Registration No. 333-_____
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
----------------
FORM S-3
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
----------------
OPTION ONE MORTGAGE ACCEPTANCE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or Other Jurisdiction of Incorporation
or Organization)
33-0727357
(I.R.S. Employer Identification No.)
3 Ada
Irvine, California 92618
(949) 790-8300
(Address, Including Zip Code, and
Telephone Number, Including Area
Code, of Registrant's Principal
Executive Offices)
William O'Neill
Option One Mortgage Acceptance Corporation
3 Ada
Irvine, California 92618
(949) 790-8300
(Name, Address, Including Zip Code,
and Telephone Number, Including
Area Code, of Agent For Service)
----------------
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 after this Registration Statement becomes effective.
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/
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CALCULATION OF REGISTRATION FEE
=======================================================================================================================
Proposed Proposed
maximum maximum
Amount offering aggregate Amount of
Title of securities being price per offering registration
being registered registered (1) unit (2) price (2) fee (1)
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<S> <C> <C> <C> <C>
Mortgage Pass-Through Certificates,
issued in Series........................ $1,000,000,000.00 100% $1,000,000,000.00 $278,000.00
=======================================================================================================================
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(1) $132,015,000.00 aggregate principal amount of Mortgage Pass-Through
Certificates registered by the Registrant under Registration Statement No.
333-14625 referred to below and not previously sold are proposed to be
consolidated in this Registration Statement concurrently with the
effectiveness hereof pursuant to Rule 429. All registration fees in
connection with such unsold amount of Mortgage Pass-Through Certificates
have been previously paid by the Registrant under the foregoing
Registration Statement. Accordingly, the total amount proposed to be
registered under the Registration Statement as so consolidated as of the
date of this filing is $1,132,015,000.00.
(2) Estimated solely for the purposes of calculating the registration fee on
the basis of the proposed maximum aggregate offering price.
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 the 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.
Pursuant to Rule 429 of the Securities Act of 1933, the Prospectus and
Prospectus Supplements contained in this Registration Statement also relate to
the Registrant's Registration Statement on Form S-3 (Registration Statement No.
333-14625). This Registration Statement, which is a new registration statement,
also constitutes a post-effective amendment to Registration Statement No.
333-14625. Such post-effective amendment shall hereafter become effective
concurrently with the effectiveness of this Registration Statement in accordance
with Section 8(a) of the Securities Act of 1933.
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CROSS REFERENCE SHEET FURNISHED PURSUANT TO RULE 404(a)
ITEMS AND CAPTIONS IN FORM S-3 LOCATION IN PROSPECTUSES
<S> <C> <C>
i. Forepart of Registration Statement and Outside
Front Cover Page of Prospectus................................. Forepart of Registration
Statement and Outside Front
Cover Page of
Prospectuses**
ii. Inside Front and Outside Back Cover Pages of
Prospectus..................................................... Inside Front Cover Page of
Prospectuses and Outside
Back Cover Page of
Prospectuses**
iii. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges...................................... Summaries of Prospectus;
Special Considerations
iv. Use of Proceeds................................................
Use of Proceeds**
v. Determination of Offering Price................................
*
vi. Dilution.......................................................
*
vii. Selling Security Holders.......................................
*
viii Plan of Distribution...........................................
.
Method of Distribution**
ix. Description of Securities to Be Registered..................... Outside Front Cover Page;
Summaries of Prospectus;
Description of the Trust
Funds; Description of the
Certificates**
x. Interests of Named Experts and Counsel.........................
*
xi. Material Changes...............................................
Financial Information
xii. Incorporation of Certain Information by Reference.............. Incorporation of Certain
Information by Reference
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<PAGE>
xiii Disclosure of Commission Position on
. Indemnification for Securities Act Liabilities.........See page II-2
- -------------------
* Answer negative or item inapplicable.
** To be completed or provided from time to time by Prospectus Supplement.
<PAGE>
EXPLANATORY NOTE
This Registration Statement consists of (i) a basic
prospectus, (ii) an illustrative form of prospectus supplement for use in an
offering of Mortgage Pass-Through Certificates which provide for various
combinations of credit support ("Version 1") and (iii) an illustrative form of
prospectus supplement for use in an offering of Mortgage Pass-Through
Certificates consisting of senior and subordinate certificate classes ("Version
2"). The basic prospectus used (in either preliminary or final form) will be
accompanied by the applicable prospectus supplement.
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CONTENTS OF REGISTRATION STATEMENT
Page
----
Forms of Prospectus Supplement:
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Version 1: Form of Prospectus Supplement relating to
Certificates which provide for various combinations of
Credit Support.................................................................. S-1
Version 2: Form of Prospectus Supplement relating to
Certificates in a typical Senior/Subordinate Series............................. S-1
Basic Prospectus: Form of Basic Prospectus............................................................. 1
</TABLE>
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THE PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED MAY 21, 1999
[VERSION 1]
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED ____________)
$_______________ (APPROXIMATE)
OPTION ONE MORTGAGE LOAN TRUST ______
ASSET-BACKED CERTIFICATES, SERIES_______
OPTION ONE MORTGAGE ACCEPTANCE CORPORATION
Depositor
_________________________________
OPTION ONE MORTGAGE CORPORATION
Seller and Master Servicer
_________________________________
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_____________________________
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CONSIDER CAREFULLY THE Only the ________ classes of certificates identified below are being offered by this
RISK FACTORS BEGINNING prospectus supplement and the accompanying prospectus.
ON PAGE S-___ IN THIS
PROSPECTUS SUPPLEMENT THE OFFERED CERTIFICATES
AND ON PAGE __ IN THE
PROSPECTUS. o Represent ownership interests in a trust consisting primarily of a pool of residential
The certificates represent adjustable-rate mortgage loans.
obligations of the trust
only and do not represent o The Class ____ Certificates will accrue interest at a rate equal to one-month LIBOR
an interest in or plus a fixed margin, subject to certain limitations described in this prospectus
obligation of Option One supplement.
Mortgage Acceptance
Corporation, Option One CREDIT ENHANCEMENT
Mortgage Corporation or
any of their affiliates. o Policy -- [Certificate Insurer] will issue a certificate guaranty insurance policy
This prospectus guaranteeing certain payments on the offered certificates.
supplement may be used
to offer and sell the o Overcollateralization -- Certain excess interest received from the mortgage loans in
certificates only if the trust will be applied as payments of principal on the offered certificates to
accompanied by the establish and maintain a required level of overcollateralization.
prospectus.
_____________________________
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ORIGINAL
CERTIFICATE
PRINCIPAL PASS-THROUGH UNDERWRITING PROCEEDS TO THE
CLASS BALANCE RATE PRICE TO PUBLIC(1) DISCOUNT DEPOSITOR(1)(2)
- -------------------- ------------ -------------- ------------------ ------------ ----------------
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Class ___............ $_________ Variable _____________% _______% _________%
</TABLE>
_________________________
[(1) Plus accrued interest from _________].
[(2) Before deducting expenses estimated to be $___________.]
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED THESE
SECURITIES OR DETERMINED THAT THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS
ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Delivery of the offered certificates will be made in book-entry form through the
facilities of The Depository Trust Company, Cedelbank and the Euroclear System
on or about _____________.
[UNDERWRITER]
[DATE]
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
Page
----
SUMMARY OF TERMS............................................................S-3
RISK FACTORS................................................................S-7
THE MORTGAGE POOL..........................................................S-11
OPTION ONE MORTGAGE CORPORATION............................................S-22
THE POOLING AGREEMENT......................................................S-28
DESCRIPTION OF THE CERTIFICATES............................................S-34
THE CERTIFICATE INSURER....................................................S-46
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS..............................S-46
USE OF PROCEEDS............................................................S-52
FEDERAL INCOME TAX CONSEQUENCES............................................S-52
ERISA CONSIDERATIONS.......................................................S-53
LEGAL INVESTMENT CONSIDERATIONS............................................S-55
EXPERTS....................................................................S-56
METHOD OF DISTRIBUTION.....................................................S-56
LEGAL MATTERS..............................................................S-56
RATINGS....................................................................S-57
INDEX OF DEFINED TERMS.....................................................S-58
ANNEX I....................................................................S-96
S-2
<PAGE>
SUMMARY OF TERMS
o THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS DOCUMENT AND DOES
NOT CONTAIN ALL OF THE INFORMATION THAT YOU NEED TO CONSIDER IN MAKING YOUR
INVESTMENT DECISION. TO UNDERSTAND ALL OF THE TERMS OF THE OFFERING OF THE
CERTIFICATES, READ CAREFULLY THIS ENTIRE DOCUMENT AND THE ACCOMPANYING
PROSPECTUS.
o THIS SUMMARY PROVIDES AN OVERVIEW OF CERTAIN CALCULATIONS, CASH FLOW
PRIORITIES AND OTHER INFORMATION TO AID YOUR UNDERSTANDING AND IS QUALIFIED
BY THE FULL DESCRIPTION OF THESE CALCULATIONS, CASH FLOW PRIORITIES AND
OTHER INFORMATION IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS. SOME OF THE INFORMATION CONSISTS OF FORWARD-LOOKING STATEMENTS
RELATING TO FUTURE ECONOMIC PERFORMANCE OR PROJECTIONS AND OTHER FINANCIAL
ITEMS. FORWARD-LOOKING STATEMENTS ARE SUBJECT TO A VARIETY OF RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER FROM THE PROJECTED
RESULTS. THOSE RISKS AND UNCERTAINTIES INCLUDE, AMONG OTHERS, GENERAL
ECONOMIC AND BUSINESS CONDITIONS, REGULATORY INITIATIVES AND COMPLIANCE
WITH GOVERNMENTAL REGULATIONS, AND VARIOUS OTHER MATTERS, ALL OF WHICH ARE
BEYOND OUR CONTROL. ACCORDINGLY, WHAT ACTUALLY HAPPENS MAY BE VERY
DIFFERENT FROM WHAT WE PREDICT IN OUR FORWARD- LOOKING STATEMENTS.
OFFERED CERTIFICATES
On the Closing Date, Option One Mortgage Loan Trust __________ will issue _____
classes of certificates, ______ of which are being offered by this prospectus
supplement and the accompanying prospectus. The assets of the trust that will
support the certificates will consist primarily of a pool of adjustable-rate
mortgage loans having the characteristics described in this prospectus
supplement and the obligations of the Certificate Insurer under the policy as
described in this prospectus supplement.
The offered certificates will be book-entry securities clearing through The
Depository Trust Company (in the United States) or Cedelbank and the Euroclear
System (in Europe) in minimum denominations of $_____________.
OTHER CERTIFICATES
The trust will issue two additional classes of certificates. These certificates
will be designated as the Class P Certificates and the Class R Certificates and
are not being offered to the public by this prospectus supplement and the
prospectus. The Class P Certificates will have an original principal balance of
$_____ and will not be entitled to distributions in respect of interest. The
Class P Certificates will be entitled to all prepayment premiums received in
respect of the mortgage loans. The Class R Certificates will not have an
original principal balance. The Class R Certificates will not be entitled to
distributions of interest, but will be entitled to distributions of the senior
residual distribution amount. In addition, the Class R Certificates will be
entitled to all amounts not payable to the other classes of certificates or as
otherwise provided in this prospectus supplement.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES-- GENERAL," "--BOOK-ENTRY
CERTIFICATES" AND "THE MORTGAGE POOL" IN THIS PROSPECTUS SUPPLEMENT.
