supplement,
distributions on the Certificates of each series (other than the final
distribution in retirement of any such Certificate) will be made to the persons
in whose names such Certificates are registered at the close of business on the
last business day of the month preceding the month in which the applicable
Distribution Date occurs (the "Record Date"), and the amount of each
distribution will be determined as of the close of business on the date (the
"Determination Date") specified in the related Prospectus Supplement. All
distributions with respect to each class of Certificates on each Distribution
Date will be allocated PRO RATA among the outstanding Certificates in such
class. Payments will be made either by wire transfer in immediately available
funds to the account of a Certificateholder at a bank or other entity having
appropriate facilities therefor, if such Certificateholder has provided the
Trustee or other person required to make such payments with wiring instructions
no later than five business days prior to the related Record Date or such other
date specified in the related Prospectus Supplement (and, if so provided in the
related Prospectus Supplement, such Certificateholder holds Certificates in the
requisite amount or denomination specified therein), or by check mailed to the
address of such Certificateholder as it appears on the Certificate Register;
provided, however, that the final distribution in retirement of any class of
Certificates will be made only upon presentation and surrender of such
Certificates at the location specified in the notice to Certificateholders of
such final distribution. Payments will be made to each Certificateholder in
accordance with such holder's Percentage Interest in a particular class. The
("Percentage Interest") represented by a Certificate of a particular class will
be equal to the percentage obtained by dividing the initial principal balance or
notional amount of such Certificate by the aggregate initial amount or notional
balance of all the Certificates of such class.
DISTRIBUTIONS OF INTEREST AND PRINCIPAL ON THE CERTIFICATES
Each class of Certificates of each series (other than certain classes
of Strip Certificates and certain REMIC Residual Certificates that have no
Pass-Through Rate) may have a different Pass-Through Rate, which may be fixed,
variable or adjustable, or any combination of two or more such rates. The
related Prospectus Supplement will specify the Pass-Through Rate or, in the case
of a variable or adjustable PassThrough Rate, the method for determining the
Pass-Through Rate, for each class.
Distributions of interest in respect of the Certificates of any class
(other than any class of Certificates that will be entitled to distributions of
accrued interest commencing only on the Distribution Date, or under the
circumstances, specified in the related Prospectus Supplement ("Accrual
Certificates"), and other than any class of Strip Certificates or REMIC Residual
Certificates that is not entitled to any distributions of interest) will be made
on each Distribution Date based on the Accrued Certificate Interest for such
class and such Distribution Date, subject to the sufficiency of the portion of
the Available Distribution Amount allocable to such class on such Distribution
Date. Prior to the time interest is
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distributable on any class of Accrual Certificates, the amount of Accrued
Certificate Interest otherwise distributable on such class will be added to the
principal balance thereof on each Distribution Date. With respect to each class
of Certificates (other than certain classes of Strip Certificates and REMIC
Residual Certificates), "Accrued Certificate Interest" for each Distribution
Date will be equal to interest at the applicable Pass-Through Rate accrued for a
specified period (generally one month) on the outstanding principal balance
thereof immediately prior to such Distribution Date. Accrued Certificate
Interest for each Distribution Date on Strip Certificates entitled to
distributions of interest will be similarly calculated except that it will
accrue on a notional amount that is either (i) based on the principal balances
of some or all of the Mortgage Loans in the related Trust Fund or (ii) equal to
the principal balances of one or more other classes of Certificates of the same
series. Reference to such a notional amount with respect to a class of Strip
Certificates is solely for convenience in making certain calculations and does
not represent the right to receive any distribution of principal. If so
specified in the related Prospectus Supplement, the amount of Accrued
Certificate Interest that is otherwise distributable on (or, in the case of
Accrual Certificates, that may otherwise be added to the principal balance of)
one or more classes of the Certificates of a series will be reduced to the
extent that any Prepayment Interest Shortfalls, as described under "Yield
Considerations", exceed the amount of any sums (including, if and to the extent
specified in the related Prospectus Supplement, the Master Servicer's servicing
compensation) that are applied to offset such shortfalls. The particular manner
in which such shortfalls will be allocated among some or all of the classes of
Certificates of that series will be specified in the related Prospectus
Supplement. The related Prospectus Supplement will also describe the extent to
which the amount of Accrued Certificate Interest that is otherwise distributable
on (or, in the case of Accrual Certificates, that may otherwise be added to the
principal balance of) a class of Offered Certificates may be reduced as a result
of any other contingencies, including delinquencies, losses and Deferred
Interest on or in respect of the related Mortgage Loans or application of the
Relief Act with respect to such Mortgage Loans. Any reduction in the amount of
Accrued Certificate Interest otherwise distributable on a class of Certificates
by reason of the allocation to such class of a portion of any Deferred Interest
on or in respect of the related Mortgage Loans will result in a corresponding
increase in the principal balance of such class.
As and to the extent described in the related Prospectus Supplement,
distributions of principal with respect to a series of Certificates will be made
on each Distribution Date to the holders of the class or classes of Certificates
of such series entitled thereto until the principal balance(s) of such
Certificates have been reduced to zero. In the case of a series of Certificates
which includes two or more classes of Certificates, the timing, sequential
order, priority of payment or amount of distributions in respect of principal,
and any schedule or formula or other provisions applicable to the determination
thereof (including distributions among multiple classes of Senior Certificates
or Subordinate Certificates), shall be as set forth in the related Prospectus
Supplement. Distributions of principal with respect to one or more classes of
Certificates may be made at a rate that is faster (and, in some cases,
substantially faster) than the rate at which payments or other collections of
principal are received on the Mortgage Loans in the related Trust Fund, may not
commence until the occurrence of certain events, such as the retirement of one
or more other classes of Certificates of the same series, or may be made at a
rate that is slower (and, in some cases, substantially slower) than the rate at
which payments or other collections of principal are received on such Mortgage
Loans. In addition, distributions of principal with respect to one or more
classes of Certificates may be made, subject to available funds, based on a
specified principal payment schedule and, with respect to one or more classes of
Certificates, may be contingent on the specified principal payment schedule for
another class of the same series and the rate at which payments and other
collections of principal on the Mortgage Loans in the related Trust Fund are
received.
PRE-FUNDING ACCOUNT
If so specified in the related Prospectus Supplement, the Pooling
Agreement or other agreement may provide for the transfer by the Sellers of
additional Mortgage Loans to the related Trust after the Closing Date. Such
additional Mortgage Loans will be required to conform to the requirements set
forth
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in the related Agreement or other agreement providing for such transfer, and
will be underwritten to the same standards as the Mortgage Loans initially
included in the Trust Fund. As specified in the related Prospectus Supplement,
such transfer may be funded by the establishment of a Pre-Funding Account (a
"Pre-Funding Account"). If a Pre-Funding 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 Mortgage Loans are transferred. A Pre-Funding Account will be
required to be maintained as an Eligible Account, all amounts therein will be
required to be invested in Permitted Investments and the amount held therein
shall at no time exceed 25% of the aggregate outstanding principal balance of
the Certificates. The related Agreement or other agreement providing for the
transfer of additional Mortgage Loans will generally provide that all such
transfers must be made within 3 months after the Closing Date, and that amounts
set aside to fund such transfers (whether in a Pre-Funding Account or otherwise)
and not so applied within the required period of time will be deemed to be
principal prepayments and applied in the manner set forth in such Prospectus
Supplement.
The Company will be required to provide data regarding the additional
Mortgage Loans to the Rating Agencies and the Insurer, if any, sufficiently in
advance of the scheduled transfer to permit review by such parties. Transfer of
the additional Mortgage Loans will be further conditioned upon confirmation by
the Rating Agencies that the addition of such Mortgage Loans to the Trust Fund
will not result in the downgrading of the Certificates or, in the case of a
series guaranteed or supported by an Insurer, will not adversely affect the
capital requirements of such Insurer. Finally, a legal opinion to the effect
that the conditions to the transfer of the additional Mortgage Loans have been
satisfied.
DISTRIBUTIONS ON THE CERTIFICATES IN RESPECT OF PREPAYMENT PREMIUMS
If so provided in the related Prospectus Supplement, Prepayment
Premiums received on or in connection with the Mortgage Assets in any Trust Fund
will be distributed on each Distribution Date to the holders of the class of
Certificates of the related series entitled thereto in accordance with the
provisions described in such Prospectus Supplement.
ALLOCATION OF LOSSES AND SHORTFALLS
The amount of any losses or shortfalls in collections on the Mortgage
Loans in any Trust Fund (to the extent not covered or offset by credit
enhancement) will be allocated among the respective classes of Certificates of
the related series in the priority and manner, and subject to the limitations,
specified in the related Prospectus Supplement. As described in the related
Prospectus Supplement, such allocations may result in reductions in the
entitlements to interest and/or principal balances of one or more such classes
of Certificates, or may be effected simply by a prioritization of payments among
such classes of Certificates.
ADVANCES
If and to the extent provided in the related Prospectus Supplement, and
subject to any limitations specified therein, the related Master Servicer may be
obligated to advance, or have the option of advancing, on or before each
Distribution Date, from its or their own funds or from excess funds held in the
related Certificate Account that are not part of the Available Distribution
Amount for the related series of Certificates for such Distribution Date, an
amount up to the aggregate of any payments of principal (other than the
principal portion of any Balloon Payments) and interest that were due on or in
respect of such Mortgage Loans during the related Due Period and were delinquent
on the related Determination Date. No notice will be given to the
Certificateholders of such advances. A "Due Period" is the period between
Distribution Dates, and scheduled payments on the Mortgage Loans in any Trust
Fund that became due during a given Due Period will, to the extent received by
the related Determination
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Date or advanced by the related Master Servicer or other specified person, be
distributed on the Distribution Date next succeeding such Determination Date.
Advances are intended to maintain a regular flow of scheduled interest
and principal payments to holders of the class or classes of Certificates
entitled thereto, rather than to guarantee or insure against losses.
Accordingly, all advances made from the Master Servicer's own funds will be
reimbursable out of related recoveries on the Mortgage Loans (including amounts
received under any fund or instrument constituting credit enhancement)
respecting which such advances were made (as to any Mortgage Loan, "Related
Proceeds") and such other specific sources as may be identified in the related
Prospectus Supplement, including amounts which would otherwise be payable as
principal to the Offered Certificates. No advance will be required to be made by
the Master Servicer if, in the good faith judgment of the Master Servicer, such
advance would not be recoverable from Related Proceeds or another specifically
identified source (any such advance, a "Nonrecoverable Advance"); and, if
previously made by a Master Servicer, a Nonrecoverable Advance will be
reimbursable from any amounts in the related Certificate Account prior to any
distributions being made to the related series of Certificateholders.
If advances have been made from excess funds in a Certificate Account,
the Master Servicer that advanced such funds will be required to replace such
funds in the Certificate Account on any future Distribution Date to the extent
that funds then in the Certificate Account are insufficient to permit full
distributions to Certificateholders on such date. If so specified in the related
Prospectus Supplement, the obligation of a Master Servicer to make advances may
be secured by a cash advance reserve fund or a surety bond. If applicable,
information regarding the characteristics of, and the identity of any obligor
on, any such surety bond, will be set forth in the related Prospectus
Supplement.
If any person other than the Master Servicer has any obligation to make
advances as described above, the related Prospectus Supplement will identify
such person.
If and to the extent so provided in the related Prospectus Supplement,
any entity making advances will be entitled to receive interest thereon for the
period that such advances are outstanding at the rate specified in such
Prospectus Supplement, and such entity will be entitled to payment of such
interest periodically from general collections on the Mortgage Loans in the
related Trust Fund prior to any payment to Certificateholders or as otherwise
provided in the related Pooling Agreement and described in such Prospectus
Supplement.
REPORTS TO CERTIFICATEHOLDERS
With each distribution to Certificateholders of a particular class of
Offered Certificates, the related Master Servicer or Trustee will forward or
cause to be forwarded to each holder of record of such class of Certificates a
statement or statements with respect to the related Trust Fund setting forth the
information specifically described in the related Pooling Agreement, which
generally will include the following as applicable except as otherwise provided
therein:
(i) the amount, if any, of such distribution allocable to
principal;
(ii) the amount, if any, of such distribution allocable to
interest;
(iii) the amount, if any, of such distribution allocable to
Prepayment Premiums;
(iv) with respect to a series consisting of two or more
classes, the outstanding principal balance or notional amount of each
class after giving effect to the distribution of principal on such
Distribution Date;
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(v) the amount of servicing compensation received by the
related Master Servicer (and, if payable directly out of the related
Trust Fund, by any Special Servicer and any Sub-Servicer);
(vi) the aggregate amount of advances included in the
distributions on such Distribution Date, and the aggregate amount of
unreimbursed advances at the close of business on such Distribution
Date;
(vii) the aggregate principal balance of the Mortgage Loans in
the related Mortgage Pool on, or as of a specified date shortly prior
to, such Distribution Date;
(viii) the number and aggregate principal balance of any
Mortgage Loans in the related Mortgage Pool in respect of which (A) one
scheduled payment is delinquent, (B) two scheduled payments are
delinquent, (C) three or more scheduled payments are delinquent and (D)
foreclosure proceedings have been commenced;
(ix) the book value of any real estate acquired by such Trust
Fund through foreclosure or grant of a deed in lieu of foreclosure;
(x) the balance of the Reserve Fund, if any, at the close of
business on such Distribution Date;
(xi) the amount of coverage under any Financial Guaranty
Insurance Policy, Mortgage Pool Insurance Policy or Letter of Credit
covering default risk as of the close of business on the applicable
Determination Date and a description of any credit enhancement
substituted therefor;
(xii) the Special Hazard Amount, Fraud Loss Amount and
Bankruptcy Amount as of the close of business on the applicable
Distribution Date and a description of any change in the calculation of
such amounts; and
(xiii) in the case of Certificates benefiting from alternative
credit enhancement arrangements described in a Prospectus Supplement,
the amount of coverage under such alternative arrangements as of the
close of business on the applicable Determination Date.
In the case of information furnished pursuant to subclauses (i)-(iii)
above, the amounts will be expressed as a dollar amount per minimum denomination
of the relevant class of Offered Certificates or per a specified portion of such
minimum denomination. In addition to the information described above, reports to
Certificateholders will contain such other information as is set forth in the
applicable Pooling Agreement, which may include, without limitation,
prepayments, reimbursements to Subservicers and the Master Servicer and losses
borne by the related Trust Fund.
In addition, within a reasonable period of time after the end of each
calendar year, the Master Servicer or Trustee will furnish a report to each
holder of record of a class of Offered Certificates at any time during such
calendar year which, among other things, will include information as to the
aggregate of amounts reported pursuant to subclauses (i)-(iii) above for such
calendar year or, in the event such person was a holder of record of a class of
Certificates during a portion of such calendar year, for the applicable portion
of such a year.
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DESCRIPTION OF CREDIT ENHANCEMENT
GENERAL
Credit support with respect to the Offered Certificates of each series
may be comprised of one or more of the following components. Each component will
have limitations and will provide coverage with respect to certain losses on the
related Mortgage Loans (as more particularly described in the related Prospectus
Supplement, "Realized Losses") that are (i) attributable to the Mortgagor's
failure to make any payment of principal or interest as required under the
Mortgage Note, but not including Special Hazard Losses, Extraordinary Losses or
other losses resulting from damage to a Mortgaged Property, Bankruptcy Losses or
Fraud Losses (any such loss, a "Defaulted Mortgage Loss"); (ii) of a type
generally covered by a Special Hazard Insurance Policy (as defined below) (any
such loss, a "Special Hazard Loss"); (iii) attributable to certain actions which
may be taken by a bankruptcy court in connection with a Mortgage Loan, including
a reduction by a bankruptcy court of the principal balance of or the Mortgage
Rate on a Mortgage Loan or an extension of its maturity (any such loss, a
"Bankruptcy Loss"); and (iv) incurred on defaulted Mortgage Loans as to which
there was fraud in the origination of such Mortgage Loans (any such loss, a
"Fraud Loss"). Defaulted Mortgage Losses, Special Hazard Losses, Bankruptcy
Losses and Fraud Losses in excess of the amount of coverage provided therefor
and losses occasioned by war, civil insurrection, certain governmental actions,
nuclear reaction and certain other risks ("Extraordinary Losses") will not be
covered. To the extent that the credit support for the Offered Certificates of
any series is exhausted, the holders thereof will bear all further risks of loss
not otherwise insured against.
As set forth below and in the applicable Prospectus Supplement, (i)
coverage with respect to Defaulted Mortgage Losses may be provided by one or
more of a Financial Guaranty Insurance Policy, Mortgage Pool Insurance Policy or
a Letter of Credit, (ii) coverage with respect to Special Hazard Losses may be
provided by one or more of a Financial Guaranty Insurance Policy, Letter of
Credit or a Special Hazard Insurance Policy (any instrument, to the extent
providing such coverage, a "Special Hazard Instrument"), (iii) coverage with
respect to Bankruptcy Losses may be provided by one or more of a Financial
Guaranty Insurance Policy, Letter of Credit or a Bankruptcy Bond and (iv)
coverage with respect to Fraud Losses may be provided by one or more of a
Financial Guaranty Insurance Policy, Mortgage Pool Insurance Policy, Letter of
Credit or mortgage repurchase bond. In addition, if provided in the applicable
Prospectus Supplement, in lieu of or in addition to any or all of the foregoing
arrangements, credit enhancement may be in the form of a Reserve Fund to cover
such losses, in the form of subordination of one or more classes of Subordinate
Certificates to provide credit support to one or more classes of Senior
Certificates, or in the form of Overcollateralization, or in the form of a
specified entity's agreement to repurchase certain Mortgage Loans or fund
certain losses pursuant to a Purchase Obligation, which obligations may be
supported by a Letter of Credit, surety bonds or other types of insurance
policies, certain other secured or unsecured corporate guarantees or in such
other form as may be described in the related Prospectus Supplement, or in the
form of a combination of two or more of the foregoing. The credit support may be
provided by an assignment of the right to receive certain cash amounts, a
deposit of cash into a Reserve Fund or other pledged assets, or by banks,
insurance companies, guarantees or any combination thereof identified in the
applicable Prospectus Supplement.
The amounts and type of credit enhancement arrangement as well as the
provider thereof, if applicable, with respect to the Offered Certificates of
each series will be set forth in the related Prospectus Supplement. To the
extent provided in the applicable Prospectus Supplement and the Pooling
Agreement, the credit enhancement arrangements may be periodically modified,
reduced and substituted for based on the aggregate outstanding principal balance
of the Mortgage Loans covered thereby. See "Description of Credit
Enhancement--Reduction or Substitution of Credit Enhancement." If specified
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in the applicable Prospectus Supplement, credit support for the Offered
Certificates of one series may cover the Offered Certificates of one or more
other series.
SUBORDINATE CERTIFICATES
If so specified in the related Prospectus Supplement, one or more
classes of Certificates of a series may be Subordinate Certificates. To the
extent specified in the related Prospectus Supplement, the rights of the holders
of Subordinate Certificates to receive distributions from the Certificate
Account on any Distribution Date will be subordinated to the corresponding
rights of the holders of Senior Certificates. If so provided in the related
Prospectus Supplement, the subordination of a class may apply only in the event
of (or may be limited to) certain types of losses or shortfalls. The related
prospectus Supplement will set forth information concerning the manner and
amount of subordination provided by a class or classes of Subordinate
Certificates in a series and the circumstances under which such subordination
will be available. The Offered Certificates of any series may include one or
more classes of Subordinate Certificates.
If the Mortgage Loans in any Trust Fund are divided into separate
groups, each supporting a separate class or classes of Certificates of the
related series, credit enhancement may be provided by cross-support provisions
requiring that distributions be made on Senior Certificates evidencing interests
in one group of Mortgage Loans prior to distributions on Subordinate
Certificates evidencing interests in a different group of Mortgage Loans within
the Trust Fund. The Prospectus Supplement for a series that includes a
cross-support provision will describe the manner and conditions for applying
such provisions.
OVERCOLLATERALIZATION
If so specified in the related Prospectus Supplement, interest
collections on the Mortgage Loans may exceed interest payments on the
Certificates for the related Payment Date (such excess referred to as "Excess
Interest"). Such Excess Interest may be deposited into a Reserve Fund or applied
as a payment of principal on the Certificates. To the extent Excess Interest is
applied as principal payments on the Certificates, the effect will be to reduce
the principal balance of the Certificates relative to the outstanding balance of
the Mortgage Loans, thereby creating "Overcollateralization" and additional
protection to the Certificateholders, as specified in the related Prospectus
Supplement. If so provided in the related Prospectus Supplement,
Overcollateralization may also be provided as to any series of Certificates by
the issuance of Certificates in an initial aggregate principal amount which is
less than the aggregate principal amount of the related Mortgage Loans.
FINANCIAL GUARANTY INSURANCE POLICY
If so specified in the related Prospectus Supplement, a financial
guaranty insurance policy or surety bond (a "Financial Guaranty Insurance
Policy") may be obtained and maintained for a class or series of Certificates.
The issuer of the Financial Guaranty Insurance Policy (the "Insurer") will be
described in the related Prospectus Supplement and a copy of the form of
Financial Guaranty Insurance Policy will be filed with the related Current
Report on Form 8-K.
A Financial Guaranty Insurance Policy will be unconditional and
irrevocable and will guarantee to holders of the applicable Certificates that an
amount equal to the full amount of payments due to such holders will be received
by the Trustee or its agent on behalf of such holders for payment on each
Payment Date. The specific terms of any Financial Guaranty Insurance Policy will
be set forth in the related Prospectus Supplement. A Financial Guaranty
Insurance Policy may have limitations and generally will not insure the
obligation of the Sellers or the Master Servicer to purchase or substitute for a
defective Mortgage Loan and will not guarantee any specific rate of principal
prepayments. The Insurer
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will be subrogated to the rights of each holder to the extent the Insurer makes
payments under the Financial Guaranty Insurance Policy.
MORTGAGE POOL INSURANCE POLICIES
Any Mortgage Pool Insurance Policy obtained by the Company for each
Trust Fund will be issued by the Pool Insurer named in the applicable Prospectus
Supplement. Each Mortgage Pool Insurance Policy will, subject to the limitations
described below, cover Defaulted Mortgage Losses in an amount equal to a
percentage specified in the applicable Prospectus Supplement of the aggregate
principal balance of the Mortgage Loans on the Cut-off Date. As set forth under
"Maintenance of Credit Enhancement," the Master Servicer will use reasonable
efforts to maintain the Mortgage Pool Insurance Policy and to present claims
thereunder to the Pool Insurer on behalf of itself, the related Trustee and the
related Certificateholders. The Mortgage Pool Insurance Policies, however, are
not blanket policies against loss, since claims thereunder may only be made
respecting particular defaulted Mortgage Loans and only upon satisfaction of
certain conditions precedent described below. Unless specified in the related
Prospectus Supplement, the Mortgage Pool Insurance Policies may not cover losses
due to a failure to pay or denial of a claim under a Primary Insurance Policy,
irrespective of the reason therefor.
Each Mortgage Pool Insurance Policy will generally provide that no
claims may be validly presented thereunder unless, among other things, (i) any
required Primary Insurance Policy is in effect for the defaulted Mortgage Loan
and a claim thereunder has been submitted and settled, (ii) hazard insurance on
the property securing such Mortgage Loan has been kept in force and real estate
taxes and other protection and preservation expenses have been paid by the
Master Servicer, (iii) if there has been physical loss or damage to the
Mortgaged Property, it has been restored to its condition (reasonable wear and
tear excepted) at the Cut-off Date and (iv) the insured has acquired good and
merchantable title to the Mortgaged Property free and clear of liens except
certain permitted encumbrances. Upon satisfaction of these conditions, the Pool
Insurer will have the option either (a) to purchase the property securing the
defaulted Mortgage Loan at a price equal to the principal balance thereof plus
accrued and unpaid interest at the applicable Mortgage Rate to the date of
purchase and certain expenses incurred by the Master Servicer, Special Servicer
or Subservicer on behalf of the related Trustee and Certificateholders, or (b)
to pay the amount by which the sum of the principal balance of the defaulted
Mortgage Loan plus accrued and unpaid interest at the Mortgage Rate to the date
of payment of the claim and the aforementioned expenses exceeds the proceeds
received from an approved sale of the Mortgaged Property, in either case net of
certain amounts paid or assumed to have been paid under any related Primary
Insurance Policy. Certificateholders will experience a shortfall in the amount
of interest payable on the related Certificates in connection with the payment
of claims under a Mortgage Pool Insurance Policy because the Pool Insurer is
only required to remit unpaid interest through the date a claim is paid rather
than through the end of the month in which such claim is paid. In addition, the
Certificateholders will also experience losses with respect to the related
Certificates in connection with payments made under a Mortgage Pool Insurance
Policy to the extent that the Master Servicer expends funds to cover unpaid real
estate taxes or to repair the related Mortgaged Property in order to make a
claim under a Mortgage Pool Insurance Policy, as those amounts will not be
covered by payments under such policy and will be reimbursable to the Master
Servicer from funds otherwise payable to the Certificateholders. If any
Mortgaged Property securing a defaulted Mortgage Loan is damaged and proceeds,
if any (see "Special Hazard Insurance Policies" below for risks which are not
covered by such policies), from the related hazard insurance policy or
applicable Special Hazard Instrument are insufficient to restore the damaged
property to a condition sufficient to permit recovery under the Mortgage Pool
Insurance Policy, the Master Servicer is not required to expend its own funds to
restore the damaged property unless it determines (x) that such restoration will
increase the proceeds to one or more classes of Certificateholders on
liquidation of the Mortgage Loan after reimbursement of the Master Servicer for
its expenses and (y) that such expenses will be recoverable by it through
Liquidation Proceeds or Insurance Proceeds.
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A Mortgage Pool Insurance Policy (and certain Primary Insurance
Policies) will likely not insure against loss sustained by reason of a default
arising from, among other things, (i) fraud or negligence in the origination or
servicing of a Mortgage Loan, including misrepresentation by the Mortgagor, the
Seller or other persons involved in the origination thereof, or (ii) failure to
construct a Mortgaged Property in accordance with plans and specifications.
Depending upon the nature of the event, a breach of representation made by a
Seller may also have occurred. Such a breach, if it materially and adversely
affects the interests of Certificateholders and cannot be cured, would give rise
to a purchase obligation on the part of the Seller, as more fully described
under "The Mortgage Pools--Representations by Sellers." However, such an event
would not give rise to a breach of a representation and warranty or a purchase
obligation on the part of the Company or Master Servicer.
The original amount of coverage under each Mortgage Pool Insurance
Policy will be reduced over the life of the related series of Certificates by
the aggregate dollar amount of claims paid less the aggregate of the net amounts
realized by the Pool Insurer upon disposition of all foreclosed properties. The
amount of claims paid includes certain expenses incurred by the Master Servicer,
Special Servicer or Subservicer as well as accrued interest on delinquent
Mortgage Loans to the date of payment of the claim. Accordingly, if aggregate
net claims paid under any Mortgage Pool Insurance Policy reach the original
policy limit, coverage under that Mortgage Pool Insurance Policy will be
exhausted and any further losses will be borne by holders of the related series
of Certificates. In addition, unless the Master Servicer could determine that an
advance in respect of a delinquent Mortgage Loan would be recoverable to it from
the proceeds of the liquidation of such Mortgage Loan or otherwise, the Master
Servicer would not be obligated to make an advance respecting any such
delinquency since the advance would not be ultimately recoverable to it from
either the Mortgage Pool Insurance Policy or from any other related source. See
"Description of the Certificates--Advances."
Since each Mortgage Pool Insurance Policy will require that the
property subject to a defaulted Mortgage Loan be restored to its original
condition prior to claiming against the Pool Insurer, such policy will not
provide coverage against hazard losses. As set forth under "Primary Mortgage
Insurance, Hazard Insurance; Claims Thereunder," the hazard policies covering
the Mortgage Loans typically exclude from coverage physical damage resulting
from a number of causes and, even when the damage is covered, may afford
recoveries which are significantly less than full replacement cost of such
losses. Further, no coverage in respect of Special Hazard Losses, Fraud Losses
or Bankruptcy Losses will cover all risks, and the amount of any such coverage
will be limited. See "Special Hazard Insurance Policies" below. As a result,
certain hazard risks will not be insured against and will therefore be borne by
the related Certificateholders.
LETTER OF CREDIT
If any component of credit enhancement as to the Offered Certificates
of any series is to be provided by a letter of credit (the "Letter of Credit"),
a bank (the "Letter of Credit Bank") will deliver to the related Trustee an
irrevocable Letter of Credit. The Letter of Credit may provide direct coverage
with respect to the Mortgage Loans or, if specified in the related Prospectus
Supplement, support an entity's obligation pursuant to a Purchase Obligation to
make certain payments to the related Trustee with respect to one or more
components of credit enhancement. The Letter of Credit Bank, as well as the
amount available under the Letter of Credit with respect to each component of
credit enhancement, will be specified in the applicable Prospectus Supplement.
If so specified in the related Prospectus Supplement, the Letter of Credit may
permit draws only in the event of certain types of losses and shortfalls. The
Letter of Credit may also provide for the payment of advances which the Master
Servicer would be obligated to make with respect to delinquent monthly mortgage
payments. The amount available under the Letter of Credit will, in all cases, be
reduced to the extent of the unreimbursed payments thereunder and may otherwise
be reduced as described in the related Prospectus Supplement.
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The Letter of Credit will expire on the expiration date set forth in the related
Prospectus Supplement, unless earlier terminated or extended in accordance with
its terms.
SPECIAL HAZARD INSURANCE POLICIES
Any insurance policy covering Special Hazard Losses (a "Special Hazard
Insurance Policy") obtained by the Company for a Trust Fund will be issued by
the insurer named in the applicable Prospectus Supplement. Each Special Hazard
Insurance Policy will, subject to limitations described below, protect holders
of the related series of Certificates from (i) losses due to direct physical
damage to a Mortgaged Property other than any loss of a type covered by a hazard
insurance policy or a flood insurance policy, if applicable, and (ii) losses
from partial damage caused by reason of the application of the co-insurance
clauses contained in hazard insurance policies ("Special Hazard Losses"). See
"Primary Mortgage Insurance, Hazard Insurance; Claims Thereunder." However, a
Special Hazard Insurance Policy will not cover losses occasioned by war, civil
insurrection, certain governmental actions, errors in design, faulty workmanship
or materials (except under certain circumstances), nuclear reaction, chemical
contamination, waste by the Mortgagor and certain other risks. Aggregate claims
under a Special Hazard Insurance Policy will be limited to the amount set forth
in the related Prospectus Supplement and will be subject to reduction as
described in such related Prospectus Supplement. A Special Hazard Insurance
Policy will provide that no claim may be paid unless hazard and, if applicable,
flood insurance on the property securing the Mortgage Loan has been kept in
force and other protection and preservation expenses have been paid by the
Master Servicer.
Subject to the foregoing limitations, a Special Hazard Insurance Policy
will provide that, where there has been damage to property securing a foreclosed
Mortgage Loan (title to which has been acquired by the insured) and to the
extent such damage is not covered by the hazard insurance policy or flood
insurance policy, if any, maintained by the Mortgagor or the Master Servicer,
Special Servicer or the Subservicer, the insurer will pay the lesser of (i) the
cost of repair or replacement of such property or (ii) upon transfer of the
property to the insurer, the unpaid principal balance of such Mortgage Loan at
the time of acquisition of such property by foreclosure or deed in lieu of
foreclosure, plus accrued interest at the Mortgage Rate to the date of claim
settlement and certain expenses incurred by the Master Servicer, Special
Servicer or Subservicer with respect to such property. If the property is
transferred to a third party in a sale approved by the issuer of the Special
Hazard Insurance Policy (the "Special Hazard Insurer"), the amount that the
Special Hazard Insurer will pay will be the amount under (ii) above reduced by
the net proceeds of the sale of the property. No claim may be validly presented
under the Special Hazard Insurance Policy unless hazard insurance on the
property securing a defaulted Mortgage Loan has been kept in force and other
reimbursable protection, preservation and foreclosure expenses have been paid
(all of which must be approved in advance by the Special Hazard Insurer). If the
unpaid principal balance plus accrued interest and certain expenses is paid by
the insurer, the amount of further coverage under the related Special Hazard
Insurance Policy will be reduced by such amount less any net proceeds from the
sale of the property. Any amount paid as the cost of repair of the property will
further reduce coverage by such amount. Restoration of the property with the
proceeds described under (i) above will satisfy the condition under each
Mortgage Pool Insurance Policy that the property be restored before a claim
under such Mortgage Pool Insurance Policy may be validly presented with respect
to the defaulted Mortgage Loan secured by such property. The payment described
under (ii) above will render presentation of a claim in respect of such Mortgage
Loan under the related Mortgage Pool Insurance Policy unnecessary. Therefore, so
long as a Mortgage Pool Insurance Policy remains in effect, the payment by the
insurer under a Special Hazard Insurance Policy of the cost of repair or of the
unpaid principal balance of the related Mortgage Loan plus accrued interest and
certain expenses will not affect the total Insurance Proceeds paid to
Certificateholders, but will affect the relative amounts of coverage remaining
under the related Special Hazard Insurance Policy and Mortgage Pool Insurance
Policy.
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As and to the extent set forth in the applicable Prospectus Supplement,
coverage in respect of Special Hazard Losses for a series of Certificates may be
provided, in whole or in part, by a type of Special Hazard Instrument other than
a Special Hazard Insurance Policy or by means of the special hazard
representation of the Company.
BANKRUPTCY BONDS
In the event of a personal bankruptcy of a Mortgagor, it is possible
that the bankruptcy court may establish the value of the Mortgaged Property of
such Mortgagor at an amount less than the then outstanding principal balance of
the Mortgage Loan secured by such Mortgaged Property (a "Deficient Valuation").
The amount of the secured debt could then be reduced to such value, and, thus,
the holder of such Mortgage Loan would become an unsecured creditor to the
extent the outstanding principal balance of such Mortgage Loan exceeds the value
assigned to the Mortgaged Property by the bankruptcy court. In addition, certain
other modifications of the terms of a Mortgage Loan can result from a bankruptcy
proceeding, including a reduction in the amount of the Monthly Payment on the
related Mortgage Loan (a "Debt Service Reduction"; Debt Service Reductions and
Deficient Valuations, collectively referred to herein as Bankruptcy Losses). See
"Certain Legal Aspects of Mortgage Loans and Related Matters--Anti-Deficiency
Legislation and Other Limitations on Lenders." Any Bankruptcy Bond to provide
coverage for Bankruptcy Losses for proceedings under the federal Bankruptcy Code
obtained by the Company for a Trust Fund will be issued by an insurer named in
the applicable Prospectus Supplement. The level of coverage under each
Bankruptcy Bond will be set forth in the applicable Prospectus Supplement.
RESERVE FUNDS
If so provided in the related Prospectus Supplement, the Company will
deposit or cause to be deposited in an account (a "Reserve Fund") any
combination of cash, one or more irrevocable letters of credit or one or more
Permitted Investments in specified amounts, or any other instrument satisfactory
to the relevant Rating Agency or Agencies, which will be applied and maintained
in the manner and under the conditions specified in such Prospectus Supplement.
In the alternative or in addition to such deposit, to the extent described in
the related Prospectus Supplement, a Reserve Fund may be funded through
application of all or a portion of amounts otherwise payable on any related
Subordinate Certificates, from the Spread or otherwise. To the extent that the
funding of the Reserve Fund is dependent on amounts otherwise payable on related
Subordinate Certificates, Spread or other cash flows attributable to the related
Mortgage Loans or on reinvestment income, the Reserve Fund may provide less
coverage than initially expected if the cash flows or reinvestment income on
which such funding is dependent are lower than anticipated. In addition, with
respect to any series of Certificates as to which credit enhancement includes a
Letter of Credit, if so specified in the related Prospectus Supplement, under
certain circumstances the remaining amount of the Letter of Credit may be drawn
by the Trustee and deposited in a Reserve Fund. Amounts in a Reserve Fund may be
distributed to Certificateholders, or applied to reimburse the Master Servicer
for outstanding advances, or may be used for other purposes, in the manner and
to the extent specified in the related Prospectus Supplement. The related
Prospectus Supplement will disclose whether any such Reserve Fund is part of the
related Trust Fund. If set forth in the related Prospectus Supplement, a Reserve
Fund may provide coverage to more than one series of Certificates.
In connection with the establishment of any Reserve Fund, the Reserve
Fund will be structured so that the Trustee will have a perfected security
interest for the benefit of the Certificateholders in the assets in the Reserve
Fund. However, to the extent that the Company, any affiliate thereof or any
other entity has an interest in any Reserve Fund, in the event of the
bankruptcy, receivership or insolvency of such entity, there could be delays in
withdrawals from the Reserve Fund and corresponding payments to the
Certificateholders which could adversely affect the yield to investors on the
related Certificates.
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Amounts deposited in any Reserve Fund for a series will be invested in
Permitted Investments by, or at the direction of, and for the benefit of the
Master Servicer or any other person named in the related Prospectus Supplement.
MAINTENANCE OF CREDIT ENHANCEMENT
To the extent that the applicable Prospectus Supplement does not
expressly provide for alternative credit enhancement arrangements in lieu of
some or all of the arrangements mentioned below, the following paragraphs shall
apply.
If a Financial Guaranty Insurance Policy has been obtained for a series
of Certificates, the Master Servicer will be obligated to exercise reasonable
efforts to keep such Financial Guaranty Insurance Policy in full force and
effect throughout the term of the applicable Pooling Agreement, unless coverage
thereunder has been exhausted through payment of claims or until such Financial
Guaranty Insurance Policy is replaced in accordance with the terms of the
applicable Pooling Agreement. The Master Servicer will agree to pay the premiums
for each Financial Guaranty Insurance Policy on a timely basis. In the event the
Insurer ceases to be a qualified insurer as described in the related Prospectus
Supplement, or fails to make a required payment under the related Financial
Guaranty Insurance Policy, the Master Servicer will have no obligation to
replace the Insurer. Any losses associated with any reduction or withdrawal in
rating by an applicable Rating Agency shall be borne by the related
Certificateholders.
If a Mortgage Pool Insurance Policy has been obtained for a series of
Certificates, the Master Servicer will be obligated to exercise reasonable
efforts to keep such Mortgage Pool Insurance Policy (or an alternate form of
credit support) in full force and effect throughout the term of the applicable
Pooling Agreement, unless coverage thereunder has been exhausted through payment
of claims or until such Mortgage Pool Insurance Policy is replaced in accordance
with the terms of the applicable Pooling Agreement. The Master Servicer will
agree to pay the premiums for each Mortgage Pool Insurance Policy on a timely
basis. In the event the Pool Insurer ceases to be a Qualified Insurer (such term
being defined to mean a private mortgage guaranty insurance company duly
qualified as such under the laws of the state of its incorporation and each
state having jurisdiction over the insurer in connection with the Mortgage Pool
Insurance Policy and approved as an insurer by FHLMC, FNMA or any successor
entity) because it ceases to be qualified under any such law to transact such
insurance business or coverage is terminated for any reason other than
exhaustion of such coverage, the Master Servicer will use reasonable efforts to
obtain from another Qualified Insurer a replacement insurance policy comparable
to the Mortgage Pool Insurance Policy with a total coverage equal to the then
outstanding coverage of such Mortgage Pool Insurance Policy, provided that, if
the cost of the replacement policy is greater than the cost of such Mortgage
Pool Insurance Policy, the coverage of the replacement policy will, unless
otherwise agreed to by the Company, be reduced to a level such that its premium
rate does not exceed the premium rate on such Mortgage Pool Insurance Policy. In
the event that the Pool Insurer ceases to be a Qualified Insurer because it
ceases to be approved as an insurer by FHLMC, FNMA or any successor entity, the
Master Servicer will be obligated to review, not less often than monthly, the
financial condition of the Pool Insurer with a view toward determining whether
recoveries under the Mortgage Pool Insurance Policy are jeopardized for reasons
related to the financial condition of the Pool Insurer. If the Master Servicer
determines that recoveries are so jeopardized, it will be obligated to exercise
its best reasonable efforts to obtain from another Qualified Insurer a
replacement insurance policy as described above, subject to the same cost limit.
Any losses associated with any reduction or withdrawal in rating by an
applicable Rating Agency shall be borne by the related Certificateholders.
If a Letter of Credit has been obtained for a series of Certificates,
the Master Servicer will be obligated to exercise reasonable efforts to keep or
cause to be kept such Letter of Credit (or an alternate form of credit support)
in full force and effect throughout the term of the applicable Pooling
Agreement, unless coverage thereunder has been exhausted through payment of
claims or otherwise, or substitution
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therefor is made as described below under "--Reduction or Substitution of Credit
Enhancement." If a Letter of Credit obtained for a series of Certificates is
scheduled to expire prior to the date the final distribution on such
Certificates is made and coverage under such Letter of Credit has not been
exhausted and no substitution has occurred, the Trustee will draw the amount
available under the Letter of Credit and maintain such amount in trust for such
Certificateholders.
In lieu of the Master Servicer's obligation to maintain a Financial
Guaranty Insurance Policy, Mortgage Pool Insurance Policy or Letter of Credit as
provided above, the Master Servicer may obtain a substitute Financial Guaranty
Insurance Policy, Mortgage Pool Insurance Policy or Letter of Credit. If the
Master Servicer obtains such a substitute Letter of Credit, Mortgage Pool
Insurance Policy or other form of credit enhancement, it will maintain and keep
such Financial Guaranty Insurance Policy, Mortgage Pool Insurance Policy or
Letter of Credit in full force and effect as provided herein. Prior to its
obtaining any substitute Financial Guaranty Insurance Policy, Mortgage Pool
Insurance Policy or Letter of Credit, the Master Servicer will obtain written
confirmation from the Rating Agency or Agencies that rated the related series of
Certificates that the substitution of such Financial Guaranty Insurance Policy,
Mortgage Pool Insurance Policy or Letter of Credit for the existing credit
enhancement will not adversely affect the then-current ratings assigned to such
Certificates by such Rating Agency or Agencies.
If a Special Hazard Instrument has been obtained for a series of
Certificates, the Master Servicer will also be obligated to exercise reasonable
efforts to maintain and keep such Special Hazard Instrument in full force and
effect throughout the term of the applicable Pooling Agreement, unless coverage
thereunder has been exhausted through payment of claims or otherwise or
substitution therefor is made as described below under "--Reduction or
Substitution of Credit Enhancement." If the Special Hazard Instrument takes the
form of a Special Hazard Insurance Policy, such policy will provide coverage
against risks of the type described herein under "Description of Credit
Enhancement--Special Hazard Insurance Policies." The Master Servicer may obtain
a substitute Special Hazard Instrument for the existing Special Hazard
Instrument if prior to such substitution the Master Servicer obtains written
confirmation from the Rating Agency or Agencies that rated the related
Certificates that such substitution shall not adversely affect the then-current
ratings assigned to such Certificates by such Rating Agency or Agencies.
If a Bankruptcy Bond has been obtained for a series of Certificates,
the Master Servicer will be obligated to exercise reasonable efforts to maintain
and keep such Bankruptcy Bond in full force and effect throughout the term of
the Pooling Agreement, unless coverage thereunder has been exhausted through
payment of claims or substitution therefor is made as described below under
"--Reduction or Substitution of Credit Enhancement." The Master Servicer may
obtain a substitute Bankruptcy Bond or other credit enhancement for the existing
Bankruptcy Bond if prior to such substitution the Master Servicer obtains
written confirmation from the Rating Agency or Agencies that rated the related
Certificates that such substitution shall not adversely affect the then-current
ratings assigned to such Certificates by such Rating Agency or Agencies. See
"--Bankruptcy Bonds" above.
The Master Servicer, on behalf of itself, the Trustee and
Certificateholders, will provide the Trustee information required for the
Trustee to draw under the Letter of Credit and will present claims to the
provider of any Purchase Obligation, to each Pool Insurer, to the issuer of each
Special Hazard Insurance Policy or other Special Hazard Instrument, to the
issuer of each Bankruptcy Bond and, in respect of defaulted Mortgage Loans for
which there is no Subservicer, to each Primary Insurer and take such reasonable
steps as are necessary to permit recovery under such Letter of Credit, Purchase
Obligation, insurance policies or comparable coverage respecting defaulted
Mortgage Loans or Mortgage Loans which are the subject of a bankruptcy
proceeding. Additionally, the Master Servicer will present such claims and take
such steps as are reasonably necessary to provide for the performance by the
provider of the Purchase Obligation of its Purchase Obligation. As set forth
above, all collections by the Master Servicer under any Purchase Obligation, any
Mortgage Pool Insurance Policy, any Primary
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Insurance Policy or any Bankruptcy Bond and, where the related property has not
been restored, any Special Hazard Instrument, are to be deposited in the related
Certificate Account, subject to withdrawal as described above. All draws under
any Letter of Credit are also to be deposited in the related Certificate
Account. In those cases in which a Mortgage Loan is serviced by a Subservicer,
the Subservicer, on behalf of itself, the Trustee and the Certificateholders
will present claims to the Primary Insurer, and all collections thereunder shall
initially be deposited in a subservicing account that generally meets the
requirements for the Certificate Account prior to being delivered to the Master
Servicer for deposit in the related Certificate Account.
If any property securing a defaulted Mortgage Loan is damaged and
proceeds, if any, from the related hazard insurance policy or any applicable
Special Hazard Instrument are insufficient to restore the damaged property to a
condition sufficient to permit recovery under any Financial Guaranty Insurance
Policy, Mortgage Pool Insurance Policy, Letter of Credit or any related Primary
Insurance Policy, the Master Servicer is not required to expend its own funds to
restore the damaged property unless it determines (i) that such restoration will
increase the proceeds to one or more classes of Certificateholders on
liquidation of the Mortgage Loan after reimbursement of the Master Servicer for
its expenses and (ii) that such expenses will be recoverable by it through
Liquidation Proceeds or Insurance Proceeds. If recovery under any Financial
Guaranty Insurance Policy, Mortgage Pool Insurance Policy, Letter of Credit or
any related Primary Insurance Policy is not available because the Master
Servicer has been unable to make the above determinations, has made such
determinations incorrectly or recovery is not available for any other reason,
the Master Servicer is nevertheless obligated to follow such normal practices
and procedures (subject to the preceding sentence) as it deems necessary or
advisable to realize upon the defaulted Mortgage Loan and in the event such
determination has been incorrectly made, is entitled to reimbursement of its
expenses in connection with such restoration.
REDUCTION OR SUBSTITUTION OF CREDIT ENHANCEMENT
The amount of credit support provided pursuant to any form of credit
enhancement may be reduced under certain specified circumstances. In most cases,
the amount available pursuant to any form of credit enhancement will be subject
to periodic reduction in accordance with a schedule or formula on a
nondiscretionary basis pursuant to the terms of the related Pooling Agreement.
Additionally, in most cases, such form of credit support (and any replacements
therefor) may be replaced, reduced or terminated, and the formula used in
calculating the amount of coverage with respect to Bankruptcy Losses, Special
Hazard Losses or Fraud Losses may be changed, without the consent of the
Certificateholders, upon the written assurance from each applicable Rating
Agency that the then-current rating of the related series of Certificates will
not be adversely affected. Furthermore, in the event that the credit rating of
any obligor under any applicable credit enhancement is downgraded, the credit
rating(s) of the related series of Certificates may be downgraded to a
corresponding level, and the Master Servicer will not be obligated to obtain
replacement credit support in order to restore the rating(s) of the related
series of Certificates. The Master Servicer will also be permitted to replace
such credit support with other credit enhancement instruments issued by obligors
whose credit ratings are equivalent to such downgraded level and in lower
amounts which would satisfy such downgraded level, provided that the
then-current rating(s) of the related series of Certificates are maintained.
Where the credit support is in the form of a Reserve Fund, a permitted reduction
in the amount of credit enhancement will result in a release of all or a portion
of the assets in the Reserve Fund to the Company, the Master Servicer or such
other person that is entitled thereto. Any assets so released will not be
available for distributions in future periods.
PURCHASE OBLIGATIONS
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With respect to certain types of Mortgage Loans to be included in any
Mortgage Pool, if specified in the related Prospectus Supplement, the Mortgage
Loans may be sold subject to a Purchase Obligation as described below that would
become applicable on a specified date or upon the occurrence of a specified
event. For example, with respect to certain types of ARM Loans as to which the
Mortgage Rate is fixed for the first five years, a Purchase Obligation may apply
on the first date that the Mortgage Rate of such Mortgage Loan is adjusted, and
such obligation may apply to the Mortgage Loans or to the related Certificates
themselves, or to a corresponding Purchase Obligation of the Company or another
person as specified in the related Prospectus Supplement. With respect to any
Purchase Obligation, such obligation will be an obligation of an entity (which
may include a bank or other financial institution or an insurance company)
specified in the related Prospectus Supplement, and an instrument evidencing
such obligation (a "Purchase Obligation") shall be delivered to the related
Trustee for the benefit of the Certificateholders to the related series.
The specific terms and conditions applicable to any Purchase Obligation
will be described in the related Prospectus Supplement, including the purchase
price, the timing of and any limitations and conditions to any such purchase.
Any Purchase Obligation will be payable solely to the Trustee for the benefit of
the Certificateholders of the related series and will be nontransferable. Each
Purchase Obligation will be a general unsecured obligation of the provider
thereof, and prospective purchasers of Offered Certificates must look solely to
the credit of such entity for payment under the Purchase Obligation.
PRIMARY MORTGAGE INSURANCE, HAZARD INSURANCE;
CLAIMS THEREUNDER
GENERAL
Each Mortgage Loan will be required to be covered by a hazard insurance
policy (as described below) and, if required as described below, a Primary
Insurance Policy. The following is only a brief description of certain insurance
policies and does not purport to summarize or describe all of the provisions of
these policies. Such insurance is subject to underwriting and approval of
individual Mortgage Loans by the respective insurers.
PRIMARY MORTGAGE INSURANCE POLICIES
Each Single Family Loan having a Loan-to-Value Ratio at origination of
over 80% (or other percentage described in the related Prospectus Supplement) is
required by the Company to be covered by a primary mortgage guaranty insurance
policy (a "Primary Insurance Policy") insuring against default on such Mortgage
Loan as to at least the principal amount thereof exceeding 75% of the Value of
the related Mortgaged Property at origination of the Mortgage Loan, unless and
until the principal balance of the Mortgage Loan is reduced to a level that
would produce a Loan-to-Value Ratio equal to or less than at least 80%. In
addition, the Company will represent and warrant that, to the best of the
Company's knowledge, such Mortgage Loans are so covered. However, the foregoing
standard may vary significantly depending on the characteristics of the Mortgage
Loans and the applicable underwriting standards, and any variation will be
described in the related Prospectus Supplement. A Mortgage Loan will not be
considered to be an exception to the foregoing standard if no Primary Insurance
Policy was obtained at origination but the Mortgage Loan has amortized to below
an 80% Loan-to-Value Ratio level as of the applicable Cut-off Date. Mortgage
Loans which are subject to negative amortization will only be covered by a
Primary Insurance Policy if such coverage was so required upon their
origination, notwithstanding that subsequent negative amortization may cause
such Mortgage Loan's Loan-to-Value Ratio (based on the then-current balance) to
subsequently exceed the limits which would have required such coverage upon
their origination.
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While the terms and conditions of the Primary Insurance Policies issued
by one primary mortgage guaranty insurer (a "Primary Insurer") will differ from
those in Primary Insurance Policies issued by other Primary Insurers, each
Primary Insurance Policy will in general provide substantially the following
coverage. The amount of the loss as calculated under a Primary Insurance Policy
covering a Mortgage Loan (herein referred to as the "Loss") will generally
consist of the unpaid principal amount of such Mortgage Loan and accrued and
unpaid interest thereon and reimbursement of certain expenses, less (i) rents or
other payments collected or received by the insured (other than the proceeds of
hazard insurance) that are derived from the related Mortgaged Property, (ii)
hazard insurance proceeds in excess of the amount required to restore such
Mortgaged Property and which have not been applied to the payment of the
Mortgage Loan, (iii) amounts expended but not approved by the Primary Insurer,
(iv) claim payments previously made on such Mortgage Loan and (v) unpaid
premiums and certain other amounts.
The Primary Insurer will generally be required to pay either: (i) the
insured percentage of the Loss; (ii) the entire amount of the Loss, after
receipt by the Primary Insurer of good and merchantable title to, and possession
of, the Mortgaged Property; or (iii) at the option of the Primary Insurer under
certain Primary Insurance Policies, the sum of the delinquent monthly payments
plus any advances made by the insured, both to the date of the claim payment
and, thereafter, monthly payments in the amount that would have become due under
the Mortgage Loan if it had not been discharged plus any advances made by the
insured until the earlier of (a) the date the Mortgage Loan would have been
discharged in full if the default had not occurred or (b) an approved sale.