CUT-OFF DATE
_____________ or, for mortgage loans originated in ___________, the date of
origination.
CLOSING DATE
On or about ___________.
THE DEPOSITOR
Option One Mortgage Acceptance Corporation, a Delaware corporation and a wholly
owned subsidiary of Option One Mortgage Corporation. WE REFER YOU TO "THE
DEPOSITOR" IN THE PROSPECTUS FOR ADDITIONAL INFORMATION.
SELLER AND MASTER SERVICER
Option One Mortgage Corporation. WE REFER YOU TO "OPTION ONE MORTGAGE
CORPORATION" IN THIS PROSPECTUS SUPPLEMENT AND "THE MASTER SERVICER" IN THE
PROSPECTUS FOR ADDITIONAL INFORMATION.
TRUSTEE
________________.
WE REFER YOU TO "THE POOLING AGREEMENT--THE TRUSTEE" IN THIS PROSPECTUS
SUPPLEMENT FOR ADDITIONAL INFORMATION.
S-3
<PAGE>
CERTIFICATE INSURER
_________________
WE REFER YOU TO "THE CERTIFICATE INSURER" IN THIS PROSPECTUS SUPPLEMENT FOR
ADDITIONAL INFORMATION.
DESIGNATIONS
Each class of certificates will have different characteristics, some of which
are reflected in the following general designations.
o OFFERED CERTIFICATES OR CLASS A CERTIFICATES
Class A Certificates.
o RESIDUAL CERTIFICATEs
Class R Certificates.
o BOOK-ENTRY CERTIFICATES
Class A Certificates.
o PHYSICAL CERTIFICATES
Class P Certificates and Class R Certificates.
MORTGAGE LOANS
On the Closing Date the trust will acquire a pool of mortgage loans. The
mortgage pool will consist of _____ mortgage loans having an aggregate
outstanding principal balance as of the Cut-off Date of approximately
$____________.
The statistical information in this prospectus supplement reflects the
characteristics of the mortgage loans as of the Cut-off Date.
The mortgage loans have the following characteristics (with all figures being
approximate):
Loans with Prepayment Premiums
(by principal balance): _________%
Range of Remaining Term ___ months to
to Stated Maturities: ___ months
Weighted Average Remaining
Term to Stated Maturity: ____ months
Range of Original Principal $________ to
Balances: $________
Average Original Principal Balance: $________
Range of Outstanding Principal $________ to
Balances: $________
Average Outstanding Principal $________
Balance:
Current Range of Loan Rates: _________% to
_________%
Current Weighted Average Loan Rate: _________%
Current Weighted Average _________%
Net Loan Rate:
Weighted Average Gross Margin: _________%
Weighted Average Maximum Loan _________%
Rate:
Weighted Average Minimum Loan _________%
Rate:
Weighted Average Initial
Rate Adjustment Cap: _________%
Weighted Average Periodic
Rate Adjustment Cap: _________%
Weighted Average Time
Until Next Adjustment Date: ___ months
Geographic Concentrations
in Excess of 5%:
[State] 36.78%
[State] 10.73%
8.76%
DISTRIBUTION DATES
The Trustee will make distributions on the certificates on the 25th day of each
calendar month beginning in _________ to the holder of record of the
certificates generally as of the business day preceding such date of
distribution. If the 25th day of a month is not a business day, then the
distribution will be made on the next business day.
PAYMENTS ON THE CERTIFICATES
INTEREST PAYMENTS
The pass-through rate for the offered certificates will be calculated at the per
annum rates specified below, subject to the limitations described under
"Description of the Certificates -- Pass-Through
Rates" in this prospectus supplement:
Class A: One-Month LIBOR + ___ basis
points
The pass-through rate will be subject to both accrual and payment caps as
described in this prospectus supplement.
S-4
<PAGE>
In addition, if the Master Servicer and the Certificate Insurer each fail to
exercise their option to terminate the trust on the earliest permitted date as
described below under "Optional Termination," the pass-through rates on the
Class A Certificates will then increase to the rate indicated below:
Class A One-Month LIBOR + ___ basis
points
The pass-through rate is subject to both accrual and payment caps as described
in this prospectus supplement.
Interest payable on the certificates accrues during an accrual period. Except
for the first accrual period, the accrual period for the Class A Certificates is
the period from the distribution date in the prior month to the day prior to the
current distribution date. The first accrual period for the Class A Certificates
will begin on the Closing Date and end on __________. Interest will be
calculated for the Class A Certificates on the basis of the actual number of
days in the accrual period, based on a 360-day year.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES" IN THIS PROSPECTUS SUPPLEMENT
FOR ADDITIONAL INFORMATION.
PRINCIPAL PAYMENTS
Principal will be distributed to holders of the offered certificates on each
distribution date in the amounts described herein under "Description of the
Certificates -- Allocation of Available Funds."
PAYMENT PRIORITIES
In general, on any distribution date, funds available for distribution from
payments and other amounts received on the mortgage loans will be distributed in
the following order:
FIRST, to pay interest on the Class A Certificates; and
SECOND, to pay principal on the Class A Certificates, but only in the
amounts and to the extent described herein.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES" IN THIS PROSPECTUS SUPPLEMENT
FOR ADDITIONAL INFORMATION.
ADVANCES
The Master Servicer will make cash advances to cover delinquent payments of
principal and interest to the extent it reasonably believes that the cash
advances are recoverable from future payments on the related mortgage loans.
Advances are intended to maintain a regular flow of scheduled interest and
principal payments on the certificates and are not intended to guarantee or
insure against losses.
WE REFER YOU TO "THE POOLING AGREEMENT--ADVANCES" IN THIS PROSPECTUS SUPPLEMENT
AND "DESCRIPTION OF THE CERTIFICATES--ADVANCES" IN THE PROSPECTUS FOR ADDITIONAL
INFORMATION.
OPTIONAL TERMINATION
The Master Servicer or the Certificate Insurer may purchase all of the mortgage
loans and retire the certificates when the current principal balance of the
mortgage loans, in aggregate, is equal to or less than [10]% of the principal
balance of the mortgage loans as of the Cut-off Date.
WE REFER YOU TO "THE POOLING AGREEMENT --TERMINATION" AND "DESCRIPTION OF THE
CERTIFICATES--PASS-THROUGH RATES" IN THIS PROSPECTUS SUPPLEMENT AND "POOLING
AGREEMENT--TERMINATION; RETIREMENT" IN THE PROSPECTUS FOR ADDITIONAL
INFORMATION.
CREDIT ENHANCEMENT
1. THE POLICY
The policy will guaranty the payment of principal and interest on the offered
certificates to the extent described in this prospectus supplement. If the
Certificate Insurer were unable to pay under the policy, the offered
certificates could be subject to losses.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES--THE POLICY" AND "THE
CERTIFICATE INSURER" IN THIS PROSPECTUS SUPPLEMENT FOR ADDITIONAL INFORMATION.
2. OVERCOLLATERALIZATION
The mortgage loans owned by the trust bear interest each month that in the
aggregate is expected to exceed the amount needed to pay monthly interest on the
offered certificates and senior residual distribution amounts and to pay certain
fees and expenses of the trust. A portion of this excess interest will be
applied initially to pay principal on the offered certificates (until the
required level of overcollateralization is reached), which reduces the aggregate
of the principal balances of such certificates at a faster rate than the
aggregate of the principal balances on the mortgage loans is being reduced. As a
result, the aggregate principal balance
S-5
<PAGE>
of the mortgage loans is expected to exceed the aggregate principal balance of
the offered certificates. This feature is referred to as
"overcollateralization." The required level of overcollateralization may
increase or decrease over time. We cannot assure you that sufficient interest
will be generated by the mortgage loans to maintain the required level of
overcollateralization.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES--OVERCOLLATERALIZATION" IN THIS
PROSPECTUS SUPPLEMENT FOR ADDITIONAL INFORMATION.
RATINGS
It is a condition of the issuance of the offered certificates that they be
assigned the following ratings by ___________, _________ and ___________:
------ ------ ------
Rating Rating Rating
CLASS
- ----- -------- --------- ----------
A ____ ____ ____
A rating is not a recommendation to buy, sell or hold securities. These ratings
may be lowered or withdrawn at any time by any of the rating agencies.
WE REFER YOU TO "RATINGS" IN THIS PROSPECTUS SUPPLEMENT AND "RATING" IN THE
PROSPECTUS FOR ADDITIONAL INFORMATION.
TAX STATUS
Two elections will be made to treat designated portions of the trust as real
estate mortgage investment conduits for federal income tax purposes.
WE REFER YOU TO "FEDERAL INCOME TAX CONSEQUENCES" IN THIS PROSPECTUS SUPPLEMENT
AND IN THE PROSPECTUS FOR ADDITIONAL INFORMATION.
ERISA CONSIDERATIONS
It is expected that the offered certificates may be purchased by a pension or
other employee benefit plan subject to the Employee Retirement Income Security
Act of 1974 or Section 4975 of the Internal Revenue Code of 1986, as amended
(the "Code") so long as certain conditions are met. A fiduciary of an employee
benefit plan must determine that the purchase of a certificate is consistent
with its fiduciary duties under applicable law and does not result in a
nonexempt prohibited transaction under applicable law.
WE REFER YOU TO "ERISA CONSIDERATIONS" IN THIS PROSPECTUS SUPPLEMENT AND IN THE
PROSPECTUS FOR ADDITIONAL INFORMATION.
LEGAL INVESTMENT
The offered certificates [will] [will not] be "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA") [as
long as they are rated in one of the two highest rating categories by at least
one nationally recognized statistical rating organization.]
WE REFER YOU TO "LEGAL INVESTMENT CONSIDERATIONS" IN THIS PROSPECTUS SUPPLEMENT
AND "LEGAL INVESTMENT MATTERS" IN THE PROSPECTUS FOR ADDITIONAL INFORMATION.
S-6
<PAGE>
RISK FACTORS
THE FOLLOWING INFORMATION, WHICH YOU SHOULD CAREFULLY CONSIDER, IDENTIFIES
CERTAIN SIGNIFICANT SOURCES OF RISK ASSOCIATED WITH AN INVESTMENT IN THE
CERTIFICATES. YOU SHOULD ALSO CAREFULLY CONSIDER THE INFORMATION SET FORTH UNDER
"RISK FACTORS" IN THE PROSPECTUS.
[ADDITIONAL APPROPRIATE RISK FACTORS AS NECESSARY]
[UNPREDICTABILITY OF PREPAYMENTS AND EFFECT ON YIELDS
Borrowers may prepay their mortgage loans in whole or in part at any time.
We cannot predict the rate at which borrowers will repay their mortgage loans. A
prepayment of a mortgage loan generally will result in a prepayment on the
certificates.
o If you purchase your certificates at a discount and principal is
repaid slower than you anticipate, then your yield may be lower than
you anticipate.
o If you purchase your certificates at a premium and principal is repaid
faster than you anticipate, then your yield may be lower than you
anticipate.
o The rate of prepayments on the mortgage loans will be sensitive to
prevailing interest rates. Generally, if prevailing interest rates
decline significantly below the interest rates on the fixed-rate
mortgage loans, those mortgage loans are more likely to prepay than if
prevailing rates remain above the interest rates on those mortgage
loans. In addition, if interest rates decline, adjustable- rate
mortgage loan prepayments may increase due to the availability of
fixed-rate mortgage loans or other adjustable-rate mortgage loans at
lower interest rates. Conversely, if prevailing interest rates rise
significantly, the prepayments on adjustable-rate mortgage loans may
decrease.
o Approximately ______% of the mortgage loans, by aggregate principal
balance as of the Cut-off Date, require the mortgagor to pay a premium
in certain instances if the mortgagor prepays the mortgage loan during
a stated period, which may be from one year to five years after the
mortgage loan was originated. A prepayment premium may discourage a
mortgagor from prepaying the mortgage loan during the applicable
period.
o The Seller may be required to purchase mortgage loans from the trust
in the event certain breaches of representations and warranties occur
and have not been cured. In addition, the Master Servicer has the
option to purchase mortgage loans that become ninety days or more
delinquent, subject to certain limitations and conditions described in
this prospectus supplement. These purchases will have the same effect
on the holders of the offered certificates as a prepayment of the
mortgage loans.
o If the rate of default and the amount of losses on the mortgage loans
is higher than you expect, then your yield may be lower than you
expect.
o The overcollateralization provisions are intended to result in an
accelerated rate of principal distributions to holders of the offered
certificates.
SEE "YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS" IN THIS PROSPECTUS
SUPPLEMENT FOR A DESCRIPTION OF FACTORS THAT MAY INFLUENCE THE RATE AND TIMING
OF PREPAYMENTS ON THE MORTGAGE LOANS.]
[POTENTIAL INADEQUACY OF CREDIT ENHANCEMENT FOR THE OFFERED CERTIFICATES
The credit enhancement features described in the summary are intended to
enhance the likelihood that holders of the offered certificates will receive
regular payments of interest and principal. However, we cannot assure you that
the applicable credit enhancement will adequately cover any shortfalls in cash
available to pay your certificates as a result of delinquencies or defaults on
the mortgage loans. If delinquencies or defaults occur on the mortgage loans,
neither the Master Servicer nor any other entity will advance scheduled monthly
payments of interest and principal on delinquent or defaulted mortgage loans if
such advances are not likely to be recovered.
S-7
<PAGE>
If substantial losses occur as a result of defaults and delinquent payments
on the mortgage loans, and the Certificate Insurer were unable to pay under the
certificate guaranty insurance policy, you may suffer losses.]
[INTEREST GENERATED BY THE MORTGAGE LOANS MAY BE INSUFFICIENT TO CREATE OR
MAINTAIN OVERCOLLATERALIZATION
The weighted average of the interest rates on the mortgage loans is
expected to be higher than the weighted average of the pass-through rates on the
offered certificates. The mortgage loans are expected to generate more interest
than is needed to pay interest owed on the offered certificates and senior
residual distribution amounts and to pay certain fees and expenses of the trust.
Any remaining interest generated by the mortgage loans will then be used to
absorb losses that occur on the mortgage loans. After these financial
obligations of the trust are covered, the available excess interest generated by
the mortgage loans will be used to create and maintain overcollateralization. We
cannot assure you, however, that enough excess interest will be generated to
maintain the required level of overcollateralization. The factors described
below will affect the amount of excess interest that the mortgage loans will
generate:
o Every time a mortgage loan is prepaid in full, excess interest
may be reduced because the mortgage loan will no longer be
outstanding and generating interest or, in the case of a partial
prepayment, will be generating less interest.
o Every time a mortgage loan is liquidated or written off, excess
interest may be reduced because such mortgage loans will no
longer be outstanding and generating interest.
o If the rates of delinquencies, defaults or losses on the mortgage
loans turn out to be higher than expected, excess interest will
be reduced by the amount necessary to compensate for any
shortfalls in cash available on such date to pay
certificateholders.
o The mortgage loans have rates that adjust based on an index that
is different from the index used to determine the pass-through
rate on the offered certificates. As a result, the pass-through
rate on the offered certificates may increase relative to
interest rates on the mortgage loans, or may remain constant as
interest rates on such mortgage loans decline. In either case,
this would require that more of the interest generated by the
mortgage loans be applied to cover interest on the offered
certificates.]
[RATING OF THE OFFERED CERTIFICATES BASED PRIMARILY ON CLAIMS-PAYING ABILITY OF
THE CERTIFICATE INSURER
The ratings on the offered certificates depend primarily on the claims
paying ability of the Certificate Insurer. Therefore, a reduction of the rating
assigned to the claims paying ability of the Certificate Insurer may have a
corresponding reduction on the ratings assigned to the offered certificates. In
general, the ratings address credit risk and do not address the likelihood of
prepayments.]
[IF THE CERTIFICATE INSURER FAILS TO MEET ITS OBLIGATIONS UNDER THE POLICY,
HOLDERS OF THE OFFERED CERTIFICATES MAY EXPERIENCE A LOSS ON THEIR INVESTMENT
If the protection created by the overcollateralization is insufficient and
the Certificate Insurer is unable to meet its obligations under the Policy, then
you could experience a loss of some of your investment. ]
[EFFECT OF MORTGAGE LOAN RATES ON THE OFFERED CERTIFICATES
The offered certificates accrue interest at a pass-through rate based on
the one-month LIBOR index plus a specified margin, but are subject to a limit.
The limit on the pass-through rate on the offered certificates is based on the
weighted average of the interest rates on the mortgage loans net of certain
trust expenses and other fees and a spread of _____%. The mortgage loans have
interest rates that are based on a six-month LIBOR index. All of the mortgage
loans have periodic and maximum limitations on adjustments to their interest
rates. As a result, the offered certificates may accrue less interest than they
would accrue if their pass-through rate was based solely on the one-month LIBOR
index plus the specified margin. Under limited circumstances, funds may be
available to cover any such deficiency; however, the Certificate Insurer is not
required to cover any such deficiency.
S-8
<PAGE>
A variety of factors could limit the pass-through rates on the offered
certificates. Some of these factors are described below:
o The pass-through rates adjust monthly while the loan rates
on the mortgage loans adjust less frequently. Consequently,
the cap on the certificates may limit increases in the
pass-through rates for extended periods in a rising interest
rate environment.
o Six-month LIBOR may change at different times and in
different amounts than one-month LIBOR. As a result, it is
possible that interest rates on certain of the mortgage
loans may decline while interest rates on the offered
certificates are stable or rising. It is also possible that
interest rates on the mortgage loans and the offered
certificates may decline or increase during the same period,
but that the interest rates on the offered certificates may
decline more slowly or increase more rapidly.
o These factors may adversely affect the yields to maturity on
the offered certificates.]
[PREPAYMENT INTEREST SHORTFALLS AND RELIEF ACT SHORTFALLS
When a mortgage loan is prepaid, the borrower is charged interest on the
amount prepaid only up to the date on which the prepayment is made, rather than
for an entire month. This may result in a shortfall in interest collections
available for payment on the next distribution date. The Master Servicer is
required to cover a portion of the shortfall in interest collections that are
attributable to prepayments, but only up to the amount of the Master Servicer's
servicing fee for the related calendar month. If this shortfall exceeds the
portion covered by the Master Servicer, the amount of interest paid on the
offered certificates will be reduced and will not be covered by the Certificate
Insurer, adversely affecting the yield on your investment.
In addition, certain shortfalls in interest collections arising from the
application of the Soldiers' and Sailors' Civil Relief Act of 1940 (the "Relief
Act") will not be covered by either the Master Servicer or the Certificate
Insurer and will adversely affect the yield on your investment.]
[DELAY IN RECEIPT OF LIQUIDATION PROCEEDS; LIQUIDATION PROCEEDS MAY BE LESS THAN
MORTGAGE LOAN BALANCE
Substantial delays could be encountered in connection with the liquidation
of delinquent mortgage loans. Further, reimbursement of advances made on a
mortgage loan, liquidation expenses such as legal fees, real estate taxes,
hazard insurance and maintenance and preservation expenses may reduce the
portion of liquidation proceeds payable to you. If a mortgaged property fails to
provide adequate security for the mortgage loan, you will incur a loss on your
investment if the Certificate Insurer fails to perform its obligations under the
certificate insurance policy and the other credit enhancements are insufficient
to cover the loss.]
[HIGH LOAN-TO-VALUE RATIOS INCREASE RISK OF LOSS
Mortgage loans with higher loan-to-value ratios may present a greater risk
of loss than mortgage loans with loan-to-value ratios of 80% or below.
Approximately _____ of the mortgage loans, by aggregate principal balance of the
mortgage loans as of the Cut-off Date, had loan-to-value ratios in excess of
80%, but no more than ____%, at origination. Additionally, the Master Servicer's
determination of the value of a mortgaged property used in the calculation of
the loan-to-values ratios of the mortgage loans in the mortgage pool may differ
from the appraised value of such mortgaged properties. No mortgage loan in the
mortgage pool will be covered by a primary mortgage insurance policy. See
"Option One Mortgage Corporation--Underwriting Standards" herein.]
[GEOGRAPHIC CONCENTRATION
The following chart lists the states with the highest concentrations of
mortgage loans in excess of 5% for the mortgage loans, by aggregate principal
balance of the mortgage loans as of the Cut-off Date.
[insert chart]
Property in California may be particularly susceptible to certain types of
uninsurable hazards, such as earthquakes, floods, mudslides and other natural
disasters.
S-9
<PAGE>
In addition, the conditions below will have a disproportionate impact on
the mortgage loans in general:
o Economic conditions in states listed above which may or may not affect
real property values may affect the ability of borrowers to repay
their loans on time.
o Declines in the residential real estate markets in the states listed
above may reduce the values of properties located in those states,
which would result in an increase in the loan-to-value ratios.
o Any increase in the market value of properties located in the states
listed above would reduce the loan-to-value ratios and could,
therefore, make alternative sources of financing available to the
borrowers at lower interest rates, which could result in an increased
rate of prepayment of the mortgage loans.]
[VIOLATION OF VARIOUS FEDERAL AND STATE LAWS MAY RESULT IN LOSSES ON THE
MORTGAGE LOANS
Applicable state laws generally regulate interest rates and other charges,
require certain disclosure, and require licensing of the Seller. In addition,
other state laws, public policy and general principles of equity relating to the
protection of consumers, unfair and deceptive practices and debt collection
practices may apply to the origination, servicing and collection of the mortgage
loans.
The mortgage loans are also subject to federal laws, including:
o the Federal Truth-in-Lending Act and Regulation Z promulgated
thereunder, which require certain disclosures to the borrowers
regarding the terms of the mortgage loans;
o the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age,
race, color, sex, religion, marital status, national origin,
receipt of public assistance or the exercise of any right under
the Consumer Credit Protection Act, in the extension of credit;
and
o the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit
experience.
Depending on the provisions of the applicable law and the specific facts
and circumstances involved, violations of these federal or state laws, policies
and principles may limit the ability of the trust to collect all or part of the
principal of or interest on the mortgage loans, may entitle the borrower to a
refund of amounts previously paid and, in addition, could subject the Seller to
damages and administrative enforcement.
The Seller will represent that as of the closing date, each mortgage loan
originated by it is in compliance with applicable federal and state laws and
regulations. In the event of a breach of such representation, the Seller will be
obligated to cure such breach or repurchase or replace the affected mortgage
loan in the manner described in the prospectus.]