As conditions precedent to the filing or payment of a claim under a
Primary Insurance Policy, in the event of default by the Mortgagor, the insured
will typically be required, among other things, to: (i) advance or discharge (a)
hazard insurance premiums and (b) as necessary and approved in advance by the
Primary Insurer, real estate taxes, protection and preservation expenses and
foreclosure and related costs; (ii) in the event of any physical loss or damage
to the Mortgaged Property, have the Mortgaged Property restored to at least its
condition at the effective date of the Primary Insurance Policy (ordinary wear
and tear excepted); and (iii) tender to the Primary Insurer good and
merchantable title to, and possession of, the Mortgaged Property.
For any Certificates offered hereunder, the Master Servicer will
maintain or cause each Subservicer to maintain, as the case may be, in full
force and effect and to the extent coverage is available a Primary Insurance
Policy with regard to each Single Family Loan for which such coverage is
required under the standard described above, provided that such Primary
Insurance Policy was in place as of the Cut-off Date and the Company had
knowledge of such Primary Insurance Policy. In the event that the Company gains
knowledge that as of the Closing Date, a Mortgage Loan had a Loan-to-Value Ratio
at origination in excess of 80% and was not the subject of a Primary Insurance
Policy (and was not included in any exception to such standard disclosed in the
related Prospectus Supplement) and that such Mortgage Loan has a then current
Loan-to-Value Ratio in excess of 80%, then the Master Servicer is required to
use reasonable efforts to obtain and maintain a Primary Insurance Policy to the
extent that such a policy is obtainable at a reasonable price. The Master
Servicer or, in the case of a Designated Seller Transaction, the Seller will not
cancel or refuse to renew any such Primary Insurance Policy in effect at the
time of the initial issuance of a series of Certificates that is required to be
kept in force under the applicable Pooling Agreement unless the replacement
Primary Insurance Policy for such cancelled or non-renewed policy is maintained
with an insurer whose claims-paying ability is acceptable to the Rating Agency
or Agencies that rated such series of Certificates for mortgage pass-through
certificates having a rating equal to or better than the highest then-current
rating of any class of such series of Certificates. For further information
regarding the extent of coverage under any Mortgage Pool Insurance Policy or
Primary Insurance Policy, see "Description of Credit Enhancement--Mortgage Pool
Insurance Policies."
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HAZARD INSURANCE POLICIES
The terms of the Mortgage Loans require each Mortgagor to maintain a
hazard insurance policy for their Mortgage Loan. Additionally, the Pooling
Agreement will require the Master Servicer to cause to be maintained for each
Mortgage Loan a hazard insurance policy providing for no less than the coverage
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 owing on such Mortgage
Loan or 100% of the insurable value of the improvements securing the Mortgage
Loan except that, if generally available, such coverage must not be less than
the minimum amount required under the terms thereof to fully compensate for any
damage or loss on a replacement cost basis. The ability of the Master Servicer
to ensure that hazard insurance proceeds are appropriately applied may be
dependent on its being named as an additional insured under any hazard insurance
policy and under any flood insurance policy referred to below, or upon the
extent to which information in this regard is furnished to the Master Servicer
by Mortgagors or Subservicers.
As set forth above, all amounts collected by the Master Servicer under
any hazard policy (except for amounts to be applied to the restoration or repair
of the Mortgaged Property or released to the Mortgagor in accordance with the
Master Servicer's normal servicing procedures) will be deposited in the related
Certificate Account. The Pooling Agreement will provide that the Master Servicer
may satisfy its obligation to cause hazard policies to be maintained by
maintaining a blanket policy insuring against losses on the Mortgage Loans. If
such blanket policy contains a deductible clause, the Master Servicer will
deposit in the applicable Certificate Account all sums which would have been
deposited therein but for such clause.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements on the property by
fire, lightning, explosion, smoke, windstorm, hail, riot, strike and civil
commotion, subject to the conditions and exclusions specified in each policy.
Although the policies relating to the Mortgage Loans will be underwritten by
different insurers 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 the
following: war, revolution, governmental actions, floods and other water-related
causes, earth movement (including earthquakes, landslides and mudflows), nuclear
reactions, wet or dry rot, vermin, rodents, insects or domestic animals, theft
and, in certain cases, vandalism. The foregoing list is merely indicative of
certain kinds of uninsured risks and is not intended to be all-inclusive. Where
the improvements securing a Mortgage Loan are located in a federally designated
flood area at the time of origination of such Mortgage Loan, the Pooling
Agreement requires the Master Servicer to cause to be maintained for each such
Mortgage Loan serviced, flood insurance (to the extent available) in an amount
equal in general to the lesser of the amount required to compensate for any loss
or damage on a replacement cost basis or the maximum insurance available under
the federal flood insurance program.
The hazard insurance policies covering the Mortgaged Properties
typically contain a co-insurance clause which in effect requires the insured at
all times to carry insurance of a specified percentage (generally 80% to 90%) of
the full replacement value of the improvements on the property in order to
recover the full amount of any partial loss. If the insured's coverage falls
below this specified percentage, such clause generally provides that the
insurer's liability in the event of partial loss does not exceed the greater of
(i) the replacement cost of the improvements damaged or destroyed less physical
depreciation or (ii) such proportion of the loss as the amount of insurance
carried bears to the specified percentage of the full replacement cost of such
improvements.
Since the amount of hazard insurance that Mortgagors are required to
maintain on the improvements securing the Mortgage Loans may decline as the
principal balances owing thereon decrease,
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and since residential properties have historically appreciated in value over
time, hazard insurance proceeds could be insufficient to restore fully the
damaged property in the event of a partial loss. See "Description of Credit
Enhancement--Special Hazard Insurance Policies" for a description of the limited
protection afforded by any Special Hazard Insurance Policy against losses
occasioned by hazards which are otherwise uninsured against (including losses
caused by the application of the co-insurance clause described in the preceding
paragraph).
Under the terms of the Mortgage Loans, Mortgagors are generally
required to present claims to insurers under hazard insurance policies
maintained on the Mortgaged Properties. The Master Servicer, on behalf of the
Trustee and Certificateholders, is obligated to present claims under any Special
Hazard Insurance Policy or other Special Hazard Instrument and any blanket
insurance policy insuring against hazard losses on the Mortgaged Properties.
However, the ability of the Master Servicer to present such claims is dependent
upon the extent to which information in this regard is furnished to the Master
Servicer or the Subservicers by Mortgagors.
FHA INSURANCE
The FHA is responsible for administering various federal programs,
including mortgage insurance, authorized under The Housing Act and the United
States Housing Act of 1937, as amended.
Section 223(f) of the Housing Act allows HUD to insure mortgage loans
made for the purchase or refinancing of existing apartment projects which are at
least three years old. Section 244 also provides for co-insurance of mortgage
loans made under Section 223(f). Under Section 223(f), the loan proceeds cannot
be used for substantial rehabilitation work, but repairs may be made for up to,
in general, the greater of 15% of the value of the project or a dollar amount
per apartment unit established from time to time by HUD. In general the loan
term may not exceed 35 years and a loan to value ratio of no more than 85% is
required for the purchase of a project and 70% for the refinancing of a project.
HUD has the option, in most cases, to pay insurance claims in cash or
in debentures issued by HUD. Presently, claims are being paid in cash, and
claims have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debenture interest rate. The Master Servicer will be obligated to purchase any
such debenture issued in satisfaction of a defaulted FHA insured Mortgage Loan
serviced by it for an amount equal to the principal amount of any such
debenture.
The Master Servicer will be required to take such steps as are
reasonably necessary to keep FHA insurance in full force and effect.
THE COMPANY
The Company is a limited-purpose wholly-owned subsidiary of Option One
Mortgage Corporation ("OOMC"). The Company was incorporated in the State of
Delaware on October 7, 1996. The Company was organized for the purpose of
serving as a private secondary mortgage market conduit. The Company does not
have, nor is it expected in the future to have, any significant assets. OOMC, a
California corporation, was incorporated in 1992. The principal business of OOMC
is the origination, sale and servicing of non-conforming mortgage loans.
The Company maintains its principal office at 2020 East First Street,
Suite 100, Santa Ana, California 92705. Its telephone number is (714) 558-7700.
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THE POOLING AGREEMENT
GENERAL
The Certificates of each series will be issued pursuant to a pooling
and servicing agreement or other agreement specified in the related Prospectus
Supplement (in either case, a "Pooling Agreement"). In general, the parties to a
Pooling Agreement will include the Company, the Trustee, the Master Servicer
and, in some cases, a Special Servicer. All parties to each Pooling Agreement
under which Certificates of a series are issued will be identified in the
related Prospectus Supplement.
Forms of Pooling Agreements have been filed as exhibits to the
Registration Statement of which this Prospectus is a part. However, the
provisions of each Pooling Agreement will vary depending upon the nature of the
Certificates to be issued thereunder and the nature of the related Trust Fund.
The following summaries describe certain material provisions that may appear in
a Pooling Agreement. The Prospectus Supplement for a series of Certificates will
describe any provision of the related Pooling Agreement that materially differs
from the description thereof set forth below. As used herein with respect to any
series, the term "Certificate" refers to all of the Certificates of that series,
whether or not offered hereby and by the related Prospectus Supplement, unless
the context otherwise requires. The Company will provide a copy of the Pooling
Agreement (without exhibits) that relates to any series of Certificates without
charge upon written request of a holder of a Certificate of such series
addressed to it at its principal executive offices specified herein under "The
Company".
CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE COMPANY
The Pooling Agreement for each series of Certificates will provide that
the Master Servicer may not resign from its obligations and duties thereunder
except upon a determination that performance of such duties is no longer
permissible under applicable law. No such resignation will become effective
until the Trustee or a successor servicer has assumed the Master Servicer's
responsibilities, duties, liabilities and obligations under the Pooling
Agreement.
Each Pooling Agreement will also provide that, except as set forth
below, neither the Master Servicer, the Company, nor any director, officer,
employee or agent of the Master Servicer or the Company 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
Pooling Agreement, or for errors in judgment; provided, however, that neither
the Master Servicer, the Company, nor any such person will be protected against
any liability which would otherwise be imposed by reason of willful misfeasance,
bad faith or gross negligence in the performance of duties or by reason of
reckless disregard of obligations and duties thereunder. Each Pooling Agreement
will further provide that the Master Servicer, the Company, and any director,
officer, employee or agent of the Master Servicer or the Company is entitled to
indemnification by the Trust Fund and will be held harmless against any loss,
liability or expense incurred in connection with any legal action relating to
the Pooling Agreement or the related series of Certificates, other than any
loss, liability or expense related to any specific Mortgage Loan or Mortgage
Loans (except any such loss, liability or expense otherwise reimbursable
pursuant to the Pooling Agreement) and any loss, liability or expense incurred
by reason of willful misfeasance, bad faith or gross negligence in the
performance of duties thereunder or by reason of reckless disregard of
obligations and duties thereunder. In addition, each Pooling Agreement will
provide that neither the Master Servicer nor the Company will be under any
obligation to appear in, prosecute or defend any legal or administrative action
that is not incidental to its respective duties under the Pooling Agreement and
which in its opinion may involve it in any expense or liability. The Master
Servicer or the Company may, however, in its discretion undertake any such
action which it may deem necessary or desirable with respect to the Pooling
Agreement and the rights and duties of the parties thereto and the interests of
the Certificateholders thereunder. In such event, the legal expenses and costs
of such action and any liability
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resulting therefrom will be expenses, costs and liabilities of the Trust Fund,
and the Master Servicer or the Company, as the case may be, will be entitled to
be reimbursed therefor out of funds otherwise distributable to
Certificateholders.
Any person into which the Master Servicer may be merged or
consolidated, any person resulting from any merger or consolidation to which the
Master Servicer is a party or any person succeeding to the business of the
Master Servicer will be the successor of the Master Servicer under the Pooling
Agreement, provided that (i) such person is qualified to service mortgage loans
on behalf of FNMA or FHLMC and (ii) such merger, consolidation or succession
does not adversely affect the then-current ratings of the classes of
Certificates of the related series that have been rated.
EVENTS OF DEFAULT
Events of Default under the Pooling Agreement in respect of a series of
Certificates will include, without limitation, (i) any failure by the Master
Servicer to make a required deposit to the Certificate Account or, if the Master
Servicer is so required, to distribute to the holders of any class of
Certificates of such series any required payment which continues unremedied for
5 days (or other time period described in the related Prospectus Supplement)
after the giving of written notice of such failure to the Master Servicer by the
Trustee or the Company, or to the Master Servicer, the Company and the Trustee
by the holders of Certificates evidencing not less than 25% of the aggregate
undivided interests (or, if applicable, voting rights) in the related Trust
Fund; (ii) any failure by the Master Servicer duly to observe or perform in any
material respect any other of its covenants or agreements in the Pooling
Agreement with respect to such series of Certificates which continues unremedied
for 30 days (15 days in the case of a failure to pay the premium for any
insurance policy which is required to be maintained under the Pooling Agreement)
after the giving of written notice of such failure to the Master Servicer by the
Trustee or the Company, or to the Master Servicer, the Company and the Trustee
by the holders of Certificates evidencing not less than 25% of the aggregate
undivided interests (or, if applicable, voting rights) in the related Trust
Fund; (iii) certain events of insolvency, readjustment of debt, marshalling of
assets and liabilities or similar proceedings regarding the Master Servicer and
certain actions by the Master Servicer indicating its insolvency or inability to
pay its obligations and (iv) any failure of the Master Servicer to make certain
advances as described herein under "Description of the Certificates--Advances."
Additional Events of Default will be described in the related Prospectus
Supplement.
RIGHTS UPON EVENT OF DEFAULT
So long as an Event of Default remains unremedied, either the Company
or the Trustee may, and at the direction of the holders of Certificates
evidencing not less than 51% of the aggregate undivided interests (or, if
applicable, voting rights) in the related Trust Fund the Trustee shall, by
written notification to the Master Servicer and to the Company or the Trustee,
as applicable, terminate all of the rights and obligations of the Master
Servicer under the Pooling Agreement (other than any rights of the Master
Servicer as Certificateholder) covering such Trust Fund and in and to the
Mortgage Loans and the proceeds thereof, whereupon the Trustee or, upon notice
to the Company and with the Company's consent, its designee will succeed to all
responsibilities, duties and liabilities of the Master Servicer under such
Pooling Agreement (other than the obligation to purchase Mortgage Loans under
certain circumstances) and will be entitled to similar compensation
arrangements. In the event that the Trustee would be obligated to succeed the
Master Servicer but is unwilling so to act, it may appoint (or if it is unable
so to act, it shall appoint) or petition a court of competent jurisdiction for
the appointment of, an established mortgage loan servicing institution with a
net worth of at least $15,000,000 to act as successor to the Master Servicer
under the Pooling Agreement (unless otherwise set forth in the Pooling
Agreement). Pending such appointment, the Trustee is obligated to act in such
capacity. The Trustee and such successor may agree upon the servicing
compensation to be paid, which in no event may be greater than the compensation
to the initial Master Servicer under the Pooling Agreement.
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No Certificateholder will have any right under a Pooling Agreement to
institute any proceeding with respect to such Pooling Agreement unless such
holder previously has given to the Trustee written notice of default and the
continuance thereof and unless the holders of Certificates evidencing not less
than 25% of the aggregate undivided interests (or, if applicable, voting rights)
in the related Trust Fund have made written request upon the Trustee to
institute such proceeding in its own name as Trustee thereunder and have offered
to the Trustee reasonable indemnity and the Trustee for a reasonable time after
receipt of such request and indemnity has neglected or refused to institute any
such proceeding. However, the Trustee will be under no obligation to exercise
any of the trusts or powers vested in it by the Pooling Agreement or to
institute, conduct or defend any litigation thereunder or in relation thereto at
the request, order or direction of any of the holders of Certificates covered by
such Pooling Agreement, unless such Certificateholders have offered to the
Trustee reasonable security or indemnity against the costs, expenses and
liabilities which may be incurred therein or thereby.
The holders of Certificates representing at least 66% of the aggregate
undivided interests (or, if applicable, voting rights) evidenced by those
Certificates affected by a default or Event of Default may waive such default or
Event of Default (other than a failure by the Master Servicer to make an
advance); provided, however, that (a) a default or Event of Default under clause
(i) or (iv) under "--Events of Default" above may be waived only by all of the
holders of Certificates affected by such default or Event of Default and (b) no
waiver shall reduce in any manner the amount of, or delay the timing of,
payments received on Mortgage Loans which are required to be distributed to, or
otherwise materially adversely affect, any non-consenting Certificateholder.
AMENDMENT
Each Pooling Agreement may be amended by the parties thereto, without
the consent of any of the holders of Certificates covered by such Pooling
Agreement, (i) to cure any ambiguity, (ii) to correct, modify or supplement any
provision therein which may be inconsistent with any other provision therein or
to correct any error, or (iii) to make any other provisions with respect to
matters or questions arising under such Pooling Agreement which are not
materially inconsistent with the provisions thereof, provided that such action
will not adversely affect in any material respect the interests of any
Certificateholder.
The Pooling Agreement may also be amended by the parties thereto with
the consent of the holders of Certificates of each class affected thereby
evidencing, in each case, at least 66% of the aggregate Percentage Interests
constituting such class for the purpose of adding any provisions to or changing
in any manner or eliminating any of the provisions of such Pooling Agreement or
of modifying in any manner the rights of the holders of Certificates covered by
such Pooling Agreement, except that no such amendment may (i) reduce in any
manner the amount of, or delay the timing of, payments received on Mortgage
Loans which are required to be distributed on a Certificate of any class without
the consent of the holder of such Certificate, (ii) reduce the aforesaid
percentage of Certificates of any class the holders of which are required to
consent to any such amendment without the consent of the holders of all
Certificates of such class covered by such Pooling Agreement then outstanding.
Notwithstanding the foregoing, if a REMIC election has been made with
respect to the related Trust Fund, the Trustee will not be entitled to consent
to any amendment to a Pooling Agreement without having first received an opinion
of counsel to the effect that such amendment or the exercise of any power
granted to the Master Servicer, the Company, the Trustee or any other specified
person in accordance with such amendment will not result in the imposition of a
tax on the related Trust Fund or cause such Trust Fund to fail to qualify as a
REMIC.
TERMINATION; RETIREMENT OF CERTIFICATES
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The obligations created by the Pooling Agreement for each series of
Certificates (other than certain limited payment and notice obligations of the
Trustee and the Company, respectively) will terminate upon the payment to
Certificateholders of that series of all amounts held in the Certificate Account
or by the Master Servicer and required to be paid to them pursuant to such
Pooling Agreement following the earlier to occur of (i) the final payment or
other liquidation or disposition (or any advance with respect thereto) of the
last Mortgage Loan and/or REO Property subject thereto and (ii) the purchase by
the Master Servicer or the Company or a Person (other than a holder of any class
of Offered Certificates, other than any Offered Certificates which are REMIC
Residual Certificates (see "Federal Income Tax Consequences" below)) specified
in the related Prospectus Supplement, from the Trust Fund for such series of all
remaining Mortgage Loans and/or REO Properties. In addition to the foregoing,
the Master Servicer or the Company may have the option to purchase, in whole but
not in part, the Certificates specified in the related Prospectus Supplement in
the manner set forth in the related Prospectus Supplement. Upon the purchase of
such Certificates or at any time thereafter, at the option of the Master
Servicer or the Company, the assets of the Trust Fund may be sold, thereby
effecting a retirement of the Certificates and the termination of the Trust
Fund, or the Certificates so purchased may be held or resold by the Master
Servicer or the Company. In no event, however, will the trust created by the
Pooling Agreement continue beyond the expiration of 21 years from the death of
the survivor of certain persons named in such Pooling Agreement. Written notice
of termination of the Pooling Agreement will be given to each Certificateholder,
and the final distribution will be made only upon surrender and cancellation of
the Certificates at an office or agency appointed by the Trustee which will be
specified in the notice of termination. If the Certificateholders are permitted
to terminate the trust under the applicable Pooling Agreement, a penalty may be
imposed upon the Certificateholders based upon the fee that would be foregone by
the Master Servicer because of such termination.
Any such purchase of Mortgage Loans and property acquired in respect of
Mortgage Loans evidenced by a series of Certificates shall be made at the option
of the Master Servicer, the Company or, if applicable, the holder of any class
of Certificates (other than any Offered Certificates, unless such class is a
REMIC Residual Certificate) at the price specified in the related Prospectus
Supplement. The exercise of such right will effect early retirement of the
Certificates of that series, but the right of the Master Servicer, the Company
or, if applicable, such holder to so purchase is subject to the aggregate
principal balance of the Mortgage Loans in the Trust Fund for that series as of
the Distribution Date on which the purchase proceeds are to be distributed to
Certificateholders being less than the percentage specified in the related
Prospectus Supplement of the aggregate principal balance of such Mortgage Loans
at the Cut-off Date for that series. The Prospectus Supplement for each series
of Certificates will set forth the amounts that the holders of such Certificates
will be entitled to receive upon such early retirement. Such early termination
may adversely affect the yield to holders of certain classes of such
Certificates. If a REMIC election has been made, the termination of the related
Trust Fund will be effected in a manner consistent with applicable federal
income tax regulations and its status as a REMIC.
THE TRUSTEE
The Trustee under each Pooling Agreement will be named in the related
Prospectus Supplement. The commercial bank, national banking association,
banking corporation or trust company that serves as Trustee may have typical
banking relationships with the Company and its affiliates. The Trustee shall at
all times be a corporation or an association organized and doing business under
the laws of any state or the United States of America, authorized under such
laws to exercise corporate trust powers, having a combined capital and surplus
of at least $50,000,000 and subject to supervision or examination by federal or
state authority.
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DUTIES OF THE TRUSTEE
The Trustee for each series of Certificates will make no representation
as to the validity or sufficiency of the Certificates or any underlying Mortgage
Loan or related document and will not be accountable for the use or application
by or on behalf of any Master Servicer or Special Servicer of any funds paid to
the Master Servicer or Special Servicer in respect of the Certificates or the
underlying Mortgage Loans, or any funds deposited into or withdrawn from the
Certificate Account for such series or any other account by or on behalf of the
Master Servicer or Special Servicer. If no Event of Default has occurred and is
continuing, the Trustee for each series of Certificates will be required to
perform only those duties specifically required under the related Pooling
Agreement. However, upon receipt of any of the various certificates, reports or
other instruments required to be furnished to it pursuant to the related Pooling
Agreement, a Trustee will be required to examine such documents and to determine
whether they conform to the requirements of such agreement.
CERTAIN MATTERS REGARDING THE TRUSTEE
As and to the extent described in the related Prospectus Supplement,
the fees and normal disbursements of any Trustee may be the expense of the
related Master Servicer or other specified person or may be required to be borne
by the related Trust Fund.
The Trustee for each series of Certificates generally will be entitled
to indemnification, from amounts held in the Certificate Account for such
series, for any loss, liability or expense incurred by the Trustee in connection
with the Trustee's acceptance or administration of its trusts under the related
Pooling Agreement; provided, however, that such indemnification will not extend
to any loss liability or expense incurred by reason of willful misfeasance, bad
faith or gross negligence on the part of the Trustee in the performance of its
obligations and duties thereunder, or by reason of its reckless disregard of
such obligations or duties.
RESIGNATION AND REMOVAL OF THE TRUSTEE
The Trustee may resign at any time, in which event the Company will be
obligated to appoint a successor Trustee. The Company may also remove the
Trustee if the Trustee ceases to be eligible to continue as such under the
Pooling Agreement or if the Trustee becomes insolvent. Upon becoming aware of
such circumstances, the Company will be obligated to appoint a successor
Trustee. The Trustee may also be removed at any time by the holders of
Certificates evidencing not less than 51% of the aggregate undivided interests
(or, if applicable, voting rights) in the related Trust Fund. Any resignation or
removal of the Trustee and appointment of a successor Trustee will not become
effective until acceptance of the appointment by the successor Trustee.
YIELD CONSIDERATIONS
The yield to maturity of an Offered Certificate will depend on the
price paid by the holder for such Certificate, the Pass-Through Rate on any such
Certificate entitled to payments of interest (which Pass-Through Rate may vary
if so specified in the related Prospectus Supplement) and the rate and timing of
principal payments (including prepayments, defaults, liquidations and
repurchases) on the Mortgage Loans and the allocation thereof to reduce the
principal balance of such Certificate (or notional amount thereof if applicable)
and other factors.
A class of Certificates may be entitled to payments of interest at a
fixed Pass-Through Rate, a variable Pass-Through Rate or adjustable Pass-Through
Rate, or any combination of such Pass-Through
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Rates, each as specified in the related Prospectus Supplement. A variable
Pass-Through Rate may be calculated based on the weighted average of the
Mortgage Rates (in each case, net of the per annum rate or rates applicable to
the calculation of servicing and administrative fees and any Spread (each, a
"Net Mortgage Rate")) of the related Mortgage Loans for the month preceding the
Distribution Date if so specified in the related Prospectus Supplement. As will
be described in the related Prospectus Supplement, the aggregate payments of
interest on a class of Certificates, and the yield to maturity thereon, will be
affected by the rate of payment of principal on the Certificates (or the rate of
reduction in the notional balance of Certificates entitled only to payments of
interest) and, in the case of Certificates evidencing interests in ARM Loans, by
changes in the Net Mortgage Rates on the ARM Loans. See "Maturity and Prepayment
Considerations" below. The yield on the Certificates will also be affected by
liquidations of Mortgage Loans following Mortgagor defaults and by purchases of
Mortgage Loans in the event of breaches of representations made in respect of
such Mortgage Loans by the Company, the Master Servicer and others, or
conversions of ARM Loans to a fixed interest rate. See "The Mortgage
Pools--Representations by Sellers" and "Descriptions of the
Certificates--Assignment of Trust Fund Assets" above. Holders of certain Strip
Certificates or a class of Certificates having a Pass-Through Rate that varies
based on the weighted average Mortgage Rate of the underlying Mortgage Loans
will be affected by disproportionate prepayments and repurchases of Mortgage
Loans having higher Net Mortgage Rates or rates applicable to the Strip
Certificates, as applicable.
With respect to any series of Certificates, a period of time will
elapse between the date upon which payments on the related Mortgage Loans are
due and the Distribution Date on which such payments are passed through to
Certificateholders. That delay will effectively reduce the yield that would
otherwise be produced if payments on such Mortgage Loans were distributed to
Certificateholders on or near the date they were due.