[THE CERTIFICATES ARE OBLIGATIONS OF THE TRUST ONLY
The certificates will not represent an interest in or obligation of the
depositor, the Master Servicer, the Seller, the Trustee or any of their
respective affiliates. Neither the offered certificates nor the underlying
mortgage loans will be guaranteed or insured by any governmental agency or
instrumentality, or by the depositor, the Master Servicer, the Trustee, or any
of their respective affiliates. The offered certificates are covered by the
policy, as and to the extent described under the caption "Description of the
Certificates--The Policy" herein. Proceeds of the assets included in the trust
and proceeds from the policy will be the sole source of payments on the offered
certificates, and there will be no recourse to the depositor, the Master
Servicer, the Seller, the Trustee or any other entity in the event that such
proceeds are insufficient or otherwise unavailable to make all payments provided
for under the offered certificates.]
S-10
<PAGE>
[YEAR 2000 SYSTEMS RISK COULD AFFECT THE ABILITY OF THE MASTER SERVICER OR THE
TRUSTEE TO PERFORM THEIR RELATED DUTIES
As is the case with most companies using computers in their operations, the
Master Servicer and the Trustee are faced with the task of completing their
compliance goals in connection with the year 2000 issue. The year 2000 issue is
the result of computer programs having been written in the past, using two
digits, rather than four digits, to define the applicable year. Any of the
Master Servicer's or the Trustee's computer programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. Any such occurrence could result in major computer system failure or
miscalculations. Each of the Master Servicer and the Trustee is presently
engaged in various procedures to ensure that its computer systems and software
will be year 2000 compliant. However, in the event that the Master Servicer or
the Trustee, or any of its related suppliers, customers, brokers or agents do
not successfully and timely achieve year 2000 compliance, the performance of
obligations of the Master Servicer or the Trustee, as the case may be, under the
pooling agreement could be materially adversely affected.]
[LACK OF LIQUIDITY
[Underwriters] intend to make a secondary market in the offered
certificates actually purchased by them, but they have no obligation to do so.
There is no assurance that such a secondary market will develop or, if it
develops, that it will continue. Consequently, you may not be able to sell your
certificates readily or at prices that will enable you to realize your desired
yield. The market values of the certificates are likely to fluctuate; these
fluctuations may be significant and could result in significant losses to you.
The secondary markets for asset-backed securities have experienced periods
of illiquidity and can be expected to do so in the future. Illiquidity can have
a severely adverse effect on the prices of securities that are especially
sensitive to prepayment, credit, or interest rate risk, or that have been
structured to meet the investment requirements of limited categories of
investors.]
THE MORTGAGE POOL
The information set forth in the following paragraphs has been provided by
the Seller. Neither of the Depositor nor any other affiliate of the Seller, nor
the Underwriters, the Trustee, the Certificate Insurer or any of their
respective affiliates have made or will make any representation as to the
accuracy or completeness of such information.
Unless otherwise noted, all statistical percentages set forth in this
prospectus supplement are measured as a percentage of the aggregate balance of
the Mortgage Loans or the number of Mortgage Loans as of the Cut-off Date
Certain information with respect to the Mortgage Loans to be included in
the Mortgage Pool is set forth herein. Prior to the Closing Date, Mortgage Loans
may be substituted therefor. Some amortization of the Mortgage Loans may occur
prior to the Closing Date. Moreover, certain of the Mortgage Loans may prepay in
full, or may be determined not to meet the eligibility requirements for the
final pool of Mortgage Loans acquired by the Trust on the Closing Date. The
Seller believes that the information set forth herein with respect to the
Mortgage Pool is representative of the characteristics of the Mortgage Pool as
it will be constituted at the Closing Date, although certain characteristics of
the Mortgage Loans may vary.
GENERAL
Option One Mortgage Loan Trust ________ (the "Trust") will consist of first
lien, adjustable-rate mortgage loans (the "Mortgage Loans" or the "Mortgage
Pool"). The Mortgage Loans have original terms to maturity ranging from 10 to 30
years and an aggregate principal balance as of the Cut-off Date of approximately
$______________. All Mortgage Loan statistics set forth herein are based on
principal balances, interest rates, terms to maturity, mortgage loan counts and
similar statistics as of the Cut-off Date. All weighted averages specified
herein are based on the principal balances of the Mortgage Loans as of the
Cut-off Date, as adjusted for the scheduled principal payments received or
advanced on or before such date (each, a "Cut-off Date Principal Balance"). The
"Principal Balance" of a Mortgage Loan, as of any date, is equal to the
principal balance of such Mortgage Loan at its origination, less the sum of
scheduled and unscheduled payments in respect of principal made on such Mortgage
S-11
<PAGE>
Loan. References to percentages of the Mortgage Loans mean percentages based on
the aggregate of the Cut-off Date Principal Balances of the Mortgage Loans,
unless otherwise specified. The Mortgage Loans are subject to the "due-on-sale"
provisions included therein which provide that the Mortgage Loan is assumable by
a creditworthy purchaser of the related Mortgaged Property.
The Depositor will purchase the Mortgage Loans from the Seller pursuant to
the Mortgage Loan Purchase Agreement (the "Mortgage Loan Purchase Agreement"),
dated as of the Cut-off Date, between the Seller and the Depositor. Pursuant to
the Pooling Agreement, the Depositor will cause the Mortgage Loans and the
Depositor's rights under the Mortgage Loan Purchase Agreement to be assigned to
the Trustee for the benefit of the Certificateholders. See "The Pooling
Agreement" herein and "The Pooling Agreement" in the Prospectus.
Each of the Mortgage Loans in the Mortgage Pool were selected from the
Seller's portfolio of mortgage loans. The Mortgage Loans were originated by the
Seller or acquired by the Seller in the secondary market in the ordinary course
of its business and were underwritten or re-underwritten by the Seller in
accordance with its underwriting standards as described in "Option One Mortgage
Corporation--Underwriting Standards."
Under the Mortgage Loan Purchase Agreement, the Seller will make certain
representations and warranties to the Trustee relating to, among other things,
the due execution and enforceability of the Mortgage Loan Purchase Agreement and
certain characteristics of the Mortgage Loans and, subject to certain
limitations, will be obligated to repurchase or substitute a similar mortgage
loan for any Mortgage Loan as to which there exists deficient documentation or
an uncured breach of any such representation or warranty, if such breach of any
such representation or warranty materially and adversely affects the
Certificateholders' interests in such Mortgage Loan. The Seller is selling the
Mortgage Loans without recourse and will have no obligation with respect to the
Certificates in its capacity as Seller other than the repurchase or substitution
obligations described above.
Substantially all of the Mortgage Loans in the Mortgage Pool have scheduled
monthly payments due on the first day of the month (with respect to each
Mortgage Loan, a "Due Date"). No Mortgage Loan in the Mortgage Pool will be
covered by a primary mortgage insurance policy.
The Mortgage Loans consist of _______ adjustable-rate Mortgage Loans with
an aggregate principal balance of approximately $______________ as of the
Cut-off Date.
Approximately ______% of the Mortgage Loans provide for payment by the
borrower of a prepayment premium in limited circumstances on certain
prepayments. Generally, each such Mortgage Loan provides for payment of a
prepayment premium on partial prepayments and prepayments in full made within a
stated number of months that is between [6 and 60] months from the date of
origination of such Mortgage Loan. The amount of the prepayment premium is
provided in the related mortgage note and is generally equal to six months'
interest on any amounts prepaid in excess of 20% of the original principal
balance of the related Mortgage Loan in any 12 month period. The holders of the
Class P Certificates will be entitled to all prepayment premiums received on the
Mortgage Loans, and such amounts will not be available for distribution on the
other classes of Certificates. Under certain circumstances, as described in the
Pooling Agreement, the Master Servicer may waive the payment of any otherwise
applicable prepayment premium. Investors should conduct their own analysis of
the effect, if any, that the prepayment premiums, and decisions by the Master
Servicer with respect to the waiver thereof, may have on the prepayment
performance of the Mortgage Loans. The Depositor makes no representations as to
the effect that the prepayment premiums, and decisions by the Master Servicer
with respect to the waiver thereof, may have on the prepayment performance of
the Mortgage Loans.
MORTGAGE LOANS STATISTICS
The Mortgage Loans have original terms to maturity of 30 years. The
following statistical information, unless otherwise specified, is based upon the
aggregate principal balance of the Mortgage Loans as of the Cut-off Date.
The Mortgage Loans are secured by Mortgages creating first liens on
Mortgaged Properties. Approximately _____% of the Mortgage Loans had
Loan-to-Value Ratios at origination in excess of 80.00%. Approximately ______%
of the Mortgage Loans had Loan-to-Value Ratios at origination greater than
_____% but not more than _____%. There can be no assurance that the
Loan-to-Value Ratio of any Mortgage Loan determined at any time after
origination is less than or equal to its original Loan-to-Value Ratio.
S-12
<PAGE>
None of the Mortgage Loans are Balloon Loans.
Approximately ______% of the Mortgage Loans provide for the payment of
prepayment premiums by the related borrowers in certain instances.
The weighted average remaining term to maturity of the Mortgage Loans will
be approximately ____ months as of the Cut-off Date. None of the Mortgage Loans
had a first Due Date prior to [month/year] or after [month/year] or will have a
remaining term to maturity of less than ___ months or greater than 30 years as
of the Cut-off Date. The latest maturity date of any Mortgage Loan is
[month\year].
The average Principal Balance of the Mortgage Loans at origination was
approximately $__________. The average Cut-off Date Principal Balance of the
Mortgage Loans was approximately $__________.
No Mortgage Loan had a Cut-off Date Principal Balance of greater than
approximately $________ or less than approximately $___________.
Generally, the Mortgage Loans provide for semi-annual adjustment to the
Loan Rate thereon and for corresponding adjustments to the monthly payment
amount due thereon, in each case on each adjustment date applicable thereto
(each such date, an "Adjustment Date"); provided, that the first adjustment for
such Mortgage Loans will occur after an initial period of two years in the case
of ______% of the Mortgage Loans and three years in the case of _______% of the
Mortgage Loans (each such Mortgage Loan, a "Delayed First Adjustment Mortgage
Loan"). On each Adjustment Date for each Mortgage Loan, the Loan Rate thereon
will be adjusted to equal the sum, rounded to the nearest or next highest
multiple of 0.125%, of Six-Month LIBOR (as defined below) and a fixed percentage
amount (the "Gross Margin"). The Loan Rate on any such Mortgage Loan will not
increase by more than an amount set forth in the related Mortgage Note, which is
not more than _____% per annum on the first related Adjustment Date (the
"Initial Periodic Rate Cap") and ______% on any Adjustment Date thereafter (the
"Periodic Rate Cap"). The Mortgage Loans have a weighted average Initial
Periodic Rate Cap of approximately _______% per annum and a weighted average
Periodic Rate Cap of approximately ______% per annum thereafter. Each Loan Rate
on each such Mortgage Loan will not exceed a specified maximum Loan Rate over
the life of such Mortgage Loan (the "Maximum Loan Rate") or be less than a
specified minimum Loan Rate over the life of such Mortgage Loan (the "Minimum
Loan Rate"). The Mortgage Loans that are Delayed First Adjustment Mortgage Loans
have a weighted average Initial Periodic Rate Cap of approximately ______% per
annum and a weighted average Periodic Rate Cap of approximately _______% per
annum thereafter. Effective with the first monthly payment due on each Mortgage
Loan after each related Adjustment Date, the monthly payment amount will be
adjusted to an amount that will amortize fully the outstanding Principal Balance
of the related Mortgage Loan over its remaining term, and pay interest at the
Loan Rate as so adjusted. Due to the application of the Periodic Rate Caps and
the Maximum Loan Rates, the Loan Rate on each such Mortgage Loan, as adjusted on
any related Adjustment Date, may be less than the sum of the Index and the
related Gross Margin, rounded as described herein. See "--The Index" herein.
None of the Mortgage Loans will permit the related mortgagor to convert the
adjustable Loan Rate thereon to a fixed Loan Rate.
The Mortgage Loans had Loan Rates as of the Cut-off Date of not less than
_______% per annum and not more than ________% per annum and the weighted
average Loan Rate was approximately _______% per annum. As of the Cut-off Date,
the Mortgage Loans had Gross Margins ranging from ______% to ______%, Minimum
Loan Rates ranging from ______% per annum to ______% per annum and Maximum Loan
Rates ranging from ________% per annum to ________% per annum. As of the Cut-off
Date, the weighted average Gross Margin was approximately ______%, the weighted
average Minimum Loan Rate was approximately ______% per annum and the weighted
average Maximum Loan Rate was approximately ______% per annum. The latest next
Adjustment Date following the Cut-off Date on any Mortgage Loan occurs on
[month\year] and the weighted average time until the next Adjustment Date for
all of the Mortgage Loans is approximately ___ months.
The Mortgage Loans are expected to have the following characteristics as of
the Cut-off Date (the sum in any column may not equal the total indicated due to
rounding):
S-13
<PAGE>
CREDIT GRADE FOR THE MORTGAGE LOANS(1)
% of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Credit Grade of Mortgage Loans the Cut-off Date the Cut-off Date
- ----------------- ------------------- -------------------- ------------------
Total..........
________________
(1) For a description of each credit grade, see "Option One Mortgage Corporation
- - Underwriting Standards" herein.
S-14
<PAGE>
CUT-OFF DATE PRINCIPAL BALANCES OF THE MORTGAGE LOANS(1)
% of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Principal Balance($) of Mortgage Loans the Cut-off Date the Cut-off Date
- -------------------- ------------------- ----------------- -----------------
241,158 - 250,000.....
250,001 - 275,000.....
275,001 - 300,000.....
300,001 - 325,000.....
325,001 - 350,000.....
350,001 - 375,000.....
375,001 - 400,000.....
400,001 - 425,000.....
425,001 - 450,000.....
450,001 - 475,000.....
475,001 - 500,000.....
625,001 - 650,000.....
650,001 - 675,000.....
825,001 - 830,474.....
Total..................
_____________________
(1) The average Cut-off Date Principal Balance of the Mortgage Loans was
approximately $_____________.
REMAINING TERMS TO MATURITY OF THE MORTGAGE LOANS(1)
% of Aggregate
Principal Balance Principal Balance
Remaining Term Number Outstanding as of Outstanding as of
(months) of Mortgage Loans the Cut-off Date the Cut-off Date
- -------------------- ----------------- ----------------- -----------------
352-360.............
Total...............
__________________
(1) The weighted average remaining term of the Mortgage Loans was approximately
_____ months.
S-15
<PAGE>
<TABLE>
<CAPTION>
PROPERTY TYPES OF THE MORTGAGE LOANS
% of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Property Type of Mortgage Loans the Cut-off Date the Cut-off Date
- -------------------------- ------------------- ----------------- -----------------
<S> <C> <C> <C>
Single Family Detached....
PUD Detached (1)..........
Condo Low-Rise
Attached..................
Single Family Attached....
2-4 Units Detached........
Condo High-Rise
Attached..................
PUD Attached (1)..........
Total................
______________________
</TABLE>
(1) PUD refers to a home or "unit" in a Planned Unit Development.
OCCUPANCY STATUS OF THE MORTGAGE LOANS
% of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Occupancy Status(1) of Mortgage Loans the Cut-off Date the Cut-off Date
- -------------------- ------------------- ----------------- -----------------
Primary.............
Non-owner...........
Second Home.........
Total..........
____________________
(1) Occupancy as represented by the borrower at the time of origination.
PURPOSE OF THE MORTGAGE LOANS
% of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Purpose of Mortgage Loans the Cut-off Date the Cut-off Date
- ---------------------- ------------------ ----------------- -----------------
Cash Out Refinance....
Purchase..............
Rate/Term Refinance...
Total.................
S-16
<PAGE>
CURRENT LOAN RATES OF THE MORTGAGE LOANS(1)
% of Aggregate
Principal Balance Principal Balance
Current Loan Rate Number Outstanding as of Outstanding as of
(%) of Mortgage Loans the Cut-off Date the Cut-off Date
- ------------------- ------------------- ----------------- -----------------
6.75 -
7.00..............
7.01 -
8.00..............
8.01 -
9.00..............
9.01 -
10.00..............
10.01 -
11.00..............
11.01 -
12.00..............
12.01 -
12.85..............
Total..........
___________________
(1) The weighted average Loan Rate of the Mortgage Loans as of the Cut-off Date
was approximately _______% per annum.
ORIGINAL LOAN-TO-VALUE RATIOS OF THE MORTGAGE LOANS(1)(2)
% of Aggregate
Principal Balance Principal Balance
Original Loan-to-Value Number Outstanding as of Outstanding as of
Ratio(%) of Mortgage Loans the Cut-off Date the Cut-off Date
- ---------------------- ------------------- ----------------- -----------------
17.17 - 20.00.........
45.01 - 50.00.........
50.01 - 55.00.........
55.01 - 60.00.........
60.01 - 65.00.........
65.01 - 70.00.........
70.01 - 75.00.........
75.01 - 80.00.........
80.01 - 85.00.........
85.01 - 90.00.........
90.01 - 95.00.........
Total...............
____________________
(1) The weighted average original Loan-to-Value Ratio of the Mortgage Loans as
of the Cut-off Date was approximately ______%.
(2) For a description of the determination of Loan-to-Value Ratio by the Master
Servicer see "Option One Mortgage Corporation - Underwriting Standards"
herein.
S-17
<PAGE>
GEOGRAPHIC DISTRIBUTION OF THE MORTGAGED PROPERTIES(1)
% of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Location of Mortgage Loans the Cut-off Date the Cut-off Date
- ---------------------- ------------------ ----------------- -----------------
Arizona...............
California............
Colorado..............
Connecticut...........
Delaware..............
District of Columbia..
Florida...............
Georgia...............
Illinois..............
Kentucky..............
Maine.................
Maryland..............
Massachusetts.........
Michigan..............
Minnesota.............
Missouri..............
Nevada................
New Hampshire.........
New Jersey............
New York..............
Ohio..................
Oregon................
Pennsylvania..........
Tennessee.............
Texas.................
Vermont...............
Virginia..............
Washington............
Wisconsin.............
Total ...........
_____________________
(1) The greatest ZIP code geographic concentration of the Mortgage Loans, by
Loan Balance as of the Cut-off Date, was approximately ______% in the
_______ ZIP code.
S-18
<PAGE>
<TABLE>
<CAPTION>
DOCUMENTATION LEVELS OF THE MORTGAGE LOANS(1)
% of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Documentation Level of Mortgage Loans the Cut-off Date the Cut-off Date
- ------------------------------ ------------------- ----------------- -----------------
<S> <C> <C> <C>
Full Documentation............
Lite Documentation............
Stated Income Documentation...
Total....................
</TABLE>
_______________________
(1) For a description of each documentation level, see "Option One Mortgage
Corporation - Underwriting Standards" herein.
MAXIMUM LOAN RATES OF THE MORTGAGE LOANS(1)
% of Aggregate
Principal Balance Principal Balance
Maximum Loan Rate Number Outstanding as of Outstanding as of
(%) of Mortgage Loans the Cut-off Date the Cut-off Date
- ------------------ ------------------- ----------------- -----------------
12.7 -
13.00..........
13.0 -
14.00..........
14.0 -
15.00..........
15.0 -
16.00..........
16.0 -
17.00..........
17.0 -
18.00..........
18.0 -
18.85..........
Total......
________________
(1) The weighted average Maximum Loan Rate of the Mortgage Loans as of the
Cut-off Date was approximately ______% per annum.
S-19
<PAGE>
MINIMUM LOAN RATES OF THE MORTGAGE LOANS(1)
% of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Minimum Loan Rate(%) of Mortgage Loans the Cut-off Date the Cut-off Date
- -------------------- ------------------ ----------------- -----------------
6.7 -
7.00............
7. -
8.00............
8.0 -
9.00............
9.0 -
10.00............
10.0 -
11.00............
11.0 -
12.00............
12.0 -
12.85............
Total...........
____________________
(1) The weighted average Minimum Loan Rate of the Mortgage Loans as of the
Cut-off Date was approximately ______% per annum.
GROSS MARGINS OF THE MORTGAGE LOANS(1)
% of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Gross Margins(%) of Mortgage Loans the Cut-off Date the Cut-off Date
- ------------------ ------------------- ----------------- -----------------
3.7 -
5.00..........
5.0 -
7.63..........
Total......
_________________
(1) The weighted average Gross Margin of the Mortgage Loans as of the Cut-off
Date was approximately ______%.
S-20
<PAGE>
NEXT ADJUSTMENT DATE FOR THE MORTGAGE LOANS
% of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Rate Change Date of Mortgage Loans the Cut-off Date the Cut-off Date
- ------------------ ------------------- ----------------- -----------------
07/01/___.........
08/01/___.........
09/01/___.........
10/01/___.........
08/01/___.........
09/01/___.........
10/01/___.........
11/01/___.........
12/01/___.........
01/01/___.........
02/01/___.........
02/15/___.........
03/01/___.........
04/01/___.........
09/01/___.........
01/01/___.........
02/01/___.........
03/01/___.........
Total...........
<TABLE>
<CAPTION>
INITIAL PERIODIC RATE CAPS OF THE MORTGAGE LOANS(1)
% of Aggregate
Principal Balance Principal Balance
Initial Periodic Rate Cap Number Outstanding as of Outstanding as of
(%) of Mortgage Loans the Cut-off Date the Cut-off Date
- ------------------------- ------------------- ----------------- -----------------
<S> <C> <C> <C>
1.00.....................
1.50.....................
3.00.....................
Total.........
</TABLE>
_____________________
(1) Relates solely to initial rate adjustments.
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<PAGE>
SUBSEQUENT PERIODIC RATE CAPS OF THE MORTGAGE LOANS(1)
% of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Periodic Rate Cap(%) of Mortgage Loans the Cut-off Date the Cut-off Date
- -------------------- ------------------ ----------------- -----------------
1.00...............
1.50...............
Total........
__________________
(1) Relates to all rate adjustments subsequent to initial rate adjustments.
THE INDEX
The index with respect to the Mortgage Loans is the average of interbank
offered rates for six-month U.S. dollar deposits in the London market based on
quotations of major banks, and most recently available as of a day specified in
the related note as published by the Western Edition of THE WALL STREET JOURNAL
("Six Month LIBOR" or the "Index"). If the Index becomes unpublished or is
otherwise unavailable, the Master Servicer will select an alternative index
which is based upon comparable information.
OPTION ONE MORTGAGE CORPORATION
GENERAL
The information set forth in the following paragraphs has been provided by
Option One Mortgage Corporation ("Option One"). Neither the Depositor nor any
other affiliate of Option One, nor the Trustee, the Underwriters or any of their
affiliates has made or will make any representation as to the accuracy or
completeness of such information.