In general, if a class of Certificates is purchased at initial issuance
at a premium and payments of principal on the related Mortgage Loans occur at a
rate faster than anticipated at the time of purchase, the purchaser's actual
yield to maturity will be lower than that assumed at the time of purchase.
Conversely, if a class of Certificates is purchased at initial issuance at a
discount and payments of principal on the related Mortgage Loans occur at a rate
slower than that assumed at the time of purchase, the purchaser's actual yield
to maturity will be lower than that originally anticipated. The effect of
principal prepayments, liquidations and purchases on yield will be particularly
significant in the case of a series of Certificates having a class entitled to
payments of interest only or to payments of interest that are disproportionately
high relative to the principal payments to which such class is entitled. Such a
class will likely be sold at a substantial premium to its principal balance and
any faster than anticipated rate of prepayments will adversely affect the yield
to holders thereof. In certain circumstances extremely rapid prepayments may
result in the failure of such holders to recoup their original investment. In
addition, the yield to maturity on certain other types of classes of
Certificates, including Accrual Certificates, Certificates with a Pass-Through
Rate which fluctuates inversely with or at a multiple of an index or certain
other classes in a series including more than one class of Certificates, may be
relatively more sensitive to the rate of prepayment on the related Mortgage
Loans than other classes of Certificates.
The timing of changes in the rate of principal payments on or
repurchases of the Mortgage Loans may significantly affect an investor's actual
yield to maturity, even if the average rate of principal payments experienced
over time is consistent with an investor's expectation. In general, the earlier
a prepayment of principal on the underlying Mortgage Loans or a repurchase
thereof, the greater will be the effect on an investor's yield to maturity. As a
result, the effect on an investor's yield of principal payments and repurchases
occurring at a rate higher (or lower) than the rate anticipated by the investor
during the period immediately following the issuance of a series of Certificates
would not be fully offset by a subsequent like reduction (or increase) in the
rate of principal payments.
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When a principal prepayment in full is made on a Mortgage Loan, the
borrower is generally charged interest only for the period from the due date of
the preceding scheduled payment up to the date of such prepayment, instead of
for the full accrual period, that is, the period from the due date of the
preceding scheduled payment up to the due date for the next scheduled payment.
In addition, a partial principal prepayment may likewise be applied as of a date
prior to the next scheduled due date (and, accordingly, be accompanied by
interest thereon for less than the full accrual period). However, interest
accrued on any series of Certificates and distributable thereon on any
Distribution Date will generally correspond to interest accrued on the principal
balance of Mortgage Loans for their respective full accrual periods.
Consequently, if a prepayment on any Mortgage Loan is distributable to
Certificateholders on a particular Distribution Date, but such prepayment is not
accompanied by interest thereon for the full accrual period, the interest
charged to the borrower (net of servicing and administrative fees and any
Spread) may be less (such shortfall, a "Prepayment Interest Shortfall") than the
corresponding amount of interest accrued and otherwise payable on the
Certificates of the related series. If and to the extent that any such shortfall
is allocated to a class of Offered Certificates, the yield thereon will be
adversely affected. The Prospectus Supplement for a series of Certificates will
describe the manner in which any such shortfalls will be allocated among the
classes of such Certificates. If so specified in the related Prospectus
Supplement, the Master Servicer will be required to apply some or all of its
servicing compensation for the corresponding period to offset the amount of any
such shortfalls. The related Prospectus Supplement will also describe any other
amounts available to offset such shortfalls. See Servicing of Mortgage
Loans--Servicing and Other Compensation and Payment of Expenses; Spread".
The Trust Fund with respect to any series may include Convertible
Mortgage Loans. As is the case with conventional, fixed-rate mortgage loans
originated in a high interest rate environment which may be subject to a greater
rate of principal prepayments when interest rates decrease, Convertible Mortgage
Loans may be subject to a greater rate of principal prepayments (or purchases by
the related Subservicer or the Master Servicer) due to their refinancing or
conversion to fixed interest rate loans in a low interest rate environment. For
example, if prevailing interest rates fall significantly, Convertible Mortgage
Loans could be subject to higher prepayment and conversion rates than if
prevailing interest rates remain constant because the availability of fixed-rate
or other adjustable-rate mortgage loans at competitive interest rates may
encourage Mortgagors to refinance their adjustable-rate mortgages to "lock in" a
lower fixed interest rate or to take advantage of the availability of such other
adjustable-rate mortgage loans, or, in the case of convertible adjustable-rate
mortgage loans, to exercise their option to convert the adjustable interest
rates to fixed interest rates. The conversion feature may also be exercised in a
rising interest rate environment as Mortgagors attempt to limit their risk of
higher rates. Such a rising interest rate environment may also result in an
increase in the rate of defaults on the Mortgage Loans. If the related
Subservicer or the Master Servicer purchases Convertible Mortgage Loans, a
Mortgagor's exercise of the conversion option will result in a distribution of
the principal portion thereof to the Certificateholders, as described herein.
Alternatively, to the extent Subservicers or the Master Servicer fail to
purchase Converting Mortgage Loans, the Mortgage Pool will include fixed-rate
Mortgage Loans.
The rate of defaults on the Mortgage Loans will also affect the rate
and timing of principal payments on the Mortgage Loans and thus the yield on the
Certificates. In general, defaults on Single Family Loans are expected to occur
with greater frequency in their early years. However, there is a risk that
Mortgage Loans that require Balloon Payments may default at maturity, or that
the maturity of such a Mortgage Loan may be extended in connection with a
workout. The rate of default on Single Family Loans which are refinance or
limited documentation mortgage loans, and on Mortgage Loans with high
Loan-to-Value Ratios, may be higher than for other types of Mortgage Loans.
Furthermore, the rate and timing of prepayments, defaults and liquidations on
the Mortgage Loans will be affected by the general economic condition of the
region of the country in which the related Mortgaged Properties are located. The
risk of delinquencies and loss is greater and prepayments are less likely in
regions where a weak or
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deteriorating economy exists, as may be evidenced by, among other factors,
increasing unemployment or falling property values. See "Risk Factors."
With respect to certain Mortgage Loans including ARM Loans, the
Mortgage Rate at origination may be below the rate that would result if the
index and margin relating thereto were applied at origination. Under the
applicable underwriting standards, the Mortgagor under each Mortgage Loan
generally will be qualified, or the Mortgage Loan otherwise approved, on the
basis of the Mortgage Rate in effect at origination. The repayment of any such
Mortgage Loan may thus be dependent on the ability of the mortgagor to make
larger level monthly payments following the adjustment of the Mortgage Rate. In
addition, the periodic increase in the amount paid by the Mortgagor of a Buydown
Mortgage Loan during or at the end of the applicable Buydown Period may create a
greater financial burden for the Mortgagor, who might not have otherwise
qualified for a mortgage under applicable underwriting guidelines, and may
accordingly increase the risk of default with respect to the related Mortgage
Loan.
The Mortgage Rates on certain ARM Loans subject to negative
amortization generally adjust monthly and their amortization schedules adjust
less frequently. During a period of rising interest rates as well as immediately
after origination (initial Mortgage Rates are generally lower than the sum of
the Indices applicable at origination and the related Note Margins), the amount
of interest accruing on the principal balance of such Mortgage Loans may exceed
the amount of the minimum scheduled monthly payment thereon. As a result, a
portion of the accrued interest on negatively amortizing Mortgage Loans may
become Deferred Interest which will be added to the principal balance thereof
and will bear interest at the applicable Mortgage Rate. The addition of any such
Deferred Interest to the principal balance of any related class or classes of
Certificates will lengthen the weighted average life thereof and may adversely
affect yield to holders thereof, depending upon the price at which such
Certificates were purchased. In addition, with respect to certain ARM Loans
subject to negative amortization, during a period of declining interest rates,
it might be expected that each minimum scheduled monthly payment on such a
Mortgage Loan would exceed the amount of scheduled principal and accrued
interest on the principal balance thereof, and since such excess will be applied
to reduce the principal balance of the related class or classes of Certificates,
the weighted average life of such Certificates will be reduced and may adversely
affect yield to holders thereof, depending upon the price at which such
Certificates were purchased.
MATURITY AND PREPAYMENT CONSIDERATIONS
As indicated above under "The Mortgage Pools," the original terms to
maturity of the Mortgage Loans in a given Mortgage Pool will vary depending upon
the type of Mortgage Loans included in such Mortgage Pool. The Prospectus
Supplement for a series of Certificates will contain information with respect to
the types and maturities of the Mortgage Loans in the related Mortgage Pool. All
of the Mortgage Loans generally may be prepaid without penalty in full or in
part at any time; any exceptions will be described in the related Prospectus
Supplement. The prepayment experience with respect to the Mortgage Loans in a
Mortgage Pool will affect the life and yield of the related series of
Certificates.
With respect to Balloon Loans, payment of the Balloon Payment (which,
based on the amortization schedule of such Mortgage Loans, is expected to be a
substantial amount) will generally depend on the Mortgagor's ability to obtain
refinancing of such Mortgage Loans or to sell the Mortgaged Property prior to
the maturity of the Balloon Loan. The ability to obtain refinancing will depend
on a number of factors prevailing at the time refinancing or sale is required,
including, without limitation, real estate values, the Mortgagor's financial
situation, prevailing mortgage loan interest rates, the Mortgagor's equity in
the related Mortgaged Property, tax laws and prevailing general economic
conditions. None of the Company, the Master Servicer, or any of their affiliates
will be obligated to refinance or repurchase any Mortgage Loan or to sell the
Mortgaged Property.
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The extent of prepayments of principal of the Mortgage Loans may be
affected by a number of factors, including, without limitation, solicitations
and the availability of mortgage credit, the relative economic vitality of the
area in which the Mortgaged Properties are located. In addition, the rate of
principal payments on the Mortgage Loans may be affected by the existence of
Lock-out Periods and requirements that principal prepayments be accompanied by
Prepayment Premiums, as well as due-on-sale and due-on-encumbrance provisions,
and by the extent to which such provisions may be practicably enforced. See
"Servicing of Mortgage Loans--Collection and Other Servicing Procedures" and
"Certain Legal Aspects of the Mortgage Loans--Enforceability of Certain
Provisions" for a description of certain provisions of the Pooling Agreement and
certain legal developments that may affect the prepayment experience on the
Mortgage Loans.
The rate of prepayment on a pool of mortgage loans is also affected by
prevailing market interest rates for mortgage loans of a comparable type, term
and risk level. When the prevailing market interest rate is below a mortgage
coupon, a borrower may have an increased incentive to refinance its mortgage
loan. In addition, as prevailing market interest rates decline, even borrowers
with ARM Loans that have experienced a corresponding interest rate decline may
have an increased incentive to refinance for purposes of either (i) converting
to a fixed rate loan and thereby "locking in" such rate or (ii) taking advantage
of the initial "teaser rate" (a mortgage interest rate below what it would
otherwise be if the applicable index and gross margin were applied) on another
adjustable rate mortgage loan. Moreover, although the Mortgage Rates on ARM
Loans will be subject to periodic adjustments, such adjustments generally will
(i) not increase or decrease such Mortgage Rates by more than a fixed percentage
amount on each adjustment date, (ii) not increase such Mortgage Rates over a
fixed percentage amount during the life of any ARM Loan and (iii) be based on an
index (which may not rise and fall consistently with mortgage interest rates)
plus the related Note Margin (which may be different from margins being used at
the time for newly originated adjustable rate mortgage loans). As a result, the
Mortgage Rates on the ARM Loans at any time may not equal the prevailing rates
for similar, newly originated adjustable rate mortgage loans. In certain rate
environments, the prevailing rates on fixed-rate mortgage loans may be
sufficiently low in relation to the then-current Mortgage Rates on ARM Loans
that the rate of prepayment may increase as a result of refinancings. There can
be no certainty as to the rate of prepayments on the Mortgage Loans during any
period or over the life of any series of Certificates.
If the applicable Pooling Agreement for a series of Certificates
provides for a Pre-Funding Account or other means of funding the transfer of
additional Mortgage Loans to the related Trust Fund, as described under
"Description of the Certificates--Pre-Funding Account" herein, and the Trust
Fund is unable to acquire such additional Mortgage Loans within any applicable
time limit, the amounts set aside for such purpose may be applied as principal
payments on one or more classes of Certificates of such series. See "Risk
Factors--Yield and Prepayment Considerations."
There can be no assurance as to the rate of prepayment of the Mortgage
Loans. The Company is not aware of any publicly available statistics relating to
the principal prepayment experience of diverse portfolios of mortgage loans such
as the Mortgage Loans over an extended period of time. All statistics known to
the Company that have been compiled with respect to prepayment experience on
mortgage loans indicate that while some mortgage loans may remain outstanding
until their stated maturities, a substantial number will be paid prior to their
respective stated maturities. No representation is made as to the particular
factors that will affect the prepayment of the Mortgage Loans or as to the
relative importance of such factors.
Under certain circumstances, the Master Servicer, the Company or a
person specified in the related Prospectus Supplement (other than the holders of
the Certificates, other than the holders of the REMIC Residual Certificates) may
have the option to purchase the assets in a Trust Fund and effect early
retirement of the related series of Certificates. See "The Pooling
Agreement--Termination; Retirement of Certificates."
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CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains summaries of certain material legal
aspects of mortgage loans that are general in nature. Because such legal aspects
are governed in part by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete nor to reflect the
laws of any particular state nor to encompass the laws of all states in which
the Mortgaged Properties may be situated. The summaries are qualified in their
entirety by reference to the applicable federal and state laws governing the
Mortgage Loans.
SINGLE FAMILY LOANS
GENERAL. Each Single Family Loan will be evidenced by a note or bond
and secured by an instrument granting a security interest in real property,
which may be a mortgage, deed of trust or a deed to secure debt, depending upon
the prevailing practice and law in the state in which the related Mortgaged
Property is located. Mortgages, deed of trust and deeds to secure debt are
herein collectively referred to as "mortgages". A mortgage creates a lien upon,
or grants a title interest in, the real property covered thereby, and represents
the security for the repayment of the indebtedness customarily evidenced by a
promissory note. The priority of the lien created or interest granted will
depend on the terms of the mortgage and, in some cases, on the terms of separate
subordination agreements or intercreditor agreements with others that hold
interests in the real property, the knowledge of the parties to the mortgage
and, generally, the order of recordation of the mortgage in the appropriate
public recording office. However, the lien of a recorded mortgage will generally
be subordinate to later-arising liens for real estate taxes and assessments and
other charges imposed under governmental police powers.
TYPES OF MORTGAGE INSTRUMENTS. There are two parties to a mortgage: a
mortgagor (the borrower and usually the owner of the subject property) and a
mortgagee (the lender). In contrast, a deed of trust is a three-party
instrument, among a trustor (the equivalent of a borrower), a trustee to whom
the real property is conveyed, and a beneficiary (the lender) for whose benefit
the conveyance is made. Under a deed of trust, the trustor grants the property,
irrevocably until the debt is paid, in trust and generally with a power of sale,
to the trustee to secure repayment of the indebtedness evidenced by the related
note. A deed to secure debt typically has two parties. The borrower, or grantor,
conveys title to the real property to the grantee, or lender, generally with a
power of sale, until such time as the debt is repaid. In a case where the
borrower is a land trust, there would be an additional party because legal title
to the property is held by a land trustee under a land trust agreement for the
benefit of the borrower. At origination of a mortgage loan involving a land
trust, the borrower executes a separate undertaking to make payments on the
mortgage note. The mortgagee's authority under a mortgage, the trustee's
authority under a deed of trust and the grantee's authority under a deed to
secure debt are governed by the express provisions of the related instrument,
the law of the state in which the real property is located, certain federal laws
(including, without limitation, the Relief Act) and, in some deed of trust
transactions, the directions of the beneficiary.
CONTRACTS
Under the laws of most states, manufactured housing constitutes
personal property and is subject to the motor vehicle registration laws of the
state or other jurisdiction in which the unit is located. In a few states, where
certificates of title are not required for manufactured homes, security
interests are perfected by the filing of a financing statement under Article 9
of the UCC which has been adopted by all states. Such financing statements are
effective for five years and must be renewed at the end of each five years. The
certificate of title laws adopted by the majority of states provide that
ownership of motor vehicles and manufactured housing shall be evidenced by a
certificate of title issued by the motor vehicles department (or a similar
entity) of such state. In the states that have enacted certificate of title
laws, a
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security interest in a unit of manufactured housing, so long as it is not
attached to land in so permanent a fashion as to become a fixture, is generally
perfected by the recording of such interest on the certificate of title to the
unit in the appropriate motor vehicle registration office or by delivery of the
required documents and payment of a fee to such office, depending on state law.
The Master Servicer will be required under the related Pooling
Agreement to effect such notation or delivery of the required documents and
fees, and to obtain possession of the certificate of title, as appropriate under
the laws of the state in which any Manufactured Home is registered. In the event
the Master Servicer fails, due to clerical errors or otherwise, 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 by
the borrowers to move them, courts in many states have held that manufactured
homes may, under certain circumstances, 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 home under applicable state real estate law. In order to perfect a security
interest in a manufactured home under real estate laws, 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 home is located. These filings must be made in the real estate records
office of the county where the home is located. Generally, Contracts will
contain provisions prohibiting the obligor from permanently attaching the
Manufactured Home to its site. So long as the obligor 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 its site,
other parties could obtain an interest in the Manufactured Home that is prior to
the security interest originally retained by the Seller and transferred to the
Company.
The Company will assign or cause to be assigned a security interest in
the Manufactured Homes to the Trustee, on behalf of the Certificateholders.
Neither the Company, the Master Servicer nor the Trustee will amend the
certificates of title to identify the Trustee, on behalf of the
Certificateholders, as the new secured party and, accordingly, the Company or
the Seller 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 Company'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 Company or Seller.
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 Company on
the certificate of title or delivery of the required documents and fees will be
sufficient to protect the Trustee 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 Company
has failed to perfect or cause to be perfected the security interest assigned to
the Trust Fund, 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 Trustee, on
behalf of the Certificateholders, as the new secured party on the certificate of
title that, through fraud or negligence, the security interest of the Trustee
could be released.
In the event that 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
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interest in the Manufactured Home would continue for four months after such
relocation and thereafter until the owner re-registers the Manufactured Home in
such state. If the owner were to relocate a Manufactured Home to another state
and re-register the Manufactured Home in such state, and if the Company did not
take steps to re-perfect its 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 Company must surrender possession if it
holds the certificate of title to such Manufactured Home or, in the case of
Manufactured Homes registered in states that provide for notation of lien, the
Company would receive notice of surrender if the security interest in the
Manufactured Home is noted on the certificate of title. Accordingly, the Company
would have the opportunity to re-perfect its security interest in the
Manufactured Home in the state of relocation. In states that do not require a
certificate of title for registration of a manufactured home, re-registration
could defeat perfection. Similarly, when an obligor under a manufactured housing
conditional sales contract sells a manufactured home, the obligee must surrender
possession of the certificate of title or it will receive notice as a result of
its lien noted thereon and accordingly will have an opportunity to require
satisfaction of the related manufactured housing conditional sales contract
before release of the lien. Under each related Pooling Agreement, the Master
Servicer will be 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
Company will obtain the representation of the related Seller that it has no
knowledge of any such liens with respect to any Manufactured Home securing a
Contract. However, such liens could arise at any time during the term of a
Contract. No notice will be given to the Trustee or Certificateholders in the
event such a lien arises.
FORECLOSURE ON MORTGAGES
Foreclosure of a deed of trust is generally accomplished by a
non-judicial trustee's sale under a specific provision in the deed of trust
which authorizes the trustee to sell the property upon any default by the
borrower under the terms of the note or deed of trust. In addition to any notice
requirements contained in a deed of trust, 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 notice of default and notice of
sale. In addition, the trustee must provide notice in some states to any other
individual having an interest of record in the real property, including any
junior lienholders. If the deed of trust is not reinstated within a specified
period, a notice of sale must be posted in a public place and, in most states,
published for a specific period of time in one or more newspapers. In addition,
some state laws require that a copy of the notice of sale be posted on the
property and sent to all parties having an interest of record in the real
property.
Foreclosure of a mortgage is generally accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in completion
of the foreclosure may occasionally result from difficulties in locating
necessary parties. Judicial foreclosure proceedings are often not contested by
any of the applicable parties. If the mortgagee's right to foreclose is
contested, the legal proceedings necessary to resolve the issue can be
time-consuming.
In some states, the borrower-trustor has the right to reinstate the
loan at any time following default until shortly before the trustee's sale. In
general, in such states, the borrower, or any other person having a junior
encumbrance on the real estate, may, during a reinstatement period, cure the
default by paying the entire amount in arrears plus the costs and expenses
incurred in enforcing the obligation.
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In the 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 a
public sale. However, 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 may have deteriorated during the foreclosure
proceedings, it is uncommon for a third party to purchase the property at a
foreclosure sale. Rather, it is common for the lender to purchase the property
from the trustee or referee for a credit bid less than or equal to the unpaid
principal amount of the mortgage or deed of trust, accrued and unpaid interest
and the expense of foreclosure. Generally, state law controls the amount of
foreclosure costs and expenses, including attorneys' fees, which may be
recovered by a lender. Thereafter, subject to the right of the borrower in some
states to remain in possession during the redemption period, the lender will
assume the burdens of ownership, including obtaining hazard insurance and making
such repairs at its own expense as are necessary to render the property suitable
for sale. The lender will commonly obtain the services of a real estate broker
and pay the broker's commission in connection with the sale of the property.
Depending upon market conditions, the ultimate proceeds of the sale of the
property may not equal the lender's investment in the property and, in some
states, subject to the terms of the loan, the lender may be entitled to a
deficiency judgment. Any loss may be reduced by the receipt of any mortgage
insurance proceeds.
A junior mortgagee may not foreclose on the property securing a junior
mortgage unless it forecloses subject to the senior mortgages, in which case it
must either pay the entire amount due on the senior mortgages to the senior
mortgagees prior to or at the time of the foreclosure sale or undertake the
obligation to make payments on the senior mortgages in the event the mortgagor
is in default thereunder, in either event adding the amounts expended to the
balance due on the junior loan, and may be subrogated to the rights of the
senior mortgagees. In addition, in the event that the foreclosure of a junior
mortgage triggers the enforcement of a "due-on-sale" clause, the junior
mortgagee may be required to pay the full amount of the senior mortgages to the
senior mortgagees. Accordingly, with respect to those Single Family Loans which
are junior 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 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 of 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 proceeds.
In foreclosure, courts have imposed general equitable principles. The
equitable principles are generally designed to relieve the borrower from the
legal effect of its defaults under the loan documents. Examples of judicial
remedies that have been fashioned include judicial requirements 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 lender's 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
a lender to foreclose if the default under the mortgage instrument is not
monetary, such as the borrower's failure to adequately maintain the property or
the borrower's execution of a second mortgage or deed of trust affecting the
property. Finally, some courts have been faced with the issue of whether or not
federal or state constitutional provisions reflecting due process concerns for
adequate notice require that borrowers under deeds of trust or mortgages receive
notices in addition to the statutorily-prescribed minimums. For the most part,
these cases have upheld the notice provisions as being reasonable or have found
that the sale by a trustee under a deed of trust, or under a mortgage having a
power of sale, does not involve sufficient state action to afford constitutional
protection to the borrower.
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REPOSSESSION WITH RESPECT TO CONTRACTS
GENERAL. Repossession of manufactured housing is governed by state law.
A few states have enacted legislation that requires that the debtor be given an
opportunity to cure its default (typically 30 days to bring the account current)
before repossession can commence. So long as a manufactured home has not become
so attached to real estate that it would be treated as a part of the real estate
under the law of the state where it is located, repossession of such home in the
event of a default by the obligor will generally be governed by the UCC (except
in Louisiana). Article 9 of the UCC provides the statutory framework for the
repossession of manufactured housing. While the UCC as adopted by the various
states may vary in certain small particulars, the general repossession procedure
established by the UCC is as follows:
(i) Except in those states where the debtor must receive
notice of the right to cure a default, repossession can commence
immediately upon default without prior notice. Repossession may be
effected either through self-help (peaceable retaking without court
order), voluntary repossession or through judicial process
(repossession pursuant to court-issued writ of replevin). The self-help
and/or voluntary repossession methods are more commonly employed, and
are accomplished simply by retaking possession of the manufactured
home. In cases in which the debtor objects or raises a defense to
repossession, a court order must be obtained from the appropriate state
court, and the manufactured home must then be repossessed in accordance
with that order. Whether the method employed is self-help, voluntary
repossession or judicial repossession, the repossession can be
accomplished either by an actual physical removal of the manufactured
home to a secure location for refurbishment and resale or by removing
the occupants and their belongings from the manufactured home and
maintaining possession of the manufactured home on the location where
the occupants were residing. Various factors may affect whether the
manufactured home is physically removed or left on location, such as
the nature and term of the lease of the site on which it is located and
the condition of the unit. In many cases, leaving the manufactured home
on location is preferable, in the event that the home is already set
up, because the expenses of retaking and redelivery will be saved.
However, in those cases where the home is left on location, expenses
for site rentals will usually be incurred.
(ii) Once repossession has been achieved, preparation for
the subsequent disposition of the manufactured home can commence. The
disposition may be by public or private sale provided the method,
manner, time, place and terms of the sale are commercially reasonable.
(iii) Sale proceeds are to be applied first to repossession
expenses (expenses incurred in retaking, storage, preparing for sale to
include refurbishing costs and selling) and then to satisfaction of the
indebtedness. While some states impose prohibitions or limitations on
deficiency judgments if the net proceeds from resale do not cover the
full amount of the indebtedness, the remainder may be sought from the
debtor in the form of a deficiency judgement in those states that do
not prohibit or limit such judgments. The deficiency judgment is a
personal judgment against the debtor for the shortfall. Occasionally,
after resale of a manufactured home and payment of all expenses and
indebtedness, there is a surplus of funds. In that case, the UCC
requires the party suing for the deficiency judgment to remit the
surplus to the debtor. Because the defaulting owner of a manufactured
home generally has very little capital or income available following
repossession, a deficiency judgment may not be sought in many cases or,
if obtained, will be settled at a significant discount in light of the
defaulting owner's strained financial condition.
LOUISIANA LAW. Any contract secured by a manufactured home located in
Louisiana will be governed by Louisiana law rather than Article 9 of the UCC.
Louisiana laws provide similar mechanisms
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for perfection and enforcement of security interests in manufactured housing
used as collateral for an installment sale contract or installment loan
agreement.
Under Louisiana law, a manufactured home that has been permanently
affixed to real estate will nevertheless remain subject to the motor vehicle
registration laws unless the obligor and any holder of a security interest in
the property execute and file in the real estate records for the parish in which
the property is located a document converting the unit into real property. A
manufactured home that is converted into real property but is then removed from
its site can be converted back to personal property governed by the motor
vehicle registration laws if the obligor executes and files various documents in
the appropriate real estate records and all mortgagees under real estate
mortgages on the property and the land to which it was affixed file releases
with the motor vehicle commission.
So long as a manufactured home remains subject to the Louisiana motor
vehicle laws, liens are recorded on the certificate of title by the motor
vehicle commissioner and repossession can be accomplished by voluntary consent
of the obligor, executory process (repossession proceedings which must be
initiated through the courts but which involve minimal court supervision) or a
civil suit for possession. In connection with a voluntary surrender, the obligor
must be given a full release from liability for all amounts due under the
contract. In executory process repossessions, a sheriff's sale (without court
supervision) is permitted, unless the obligor brings suit to enjoin the sale,
and the lender is prohibited from seeking a deficiency judgment against the
obligor unless the lender obtained an appraisal of the manufactured home prior
to the sale and the property was sold for at least two-thirds of its appraised
value.
RIGHTS OF REDEMPTION
SINGLE FAMILY PROPERTIES. The purposes of a foreclosure action in
respect of a Single Family Property are to enable the lender to realize upon its
security and to bar the borrower, and all persons who have interests in the
property that are subordinate to that of the foreclosing lender, from exercise
of their "equity of redemption". The doctrine of equity of redemption provides
that, until the property encumbered by a mortgage has been sold in accordance
with a properly conducted foreclosure and foreclosure sale, those having
interests that are subordinate to that of the foreclosing lender have an equity
of redemption and may redeem the property by paying the entire debt with
interest. Those having an equity of redemption must generally be made parties
and joined in the foreclosure proceeding in order for their equity of redemption
to be terminated.
The equity of redemption is a common-law (non-statutory) right which
should be distinguished from post-sale statutory 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. In some states, statutory redemption may occur only upon
payment of the foreclosure sale price. In other states, redemption may be
permitted 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 because the exercise of a right of redemption would
defeat the title of any purchase through a foreclosure. Consequently, the
practical effect of the redemption right is to force the lender to maintain the
property and pay the expenses of ownership until the redemption period has
expired. In some states, a post-sale statutory right of redemption may exist
following a judicial foreclosure, but not following a trustee's sale under a
deed of trust.
MANUFACTURED HOMES. While state laws do not usually require notice to
be given to debtors prior to repossession, many states do require delivery of a
notice of default and of the debtor's right to cure defaults before
repossession. The law in most states also requires that the debtor be given
notice of sale prior to the resale of the home so that the owner may redeem at
or before resale. In addition, the sale must comply with the requirements of the
UCC.
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ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
SINGLE FAMILY LOANS. 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 including California, statutes limit the right
of the beneficiary or mortgagee to obtain a deficiency judgment against the
borrower following foreclosure. A deficiency judgment is 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. In the case of a Mortgage Loan secured by a property owned by a
trust where the Mortgage Note is executed on behalf of the trust, a deficiency
judgment against the trust following foreclosure or sale under a deed of trust,
even if obtainable under applicable law, may be of little value to the mortgagee
or beneficiary if there are no trust assets against which such deficiency
judgment may be executed. In the case of a Mortgage Loan secured by a property
owned by a trust where the Mortgage Note is executed on behalf of the trust, a
deficiency judgment against the trust following foreclosure or sale under a deed
of trust, even if obtainable under applicable law, may be of little value to the
mortgagee or beneficiary if there are no trust assets against which such
deficiency judgment may be executed. 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. In certain other states, the lender has the option
of bringing a personal action against the borrower on the debt without first
exhausting such security; however in some of these states, the lender, following
judgment on such personal action, may be deemed to have elected a remedy and may
be precluded from exercising remedies with respect to the security.
Consequently, the practical effect of the election requirement, in those states
permitting such election, is that lenders will usually proceed against the
security first rather than bringing a personal action against the borrower.
Finally, in certain other states, statutory provisions limit any deficiency
judgment against the former borrower following a foreclosure to the excess of
the outstanding debt over the fair value of the property at the time of the
public sale. The purpose of these statutes is generally to prevent a beneficiary
or 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 federal and state statutory provisions, including the federal
bankruptcy laws and state laws affording relief to debtors, may interfere with
or affect the ability of the secured mortgage lender to realize upon collateral
or enforce a deficiency judgment. For example, under the federal Bankruptcy
Code, as amended from time to time (Title 11 of the United States Code) (the
"Bankruptcy Code"), virtually all actions (including foreclosure actions and
deficiency judgment proceedings) to collect a debt are automatically stayed upon
the filing of the bankruptcy petition and, often, no interest or principal
payments are made during the course of the bankruptcy case. The delay and the
consequences thereof caused by such automatic stay can be significant. Also,
under the Bankruptcy Code, the filing of a petition in a bankruptcy by or on
behalf of a junior lienor may stay the senior lender from taking action to
foreclose out of such junior lien. Moreover, with respect to federal bankruptcy
law, a court with federal bankruptcy jurisdiction may permit a debtor through
his or her Chapter 11 or Chapter 13 rehabilitative plan to cure a monetary
default in respect of a mortgage loan on a debtor's residence by paying
arrearage 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 arrearage over a number of years.
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
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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.
Certain tax liens arising under the Internal Revenue Code of 1986, as
amended, may in certain circumstances provide priority over the lien of a
mortgage or deed of trust. In addition, substantive requirements are imposed
upon mortgage lenders in connection with the origination and the servicing of
single family 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 law. In some cases, this
liability may affect assignees of the mortgage loans.
CONTRACTS. In addition to the laws limiting or prohibiting deficiency
judgments, numerous other statutory provisions, including federal bankruptcy
laws and related state laws, may interfere with or affect the ability of a
lender to realize upon collateral and/or enforce a deficiency judgment. For
example, in a Chapter 13 proceeding under the federal bankruptcy law, a court
may prevent a lender from repossessing a home, and, as part of the
rehabilitation plan, reduce the amount of the secured indebtedness to the market
value of the home at the time of bankruptcy (as determined by the court),
leaving the party providing financing as a general unsecured creditor for the
remainder of the indebtedness. A bankruptcy court may also reduce the monthly
payments due under a contract or change the rate of interest and time of
repayment of the indebtedness.
JUNIOR MORTGAGES
Some of the Mortgage Loans may be secured by junior mortgages or deeds
of trust, which are junior to senior mortgages or deeds of trust which are not
part of the Trust Fund. The rights of the Certificateholders as the holders of a
junior deed of trust or a junior mortgage are subordinate in lien priority and
in payment priority 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 or the sale
pursuant to the deed of trust, the junior mortgagee's or junior beneficiary's
lien will be extinguished unless the junior lienholder satisfies the defaulted
senior loan or asserts its subordinate interest in a property in foreclosure
proceedings. See "--Foreclosure on Mortgages" above.
Furthermore, the terms of the junior mortgage or deed of trust are
subordinate to the terms of the 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.
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CONSUMER PROTECTION LAWS WITH RESPECT TO CONTRACTS
Numerous federal and state consumer protection laws impose substantial
requirements upon creditors involved in consumer finance. These laws include the
federal Truth-in-Lending Act, Regulation "Z", the Equal Credit Opportunity Act,
Regulation "B", the Fair Credit Reporting Act, and related statutes. These laws
can impose specific statutory liabilities upon creditors who fail to comply with
their provisions. In some cases, this liability may affect an assignee's ability
to enforce a contract.
Manufactured housing contracts often contain provisions obligating the
obligor to pay late charges if payments are not timely made. In certain cases,
federal and state law may specifically limit the amount of late charges that may
be collected. Under the related Pooling Agreement, late charges will be retained
by the Master Servicer as additional servicing compensation, and any inability
to collect these amounts will not affect payments to Certificateholders.
Courts have imposed general equitable principles upon repossession and
litigation involving deficiency balances. These equitable principles are
generally designed to relieve a consumer from the legal consequences of a
default.
In several cases, consumers have asserted that the remedies provided to
secured parties under the UCC and related laws violate the due process
protections provided under the 14th Amendment to the Constitution of the United
States. For the most part, courts have upheld the notice provisions of the UCC
and related laws as reasonable or have found that the repossession and resale by
the creditor does not involve sufficient state action to afford constitutional
protection to consumers.
The so-called "Holder-in-Due-Course" Rule of the Federal Trade
Commission (the "FTC Rule") has the effect of subjecting a seller (and certain
related creditors and their assignees) in a consumer credit transaction and any
assignee of the creditor to all claims and defenses which the debtor in the
transaction could assert against the seller of the goods. Liability under the
FTC Rule is limited to the amounts paid by a debtor on the contract, and the
holder of the contract may also be unable to collect amounts still due
thereunder. Most of the Contracts in a Trust Fund will be subject to the
requirements of the FTC Rule. Accordingly, the Trust Fund, as holder of the
Contracts, will be subject to any claims or defenses that the purchaser of the
related manufactured home may assert against the seller of the manufactured
home, subject to a maximum liability equal to the amounts paid by the obligor on
the Contract.
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 under state law in a number of states, a secured party which
takes a deed in lieu of foreclosure or acquires a mortgaged property at a
foreclosure sale or becomes involved in the operation or management of a
property so as to be deemed an "owner" or "operator" of the 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 lender
(such as a Trust Fund) secured by residential real property. In the event that
title to a Mortgaged Property securing a Mortgage Loan in a Trust Fund was
acquired by the Trust Fund and cleanup costs were incurred in respect of the
Mortgaged Property, the holders of the Offered Certificates of the related
series might realize a loss if such costs were required to be paid by the Trust
Fund.
ENFORCEABILITY OF CERTAIN PROVISIONS
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TRANSFER OF SINGLE FAMILY PROPERTIES. Unless the related Prospectus
Supplement indicates otherwise, the Single Family Loans generally contain
due-on-sale clauses. These clauses permit the lender to accelerate the maturity
of the loan if the borrower sells, transfers or conveys the property. The
enforceability of these clauses has been the subject of legislation or
litigation in many states, and in some cases the enforceability of these clauses
was limited or denied. However, the Garn-St Germain Depository Institutions Act
of 1982 (the "Garn-St Germain Act") preempts state constitutional, statutory and
case law that prohibits the enforcement of due-on-sale clauses and permits
lenders to enforce these clauses in accordance with their terms, subject to
certain limited exceptions. The Garn-St Germain Act does "encourage" lenders to
permit assumption of loans at the original rate of interest or at some other
rate less than the average of the original rate and the market rate.
The Garn-St Germain Act also sets forth nine specific instances in
which a mortgage lender covered by the Garn-St Germain Act may not exercise a
due-on-sale clause, notwithstanding the fact that a transfer of the property may
have occurred. These include intra-family transfers, certain transfers by
operation of law, leases of fewer than three years and the creation of a junior
encumbrance. Regulations promulgated under the Garn-St Germain Act also prohibit
the imposition of a prepayment penalty upon the acceleration of a loan pursuant
to a due-on-sale clause.
The inability to enforce a due-on-sale clause may result in a mortgage
loan bearing an interest rate below the current market rate being assumed by the
buyer rather than being paid off, which may have an impact upon the average life
of the Mortgage Loans and the number of Mortgage Loans which may be outstanding
until maturity.
TRANSFER OF MANUFACTURED HOMES. Generally, manufactured housing
contracts contain provisions prohibiting the sale or transfer of the related
manufactured homes without the consent of the obligee on the contract and
permitting the acceleration of the maturity of such contracts by the obligee on
the contract upon any such sale or transfer that is not consented to. The Master
Servicer will, to the extent it has knowledge of such conveyance or proposed
conveyance, exercise or cause to be exercised its rights to accelerate the
maturity of the related Contracts through enforcement of due-on-sale clauses,
subject to applicable state law. 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 as to which the Master
Servicer desires to accelerate the maturity of the related Contract, the Master
Servicer's 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. Consequently, in some cases the
Master Servicer may be prohibited from enforcing a due-on-sale clause in respect
of certain Manufactured Homes.
LATE PAYMENT CHARGES AND PREPAYMENT RESTRICTIONS. Mortgage notes and
mortgages, as well as manufactured housing conditional sales contracts and
installment loan agreements, may contain provisions that obligate the borrower
to pay a late charge or additional interest if payments are not timely made, and
in some circumstances, may prohibit prepayments for a specified period and/or
condition prepayments upon the borrower's payment of prepayment fees or yield
maintenance penalties. In certain states, there are or may be specific
limitations upon the late charges which a lender may collect from a borrower for
delinquent payments. Certain states also limit the amounts that a lender may
collect from a borrower as an additional charge if the loan is prepaid. In
addition, the enforceability of provisions that provide for prepayment fees or
penalties upon an involuntary prepayment is unclear under the laws of many
states.
SUBORDINATE FINANCING
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When the mortgagor encumbers mortgaged property with one or more junior
liens, the senior lender is subjected to additional risk. First, the mortgagor
may have difficulty servicing and repaying multiple loans. In addition, if the
junior loan permits recourse to the mortgagor (as junior loans often do) and the
senior loan does not, a mortgagor may be more likely to repay sums due on the
junior loan than those on the senior loan. Second, acts of the senior lender
that prejudice the junior lender or impair the junior lender's security may
create a superior equity in favor of the junior lender. For example, if the
mortgagor and the senior lender agree to an increase in the principal amount of
or the interest rate payable on the senior loan, the senior lender may lose its
priority to the extent an existing junior lender is harmed or the mortgagor is
additionally burdened. Third, if the mortgagor defaults on the senior loan
and/or any junior loan or loans, the existence of junior loans and actions taken
by junior lenders can impair the security available to the senior lender and can
interfere with or delay the taking of action by the senior lender. Moreover, the
bankruptcy of a junior lender may operate to stay foreclosure or similar
proceeds by the senior lender.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, enacted in March 1980 ("Title V"), provides that state
usury limitations shall not apply to certain types of residential first mortgage
loans originated by certain lenders after March 31, 1980. A similar federal
statute was in effect with respect to mortgage loans made during the first three
months of 1980. The Office of Thrift Supervision is authorized to issue rules
and regulations and to publish interpretations governing implementation of Title
V. 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 or to limit
discount points or other charges.
Title V also provides that, subject to the following conditions, state
usury limitations shall not apply to any loan that is secured by a first lien on
certain kinds of manufactured housing. The Contracts would be covered if they
satisfy certain conditions, among other things, governing the terms of any
prepayments, late charges and deferral fees and requiring a 30-day notice period
prior to instituting any action leading to repossession of or foreclosure with
respect to the related unit. Title V authorized any state to reimpose
limitations on interest rates and finance charges by adopting before April 1,
1983 a law or constitutional provision which expressly rejects application of
the federal law. Fifteen states adopted such a law prior to the April 1, 1983
deadline. In addition, even where Title V was not so rejected, any state is
authorized by the law to adopt a provision limiting discount points or other
charges on loans covered by Title V. In any state in which application of Title
V was expressly rejected or a provision limiting discount points or other
charges has been adopted, no Contract which imposes finance charges or provides
for discount points or charges in excess of permitted levels has been included
in the Trust Fund.
As indicated above under "The Mortgage Pools--Representations by
Sellers," each Seller of a Mortgage Loan will have represented that such
Mortgage Loan was originated in compliance with then applicable state laws,
including usury laws, in all material respects. However, the Mortgage Rates on
the Mortgage Loans will be subject to applicable usury laws as in effect from
time to time.
ALTERNATIVE MORTGAGE INSTRUMENTS
Alternative mortgage instruments, including adjustable rate mortgage
loans and early ownership mortgage loans, originated by non-federally chartered
lenders have historically been subjected to a variety of restrictions. Such
restrictions differed from state to state, resulting in difficulties in
determining
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whether a particular alternative mortgage instrument originated by a
state-chartered lender was in compliance with applicable law. These difficulties
were alleviated substantially as a result of the enactment of Title VIII of the
Garn-St Germain Act ("Title VIII"). Title VIII provides that, notwithstanding
any state law to the contrary, state-chartered banks may originate alternative
mortgage instruments in accordance with regulations promulgated by the
Comptroller of the Currency with respect to origination of alternative mortgage
instruments by national banks, state-chartered credit unions may originate
alternative mortgage instruments in accordance with regulations promulgated by
the National Credit Union Administration with respect to origination of
alternative mortgage instruments by federal credit unions, and all other
non-federally chartered housing creditors, including state-chartered savings and
loan associations, state-chartered savings banks and mutual savings banks and
mortgage banking companies, may originate alternative mortgage instruments in
accordance with the regulations promulgated by the Federal Home Loan Bank Board,
predecessor to the Office of Thrift Supervision, with respect to origination of
alternative mortgage instruments by federal savings and loan associations. Title
VIII provides that any state may reject applicability of the provisions of Title
VIII by adopting, prior to October 15, 1985, a law or constitutional provision
expressly rejecting the applicability of such provisions. Certain states have
taken such action.
FORMALDEHYDE LITIGATION WITH RESPECT TO CONTRACTS
A number of lawsuits are pending in the United States alleging personal
injury from exposure to the chemical formaldehyde, which is present in many
building materials, including such components of manufactured housing as plywood
flooring and wall paneling. Some of these lawsuits are pending against
manufacturers of manufactured housing, suppliers of component parts, and related
persons in the distribution process. The Company is aware of a limited number of
cases in which plaintiffs have won judgments in these lawsuits.
Under the FTC Rule, which is described above under "Consumer Protection
Laws", the holder of any Contract secured by a Manufactured Home with respect to
which a formaldehyde claim has been successfully asserted may be liable to the
obligor for the amount paid by the obligor on the related Contract and may be
unable to collect amounts still due under the Contract. In the event an obligor
is successful in asserting such a claim, the related Certificateholders could
suffer a loss if (i) the related Seller fails or cannot be required to
repurchase the affected Contract for a breach of representation and warranty and
(ii) the Master Servicer or the Trustee were unsuccessful in asserting any claim
of contribution or subrogation on behalf of the Certificateholders against the
manufacturer or other persons who were directly liable to the plaintiff for the
damages. Typical products liability insurance policies held by manufacturers and
component suppliers of manufactured homes may not cover liabilities arising from
formaldehyde in manufactured housing, with the result that recoveries from such
manufacturers, suppliers or other persons may be limited to their corporate
assets without the benefit of insurance.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940,
as amended (the "Relief Act"), a Mortgagor who enters military service after the
origination of such Mortgagor's Mortgage Loan (including a Mortgagor who was in
reserve status and is called to active duty after origination of the Mortgage
Loan), 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. The Relief Act applies to
individuals who are members of the Army, Navy, Air Force, Marines, National
Guard, Reserves, Coast Guard, and officers of the U.S. Public Health Service
assigned to duty with the military. Because the Relief Act applies to Mortgagors
who enter military service (including reservists who are called to active duty)
after origination of the related Mortgage Loan, no information can be provided
as to the number of loans that may be affected by the Relief Act. Application of
the Relief Act would adversely affect, for an indeterminate period of time, the
ability of
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the Master Servicer to collect full amounts of interest on certain of the
Mortgage Loans. Any shortfall in interest collections resulting from the
application of the Relief Act or similar legislation or regulations, which would
not be recoverable from the related Mortgage Loans, would result in a reduction
of the amounts distributable to the holders of the related Certificates, and
would not be covered by advances or by any Letter of Credit or any other form of
credit enhancement provided in connection with the related series of
Certificates. In addition, the Relief Act imposes limitations that would impair
the ability of the Master Servicer to foreclose on an affected Mortgage Loan or
enforce rights under a Contract during the Mortgagor's period of active duty
status, and, under certain circumstances, during an additional three month
period thereafter. Thus, in the event that the Relief Act or similar legislation
or regulations applies to any Mortgage Loan which goes into default, there may
be delays in payment and losses on the related Certificates in connection
therewith. Any other interest shortfalls, deferrals or forgiveness of payments
on the Mortgage Loans resulting from similar legislation or regulations may
result in delays in payments or losses to Certificateholders of the related
series.
FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following general discussion of the anticipated material federal
income tax consequences of the purchase, ownership and disposition of Offered
Certificates of any series thereof, to the extent it relates to matters of law
or legal conclusions with respect thereto, represents the opinion of counsel to
the Company with respect to that series on the material matters associated with
such consequences, subject to any qualifications set forth herein. Counsel to
the Company for each series will be Thacher Proffitt & Wood. This discussion is
directed primarily to Certificateholders that hold the Certificates as capital
assets within the meaning of Section 1221 of the Internal Revenue Code of 1986
(the "Code") (although portions thereof may also apply to Certificateholders who
do not hold Certificates as "capital assets") and does not purport to discuss
all federal income tax consequences that may be applicable to the individual
circumstances of particular categories of investors, some of which (such as
banks, insurance companies and foreign investors) may be subject to special
treatment under the Code. 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. Prospective investors should
note that no rulings have been or will be sought from the Internal Revenue
Service (the "IRS") with respect to any of the federal income tax consequences
discussed below, and no assurance can be given the IRS will not take contrary
positions. 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 of two general types: (i)
certificates ("REMIC Certificates") representing interests in a Trust Fund, or a
portion thereof, that the Trustee, the Master Servicer or another specified
party (the "REMIC Administrator") will elect to have treated as a real estate
mortgage investment conduit ("REMIC") under Sections 860A through 860G (the
"REMIC Provisions") of the Code and (ii) certificates ("Grantor Trust
Certificates") representing interests in a Trust Fund
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("Grantor Trust Fund") as to which no such election will be made. The Prospectus
Supplement for each series of Certificates will indicate whether a REMIC
election (or elections) will be made for the related Trust Fund 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 limited in applicability to Offered
Certificates. Moreover, this discussion applies only to the extent that the
Trust Fund consists of a Mortgage Pool that does not include Mortgage
Securities. To the extent that Mortgage Securities, including REMIC certificates
and mortgage pass-through certificates, are to be held by a Trust Fund, the tax
consequences associated with the inclusion of such assets will be disclosed in
the related Prospectus Supplement.
Furthermore, 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 do
not adequately address certain issues relevant to, and in some instances provide
that they are not applicable to, securities such as the Certificates.
REMICS
CLASSIFICATION OF REMICS. Upon the issuance of each series of REMIC
Certificates, Thacher Proffitt & Wood, counsel to the Company, will deliver its
opinion generally to the effect that, assuming compliance with all provisions of
the related Pooling and Servicing Agreement, the related Trust Fund (or each
applicable portion thereof) will qualify as a REMIC and the REMIC Certificates
offered with respect thereto will be considered to evidence ownership of
"regular interests" ("REMIC Regular Certificates") or "residual interests"
("REMIC Residual Certificates") in that REMIC within the meaning of the REMIC
Provisions. The following general discussion of the anticipated federal income
tax consequences of the purchase, ownership and disposition of REMIC
Certificates, to the extent it relates to matters of law or legal conclusions
with respect thereto, represents the opinion of counsel to the Company for the
applicable series as specified in the related Prospectus Supplement, subject to
any qualifications set forth herein. In addition, counsel to the Company has
prepared the statements in this Prospectus under the heading "Certain Federal
Income Tax Consequences--REMICs," and is of the opinion that such statements are
correct in all material respects. Such statements are intended as an explanatory
discussion of the possible effects of the classification of any Trust Fund (or
applicable portion thereof) as a REMIC for federal income tax purposes on
investors generally and of related tax matters affecting investors generally,
but do not purport to furnish information in the level of detail or with the
attention to an investor's specific tax circumstances that would be provided by
an investor's own tax advisor. Accordingly, each investor is advised to consult
its own tax advisors with regard to the tax consequences to it of investing in
REMIC Certificates.
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
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 Fund's income for the period in which the requirements for such status are
not satisfied. The Pooling Agreement with respect to each REMIC will include
provisions designed to maintain the Trust Fund's status as a REMIC under the
REMIC
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Provisions. It is not anticipated that the status of any Trust Fund as a REMIC
will be inadvertently terminated.
CHARACTERIZATION OF INVESTMENTS IN REMIC CERTIFICATES. In general,
except as set forth in the related Prospectus Supplement, 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, 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, the REMIC Regular
Certificates will be "qualified mortgages" within the meaning of Section
860G(a)(3) 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 REMIC Administrator 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 Mortgage Loans,
payments on Mortgage Loans held pending distribution on the REMIC Certificates
and any 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 Mortgage Loans, or whether such assets (to the
extent not invested in assets described in the foregoing sections) otherwise
would receive the same treatment as the Mortgage Loans for purposes of all of
the foregoing sections of the Code. In addition, in some instances Mortgage
Loans may not be treated entirely as assets described in the foregoing sections.
If so, the related Prospectus Supplement will describe the Mortgage Loans that
may not be so treated. The REMIC Regulations do provide, however, that cash
received from payments on Mortgage Loans held pending distribution is considered
part of the Mortgage Loans for purposes of 856(c)(5)(A) of the Code.
Furthermore, foreclosure property will qualify as "real estate assets" under
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 Fund as REMICs ("Tiered REMICs") for federal income tax purposes.
As to each such series of REMIC Certificates, in the opinion of counsel to the
Company, assuming compliance with all provisions of the related Pooling
Agreement, the Tiered REMICs will each qualify as a REMIC and the REMIC
Certificates issued by the Tiered REMICs 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 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, 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
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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. 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 "constant yield" 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 reasonable prepayment assumption be used with
respect to Mortgage Loans 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 Conference Committee Report accompanying the Tax Reform Act of 1986 (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 (the "Prepayment Assumption") used in
reporting original issue discount for each series of REMIC Regular Certificates
will be consistent with this standard and will be disclosed in the related
Prospectus Supplement. However, neither the Company, the Master Servicer nor the
Trustee will make any representation that the Mortgage Loans will in fact prepay
at a rate conforming to the Prepayment Assumption or at any other rate.
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 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" is interest that is unconditionally
payable at least annually (during the entire term of the instrument) at a single
fixed rate, or 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 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. If the original issue discount rules apply to
such Certificates, the related Prospectus Supplement will describe the manner in
which such rules will be applied with respect to those Certificates in preparing
information returns to the Certificateholders and the Internal Revenue Service
(the "IRS").