Option One, a California corporation, headquartered in Irvine, California,
will serve as the Master Servicer pursuant to the Pooling Agreement for the
Mortgage Loans.
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.
Option One is a wholly-owned subsidiary of Block Financial, which is in
turn a wholly-owned subsidiary of H&R Block, Inc. As of December 31, _____,
Option One had ______ loan origination centers in [state], ____ loan origination
centers in [state] and _____ loan origination center in each of [state] and
[state].
Option One operates as a stand-alone mortgage banking company and is a
Fannie Mae and Freddie Mac approved servicer.
The following tables set forth, as of December 31, ____, ____, ____ and
_____ 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 has not been paid by the next scheduled
due date for such mortgage loan.
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<PAGE>
<TABLE>
<CAPTION>
DELINQUENCIES AND FORECLOSURES
(DOLLARS IN THOUSANDS)
AT DECEMBER 31, ____ AT DECEMBER 31, ____
--------------------------------------------- --------------------------------------------
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........
Period of Delinquency
31-59 Days.............
60-89 Days.............
90 days or more........
Total Delinquent Loans.
Loans in Foreclosure(1)
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, ____ AT DECEMBER 31, ____
--------------------------------------------- --------------------------------------------
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........
Period of Delinquency
31-59 Days.............
60-89 Days.............
90 days or more........
Total Delinquent Loans.
Loans in Foreclosure(1)
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
REAL ESTATE OWNED
(DOLLARS IN THOUSANDS)
AT DECEMBER 31, ____ AT DECEMBER 31, ____ AT DECEMBER 31, ____ AT DECEMBER 31, ____
--------------------- --------------------- --------------------- ----------------------
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
Foreclosed Loans(2)
Foreclosure Ratio(3)
</TABLE>
______________________
(1) Loans in foreclosure are also included under the heading "Total Delinquent
Loans."
(2) For the purpose 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.
(3) 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.
LOAN LOSS EXPERIENCE ON OPTION ONE'S SERVICING PORTFOLIO OF MORTGAGE LOANS
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
----------------------------------- -------------
---- ---- ----- -----
---------- ----------- ------------ -------------
Total Portfolio (1)
Net Losses (2)(3)
Net Losses as a Percentage of
Total Portfolio
____________________
(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) "Net Losses" means "Gross Losses" minus "Recoveries." "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. "Recoveries" are
recoveries from liquidation proceeds and deficiency judgments.
(3) "Net Losses" are computed on a loan-by-loan basis and are reported with
respect to the period in which the loan is liquidated. If additional costs
are incurred or recoveries are received after the end of the period, the
amounts are adjusted with respect to the period in which the related loan
was liquidated. Accordingly, the Net Losses reported in the table may
change in future periods. The information in this table reflects costs and
recoveries through ___________.
It is unlikely that the delinquency experience of the Mortgage Loans
included in the Mortgage Pool will correspond to the delinquency experience of
Option One's mortgage portfolio set forth in the foregoing tables. The
statistics shown above represent the delinquency experience for Option One's
mortgage servicing portfolio only for the periods presented, whereas the
aggregate delinquency experience on the Mortgage Loans included in the Mortgage
Pool will depend on the results obtained over the life of the Mortgage Pool. In
particular, investors should note that newly originated mortgage loans will not
be added to the Mortgage Pool after the Closing Date, and the Mortgage Pool will
therefore consist of a static group of Mortgage Loans, whereas new mortgage
loans are continually being originated and added to the group for which such
statistics above are compiled. Accordingly the actual loss and delinquency
percentages with respect to the Mortgage Pool are likely to be substantially
higher than those indicated in the tables above. In addition, 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 Option One. Furthermore, adverse economic conditions
may affect the timely payment by Mortgagors of scheduled payments of principal
and interest on
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<PAGE>
such Mortgage Loans and, accordingly, the actual rates of delinquencies and
foreclosures with respect to the Mortgage Pool.
UNDERWRITING STANDARDS
The 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 intended to assess (i) the value of the
mortgaged property and to evaluate the adequacy of such property as collateral
for the mortgage loan and (ii) the creditworthiness of the related mortgagor.
The Mortgage Loans were also generally underwritten with a view toward the
resale thereof in the secondary market. The Mortgage Loans generally bear higher
rates of interest than mortgage loans that are originated in accordance with
Fannie Mae and Freddie Mac 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 Fannie Mae and Freddie Mac.
The Option One Guidelines require a review of the appraisal by a loan
underwriter, who may request a written review by an independent appraiser
retained by Option One.
[The Mortgage Loans were originated consistent with and generally conform
to the Option One Guidelines' "Full Documentation," "Lite 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 ratio 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
$350,000. Mortgage loans may, however, be originated generally up to $950,000.
The Option One Guidelines permit one to four-family loans to have LTVs at
origination of generally up to 80% (except as otherwise described below),
depending on, among other things, the purpose of the mortgage loan, a
mortgagor's credit history, repayment ability and debt service-to-income ratio,
as well as the type and use of the property. With respect to mortgage loans
where the review of the appraisal results in a valuation of the mortgaged
property that is more than (i) 10% less in the case of mortgage loans with LTVs
less than or equal to 80% or (ii) 5% less in the case of mortgage loans with
LTVs in excess of 80%, the LTV of the related mortgage loan is based on the
valuation obtained in the review of the original appraisal. With respect to
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. There can be no assurance that
the value of a Mortgaged Property estimated in any appraisal or review is equal
to the actual value of such Mortgaged Property at the time of such appraisal or
review. Furthermore, there can be no assurance that the actual value of a
Mortgaged Property has not declined subsequent to the time of such appraisal or
review.]
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<PAGE>
[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 verification
of stable income for 24 months (or, if the LTV is less than or equal to 80%, for
12 months). Under the Lite Documentation program, applicants generally are
required to submit 3 months bank statements or a paystub as verification of
income. 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 within the last 12 months, and no 60-day late
payments within the last 24 months is acceptable on an existing mortgage loan.
An existing mortgage loan must be current at the time of application and
funding. No open collection accounts or open charge-offs filed in the last 24
months may remain open after the funding of the loan. No bankruptcy or notice of
default filings may have occurred during the preceding five years. A minimum
FICO score of 640 is required if the LTV is less than or equal to 90%, a minimum
FICO score of 648 is required if the LTV is greater than 90%. The mortgaged
property must be in at least average condition. A maximum LTV of 95% is
permitted for a mortgage loan on a single family owner-occupied property. The
debt service-to-income ratio must not exceed 45%.]
["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 chapter 13
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
on LTVs less than or equal to 80%. The mortgaged property must be in at least
average condition. A maximum LTV of 95% is permitted for a mortgage loan on a
single family owner-occupied property. A maximum LTV of 90% is permitted for a
mortgage loan on an owner-occupied condominium or a maximum LTV of 80% is
permitted on a two to four-family residential property. 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 filed within the last 24 months may
remain open after funding of the loan if the LTV is greater than 80%; if the LTV
is less than or equal to 80%, then up to $500 may remain open after funding of
the loan. No bankruptcy filings may have occurred during the preceding two
years; provided, however, that if the borrower's chapter 13 bankruptcy has been
discharged during the past two 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, if the LTV is less
than or equal to 80%. No notice of default filings may have occurred during the
preceding three years if the LTV is greater than 80% or two years if the LTV is
less than or equal to 80%. The mortgaged property must be in at least average
condition. A maximum LTV of 90% is permitted for a mortgage loan on a single
family or condo owner-occupied property. A maximum LTV of 75% (or 60% for
mortgage loans originated under the Stated Income Documentation program) is
permitted for a mortgage loan on a non-owner-occupied property. However, for
most refinance mortgage loans under the Full Documentation program, a maximum
LTV of 80% is permitted for a mortgage loan on an owner-occupied property, and a
maximum LTV of 75% is permitted only for a
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<PAGE>
mortgage loan on a non-owner-occupied property. 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,
or, if the LTV is less than or equal to 80%, two 30-day late payments, and one
60- day late payment in 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, unless there has been a 60-day late payment
in the last 12 months. 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 if the LTV is greater than
80% or $1,500 if the LTV is less than or equal to 80% in open charge-offs or
collection accounts filed within the last 24 months 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 with respect to loans with LTVs
that are less than or equal to 80% or the preceding 24 months with respect to
loans with LTVs that are greater than 80%; provided, however, that if the
borrower's chapter 13 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, if the LTV is less than or equal to 80%. The mortgaged
property must be in at least average condition. A maximum LTV of 85% is
permitted for a mortgage loan on an owner-occupied property for the Full
Documentation program or 80% for the Stated Income Documentation program. A
maximum LTV of 75% (or 60% for mortgage loans originated under the Stated Income
Documentation program) is permitted for a mortgage loan on a non-owner- occupied
property. The debt service-to-income ratio generally ranges from 45% 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 months 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 $3,000 in open charge-offs or collection accounts filed within the last 24
months 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 12
months; provided, however, that if the borrower's chapter 13 bankruptcy has been
discharged during the past 12 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 adequate condition. Generally, a maximum LTV of 75% for a
mortgage loan on an owner-occupied property for the Full Documentation program
or 70% for the Lite Documentation program is permitted. A maximum LTV of 70% is
permitted for a mortgage loan on a single family, detached non-owner-occupied
property. A maximum LTV of 65% is permitted under the Full Documentation program
or Lite Documentation program for all other acceptable types of properties. The
debt service-to-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, mortgage
delinquency, including foreclosure proceedings, will be considered on a
case-by-case basis. 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. The mortgaged property may exhibit some deferred
maintenance. A maximum LTV of 65% (or 60% non-owner-occupied for mortgage loans
originated under the Lite 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
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<PAGE>
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.]
THE POOLING AGREEMENT
GENERAL
The Certificates will be issued pursuant to the Pooling and Servicing
Agreement, dated as of _____________ (the "Pooling Agreement"), among the
Depositor, the Master Servicer and the Trustee. The Trust created under the
Pooling Agreement will consist of (i) all of the Depositor's right, title and
interest in the Mortgage Loans, the related mortgage notes, mortgages and other
related documents, (ii) all payments on or collections in respect of the
Mortgage Loans due after the Cut-off Date, together with any proceeds thereof,
(iii) any Mortgaged Properties acquired on behalf of Certificateholders by
foreclosure or by deed in lieu of foreclosure, and any revenues received
thereon, (iv) the rights of the Trustee under all insurance policies required to
be maintained pursuant to the Pooling Agreement and (v) the rights of the
Depositor under the Mortgage Loan Purchase Agreement between the Depositor and
the Seller. The Offered Certificates will be transferable and exchangeable at
the corporate trust offices of the Trustee.
ASSIGNMENT OF THE MORTGAGE LOANS
On the Closing Date, the Depositor will transfer to the Trust all of its
right, title and interest in and to each Mortgage Loan, the related mortgage
note, mortgage, assignment of mortgage in recordable form to the Trustee and
other related documents (collectively, the "Related Documents"), including all
scheduled payments with respect to each such Mortgage Loan due on or after the
Cut-off Date. The Trustee, concurrently with such transfer, will deliver the
Certificates to the Depositor. Each Mortgage Loan transferred to the Trust will
be identified on a schedule (the "Mortgage Loan Schedule") delivered to the
Trustee pursuant to the Pooling Agreement. Such schedule will include
information such as the Principal Balance of each Mortgage Loan as of the
Cut-off Date, its Loan Rate as well as other information.
The Pooling Agreement will require that, within the time period specified
therein, the Seller will deliver or cause to be delivered to the Trustee (or a
custodian, as the Trustee's agent for such purpose) the mortgage notes endorsed
to the Trustee on behalf of the Certificateholders and the Related Documents. In
lieu of delivery of original mortgages or mortgage notes, if such original is
not available or lost, the Seller, upon the consent of the Certificate Insurer,
may deliver or cause to be delivered true and correct copies thereof, or, with
respect to a lost mortgage note, a lost note affidavit executed by the Seller.
The assignments of mortgage are generally required to be recorded by or on
behalf of the Seller in the appropriate offices for real property records;
provided, however, that such assignments of mortgage are not required to be
recorded if the Seller furnishes to the Trustee, on or before the Closing Date,
at the Seller's expense, an opinion of counsel with respect to the relevant
jurisdictions that such recording is not necessary to perfect the Trustee's
interest in the related Mortgage Loan; provided further, however,
notwithstanding the delivery of such opinion of counsel, upon the occurrence of
certain events set forth in the Pooling Agreement, each such assignment of
mortgage shall be recorded by the Master Servicer or the Trustee as set forth in
the Pooling Agreement. The Seller expects to deliver such an opinion of counsel
and as a result of which the assignments of mortgage for substantially all of
the Mortgage Loans will not initially be recorded. Any cost associated with the
recording of such assignments of mortgage will be borne by the Seller; provided,
however, if the Seller fails to pay the cost of recording, such expense will be
paid by the Master Servicer or the Trustee, as applicable, and will be
reimbursable to such party (other than the Master Servicer so long as the Master
Servicer is also the Seller) by the Trust prior to any distribution to
Certificateholders.
On or prior to the Closing Date, the Trustee will review the Mortgage Loans
and the Related Documents pursuant to the Pooling Agreement and if any Mortgage
Loan or Related Document is found to be defective in any material respect and
such defect is not cured within 90 days following notification thereof to the
Seller by the Trustee, the Seller will be obligated to either (i) substitute for
such Mortgage Loan a Qualified Substitute Mortgage Loan; however, such
substitution is permitted only within two years of the Closing Date and may not
be made unless an opinion of counsel is provided to the effect that such
substitution will not
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<PAGE>
disqualify either REMIC I or REMIC II (as defined in the Pooling Agreement) as a
REMIC or result in a prohibited transaction tax under the Code or (ii) purchase
such Mortgage Loan at a price (the "Purchase Price") equal to the outstanding
Principal Balance of such Mortgage Loan as of the date of purchase, plus all
accrued and unpaid interest thereon, computed at the Loan Rate through the end
of the calendar month in which the purchase is effected, plus the amount of any
unreimbursed Advances and Servicing Advances made by the Master Servicer. The
Purchase Price will be deposited in the Collection Account on or prior to the
next succeeding Determination Date after such obligation arises. The obligation
of the Seller to repurchase or substitute for a Deleted Mortgage Loan is the
sole remedy regarding any defects in the Mortgage Loans and Related Documents
available to the Trustee or the Certificateholders.
In connection with the substitution of a Qualified Substitute Mortgage
Loan, the Seller will be required to deposit in the Collection Account on or
prior to the next succeeding Determination Date after such obligation arises an
amount (the "Substitution Adjustment") equal to the excess of the Principal
Balance of the related Deleted Mortgage Loan over the Principal Balance of such
Qualified Substitute Mortgage Loan.
A "Qualified Substitute Mortgage Loan" is a mortgage loan substituted by
the Seller for a Deleted Mortgage Loan which must, on the date of such
substitution, (i) have an outstanding Principal Balance (or in the case of a
substitution of more than one Mortgage Loan for a Deleted Mortgage Loan, an
aggregate Principal Balance), not in excess of, and not more than 5% less than,
the Principal Balance of the Deleted Mortgage Loan; (ii) have a Maximum Loan
Rate and Minimum Loan Rate not less than the respective rate for the Deleted
Mortgage Loan and have a Gross Margin equal to or greater than the Deleted
Mortgage Loan, have the same Index Adjustment Date frequency as the Deleted
Mortgage Loan; (iii) have the same Due Date as the Deleted Mortgage Loan; (iv)
have a remaining term to maturity not more than one year earlier and not later
than the remaining term to maturity of the Deleted Mortgage Loan; (v) comply
with each representation and warranty as to the Mortgage Loans set forth in the
Mortgage Loan Purchase Agreement (deemed to be made as of the date of
substitution); (vi) have been underwritten or reunderwritten by the Seller in
accordance with the same underwriting criteria and guidelines as the Mortgage
Loans being replaced; (vii) be of the same or better credit quality as the
Mortgage Loan being replaced; and (viii) satisfy certain other conditions
specified in the Pooling Agreement.
The Seller will make certain representations and warranties as to the
accuracy in all material respects of certain information furnished to the
Trustee with respect to each Mortgage Loan (e.g., Cut-off Date Principal Balance
and the Loan Rate). In addition, the Seller will represent and warrant, on the
Closing Date, that, among other things: (i) at the time of transfer to the
Depositor, the Seller has transferred or assigned all of its right, title and
interest in each Mortgage Loan and the Related Documents, free of any lien; and
(ii) each Mortgage Loan complied, at the time of origination, in all material
respects with applicable state and federal laws. Upon discovery of a breach of
any such representation and warranty which materially and adversely affects the
interests of the Certificate Insurer or the Certificateholders in the related
Mortgage Loan and Related Documents, the Seller will have a period of 90 days
after discovery or notice of the breach to effect a cure. If the breach cannot
be cured within the 90-day period, the Seller will be obligated to (i)
substitute for such Deleted Mortgage Loan a Qualified Substitute Mortgage Loan
or (ii) purchase such Deleted Mortgage Loan from the Trust. The same procedure
and limitations that are set forth above for the substitution or purchase of
Deleted Mortgage Loans as a result of deficient documentation relating thereto
will apply to the substitution or purchase of a Deleted Mortgage Loan as a
result of a breach of a representation or warranty in the Mortgage Loan Purchase
Agreement that materially and adversely affects the interests of the Certificate
Insurer or the Certificateholders.
Mortgage Loans required to be transferred to the Seller as described in the
preceding paragraphs are referred to as "Deleted Mortgage Loans."
Pursuant to the Pooling Agreement, the Master Servicer will service and
administer the Mortgage Loans as more fully set forth therein.
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO COLLECTION ACCOUNT AND DISTRIBUTION
ACCOUNT
The Master Servicer shall establish and maintain or cause to be maintained
a separate trust account (the "Collection Account") for the benefit of the
holders of the Certificates and the Certificate Insurer. The Collection Account
will be an Eligible Account (as defined herein). Upon receipt by the Master
Servicer of
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amounts in respect of the Mortgage Loans (excluding amounts representing the
Servicing Fee or other servicing compensation, reimbursement for Advances and
Servicing Advances and insurance proceeds to be applied to the restoration or
repair of a Mortgaged Property or similar items), the Master Servicer will
deposit such amounts in the Collection Account. Amounts so deposited may be
invested in Eligible Investments (as described in the Pooling Agreement)
maturing no later than one Business Day prior to the date on which the amount on
deposit therein is required to be deposited in the Distribution Account. The
Trustee will establish an account (the "Distribution Account") into which will
be deposited amounts withdrawn from the Collection Account for distribution to
Certificateholders on a Distribution Date. The Distribution Account will be an
Eligible Account. Amounts on deposit therein may be invested in Eligible
Investments maturing on or before the Business Day prior to the related
Distribution Date unless such Eligible Investments are invested in investments
managed or advised by the Trustee or an affiliate thereof, in which case such
Eligible Investments may mature on the related Distribution Date.
An "Eligible Account" is a segregated account that is (i) an account or
accounts maintained with a federal or state chartered depository institution or
trust company the short-term unsecured debt obligations of which (or, in the
case of a depository institution or trust company that is the principal
subsidiary of a holding company, the short-term unsecured debt obligations of
such holding company) are rated P-1 by Moody's and A-1 by Standard & Poor's (or
comparable ratings if Moody's and Standard & Poor's are not the Rating Agencies)
at the time any amounts are held on deposit therein, (ii) an account or accounts
the deposits in which are fully insured by the Federal Deposit Insurance
Corporation (to the limits established by such corporation), the uninsured
deposits in which account are otherwise secured such that, as evidenced by an
opinion of counsel delivered to the Trustee and to each Rating Agency, the
Certificateholders will have a claim with respect to the funds in such account
or a perfected first priority security interest against such collateral (which
shall be limited to Eligible Investments) securing such funds that is superior
to claims of any other depositors or creditors of the depository institution
with which such account is maintained, (iii) a trust account or accounts
maintained with the trust department of a federal or state chartered depository
institution, national banking association or trust company acting in its
fiduciary capacity or (iv) otherwise acceptable to the Certificate Insurer and
to each Rating Agency without reduction or withdrawal of their then current
ratings of the Certificates as evidenced by a letter from each Rating Agency to
the Trustee and the Certificate Insurer. Eligible Investments are specified in
the Pooling Agreement and are limited to investments which meet the criteria of
the Rating Agencies from time to time as being consistent with their then
current ratings of the Certificates and which are acceptable to the Certificate
Insurer.
ADVANCES
Subject to the following limitations, the Master Servicer will be obligated
to advance or cause to be advanced on or before each Distribution Date its own
funds, or funds in the Collection Account that are not included in the Available
Funds for such Distribution Date, in an amount equal to the aggregate of all
payments of principal and interest (net of Servicing Fees) that were due during
the related Due Period on the Mortgage Loans and that were delinquent on the
related Determination Date, plus certain amounts representing assumed payments
not covered by any current net income on the Mortgaged Properties acquired by
foreclosure or deed in lieu of foreclosure (any such advance, an "Advance").
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 condemnation proceeds. 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, however, 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. Subject to the recoverability
standard above, the Master Servicer's obligation to make Advances as to any
Mortgage Loan will continue until the Mortgage Loan is paid in full or until the
recovery of all Liquidation Proceeds thereon.
All Advances will be reimbursable to the Master Servicer from late
collections, insurance proceeds, condemnation proceeds and liquidation proceeds
from the Mortgage Loan as to which such unreimbursed Advance was made. The
Master Servicer may recover from amounts in the Collection Account the amount of
any Advance that remains unreimbursed to the Master Servicer from the related
liquidation proceeds after the final liquidation of the related Mortgage Loan,
and such reimbursement amount will not be available for remittance to the
Trustee for distribution on the Certificates. In addition, the Master Servicer
may, if consented
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to by the Certificate Insurer and so provided in the Pooling Agreement, withdraw
from the Collection Account funds that were not included in Available Funds for
the preceding Distribution Date to cover Advances previously made by the Master
Servicer. In the event the Master Servicer fails in its obligation to make any
required Advance, the Trustee, in its capacity as successor Master Servicer,
will be obligated to make any such Advance, to the extent required in the
Pooling and Servicing Agreement.