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" (as defined below) for original issue discount is each monthly period
that ends on the day prior to each Distribution Date, in some cases, as a
consequence of this "long first accrual period," some or all interest
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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,
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, 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, each period that ends on a date
that corresponds to the day prior to each Distribution Date and begins on the
first day following the immediately preceding accrual period (or in the case of
the first such period, begins on the Closing Date), a calculation will be made
of the portion of the original issue discount that accrued during such accrual
period. The portion of original issue discount that accrues in any accrual
period will equal the excess, if any, of (i) the sum of (A) the present value,
as of the end of the accrual period, of all of the distributions remaining to be
made on the REMIC Regular Certificate, if any, in future periods and (B) the
distributions made on such
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REMIC Regular Certificate during the accrual period of amounts included in the
stated redemption price, over (ii) the adjusted issue price of such REMIC
Regular Certificate at the beginning of the accrual period. The present value of
the remaining distributions referred to in the preceding sentence will be
calculated (i) assuming that distributions on the REMIC Regular Certificate will
be received in future periods based on the Mortgage Loans being prepaid at a
rate equal to the Prepayment Assumption, (ii) using a discount rate equal to the
original yield to maturity of the Certificate and (iii) taking into account
events (including actual prepayments) that have occurred before the close of the
accrual period. 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 Mortgage Loans 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 the 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.
A subsequent purchaser of a REMIC Regular Certificate that purchases
such Certificate at a cost (excluding any portion of such cost attributable to
accrued qualified stated interest) less than its remaining stated redemption
price will also be required to include in gross income the daily portions of any
original issue discount with respect to such Certificate. However, each such
daily portion will be reduced, if such cost is in excess of its "adjusted issue
price," in proportion to the ratio such excess bears to the aggregate original
issue discount remaining to be accrued on such REMIC Regular Certificate. The
adjusted issue price of a REMIC Regular Certificate on any given day equals the
sum of (i) the adjusted issue price (or, in the case of the first accrual
period, the issue price) of such Certificate at the beginning of the accrual
period which includes such day and (ii) the daily portions of original issue
discount for all days during such accrual period prior to such day.
MARKET DISCOUNT. 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 gain 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) in income as
interest, and to amortize premium, based on a constant yield method. If such an
election were made with respect to a REMIC Regular Certificate with market
discount, the Certificateholder would be deemed to have made an election to
include currently market discount in income with respect to all other debt
instruments having market discount that such Certificateholder acquires during
the taxable year of the election or thereafter, and possibly previously acquired
instruments. Similarly, a Certificateholder that made this election for a
Certificate that is acquired at a premium would be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that such Certificateholder owns or acquires. See
"Taxation of Owners of REMIC Regular Certificates--Premium" below. 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, except with the
approval of the IRS.
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However, 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" above. 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 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 also 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 includible 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 includible in income. If such
holder elects to include market discount in income currently as it accrues on
all market discount instruments acquired by such holder in that taxable year or
thereafter, the interest deferral rule described above will not apply.
PREMIUM. 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
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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 debt instrument, 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" above. 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. 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 Mortgage Loans.
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 Mortgage Loans 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. Although a REMIC is a separate entity for federal income tax
purposes, a REMIC generally is not subject to entity-level taxation, except with
regard to prohibited transactions and certain other transactions. See
"-Prohibited Transactions Tax and Other Taxes" below. Rather, the taxable income
or net loss of a REMIC is generally taken into account by the holder of the
REMIC Residual Certificates. Accordingly, 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 Mortgage Loans or as debt instruments issued
by the REMIC.
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. The daily amounts so allocated 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 paragraph will be treated as ordinary income or loss. The taxable income of
the REMIC will be determined under the rules described below
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in "Taxable Income of the REMIC" and will be taxable to the REMIC Residual
Certificateholders without regard to the timing or amount of cash distributions
by the REMIC. Ordinary income derived from REMIC Residual Certificates will be
"portfolio income" for purposes of the taxation of taxpayers subject to
limitations under Section 469 of the Code on the deductibility of "passive
losses."
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 share of
the taxable income (or net loss) of the REMIC for each day that it holds such
REMIC Residual Certificate. Those daily amounts 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 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 (as defined below) 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 includible
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 or unrelated deductions against
which income may be offset, subject to the rules relating to "excess
inclusions," residual interests without "significant value" and "noneconomic"
residual interests discussed below. The fact that the tax liability associated
with the income allocated to REMIC Residual Certificateholders may exceed the
cash distributions received by such REMIC Residual Certificateholders for the
corresponding period may significantly adversely affect such REMIC Residual
Certificateholders' after-tax rate of return. Such disparity between income and
distributions may not be offset by corresponding losses or reductions of income
attributable to the REMIC Residual Certificateholder until subsequent tax years
and, then, may not be completely offset due to changes in the Code, tax rates or
character of the income or loss.
TAXABLE INCOME OF THE REMIC. The taxable income of the REMIC will equal
the income from the Mortgage Loans and other assets of the REMIC plus any
cancellation of indebtedness income due to the allocation of realized losses to
REMIC Regular Certificates, less the deductions allowed to the REMIC for
interest (including original issue discount and reduced by any premium 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 Mortgage Loans, bad debt losses with respect
to the Mortgage Loans 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 the sum of the issue prices of
all REMIC Certificates (or, if a class of REMIC Certificates is not sold
initially, their fair market values). Such aggregate basis will be allocated
among the Mortgage Loans and the other assets of the REMIC in proportion to
their respective fair market
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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." The issue price of a REMIC
Certificate received in exchange for an interest in the Mortgage Loans or other
property will equal the fair market value of such interests in the Mortgage
Loans or other property. Accordingly, if one or more classes of REMIC
Certificates are retained initially rather than sold, the REMIC Administrator
may be required to estimate the fair market value of such interests in order to
determine the basis of the REMIC in the Mortgage Loans and other property held
by the REMIC.
Subject to 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 Mortgage Loans that it holds will be equivalent to the
method for accruing original issue discount income for holders of REMIC Regular
Certificates (that is, under the constant yield method taking into account the
Prepayment Assumption). However, a REMIC that acquires loans at a market
discount must include such market discount in income currently, as it accrues,
on a constant yield basis. See "--Taxation of Owners of REMIC Regular
Certificates" above, which describes a method for accruing such discount income
that is analogous to that required to be used by a REMIC as to Mortgage Loans
with market discount that it holds.
A Mortgage Loan 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 includible 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 Mortgage
Loans. Premium on any Mortgage Loan to which such election applies may be
amortized under a constant yield method, presumably taking into account a
Prepayment Assumption. Further, such an election would not apply to any Mortgage
Loan originated on or before September 27, 1985. Instead, premium on such a
Mortgage Loan should be allocated among the principal payments thereon and be
deductible by the REMIC as those payments become due or upon the prepayment of
such Mortgage Loan.
A 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 REMIC Certificates constituting "regular interests" in the REMIC
not offered hereby) described therein will not apply.
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
net amount of interest deductions that are allowed the REMIC in each taxable
year with respect to the REMIC Regular Certificates of such class will be
reduced by 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 a 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
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of accounting. However, no item of income, gain, loss or deduction allocable to
a prohibited transaction will be taken into account. See "--Prohibited
Transactions Tax and Other 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" below.
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. 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.
A REMIC Residual Certificateholder is not allowed to take into account
any net loss for any calendar quarter to the extent such net loss exceeds such
REMIC Residual Certificateholder's adjusted basis in its REMIC Residual
Certificate as of the close of such calendar quarter (determined without regard
to such net loss). Any loss that is not currently deductible by reason of this
limitation may be carried forward indefinitely to future calendar quarters and,
subject to the same limitation, may be used only to offset income from the REMIC
Residual Certificate. The ability of REMIC Residual Certificateholders to deduct
net losses may be subject to additional limitations under the Code, as to which
REMIC Residual Certificateholders should consult their tax advisors.
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 REMIC. However, such bases 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 any net losses of the
REMIC or upon the sale of its REMIC Residual Certificate. See "--Sales of REMIC
Certificates" below. 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 REMIC Residual
Certificateholder and the adjusted basis such REMIC Residual Certificate would
have in the hands of an original holder, see "--Taxation of Owners of REMIC
Residual Certificates--General" above.
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EXCESS INCLUSIONS. 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
daily portions of REMIC taxable income allocable to such REMIC Residual
Certificate over (ii) the sum of the "daily accruals" (as defined below) 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 any 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. Although it
has not done so, the Treasury has authority to issue regulations that would
treat the entire amount of income accruing on a REMIC Residual Certificate as an
excess inclusion if the REMIC Residual Certificates are considered not to have
"significant value."
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.
Furthermore, for purposes of the alternative minimum tax, (i) excess
inclusions will not be permitted to be offset by the alternative tax net
operating loss deduction and (ii) alternative minimum taxable income may not be
less than the taxpayer's excess inclusions. The latter rule has the effect of
preventing nonrefundable tax credits from reducing the taxpayer's income tax to
an amount lower than the tentative minimum tax on excess inclusions.
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 liquidation provided for in
the
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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 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 is also
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 Company will make no representation that a REMIC
Residual Certificate will not be considered "noneconomic" for purposes of the
above-described rules. See "--Foreign Investors in REMIC Certificates--REMIC
Residual Certificates" below for additional restrictions applicable to transfers
of certain REMIC Residual Certificates to foreign persons.
MARK-TO-MARKET RULES. On December 28, 1993, the IRS released temporary
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 "negative value" REMIC Residual Certificate is not
treated as a security and thus may not be marked to market. This exclusion from
the mark-to-market requirement is expanded to include all REMIC Residual
Certificates under proposed Treasury regulations published January 4, 1995 which
provide that any REMIC Residual Certificate issued after January 4, 1995 will
not be treated as a security and therefore generally may 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. Except as stated in the
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
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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 two percent 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 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 provided in the following four paragraphs,
any such gain or loss will be capital gain or loss, provided such REMIC
Certificate is held as a capital asset (generally, property held for investment)
within the meaning of Section 1221 of the Code. The Code as of the date of this
Prospectus provides for a top marginal tax rate of 39.6% for individuals and a
maximum marginal rate for long-term capital gains of individuals of 28%. No such
rate differential exists for corporations. In addition, the distinction between
a capital gain or loss and ordinary income or loss remains relevant for other
purposes.
Gain from the sale of a REMIC Regular Certificate that might otherwise
be capital gain will be treated as ordinary income to the extent such gain does
not exceed the excess, if any, of (i) the amount that would have been includible
in the seller's income with respect to such REMIC Regular Certificate assuming
that income had 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
based on the application of the Prepayment Assumption to such 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 includible 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 in an amount not exceeding the portion of such
discount that accrued during the period such REMIC Certificate was held by such
holder, reduced by any market discount included in income under the rules
described above under "--Taxation of Owners of REMIC Regular
Certificates--Market Discount" and "--Premium."
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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 the same 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 rule that limits 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
the seller of a REMIC Residual Certificate reacquires such REMIC Residual
Certificate, or acquires 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) during the period beginning six months before, and ending six months
after, the date of such sale, such sale will be subject to the "wash sale" rules
of Section 1091 of the Code. In that event, any loss realized by the REMIC
Residual Certificateholder on the sale will not be deductible, but instead will
be added to such REMIC Residual Certificateholder's adjusted basis in the
newly-acquired asset.
PROHIBITED TRANSACTIONS AND OTHER POSSIBLE REMIC TAXES. The Code
imposes a tax on REMICs equal to 100% of the net income derived from "prohibited
transactions" (a "Prohibited Transactions Tax"). In general, subject to certain
specified exceptions a prohibited transaction means the disposition of a
Mortgage Loan, the receipt of income from a source other than a Mortgage Loan or
certain other permitted investments, the receipt of compensation for services,
or gain from the disposition of an asset purchased with the payments on the
Mortgage Loans for temporary investment pending distribution on the REMIC
Certificates. It is not anticipated that any REMIC will engage in any prohibited
transactions in which it would recognize a material amount of net income.
In addition, certain contributions to a REMIC made after the day on
which the REMIC issues all of its interests could result in the imposition of a
tax on the REMIC equal to 100% of the value of the contributed property (a
"Contributions Tax"). Each Pooling Agreement will include provisions designed to
prevent the acceptance of any contributions that would be subject to such tax.
REMICs also are subject to federal income tax at the highest corporate
rate on "net income from foreclosure property," determined by reference to the
rules applicable to real estate investment trusts. "Net income from foreclosure
property" generally means gain from the sale of a foreclosure property that is
inventory property and gross income from foreclosure property other than
qualifying rents and other qualifying income for a real estate investment trust.
It is not anticipated that any REMIC will recognize "net income from foreclosure
property" subject to federal income tax.
Except as set forth in the related Prospectus Supplement, it is not
anticipated that any material state or local income or franchise tax will be
imposed on any REMIC.
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Except as set forth 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 a
breach of the Master Servicer's or the Trustee's obligations, as the case may
be, under the related Pooling Agreement and in respect of compliance with
applicable laws and regulations. Any such tax not borne by the Master Servicer
or the Trustee will be charged against the related Trust Fund 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" (as defined below), 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 REMIC Residual 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 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" (as defined below) 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
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1381(a)(2)(C) of the Code. For these purposes, a "pass-through entity" means any
regulated investment company, real estate investment trust, trust, partnership
or certain other entities described in Section 860E(e)(6) of the Code. In
addition, a person holding an interest in a pass-through entity as a nominee for
another person will, with respect to such interest, be treated as a pass-through
entity.
TERMINATION. A REMIC will terminate immediately after the Distribution
Date following receipt by the REMIC of the final payment in respect of the
Mortgage Loans or upon a sale of the REMIC's assets following the adoption by
the REMIC of a plan of complete liquidation. The last distribution on a REMIC
Regular Certificate will be treated as a payment in retirement of a debt
instrument. In the case of a REMIC Residual Certificate, if the last
distribution on such REMIC Residual Certificate is less than the REMIC Residual
Certificateholder's adjusted basis in such Certificate, such REMIC Residual
Certificateholder should (but may not) be treated as realizing a loss equal to
the amount of such difference, and such loss may be treated as a capital loss.
REPORTING AND OTHER ADMINISTRATIVE MATTERS. Solely for purposes of the
administrative provisions of the Code, the REMIC will be treated as a
partnership and REMIC Residual Certificateholders will be treated as partners.
Except as described in the related Prospectus Supplement, the REMIC
Administrator will file REMIC federal income tax returns on behalf of the
related REMIC, and under the terms of the related Pooling Agreement, will either
(i) be irrevocably appointed by the holders of the largest percentage interest
in the related REMIC Residual Certificates as their agent to perform all of the
duties of the "tax matters person" with respect to the REMIC in all respects or
(ii) will be designated as and will act as the "tax matters person" with respect
to the related REMIC in all respects and will hold at least a nominal amount of
REMIC Residual Certificates.
The REMIC Administrator, as the tax matters person or as agent for the
tax matters person, subject to certain notice requirements and various
restrictions and limitations, generally will 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 generally will be required to report such REMIC items
consistently with their treatment on the REMIC's tax return and may in some
circumstances be bound by a settlement agreement between the REMIC
Administrator, as either tax matters person or as agent for the 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. Any person that holds a REMIC
Residual Certificate as a nominee for another person may be required to furnish
the REMIC, in a manner to be provided in Treasury regulations, with 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 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
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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 would require information relating to the holder's
purchase price that the REMIC may not have, such regulations only require that
information pertaining to the appropriate proportionate method of accruing
market discount be provided. See "--Taxation of Owners of REMIC Regular
Certificates--Market Discount."
Except as set forth in the related Prospectus Supplement, the
responsibility for complying with the foregoing reporting rules will be borne by
the REMIC Administrator.
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" (as defined below) and is
not subject to federal income tax as a result of any direct or indirect
connection to the United States in addition to its ownership of a REMIC Regular
Certificate will not be subject to United States federal income or withholding
tax in respect of a distribution on a REMIC Regular Certificate, provided that
the holder complies to the extent necessary with certain identification
requirements (including delivery of a statement, signed by the Certificateholder
under penalties of perjury, certifying that such Certificateholder is not a
United States person and providing the name and address of such
Certificateholder). For these purposes, "United States person" means a citizen
or resident of the United States, a corporation, partnership or other entity
created or organized in, or under the laws of, the United States or any
political subdivision thereof, or an estate whose income is subject to United
States federal income tax regardless of its source, 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 fiduciaries have the
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.
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Except as stated in the related Prospectus Supplement, transfers of
REMIC Residual Certificates to investors that are not United States persons will
be prohibited under the related Pooling Agreement.
GRANTOR TRUST FUNDS
CLASSIFICATION OF GRANTOR TRUST FUNDS. With respect to each series of
Grantor Trust Certificates, Thacher Proffitt & Wood, counsel to the Company,
will deliver its opinion to the effect that, assuming compliance with all
provisions of the related Pooling Agreement, the related Grantor Trust Fund will
be classified as a grantor trust under subpart E, part I of subchapter J of the
Code and not as a partnership or an association taxable as a corporation. The
following general discussion of the anticipated federal income tax consequences
of the purchase, ownership and disposition of Grantor Trust Certificates, to the
extent it relates to matters of law or legal conclusions with respect thereto,
represents the opinion of counsel to the Company for the applicable series as
specified in the related Prospectus Supplement, subject to any qualifications
set forth herein. In addition, counsel to the Company has prepared the
statements in this Prospectus under the heading "Certain Federal Income Tax
Consequences--Grantor Trust Funds," and is of the opinion that such statements
are correct in all material respects. Such statements are intended as an
explanatory discussion of the possible effects of the classification of any
Grantor Trust Fund as a grantor trust for federal income tax purposes on
investors generally and of related tax matters affecting investors generally,
but do not purport to furnish information in the level of detail or with the
attention to an investor's specific tax circumstances that would be provided by
an investor's own tax advisor. Accordingly, each investor is advised to consult
its own tax advisors with regard to the tax consequences to it of investing in
Grantor Trust Certificates.
For purposes of the following discussion, a Grantor Trust Certificate
representing an undivided equitable ownership interest in the principal of the
Mortgage Loans constituting the related Grantor Trust Fund, together with
interest thereon at a pass-through rate, will be referred to as a "Grantor Trust
Fractional Interest Certificate." A Grantor Trust Certificate representing
ownership of all or a portion of the difference between interest paid on the
Mortgage Loans constituting the related Grantor Trust Fund (net of normal
administration fees and any Spread) and interest paid to the holders of Grantor
Trust Fractional Interest Certificates issued with respect to such Grantor Trust
Fund will be referred to as a "Grantor Trust Strip Certificate." A Grantor Trust
Strip Certificate may also evidence a nominal ownership interest in the
principal of the Mortgage Loans constituting the related Grantor Trust Fund.
CHARACTERIZATION OF INVESTMENTS IN GRANTOR TRUST CERTIFICATES.
GRANTOR TRUST FRACTIONAL INTEREST CERTIFICATES. In the case of Grantor
Trust Fractional Interest Certificates, except as disclosed in the related
Prospectus Supplement, counsel to the Company will deliver an opinion that, in
general, Grantor Trust Fractional Interest Certificates will represent interests
in (i) "loans . . . secured by an interest in real property" within the meaning
of Section 7701(a)(19)(C)(v) of the Code; (ii) "obligation[s] (including any
participation or Certificate of beneficial ownership therein) which . . .[are]
principally secured by an interest in real property" within the meaning of
Section 860G(a)(3) of the Code; and (iii) "real estate assets" within the
meaning of Section 856(c)(5)(A) of the Code. In addition, counsel to the Company
will deliver an opinion that interest on Grantor Trust Fractional Interest
Certificates will to the same extent be considered "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.
GRANTOR TRUST STRIP CERTIFICATES. Even if Grantor Trust Strip
Certificates evidence an interest in a Grantor Trust Fund consisting of Mortgage
Loans that are "loans . . . secured by an interest in real property" within the
meaning of Section 7701(a)(19)(C)(v) of the Code, and "real estate assets"
within the meaning of Section 856(c)(5)(A) of the Code, and the interest on
which is "interest on obligations secured by mortgages on real property" within
the meaning of Section 856(c)(3)(B) of the Code, it is
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unclear whether the Grantor Trust Strip Certificates, and the income therefrom,
will be so characterized. However, the policies underlying such sections
(namely, to encourage or require investments in mortgage loans by thrift
institutions and real estate investment trusts) may suggest that such
characterization is appropriate. Counsel to the Company will not deliver any
opinion on these questions. Prospective purchasers to which such
characterization of an investment in Grantor Trust Strip Certificates is
material should consult their tax advisors regarding whether the Grantor Trust
Strip Certificates, and the income therefrom, will be so characterized.
The Grantor Trust Strip Certificates will be "obligation[s] (including
any participation or Certificate of beneficial ownership therein) which . .
.[are] principally secured by an interest in real property" within the meaning
of Section 860G(a)(3)(A) of the Code.
TAXATION OF OWNERS OF GRANTOR TRUST FRACTIONAL INTEREST CERTIFICATES.
Holders of a particular series of Grantor Trust Fractional Interest Certificates
generally will be required to report on their federal income tax returns their
shares of the entire income from the Mortgage Loans (including amounts used to
pay reasonable servicing fees and other expenses) and will be entitled to deduct
their shares of any such reasonable servicing fees and other expenses. Because
of stripped interests, market or original issue discount, or premium, the amount
includible in income on account of a Grantor Trust Fractional Interest
Certificate may differ significantly from the amount distributable thereon
representing interest on the Mortgage Loans. Under Section 67 of the Code, an
individual, estate or trust holding a Grantor Trust Fractional Interest
Certificate directly or through certain pass-through entities will be allowed a
deduction for such reasonable servicing fees and expenses only to the extent
that the aggregate of such holder's miscellaneous itemized deductions exceeds
two percent of such holder'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 holders of Grantor Trust Fractional Interest Certificates
who are subject to the limitations of either Section 67 or Section 68 of the
Code may be substantial. Further, Certificateholders (other than corporations)
subject to the alternative minimum tax may not deduct miscellaneous itemized
deductions in determining such holder's alternative minimum taxable income.
Although it is not entirely clear, it appears that in transactions in which
multiple classes of Grantor Trust Certificates (including Grantor Trust Strip
Certificates) are issued, such fees and expenses should be allocated among the
classes of Grantor Trust Certificates using a method that recognizes that each
such class benefits from the related services. In the absence of statutory or
administrative clarification as to the method to be used, it currently is
intended to base information returns or reports to the IRS and
Certificateholders on a method that allocates such expenses among classes of
Grantor Trust Certificates with respect to each period based on the
distributions made to each such class during that period.
The federal income tax treatment of Grantor Trust Fractional Interest
Certificates of any series will depend on whether they are subject to the
"stripped bond" rules of Section 1286 of the Code. Grantor Trust Fractional
Interest Certificates may be subject to those rules if (i) a class of Grantor
Trust Strip Certificates is issued as part of the same series of Certificates or
(ii) the Company or any of its affiliates retains (for its own account or for
purposes of resale) a right to receive a specified portion of the interest
payable on the Mortgage Loans. Further, the IRS has ruled that an unreasonably
high servicing fee retained by a seller or servicer will be treated as a
retained ownership interest in mortgages that constitutes a stripped coupon. For
purposes of determining what constitutes reasonable servicing fees for various
types of mortgages the IRS has established certain "safe harbors." The servicing
fees paid with respect to the Mortgage Loans for certain series of Grantor Trust
Certificates may be higher than the "safe harbors" and, accordingly, may not
constitute reasonable servicing compensation. The related Prospectus Supplement
will include information regarding servicing fees paid to the Master Servicer,
any
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subservicer or their respective affiliates necessary to determine whether the
preceding "safe harbor" rules apply.
IF STRIPPED BOND RULES APPLY. If the stripped bond rules apply, each
Grantor Trust Fractional Interest Certificate will be treated as having been
issued with "original issue discount" within the meaning of Section 1273(a) of
the Code, subject, however, to the discussion below regarding the treatment of
certain stripped bonds as market discount bonds and the discussion regarding de
minimis market discount. See "--Taxation of Owners of Grantor Trust Fractional
Interest Certificates--Market Discount" below. Under the stripped bond rules,
the holder of a Grantor Trust Fractional Interest Certificate (whether a cash or
accrual method taxpayer) will be required to report interest income from its
Grantor Trust Fractional Interest Certificate for each month in an amount equal
to the income that accrues on such Certificate in that month calculated under a
constant yield method, in accordance with the rules of the Code relating to
original issue discount.
The original issue discount on a Grantor Trust Fractional Interest
Certificate will be the excess of such Certificate's stated redemption price
over its issue price. The issue price of a Grantor Trust Fractional Interest
Certificate as to any purchaser will be equal to the price paid by such
purchaser for the Grantor Trust Fractional Interest Certificate. The stated
redemption price of a Grantor Trust Fractional Interest Certificate will be the
sum of all payments to be made on such Certificate, other than "qualified stated
interest," if any, as well as such Certificate's share of reasonable servicing
fees and other expenses. See "--Taxation of Owners of Grantor Trust Fractional
Interest Certificates--If Stripped Bond Rules Do Not Apply" for a definition of
"qualified stated interest." In general, the amount of such income that accrues
in any month would equal the product of such holder's adjusted basis in such
Grantor Trust Fractional Interest Certificate at the beginning of such month
(see "Sales of Grantor Trust Certificates") and the yield of such Grantor Trust
Fractional Interest Certificate to such holder. Such yield would be computed at
the rate (compounded based on the regular interval between payment dates) that,
if used to discount the holder's share of future payments on the Mortgage Loans,
would cause the present value of those future payments to equal the price at
which the holder purchased such Certificate. In computing yield under the
stripped bond rules, a Certificateholder's share of future payments on the
Mortgage Loans will not include any payments made in respect of any ownership
interest in the Mortgage Loans retained by the Company, the Master Servicer, any
subservicer or their respective affiliates, but will include such
Certificateholder's share of any reasonable servicing fees and other expenses.
Section 1272(a)(6) of the Code requires (i) the use of a reasonable
prepayment assumption in accruing original issue discount and (ii) adjustments
in the accrual of original issue discount when prepayments do not conform to the
prepayment assumption, with respect to certain categories of debt instruments,
and regulations could be adopted applying those provisions to the Grantor Trust
Fractional Interest Certificates. It is unclear whether those provisions would
be applicable to the Grantor Trust Fractional Interest Certificates or whether
use of a reasonable prepayment assumption may be required or permitted without
reliance on these rules. It is also uncertain, if a prepayment assumption is
used, whether the assumed prepayment rate would be determined based on
conditions at the time of the first sale of the Grantor Trust Fractional
Interest Certificate or, with respect to any holder, at the time of purchase of
the Grantor Trust Fractional Interest Certificate by that holder.
Certificateholders are advised to consult their own tax advisors concerning
reporting original issue discount in general and, in particular, whether a
prepayment assumption should be used in reporting original issue discount with
respect to Grantor Trust Fractional Interest Certificates.
In the case of a Grantor Trust Fractional Interest Certificate acquired
at a price equal to the principal amount of the Mortgage Loans allocable to such
Certificate, the use of a prepayment assumption generally would not have any
significant effect on the yield used in calculating accruals of interest income.
In the case, however, of a Grantor Trust Fractional Interest Certificate
acquired at a discount or premium (that is, at a price less than or greater than
such principal amount, respectively), the use of
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a reasonable prepayment assumption would increase or decrease such yield, and
thus accelerate or decelerate, respectively, the reporting of income.
If a prepayment assumption is not used, then when a Mortgage Loan
prepays in full, the holder of a Grantor Trust Fractional Interest Certificate
acquired at a discount or a premium generally will recognize ordinary income or
loss equal to the difference between the portion of the prepaid principal amount
of the Mortgage Loan that is allocable to such Certificate and the portion of
the adjusted basis of such Certificate that is allocable to such
Certificateholder's interest in the Mortgage Loan. If a prepayment assumption is
used, it appears that no separate item of income or loss should be recognized
upon a prepayment. Instead, a prepayment should be treated as a partial payment
of the stated redemption price of the Grantor Trust Fractional Interest
Certificate and accounted for under a method similar to that described for
taking account of original issue discount on REMIC Regular Certificates. See
"--REMICs--Taxation of Owners of REMIC Regular Certificates--Original Issue
Discount." It is unclear whether any other adjustments would be required to
reflect differences between an assumed prepayment rate and the actual rate of
prepayments.
In the absence of statutory or administrative clarification, it is
currently intended to base information reports or returns to the IRS and
Certificateholders in transactions subject to the stripped bond rules on a
prepayment assumption (the "Prepayment Assumption") that will be disclosed in
the related Prospectus Supplement and on a constant yield computed using a
representative initial offering price for each class of Certificates. However,
neither the Company, the Master Servicer nor the Trustee will make any
representation that the Mortgage Loans will in fact prepay at a rate conforming
to such Prepayment Assumption or any other rate and Certificateholders should
bear in mind that the use of a representative initial offering price will mean
that such information returns or reports, even if otherwise accepted as accurate
by the IRS, will in any event be accurate only as to the initial
Certificateholders of each series who bought at that price.
Under Treasury regulation Section 1.1286-1, certain stripped bonds are
to be treated as market discount bonds and, accordingly, any purchaser of such a
bond is to account for any discount on the bond as market discount rather than
original issue discount. This treatment only applies, however, if immediately
after the most recent disposition of the bond by a person stripping one or more
coupons from the bond and disposing of the bond or coupon (i) there is no
original issue discount (or only a de minimis amount of original issue discount)
or (ii) the annual stated rate of interest payable on the original bond is no
more than one percentage point lower than the gross interest rate payable on the
original mortgage loan (before subtracting any servicing fee or any stripped
coupon). If interest payable on a Grantor Trust Fractional Interest Certificate
is more than one percentage point lower than the gross interest rate payable on
the Mortgage Loans, the related Prospectus Supplement will disclose that fact.
If the original issue discount or market discount on a Grantor Trust Fractional
Interest Certificate determined under the stripped bond rules is less than 0.25%
of the stated redemption price multiplied by the weighted average maturity of
the Mortgage Loans, then such original issue discount or market discount will be
considered to be de minimis. Original issue discount or market discount of only
a de minimis amount will be included in income in the same manner as de minimis
original issue and market discount described in "Characteristics of Investments
in Grantor Trust Certificates--If Stripped Bond Rules Do Not Apply" and
"--Market Discount" below.
IF STRIPPED BOND RULES DO NOT APPLY. Subject to the discussion below on
original issue discount, if the stripped bond rules do not apply to a Grantor
Trust Fractional Interest Certificate, the Certificateholder will be required to
report its share of the interest income on the Mortgage Loans in accordance with
such Certificateholder's normal method of accounting. The original issue
discount rules will apply to a Grantor Trust Fractional Interest Certificate to
the extent it evidences an interest in Mortgage Loans issued with original issue
discount.
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The original issue discount, if any, on the Mortgage Loans will equal
the difference between the stated redemption price of such Mortgage Loans and
their issue price. Under the OID Regulations, the stated redemption price is
equal to the total of all payments to be made on such Mortgage Loan other than
"qualified stated interest." "Qualified stated interest" is interest that is
unconditionally payable at least annually at a single fixed rate, or 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 does not
operate in a manner that accelerates or defers interest payments on such
Mortgage Loan. In general, the issue price of a Mortgage Loan will be the amount
received by the borrower from the lender under the terms of the Mortgage Loan,
less any "points" paid by the borrower, and the stated redemption price of a
Mortgage Loan will equal its principal amount, unless the Mortgage Loan provides
for an initial below-market rate of interest or the acceleration or the deferral
of interest payments. The determination as to whether original issue discount
will be considered to be de minimis will be calculated using the same test
described in the REMIC discussion. See "--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount" above.
In the case of Mortgage Loans bearing adjustable or variable interest
rates, the related Prospectus Supplement will describe the manner in which such
rules will be applied with respect to those Mortgage Loans by the Master
Servicer or the Trustee in preparing information returns to the
Certificateholders and the IRS.
If original issue discount is in excess of a de minimis amount, all
original issue discount with respect to a Mortgage Loan will be required to be
accrued and reported in income each month, based on a constant yield. The OID
Regulations suggest that no prepayment assumption is appropriate in computing
the yield on prepayable obligations issued with original issue discount. In the
absence of statutory or administrative clarification, it currently is not
intended to base information reports or returns to the IRS and
Certificateholders on the use of a prepayment assumption for certificates backed
by whole mortgage loans and not subject to the stripped bond rules. However,
Section 1272(a)(6) of the Code may require that a prepayment assumption be made
in computing yield with respect to all mortgage-backed securities.
Certificateholders are advised to consult their own tax advisors concerning
whether a prepayment assumption should be used in reporting original issue
discount with respect to Grantor Trust Fractional Interest Certificates.
Certificateholders should refer to the related Prospectus Supplement with
respect to each series to determine whether and in what manner the original
issue discount rules will apply to Mortgage Loans in such series.
A purchaser of a Grantor Trust Fractional Interest Certificate that
purchases such Grantor Trust Fractional Interest Certificate at a cost less than
such Certificate's allocable portion of the aggregate remaining stated
redemption price of the Mortgage Loans held in the related Trust Fund will also
be required to include in gross income such Certificate's daily portions of any
original issue discount with respect to such Mortgage Loans. However, each such
daily portion will be reduced, if the cost of such Grantor Trust Fractional
Interest Certificate to such purchaser is in excess of such Certificate's
allocable portion of the aggregate "adjusted issue prices" of the Mortgage Loans
held in the related Trust Fund, approximately in proportion to the ratio such
excess bears to such Certificate's allocable portion of the aggregate original
issue discount remaining to be accrued on such Mortgage Loans. The adjusted
issue price of a Mortgage Loan 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 Mortgage Loan at the beginning of the accrual period that
includes such day and (ii) the daily portions of original issue discount for all
days during such accrual period prior to such day. The adjusted issue price of a
Mortgage Loan at the beginning of any accrual period will equal the issue price
of such Mortgage Loan, increased by the aggregate amount of original issue
discount with respect to such Mortgage Loan that accrued in prior accrual
periods, and reduced by the amount of any payments made on such Mortgage Loan in
prior accrual periods of amounts included in its stated redemption price.
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In addition to its regular reports, the Master Servicer or the Trustee,
except as provided in the related Prospectus Supplement, will provide to any
holder of a Grantor Trust Fractional Interest Certificate such information as
such holder may reasonably request from time to time with respect to original
issue discount accruing on Grantor Trust Fractional Interest Certificates. See
"Grantor Trust Reporting" below.
MARKET DISCOUNT. If the stripped bond rules do not apply to the Grantor
Trust Fractional Interest Certificate, a Certificateholder may be subject to the
market discount rules of Sections 1276 through 1278 of the Code to the extent an
interest in a Mortgage Loan is considered to have been purchased at a "market
discount," that is, in the case of a Mortgage Loan issued without original issue
discount, at a purchase price less than its remaining stated redemption price
(as defined above), or in the case of a Mortgage Loan issued with original issue
discount, at a purchase price less than its adjusted issue price (as defined
above). If market discount is in excess of a de minimis amount (as described
below), the holder generally will be required to include in income in each month
the amount of such discount that has accrued (under the rules described in the
next paragraph) through such month that has not previously been included in
income, but limited, in the case of the portion of such discount that is
allocable to any Mortgage Loan, to the payment of stated redemption price on
such Mortgage Loan that is received by (or, in the case of accrual basis
Certificateholders, due to) the Trust Fund in that month. A Certificateholder
may elect to include market discount in income currently as it accrues (under a
constant yield method based on the yield of the Certificate to such holder)
rather than including it on a deferred basis in accordance with the foregoing
under rules similar to those described in "--Taxation of Owners of REMIC Regular
Certificates--Market Discount" above.
Section 1276(b)(3) of the Code authorized 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 such time as regulations are issued by the Treasury Department, certain
rules described in the Committee Report will apply. Under those rules, in each
accrual period market discount on the Mortgage Loans should accrue, at the
Certificateholder's option: (i) on the basis of a constant yield method, (ii) in
the case of a Mortgage Loan 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 stated interest remaining
to be paid on the Mortgage Loan as of the beginning of the accrual period, or
(iii) in the case of a Mortgage Loan 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 at the beginning of the accrual period. The
prepayment assumption, if any, used in calculating the accrual of original issue
discount is to be used in calculating the accrual of market discount. The effect
of using a prepayment assumption could be to accelerate the reporting of such
discount income. 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 Mortgage Loan purchased at a discount in the
secondary market.
Because the Mortgage Loans will provide for periodic payments of stated
redemption price, such discount may be required to be included in income at a
rate that is not significantly slower than the rate at which such discount would
be included in income if it were original issue discount.
Market discount with respect to Mortgage Loans may be considered to be
de minimis and, if so, will be includible in income under de minimis rules
similar to those described above in "-REMICs-Taxation of Owners of REMIC Regular
Certificates-Original Issue Discount" with the exception that it is less likely
that a prepayment assumption will be used for purposes of such rules with
respect to the Mortgage Loans.
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Further, under the rules described in "--REMICs--Taxation of Owners of
REMIC Regular Certificates--Market Discount," above, any discount that is not
original issue discount and exceeds a de minimis amount may require the deferral
of interest expense deductions attributable to accrued market discount not yet
includible in income, unless an election has been made to report market discount
currently as it accrues. This rule applies without regard to the origination
dates of the Mortgage Loans.
PREMIUM. If a Certificateholder is treated as acquiring the underlying
Mortgage Loans at a premium, that is, at a price in excess of their remaining
stated redemption price, such Certificateholder may elect under Section 171 of
the Code to amortize using a constant yield method the portion of such premium
allocable to Mortgage Loans originated after September 27, 1985. Amortizable
premium is treated as an offset to interest income on the related debt
instrument, rather than as a separate interest deduction. However, premium
allocable to Mortgage Loans originated before September 28, 1985 or to Mortgage
Loans for which an amortization election is not made, should be allocated among
the payments of stated redemption price on the Mortgage Loan and be allowed as a
deduction as such payments are made (or, for a Certificateholder using the
accrual method of accounting, when such payments of stated redemption price are
due).
It is unclear whether a prepayment assumption should be used in
computing amortization of premium allowable under Section 171 of the Code. If
premium is not subject to amortization using a prepayment assumption and a
Mortgage Loan prepays in full, the holder of a Grantor Trust Fractional Interest
Certificate acquired at a premium should recognize a loss, equal to the
difference between the portion of the prepaid principal amount of the Mortgage
Loan that is allocable to the Certificate and the portion of the adjusted basis
of the Certificate that is allocable to the Mortgage Loan. If a prepayment
assumption is used to amortize such premium, it appears that such a loss would
be unavailable. Instead, if a prepayment assumption is used, a prepayment should
be treated as a partial payment of the stated redemption price of the Grantor
Trust Fractional Interest Certificate and accounted for under a method similar
to that described for taking account of original issue discount on REMIC Regular
Certificates. See "REMICs--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount." It is unclear whether any other
adjustments would be required to reflect differences between the prepayment
assumption used, and the actual rate of prepayments.
TAXATION OF OWNERS OF GRANTOR TRUST STRIP CERTIFICATES. The "stripped
coupon" rules of Section 1286 of the Code will apply to the Grantor Trust Strip
Certificates. Except as described above in "Characterization of Investments in
Grantor Trust Certificates--If Stripped Bond Rules Apply," no regulations or
published rulings under Section 1286 of the Code have been issued and some
uncertainty exists as to how it will be applied to securities such as the
Grantor Trust Strip Certificates. Accordingly, holders of Grantor Trust Strip
Certificates should consult their own tax advisors concerning the method to be
used in reporting income or loss with respect to such Certificates.
The OID Regulations do not apply to "stripped coupons," although they
provide general guidance as to how the original issue discount sections of the
Code will be applied. In addition, the discussion below is subject to the
discussion under "--Possible Application of Contingent Payment Rules" and
assumes that the holder of a Grantor Trust Strip Certificate will not own any
Grantor Trust Fractional Interest Certificates.
Under the stripped coupon rules, it appears that original issue
discount will be required to be accrued in each month on the Grantor Trust Strip
Certificates based on a constant yield method. In effect, each holder of Grantor
Trust Strip Certificates would include as interest income in each month an
amount equal to the product of such holder's adjusted basis in such Grantor
Trust Strip Certificate at the beginning of such month and the yield of such
Grantor Trust Strip Certificate to such holder. Such yield would be calculated
based on the price paid for that Grantor Trust Strip Certificate by its holder
and the payments remaining to be made thereon at the time of the purchase, plus
an allocable portion of the
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servicing fees and expenses to be paid with respect to the Mortgage Loans. See
"Characterization of Investments in Grantor Trust Certificates--If Stripped Bond
Rules Apply" above.
As noted above, Section 1272(a)(6) of the Code requires that a
prepayment assumption be used in computing the accrual of original issue
discount with respect to certain categories of debt instruments, and that
adjustments be made in the amount and rate of accrual of such discount when
prepayments do not conform to such prepayment assumption. Regulations could be
adopted applying those provisions to the Grantor Trust Strip Certificates. It is
unclear whether those provisions would be applicable to the Grantor Trust Strip
Certificates or whether use of a prepayment assumption may be required or
permitted in the absence of such regulations. It is also uncertain, if a
prepayment assumption is used, whether the assumed prepayment rate would be
determined based on conditions at the time of the first sale of the Grantor
Trust Strip Certificate or, with respect to any subsequent holder, at the time
of purchase of the Grantor Trust Strip Certificate by that holder.
The accrual of income on the Grantor Trust Strip Certificates will be
significantly slower if a prepayment assumption is permitted to be made than if
yield is computed assuming no prepayments. In the absence of statutory or
administrative clarification, it currently is intended to base information
returns or reports to the IRS and Certificateholders on the Prepayment
Assumption disclosed in the related Prospectus Supplement and on a constant
yield computed using a representative initial offering price for each class of
Certificates. However, neither the Company, the Master Servicer nor the Trustee
will make any representation that the Mortgage Loans will in fact prepay at a
rate conforming to the Prepayment Assumption or at any other rate and
Certificateholders should bear in mind that the use of a representative initial
offering price will mean that such information returns or reports, even if
otherwise accepted as accurate by the IRS, will in any event be accurate only as
to the initial Certificateholders of each series who bought at that price.
Prospective purchasers of the Grantor Trust Strip Certificates should consult
their own tax advisors regarding the use of the Prepayment Assumption.
It is unclear under what circumstances, if any, the prepayment of a
Mortgage Loan will give rise to a loss to the holder of a Grantor Trust Strip
Certificate. If a Grantor Trust Strip Certificate is treated as a single
instrument (rather than an interest in discrete mortgage loans) and the effect
of prepayments is taken into account in computing yield with respect to such
Grantor Trust Strip Certificate, it appears that no loss may be available as a
result of any particular prepayment unless prepayments occur at a rate faster
than the Prepayment Assumption. However, if a Grantor Trust Strip Certificate is
treated as an interest in discrete Mortgage Loans, or if the Prepayment
Assumption is not used, then when a Mortgage Loan is prepaid, the holder of a
Grantor Trust Strip Certificate should be able to recognize a loss equal to the
portion of the adjusted issue price of the Grantor Trust Strip Certificate that
is allocable to such Mortgage Loan.
POSSIBLE APPLICATION OF CONTINGENT PAYMENT RULES. The coupon stripping
rules' general treatment of stripped coupons is to regard them as newly issued
debt instruments in the hands of each purchaser. To the extent that payments on
the Grantor Trust Strip Certificates would cease if the Mortgage Loans were
prepaid in full, the Grantor Trust Strip Certificates could be considered to be
debt instruments providing for contingent payments. Under the OID Regulations,
debt instruments providing for contingent payments are not subject to the same
rules as debt instruments providing for noncontingent payments. Regulations were
promulgated on June 14, 1996, regarding contingent payment debt instruments (the
"Contingent Payment Regulations"), but it appears that Grantor Trust Strip
Certificates, due to their similarity to other mortgage-backed securities (such
as REMIC regular interests and debt instruments subject to Section 1272(a)(6) of
the Code) that are expressly excepted from the application of the Contingent
Payment Regulations, may be excepted from such regulations. Like the OID
Regulations, the Contingent Payment Regulations do not specifically address
securities, such as the Grantor Trust Strip Certificates, that are subject to
the stripped bond rules of Section 1286 of the Code.
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If the contingent payment rules under the Contingent Payment
Regulations were to apply, the holder of a Grantor Trust Strip Certificate would
be required to apply the "noncontingent bond method." Under the "noncontingent
bond method," the issuer of a Grantor Trust Strip Certificate determines a
projected payment schedule on which interest will accrue. Holders of Grantor
Trust Strip Certificates are bound by the issuer's projected payment schedule.
The projected payment schedule consists of all noncontingent payments and a
projected amount for each contingent payment based on the projected yield (as
described below) of the Grantor Trust Strip Certificate. The projected amount of
each payment is determined so that the projected payment schedule reflects the
projected yield. The projected amount of each payment must reasonably reflect
the relative expected values of the payments to be received by the holder of a
Grantor Trust Strip Certificate. The projected yield referred to above is a
reasonable rate, not less than the "applicable Federal rate" that, as of the
issue date, reflects general market conditions, the credit quality of the
issuer, and the terms and conditions of the Mortgage Loans. The holder of a
Grantor Trust Strip Certificate would be required to include as interest income
in each month the adjusted issue price of the Grantor Trust Strip Certificate at
the beginning of the period multiplied by the projected yield, and would add to,
or subtract from, such income any variation between the payment actually
received in such month and the payment originally projected to be made in such
month.
Assuming that a prepayment assumption were used, if the Contingent
Payment Regulations or their principles were applied to Grantor Trust Strip
Certificates, the amount of income reported with respect thereto would be
substantially similar to that described under "Taxation of Owners of Grantor
Trust Strip Certificates". Certificateholders should consult their tax advisors
concerning the possible application of the contingent payment rules to the
Grantor Trust Strip Certificates.
SALES OF GRANTOR TRUST CERTIFICATES. Any gain or loss equal to the
difference between the amount realized on the sale or exchange of a Grantor
Trust Certificate and its adjusted basis, recognized on such sale or exchange of
a Grantor Trust Certificate by an investor who holds such Grantor Trust
Certificate as a capital asset, will be capital gain or loss, except to the
extent of accrued and unrecognized market discount, which will be treated as
ordinary income, and (in the case of banks and other financial institutions)
except as provided under Section 582(c) of the Code. The adjusted basis of a
Grantor Trust Certificate generally will equal its cost, increased by any income
reported by the seller (including original issue discount and market discount
income) and reduced (but not below zero) by any previously reported losses, any
amortized premium and by any distributions with respect to such Grantor Trust
Certificate. The Code as of the date of this Prospectus provides a top marginal
tax rate of 39.6% for individuals and a maximum marginal rate for long-term
capital gains of individuals of 28%. No such rate differential exists for
corporations. In addition, the distinction between a capital gain or loss and
ordinary income or loss remains relevant for other purposes.
Gain or loss from the sale of a Grantor Trust Certificate may be
partially or wholly ordinary and not capital in certain circumstances. Gain
attributable to accrued and unrecognized market discount will be treated as
ordinary income, as will gain or loss recognized by banks and other financial
institutions subject to Section 582(c) of the Code. Furthermore, a portion of
any gain that might otherwise be capital gain may be treated as ordinary income
to the extent that the Grantor Trust 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 the same 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
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
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income for that taxable year, for purposes of the rule that limits the deduction
of interest on indebtedness incurred to purchase or carry property held for
investment to a taxpayer's net investment income.
GRANTOR TRUST REPORTING. Except as set forth in the related Prospectus
Supplement, the Master Servicer or the Trustee will furnish to each holder of a
Grantor Trust Fractional Interest Certificate with each distribution a statement
setting forth the amount of such distribution allocable to principal on the
underlying Mortgage Loans and to interest thereon at the related Pass-Through
Rate. In addition, the Master Servicer or the Trustee will furnish, within a
reasonable time after the end of each calendar year, to each holder of a Grantor
Trust Certificate who was such a holder at any time during such year,
information regarding the amount of servicing compensation received by the
Master Servicer and sub-servicer (if any) and such other customary factual
information as the Master Servicer or the Trustee deems necessary or desirable
to enable holders of Grantor Trust Certificates to prepare their tax returns and
will furnish comparable information to the IRS as and when required by law to do
so. Because the rules for accruing discount and amortizing premium with respect
to the Grantor Trust Certificates are uncertain in various respects, there is no
assurance the IRS will agree with the Trust Fund's information reports of such
items of income and expense. Moreover, such information reports, even if
otherwise accepted as accurate by the IRS, will in any event be accurate only as
to the initial Certificateholders that bought their Certificates at the
representative initial offering price used in preparing such reports.
Except as disclosed in the related Prospectus Supplement, the
responsibility for complying with the foregoing reporting rules will be borne by
the Master Servicer or the Trustee.
BACKUP WITHHOLDING. In general, the rules described in
"--REMICS--Backup Withholding with Respect to REMIC Certificates" will also
apply to Grantor Trust Certificates.
FOREIGN INVESTORS. In general, the discussion with respect to REMIC
Regular Certificates in "REMICS--Foreign Investors in REMIC Certificates"
applies to Grantor Trust Certificates except that Grantor Trust Certificates
will, except as disclosed in the related Prospectus Supplement, be eligible for
exemption from U.S. withholding tax, subject to the conditions described in such
discussion, only to the extent the related Mortgage Loans were originated after
July 18, 1984.
To the extent that interest on a Grantor Trust Certificate would be
exempt under Sections 871(h)(1) and 881(c) of the Code from United States
withholding tax, and the Grantor Trust Certificate is not held in connection
with a Certificateholder's trade or business in the United States, such Grantor
Trust Certificate will not be subject to United States estate taxes in the
estate of a non-resident alien individual.
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
Offered Certificates. 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 Offered
Certificates.
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ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and the Code impose certain requirements on employee benefit plans
and on certain other retirement plans and arrangements, including individual
retirement accounts and annuities, Keogh plans and collective investment funds
and separate accounts (and, as applicable, insurance company general accounts)
in which such plans, accounts or arrangements are invested that are subject to
the fiduciary responsibility provisions of ERISA and Section 4975 of the Code
("Plans") and on persons who are fiduciaries with respect to such Plans in
connection with the investment of Plan assets. Certain employee benefit plans,
such as governmental plans (as defined in ERISA Section 3(32)), and, if no
election has been made under Section 410(d) of the Code, church plans (as
defined in Section 3(33) of ERISA) are not subject to ERISA requirements.
Accordingly, assets of such plans may be invested in Offered Certificates
without regard to the ERISA considerations described below, 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,
however, is subject to the prohibited transaction rules set forth in Section 503
of the Code.
ERISA generally imposes on Plan fiduciaries certain general fiduciary
requirements, including those of investment prudence and diversification and the
requirement that a Plan's investments be made in accordance with the documents
governing the Plan. In addition, Section 406 of ERISA and Section 4975 of the
Code prohibit a broad range of transactions involving assets of a Plan and
persons (parties in interest under ERISA and disqualified persons under the
Code, collectively, "Parties in Interest") who have certain specified
relationships to the Plan unless a statutory or administrative exemption is
available. Certain Parties in Interest that participate in a prohibited
transaction may be subject to an excise tax imposed pursuant to Section 4975 of
the Code or a penalty imposed pursuant to Section 502(i) of ERISA, unless a
statutory or administrative exemption is available. These prohibited
transactions generally are set forth in Section 406 of ERISA and Section 4975 of
the Code.
The Trust Fund, the Company, any underwriter, the Trustee, the Master
Servicer, any Servicer, any provider of credit support or any of their
affiliates may be considered to be or may become Parties in Interest (or
Disqualified Persons) with respect to certain Plans. Prohibited transactions
under Section 406 of ERISA and Section 4975 of the Code may arise if a
Certificate is acquired by a Plan with respect to which such persons are Parties
in Interest (or Disqualified Persons) unless such transactions are subject to
one or more statutory or administrative exemptions, such as: Prohibited
Transaction Class Exemption ("PTCE") 75-1, which exempts certain transactions
involving Plans and certain broker-dealers, reporting dealers and banks; PTCE
90-1, which exempts certain transactions between insurance company separate
accounts and Parties in Interest (or Disqualified Persons); PTCE 91-38, which
exempts certain transactions between bank collective investment funds and
Parties in Interest (or Disqualified Persons); PTCE 95-60, which exempts certain
transactions between insurance company general accounts and Parties in Interest
(or Disqualified Persons); or PTCE 84-14, which exempts certain transactions
effected on behalf of a Plan by a "qualified professional asset manager". There
can be no assurance that any of these class exemptions will apply with respect
to any particular Plan investment in Certificates or, even if it were deemed to
apply, that any exemption would apply to all prohibited transactions that may
occur in connection with such investment. Accordingly, prior to making an
investment in the Certificates, investing Plans should determine whether the
Trust Fund, the Company, any underwriter, the Trustee, the Master Servicer, any
Servicer, any provider of credit support or any of their affiliates is a Party
in Interest (or Disqualified Person) with respect to such Plan and, if so,
whether such transaction is subject to one or more statutory or administrative
exemptions.
Any Plan fiduciary considering whether to invest in Certificates on
behalf of a Plan should consult with its counsel regarding the applicability of
the fiduciary responsibility and prohibited transaction provisions of ERISA and
the Code to such investment. Each Plan fiduciary also should determine whether,
under the general fiduciary standards of investment prudence and
diversification, an investment
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in the Certificates is appropriate for the Plan considering the overall
investment policy of the Plan and the composition of the Plan's investment
portfolio as well as whether such investment is permitted under the governing
Plan instruments.
TAX-EXEMPT INVESTORS
A Plan that is exempt from federal income taxation pursuant to Section
501 of the Code (a "TaxExempt 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.
LEGAL INVESTMENT MATTERS
Each class of Certificates offered hereby and by the related Prospectus
Supplement will be rated at the date of issuance in one of the four highest
rating categories by at least one Rating Agency. If so specified in the related
Prospectus Supplement, each such class that is rated in one of the two highest
rating categories by at least one Rating Agency will constitute "mortgage
related securities" for purposes of the Secondary Mortgage Market Enhancement
Act of 1984 ("SMMEA"), and, as such, will be legal investments for persons,
trusts, corporations, partnerships, associations, business trusts and business
entities (including depository institutions, life insurance companies and
pension funds) created pursuant to or existing under the laws of the United
States or of any State whose authorized investments are subject to state
regulation to the same extent that, under applicable law, obligations issued by
or guaranteed as to principal and interest by the United States or any agency or
instrumentality thereof constitute legal investments for such entities. Under
SMMEA, if a State enacted legislation on or prior to October 3, 1991
specifically limiting the legal investment authority of any such entities with
respect to "mortgage related securities," such securities will constitute legal
investments for entities subject to such legislation only to the extent provided
therein. Certain States have enacted legislation which overrides the preemption
provisions of SMMEA. SMMEA provides, however, that in no event will the
enactment of any such legislation affect the validity of any contractual
commitment to purchase, hold or invest in "mortgage related securities," or
require the sale or other disposition of such securities, so long as such
contractual commitment was made or such securities acquired prior to the
enactment of such legislation.
SMMEA also amended the legal investment authority of
federally-chartered depository institutions as follows: federal savings and loan
associations and federal savings banks may invest in, sell or otherwise deal
with "mortgage related securities" without limitation as to the percentage of
their assets represented thereby, federal credit unions may invest in such
securities, and national banks may purchase such securities for their own
account without regard to the limitations generally applicable to investment
securities set forth in 12 U.S.C. 24 (Seventh), subject in each case to such
regulations as the applicable federal regulatory authority may prescribe.
The Federal Financial Institutions Examination Council has issued a
supervisory policy statement (the "Policy Statement") applicable to all
depository institutions, setting forth guidelines for and significant
restrictions on investments in "high-risk mortgage securities." The Policy
Statement has been adopted by the Federal Reserve Board, the Office of the
Comptroller of the Currency, the FDIC and the OTS with an effective date of
February 10, 1992. The Policy Statement generally indicates that a mortgage
derivative product will be deemed to be high risk if it exhibits greater price
volatility than a standard fixed rate thirty-year mortgage security. According
to the Policy Statement, prior to purchase, a depository institution will be
required to determine whether a mortgage derivative product that it is
considering acquiring is high-risk, and if so that the proposed acquisition
would reduce the institution's overall interest rate risk. Reliance on analysis
and documentation obtained from a securities dealer or other outside party
without internal analysis by the institution would be unacceptable. There can be
no
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assurance as to which classes of Offered Certificates will be treated as
high-risk under the Policy Statement.
The predecessor to the Office of Thrift Supervision ("OTS") issued a
bulletin, entitled, "Mortgage Derivative Products and Mortgage Swaps", which is
applicable to thrift institutions regulated by the OTS. The bulletin established
guidelines for the investment by savings institutions in certain "high-risk"
mortgage derivative securities and limitations on the use of such securities by
insolvent, undercapitalized or otherwise "troubled" institutions. According to
the bulletin, such "high-risk" mortgage derivative securities include securities
having certain specified characteristics, which may include certain classes of
Offered Certificates. In addition, the National Credit Union Administration has
issued regulations governing federal credit union investments which prohibit
investment in certain specified types of securities, which may include certain
classes of Offered Certificates. Similar policy statements have been issued by
regulators having jurisdiction over other types of depository institutions.
Certain classes of Certificates offered hereby, including any class
that is not rated in one of the two highest rating categories by at least one
Rating Agency, will not constitute "mortgage related securities" for purposes of
SMMEA. Any such class of Certificates will be identified in the related
Prospectus Supplement. Prospective investors in such classes of Certificates, in
particular, should consider the matters discussed in the following paragraph.
There may be other restrictions on the ability of certain investors
either to purchase certain classes of Offered Certificates or to purchase any
class of Offered Certificates representing more than a specified percentage of
the investors' assets. The Company will make no representations as to the proper
characterization of any class of Offered Certificates for legal investment or
other purposes, or as to the ability of particular investors to purchase any
class of Certificates under applicable legal investment restrictions. These
uncertainties may adversely affect the liquidity of any class of Certificates.
Accordingly, all investors whose investment activities are subject to legal
investment laws and regulations, regulatory capital requirements or review by
regulatory authorities should consult with their own legal advisors in
determining whether and to what extent the Offered Certificates of any class
thereof constitute legal investments or are subject to investment, capital or
other restrictions, and, if applicable, whether SMMEA has been overridden in any
jurisdiction relevant to such investor.
USE OF PROCEEDS
Substantially all of the net proceeds to be received from the sale of
Certificates will be applied by the Company to finance the purchase of, or to
repay short-term loans incurred to finance the purchase of, the Mortgage Loans
in the respective Mortgage Pools and to pay other expenses. The Company expects
that it will make additional sales of securities similar to the Offered
Certificates from time to time, but the timing and amount of any such additional
offerings will be dependent upon a number of factors, including the volume of
mortgage loans purchased by the Company, prevailing interest rates, availability
of funds and general market conditions.
METHODS OF DISTRIBUTION
The Certificates offered hereby and by the related Prospectus
Supplements will be offered in series through one or more of the methods
described below. The Prospectus Supplement prepared for each series will
describe the method of offering being utilized for that series and will state
the net proceeds to the Company from such sale.
The Company intends that Offered Certificates will be offered through
the following methods from time to time and that offerings may be made
concurrently through more than one of these methods
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or that an offering of the Offered Certificates of a particular series may be
made through a combination of two or more of these methods. Such methods are as
follows:
1. By negotiated firm commitment or best efforts underwriting
and public re-offering by underwriters;
2. By placements by the Company with institutional investors
through dealers; and
3. By direct placements by the Company with institutional
investors.
If underwriters are used in a sale of any Offered Certificates (other
than in connection with an underwriting on a best efforts basis), such
Certificates will be acquired by the underwriters for their own account and may
be resold from time to time in one or more transactions, including negotiated
transactions, at fixed public offering prices or at varying prices to be
determined at the time of sale or at the time of commitment therefor. Such
underwriters may be broker-dealers affiliated with the Company whose identities
and relationships to the Company will be as set forth in the related Prospectus
Supplement. The managing underwriter or underwriters with respect to the offer
and sale of the Offered Certificates of a particular series will be set forth on
the cover of the Prospectus Supplement relating to such series and the members
of the underwriting syndicate, if any, will be named in such Prospectus
Supplement.
In connection with the sale of the Offered Certificates, underwriters
may receive compensation from the Company or from purchasers of such
Certificates in the form of discounts, concessions or commissions. Underwriters
and dealers participating in the distribution of the Offered Certificates may be
deemed to be underwriters in connection with such Certificates, and any
discounts or commissions received by them from the Company and any profit on the
resale of Offered Certificates by them may be deemed to be underwriting
discounts and commissions under the Securities Act of 1933, as amended (the
"Securities Act").
It is anticipated that the underwriting agreement pertaining to the
sale of Offered Certificates of any series will provide that the obligations of
the underwriters will be subject to certain conditions precedent, that the
underwriters will be obligated to purchase all such Certificates if any are
purchased (other than in connection with an underwriting on a best efforts
basis) and that, in limited circumstances, the Company will indemnify the
several underwriters and the underwriters will indemnify the Company against
certain civil liabilities, including liabilities under the Securities Act or
will contribute to payments required to be made in respect thereof.
The Prospectus Supplement with respect to any series offered by
placements through dealers will contain information regarding the nature of such
offering and any agreements to be entered into between the Company and
purchasers of Offered Certificates of such series.
The Company anticipates that the Certificates offered hereby will be
sold primarily to institutional investors or sophisticated non-institutional
investors. Purchasers of Offered Certificates, including dealers, may, depending
on the facts and circumstances of such purchases, be deemed to be "underwriters"
within the meaning of the Securities Act in connection with reoffers and sales
by them of such Certificates. Holders of Offered Certificates should consult
with their legal advisors in this regard prior to any such reoffer or sale.
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LEGAL MATTERS
Certain legal matters, including certain federal income tax matters, in
connection with the Certificates of each series will be passed upon for the
Company by Thacher Proffitt & Wood, New York, New York.
FINANCIAL INFORMATION
A new Trust fund will be formed with respect to each series of
Certificates, and no Trust Fund will engage in any business activities or have
any assets or obligations prior to the issuance of the related series of
Certificates. Accordingly, no financial statements with respect to any Trust
Fund will be included in this Prospectus or in the related Prospectus
Supplement.
RATING
It is a condition to the issuance of any class of Offered Certificates
that they shall have been rated not lower than investment grade, that is, in one
of the four highest rating categories, by at least one Rating Agency.
Ratings on mortgage pass-through certificates address the likelihood of
receipt by the holders thereof of all collections on the underlying mortgage
assets to which such holders are entitled. These ratings address the structural,
legal and issuer-related aspects associated with such certificates, the nature
of the underlying mortgage assets and the credit quality of the guarantor, if
any. Ratings on mortgage pass-through certificates do not represent any
assessment of the likelihood of principal prepayments by borrowers or of the
degree by which such prepayments might differ from those originally anticipated.
As a result, Certificateholders might suffer a lower than anticipated yield,
and, in addition, holders of stripped interest certificates in extreme cases
might fail to recoup their initial investments.
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INDEX OF PRINCIPAL DEFINITIONS
PAGE
Accrual Certificates...................................................7, 35, 43
Accrued Certificate Interest..................................................44
Affiliated Sellers............................................................20
ARM Loans ............................................................20
Available Distribution Amount.................................................43
Balloon Loans ............................................................22
Balloon Payment ............................................................22
Bankruptcy Code ............................................................76
Bankruptcy Loss ............................................................48
Beneficial Owner ............................................................36
Buydown Account ............................................................23
Buydown Agreement ............................................................41
Buydown Funds ............................................................23
Buydown Mortgage Loans........................................................23
Buydown Period ............................................................23
Certificate ............................................................61
Certificate Account...........................................................39
Certificate Register..........................................................36
Certificate Registrar.........................................................36
Certificateholder ............................................................36
Certificateholders.............................................................1
Certificates ..........................................................1, 5
Closing Date ............................................................85
Code .........................................................7, 82
Commission .............................................................4
Committee Report ............................................................85
Company ..........................................................1, 5
Contingent Payment Regulations...............................................107
Contracts ............................................................19
Contributions Tax ............................................................96
Convertible Mortgage Loan.....................................................23
Debt Service Reduction........................................................53
Defaulted Mortgage Loss.......................................................48
Deferred Interest ............................................................21
Deficient Valuation...........................................................53
Deleted Mortgage Loan.........................................................27
Designated Seller Transaction.................................................20
Determination Date............................................................43
Distribution Date .............................................................9
DTC ............................................................36
DTC Registered Certificates...................................................36
Due Period ............................................................45
ERISA ............................................................12
Excess Interest ............................................................49
Exchange Act .............................................................4
Extraordinary Losses..........................................................48
FDIC ............................................................20
FHA ............................................................19
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FHA Loans ........................................................19
FHLMC ........................................................25
Financial Guaranty Insurance Policy.......................................49
FIRREA ........................................................25
FNMA ........................................................25
Fraud Loss ........................................................48
FTC Rule ........................................................78
Garn-St Germain Act.......................................................79
Grantor Trust Certificates............................................13, 82
Grantor Trust Fractional Interest Certificate............................100
Grantor Trust Fund........................................................83
Grantor Trust Strip Certificate..........................................100
Holder ........................................................36
Housing Act ........................................................26
Index ........................................................21
Insurance Proceeds........................................................39
Insurer ........................................................49
Intermediaries ........................................................36
IRS ........................................................85
Issue Premium ........................................................91
Letter of Credit ........................................................51
Letter of Credit Bank.....................................................51
Liquidated Mortgage Loan..................................................32
Liquidation Proceeds..................................................39, 40
Loan-to-Value Ratio.......................................................22
Lock-out Expiration Date..................................................22
Lock-out Period ........................................................22
Loss ........................................................58
Manufactured Homes........................................................19
Manufacturer's Invoice Price..............................................23
Master Servicer ..................................................1, 5, 28
Mortgage Loans ...................................................1, 6, 8
Mortgage Notes ........................................................19
Mortgage Pool ......................................................1, 8
Mortgage Rate ........................................................20
Mortgaged Property.........................................................8
Mortgages ........................................................19
Mortgagor ........................................................16
Net Mortgage Rate ........................................................66
Non-conforming credit.....................................................15
Nonrecoverable Advance....................................................46
Note Margin ........................................................21
Offered Certificates................................................1, 5, 35
OID Regulations ........................................................83
OOMC .....................................................5, 60
OTS .......................................................112
Overcollateralization.....................................................49
Participants ........................................................36
Parties in Interest......................................................110
Pass-Through Rate .........................................................6
Percentage Interest.......................................................43
Permitted Investments.....................................................39
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Plan ................................................12, 110
Policy Statement ....................................................111
Pool Insurer .....................................................41
Pooling Agreement ..................................................1, 61
Pooling and Servicing Agreement.........................................6
Pre-Funding Account....................................................45
Prepayment Assumption.............................................85, 103
Prepayment Interest Shortfall..........................................67
Prepayment Penalty.....................................................22
Primary Insurance Policy...............................................57
Primary Insurer .....................................................58
Prohibited Transactions Tax............................................96
Prospectus Supplement...................................................1
PTCE ....................................................110
Purchase Obligation....................................................57
Purchase Price .....................................................27
Qualified Substitute Mortgage Loan.....................................27
Rating Agency .....................................................12
Realized Losses .....................................................48
Record Date .....................................................43
Related Proceeds .....................................................46
Relief Act .....................................................81
REMIC ...............................................1, 7, 82
REMIC Administrator....................................................82
REMIC Certificates.....................................................82
REMIC Provisions .....................................................82
REMIC Regular Certificates.........................................13, 83
REMIC Regulations .....................................................83
REMIC Residual Certificates........................................13, 83
REO Mortgage Loan .....................................................32
REO Property .....................................................30
Reserve Fund .....................................................53
RTC .....................................................20
Securities Act .................................................4, 113
Seller ......................................................8
Sellers ..................................................1, 20
Senior Certificates.................................................7, 35
Senior Liens .....................................................22
Senior/Subordinate Series..............................................35
Servicing Standard.....................................................29
Single Family Loans....................................................19
Single Family Property.................................................19
SMMEA ................................................12, 111
Special Hazard Instrument..............................................48
Special Hazard Insurance Policy........................................52
Special Hazard Insurer.................................................52
Special Hazard Loss....................................................48
Special Hazard Losses..................................................52
Special Servicer ..................................................5, 31
Spread ......................................................6
Strip Certificates..................................................6, 35
Subordinate Certificates............................................7, 35
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Subservicer ....................................................30
Subservicers ....................................................24
Tiered REMICs ....................................................84
Title V ....................................................80
Title VIII ....................................................81
Trust Fund ..................................................1, 6
Trust Fund Assets ..................................................1, 6
Trustee .....................................................6
Unaffiliated Sellers..................................................20
United States person..................................................99
Value ....................................................22
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION (ITEM 14 OF FORM S-3).
The expenses expected to be incurred in connection with the issuance
and distribution of the Certificates being registered, other than underwriting
compensation, are as set forth below.
All such expenses, except for the filing fee, are estimated.
Filing Fee for Registration Statement.............. $ 303.03
Legal Fees and Expenses............................ *
Accounting Fees and Expenses....................... *
Trustee's Fees and Expenses
(including counsel fees).................... *
Printing and Engraving Fees........................ *
Rating Agency Fees................................. *
Miscellaneous...................................... *
--------
Total ............................................ $ 303.03
========
INDEMNIFICATION OF DIRECTORS AND OFFICERS (ITEM 15 OF FORM S-3).
Subsection (a) of 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 is or was a director, 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 expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good faith and in
a manner he 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 conduct was unlawful.
Subsection (b) of Section 145 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 or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation and except that 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 upon application that, despite the adjudication of liability but in
view of all circumstances of the case, such person is
<PAGE>
-2-
fairly and reasonably entitled to indemnity for such expenses which the Court of
Chancery or such other court shall deem proper.
Section 145 further provides that to the extent a director, officer,
employee or agent of a corporation has been successful on the merits or
otherwise in the defense of any action, suit or proceeding referred to in
subsections (a) and (b), or in the defense of any claim, issue or matter
therein, he shall be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection therewith; that
indemnification and advancement of expenses provided by, or granted pursuant to,
Section 145 shall not be deemed exclusive of any other rights to which the
indemnified party may be entitled; and empowers the corporation to purchase and
maintain insurance on behalf of 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 liabilities under Section 145.
The By-laws of Option One Mortgage Acceptance Corporation (the
"Company") provide, in effect, that to the full extent permitted by law, the
Company shall indemnify and hold harmless each 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 and
whether or not by or in the right of the Company, by reason of the fact that he
is or was a director or officer, or his testator or intestate is or was a
director or officer of the Company, or by reason of the fact that such person is
or was serving at the request of the Company as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise of any type or kind, domestic or foreign, against expenses, including
attorneys' fees, judgments, fines and amounts paid in settlement, actually and
reasonably incurred as a result of such action, suit or proceeding.
The Company presently does not have liability insurance maintained
covering directors and principal officers of the Company.
Section 8(b) of the proposed form of Underwriting Agreement provides
that each Underwriter severally will indemnify and hold harmless the Company,
each of its directors, each of its officers who signs the Registration
Statement, and each person, if any, who controls the Company within the meaning
of the Securities Act of 1933, as amended, and the Securities Exchange of 1934,
as amended, against any losses, claims, damages or liabilities to which any of
them may become subject under the Securities Act of 1933, the Securities
Exchange Act of 1934 or other federal or state law or regulation, at common law
or otherwise, insofar as such losses, claims, damages or liabilities (or actions
in respect thereof) arise out of or are based upon an untrue statement or an
alleged untrue statement of a material fact contained in the registration
statement when it became effective, or in the Registration Statement, any
related preliminary prospectus or the Prospectus, or any amendment or supplement
thereto, or any related preliminary prospectus supplement, or arise out of or
are based upon the omission or
<PAGE>
-3-
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made therein in reliance upon and
in conformity with written information furnished to the Company by such
Underwriter, specifically for use in the preparation thereof, and will reimburse
the Company for any legal or other expenses reasonably incurred by the Company
in connection with investigating or defending against such loss, claim, damage,
liability or action.
The Pooling and Servicing Agreements and the Trust Agreements will
provide that no director, officer, employee or agent of the Company is liable to
the Trust Fund or the Certificateholders, except for such person's own willful
misfeasance, bad faith or gross negligence in the performance of duties or
reckless disregard of obligations and duties. The Pooling and Servicing
Agreements and the Trust Agreements will further provide that, with the
exceptions stated above, a director, officer, employee or agent of the Company
is entitled to be indemnified against any loss, liability or expense incurred in
connection with legal action relating to such Pooling and Servicing Agreements,
Trust Agreements and related Certificates other than such expenses related to
particular Mortgage Loans.
EXHIBITS (ITEM 16 OF FORM S-3).
Exhibits--
1.1* -- Form of Underwriting Agreement.
3.1* -- Amended and Restated Articles of Incorporation.
3.2* -- Restated By-Laws.
4.1* -- Form of Pooling and Servicing Agreement for an offering of Mortgage
Pass-Through Certificates consisting of senior and subordinate
certificate classes.
4.2* -- Form of Pooling and Servicing Agreement for alternate forms of
credit support (single class).
5.1 -- Opinion of Thacher Proffitt & Wood with respect to legality.
8.1 -- Opinion of Thacher Proffitt & Wood with respect to certain tax
matters (included with Exhibit 5.1).
23.1 -- Consent of Thacher Proffitt & Wood (included as part of Exhibit 5.1
and Exhibit 8.1).
24.1* -- Power of Attorney.
- -----------------
* Previously filed.
<PAGE>
-4-
UNDERTAKINGS (ITEM 17 OF FORM S-3).
A. UNDERTAKINGS PURSUANT TO RULE 415.
The Registrant hereby undertakes:
(a)(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, (ii)
to reflect in the prospectus any facts or events arising after the effective
date of the registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement, and (iii) to include
any material information with respect to the plan of distribution not previously
disclosed in this Registration Statement or any material change to such
information in this Registration Statement; PROVIDED, HOWEVER, that subparts (i)
and (ii) do not apply if the information required to be included in the
post-effective amendment by those subparts is contained in periodic reports
filed by the Registrant pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the Registration
Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, 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) That, for the purposes of determining any liability under the
Securities Act of 1933, each filing of the Registrant's annual report pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report pursuant to
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.
(f) 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.
B. UNDERTAKING IN RESPECT OF INDEMNIFICATION.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
<PAGE>
-5-
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.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Option
One Mortgage Acceptance Corporation certifies that it has reasonable grounds to
believe that it meets all of the requirements for filing on Form S-3, reasonably
believes that the security rating requirement contained in Transaction
Requirement B.5 of Form S-3 will be met by the time of the sale of the
securities registered hereunder, and has duly caused this Amendment No. 1 to the
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the city of Santa Ana, State of California, on the 3rd day
of January, 1997.
OPTION ONE MORTGAGE ACCEPTANCE
CORPORATION
By/s/ William L. O'Neill
----------------------
William L. O'Neill
Director and Treasurer
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 1 to the Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
* Director and President January 3, 1997
- ---------------------------------- (Principal Executive Officer)
Robert E. Dubrish
* Director and Secretary January 3, 1997
- ----------------------------------
Steven L. Nadon
* Director and Treasurer January 3, 1997
- ---------------------------------- (Principal Financial Officer and
William L. O'Neill Principal Accounting Officer
</TABLE>
* By:/s/ William L. O'Neill
----------------------
William L. O'Neill
Attorney-in-fact pursuant to a power of attorney previously filed with this
Registration Statement.
EXHIBITS 5.1, 8.1, 23.1
-----------------------
January 3, 1997
Option One Mortgage Acceptance Corporation
2020 East First Street, Suite 100
Santa Ana, California 92705
Re: Option One Mortgage Acceptance Corporation
Mortgage Pass-Through Certificates;
Registration Statement on Form S-3
------------------------------------------
Ladies and Gentlemen:
We have acted as special counsel to Option One Mortgage
Acceptance Corporation, a Delaware corporation (the "Registrant") in connection
with the registration under the Securities Act of 1933, as amended (the "Act"),
of Mortgage Pass-Through Certificates (the "Certificates"), and the related
preparation and filing of a Registration Statement on Form S-3 (the
"Registration Statement"). The Certificates are issuable in series under
separate pooling and servicing agreements (each such agreement, a "Pooling and
Servicing Agreement"), among the Registrant, a master servicer to be identified
in the prospectus supplement for such series of Certificates and a trustee to be
identified in the prospectus supplement for such series of Certificates. Each
Pooling and Servicing Agreement will be substantially in the form filed as an
Exhibit to the Registration Statement.
In connection with rendering this opinion letter, we have
examined the forms of the Pooling and Servicing Agreements contained as Exhibits
in the Registration Statement, the
<PAGE>
Registration Statement and such records and other documents as we have deemed
necessary. As to matters of fact, we have examined and relied upon
representations or certifications of officers of the Registrant or public
officials. We have assumed the authenticity of all documents submitted to us as
originals, the genuineness of all signatures, the legal capacity of natural
persons and the conformity to the originals of all documents. We have assumed
that all parties, other than the Registrant, had the corporate power and
authority to enter into and perform all obligations thereunder, and, as to such
parties, we also have assumed the enforceability of such documents.
In rendering this opinion letter, we express no opinion as to
the laws of any jurisdiction other than the laws of the State of New York, nor
do we express any opinion, either implicitly or otherwise, on any issue not
expressly addressed below. In rendering this opinion letter, we have not passed
upon and do not pass upon the application of "doing business" or the securities
laws of any jurisdiction. This opinion letter is further subject to the
qualification that enforceability may be limited by (i) bankruptcy, insolvency,
liquidation, receivership, moratorium, reorganization or other laws affecting
the enforcement of the rights of creditors generally and (ii) general principles
of equity, whether enforcement is sought in a proceeding in equity or at law.
Based on the foregoing, we are of the opinion that:
1. When a Pooling and Servicing Agreement for a series of
Certificates has been duly authorized by all necessary action and duly executed
and delivered by the parties thereto, such Pooling and Servicing Agreement will
be a legal and valid obligation of the Registrant.
2. When a Pooling and Servicing Agreement for a series of
Certificates has been duly authorized by all necessary action and duly executed
and delivered by the parties thereto, and when the Certificates of such series
have been duly executed and authenticated in accordance with the provisions of
that Pooling and Servicing Agreement, and issued and sold as contemplated in the
Registration Statement and the prospectus and prospectus supplement delivered in
connection therewith, such Certificates will be legally and validly issued and
outstanding, fully paid and non-assessable, and the holders of such Certificates
will be entitled to the benefits of that Pooling and Servicing Agreement.
3. The description of federal income tax consequences
appearing under the heading "Federal Income Tax Consequences" in the prospectus
contained in the Registration Statement, accurately describes the material
federal income tax consequences to holders of Offered Certificates, under
existing law and subject to the qualifications and assumptions stated therein.
We hereby consent to the filing of this opinion letter as an
Exhibit to the Registration Statement, and to the use of our name in the
prospectus and prospectus supplement included in the Registration Statement
under the heading "Legal Matters", and in the prospectus
<PAGE>
included in the Registration Statement under the heading "Federal Income Tax
Consequences", without admitting that we are "experts" within the meaning of the
Act, and the rules and regulations thereunder, with respect to any part of the
Registration Statement, including this Exhibit.
Very truly yours,
THACHER PROFFITT & WOOD
By
/s/ Thacher Proffitt & Wood
----------------------------