In the course of performing its servicing obligations, the Master Servicer
will pay all reasonable and customary "out-of-pocket" costs and expenses
(including reasonable attorney's fees and disbursements) incurred in the
performance of its servicing obligations, including, but not limited to, the
cost of (i) the preservation, restoration, inspection and protection of the
Mortgaged Properties, (ii) any enforcement or judicial proceedings, including
foreclosures, and (iii) the management and liquidation of Mortgaged Properties
acquired in satisfaction of the related mortgage. Each such expenditure will
constitute a "Servicing Advance." The Master Servicer is obligated to pay
certain insurance premiums and certain ongoing expenses associated with the
Mortgage Pool and incurred by the Master Servicer in connection with its
responsibilities under the Pooling Agreement and is entitled to reimbursement
therefor as provided in the Pooling Agreement.
The Master Servicer's right to reimbursement for Servicing Advances is
limited to late collections on the related Mortgage Loan, including liquidation
proceeds, released mortgaged property proceeds, insurance proceeds and such
other amounts as may be collected by the Master Servicer from the related
Mortgagor or otherwise relating to the Mortgage Loan in respect of which such
unreimbursed amounts are owed, unless such amounts are deemed to be
nonrecoverable by the Master Servicer, in which event reimbursement will be made
to the Master Servicer from general funds in the Collection Account.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The principal compensation (the "Servicing Fee") to be paid to the Master
Servicer in respect of its servicing activities for the Certificates will be at
the "Servicing Fee Rate" of _____% per annum on the Principal Balance of each
Mortgage Loan. As additional servicing compensation, the Master Servicer is
entitled to retain all service-related fees, including assumption fees,
modification fees, extension fees, late payment charges and Prepayment Interest
Excess (as defined in the Pooling Agreement) and other ancillary fees (but not
prepayment premiums, which will be distributed to the holders of the Class P
Certificates), to the extent collected from mortgagors, together with any
interest or other income earned on funds held in the Collection Account and any
Servicing Accounts. The Master Servicer is obligated to deposit into the
Collection Account the amount of any Prepayment Interest Shortfall (payments
made by the Master Servicer in satisfaction of such obligation, "Compensating
Interest") but only in an amount up to its Servicing Fee for the related
Distribution Date.
The "Determination Date" with respect to any Distribution Date will be the
15th day of the calendar month in which such Distribution Date occurs or, if
such 15th day is not a Business Day, the Business Day immediately preceding such
15th day. With respect to any Determination Date and each Mortgage Loan as to
which a principal prepayment was applied during the portion of the related
Prepayment Period (as defined below) occurring in the month preceding the month
of such Determination Date, the "Prepayment Interest Shortfall" is an amount
equal to the interest at the applicable Loan Rate (net of the Servicing Fee) on
the amount of such principal prepayment for the number of days from the date on
which the principal prepayment is applied until the last day of such preceding
calendar month.
THE TRUSTEE
______________________, a ___________________ organized and existing under
the laws of __________________, will be named Trustee pursuant to the Pooling
Agreement. The Trustee will provide a monthly statement to Certificateholders
containing information regarding the Certificates. The Trustee may make such
statement available each month, to any interested party, via the Trustee's
website, electronic bulletin board and its fax-on-demand service. The Trustee's
website can be accessed at "http://www.____________.com." The Trustee's
electronic bulletin board may be accessed by calling _________________ and its
fax-on-demand service may be accessed by calling __________. The Trustee will
also distribute to Certificateholders hard copies of such reports.
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The principal compensation to be paid to the Trustee in respect of its
obligations under the Pooling Agreement will be equal to certain investment
earnings on the amounts on deposit in the Distribution Account. The Pooling
Agreement will provide that the Trustee and any director, officer, employee or
agent of the Trustee will be indemnified by the Master Servicer (and to the
extent the Master Servicer fails to indemnify the Trustee, by the Trust Fund)
and will be held harmless against any loss, liability or expense (not including
expenses, disbursements and advances incurred or made by the Trustee, including
the compensation and the expenses and disbursements of its agents and counsel,
in the ordinary course of the Trustee's performance in accordance with the
provisions of the Pooling Agreement) incurred by the Trustee arising out of or
in connection with the acceptance or administration of its obligations and
duties under the Pooling Agreement, other than any loss, liability or expense
(i) that constitutes a specific liability of the Trustee under the Pooling
Agreement or (ii) incurred by reason of willful misfeasance, bad faith or
negligence in the performance of the Trustee's duties under the Pooling
Agreement or as a result of a breach, or by reason of reckless disregard, of the
Trustee's obligations and duties under the Pooling Agreement. The Pooling
Agreement will provide that the Trustee may withdraw amounts owing to it under
the Pooling Agreement prior to distributions to Certificateholders.
VOTING RIGHTS
At all times ____% of all Voting Rights will be allocated among the holders
of the Class A Certificates and the Residual Certificates as provided below. The
portion of such Voting Rights allocated to the Class A Certificates shall be
based on the fraction, expressed as a percentage, the numerator of which is the
aggregate Certificate Principal Balance of the Class A Certificates then
outstanding and the denominator of which is the aggregate principal balance of
the Mortgage Loans then outstanding. The remainder of such Voting Rights shall
be allocated to the Residual Certificates. At all times ___% of all Voting
Rights will be allocated to the holders of the Class P Certificates. With
respect to any date of determination, if no Insurer Default (as defined herein)
exists and is continuing, all of the Voting Rights allocated to the holders of
the Class A Certificates shall be vested in the Certificate Insurer.
AMENDMENT
The Pooling Agreement may be amended under the circumstances set forth
under "The Pooling Agreement--Amendment" in the Prospectus; provided, however,
that unless an Insurer Default exists and is continuing, the consent of the
Certificate Insurer shall be required (if the Class A Certificates are
outstanding); provided, further, that if an Insurer Default exists and is
continuing, the consent of the Certificate Insurer shall be required for any
amendment that would affect the Certificate Insurer's right to reimbursement.
TERMINATION
The Master Servicer, or if the Master Servicer does not exercise such
option, the Certificate Insurer, will have the right to repurchase all of the
Mortgage Loans and REO Properties and thereby effect the early retirement of the
Certificates, on any Distribution Date on which the aggregate Principal Balance
of such Mortgage Loans and REO Properties in the Trust is equal to or less than
[10]% of the aggregate Principal Balance of the Mortgage Loans as of the Cut-off
Date. The first Distribution Date on which such option could be exercised is
referred to herein as the "Optional Termination Date." In the event that the
option is exercised, the repurchase will be made at a price (the "Termination
Price") generally equal to the greater of par or the fair market value of the
Mortgage Loans and REO Properties, in each case plus accrued interest for each
Mortgage Loan at the related Loan Rate to but not including the first day of the
month in which such repurchase price is paid plus the amount of any unreimbursed
Advances and Servicing Advances made by the Master Servicer plus any amounts due
to the Certificate Insurer under the Insurance Agreement plus the unpaid Net WAC
Cap Carryover Amount, if any (provided, however, that the Policy will not cover
such Net WAC Cap Carryover Amount). Proceeds from such repurchase will be
included in Available Funds and will be distributed to the holders of the
Certificates in accordance with the Pooling Agreement. Any such repurchase of
the Mortgage Loans and REO Properties will result in the early retirement of the
Certificates. See "The Pooling Agreement--Termination; Retirement of
Certificates" in the Prospectus.
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MASTER SERVICER ALTERNATIVES TO FORECLOSURE
The Master Servicer may foreclose on any delinquent Mortgage Loan or,
subject to certain limitations set forth in the Pooling Agreement, work out an
agreement with the mortgagor, which may involve waiving or modifying any term of
the mortgage loan. The Master Servicer may also sell any Mortgage Loan that is
at least 90 days delinquent. If the Master Servicer sells any such Mortgage Loan
for less than its outstanding Principal Balance plus all prior Servicing
Advances thereon, or extends the payment period or accepts a lesser amount than
stated in the mortgage note in satisfaction of the mortgage note, your yield may
be reduced.
OPTIONAL PURCHASE OF DEFAULTED LOANS
As to any Mortgage Loan which is delinquent in payment by 90 days or more,
the Master Servicer may, at its option, purchase such Mortgage Loan from the
Trust at the Purchase Price for such Mortgage Loan; provided, however, that (i)
the Seller must first purchase the Mortgage Loan that, as of the time of such
purchase, has been delinquent for the greatest period before purchasing Mortgage
Loans that have been delinquent lesser periods, and (ii) the Seller may not
purchase delinquent Mortgage Loans that, together with all previously purchased
delinquent Mortgage Loans, have an aggregate principal balance in excess of
_____% of the aggregate Cut-off Date Principal Balance of the Mortgage Loans
without the consent of the Certificate Insurer.
INITIAL TERM OF MASTER SERVICER AND EXTENSIONS OF TERM
The Master Servicer will act as Master Servicer for an initial term from
the Closing Date to ______________, which term will be extendable by the
Certificate Insurer for successive terms of three (3) calendar months
thereafter, until the termination of the Trust. Each notice of extension (a
"Master Servicer Extension Notice") will be delivered by the Certificate Insurer
to the Trustee and the Master Servicer. The Master Servicer will, upon its
receipt of any such Master Servicer Extension Notice, become bound for the
duration of the term covered by such Master Servicer Extension Notice to
continue as Master Servicer in accordance with the Pooling Agreement. If as of
the 15th day prior to the last day of any term of the Master Servicer, the
Trustee shall not have received any Master Servicer Extension Notice from the
Certificate Insurer, the Trustee will, within five (5) days thereafter, give
written notice of such non-receipt to the Certificate Insurer and the Master
Servicer. The Certificate Insurer will have certain rights to terminate the
Master Servicer as set forth in the Pooling Agreement.
EVENTS OF DEFAULT
In addition to those Events of Default described under "The Pooling
Agreement--Events of Default" in the Prospectus, upon the occurrence of certain
loss and delinquency triggers with respect to the Mortgage Loans or upon the
occurrence of certain other defaults set forth in the Pooling Agreement, the
Master Servicer may be removed as Master Servicer in accordance with the terms
of the Pooling Agreement and the Insurance Agreement.
CERTAIN MATTERS REGARDING THE CERTIFICATE INSURER
Pursuant to the terms of the Pooling Agreement, unless there exists an
Insurer Default, the Certificate Insurer will be entitled to exercise, among
others, the following rights of the holders of the Offered Certificates, without
the consent of such holders, and the holders of the Offered Certificates may
exercise such rights only with the prior written consent of the Certificate
Insurer: (i) the right to direct the Trustee to terminate the rights and
obligations of the Master Servicer; (ii) the right to consent or to direct any
waivers of defaults by the Master Servicer; (iii) the right to remove the
Trustee pursuant to the Pooling Agreement; and (iv) the right to institute
proceedings against the Master Servicer in the event of default by the Master
Servicer and refusal of the Trustee to institute such proceedings. In addition,
unless an Insurer Default exists, the Certificate Insurer will have the right to
direct all matters relating to any proceeding seeking the avoidance as a
preferential transfer under applicable bankruptcy, insolvency, receivership or
similar law of any distribution made with respect to the Offered Certificates,
and, unless an Insurer Default exists, the Certificate Insurer's consent will be
required prior to, among other things, (i) the removal of the Trustee, (ii) the
appointment of any successor Trustee or Master Servicer or (iii) any amendment
to the Pooling Agreement.
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DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates will be issued pursuant to the Pooling Agreement. Set
forth below are summaries of the specific terms and provisions pursuant to which
the Offered Certificates will be issued. The following summaries do not purport
to be complete and are subject to, and are qualified in their entirety by
reference to, the provisions of the Pooling Agreement. When particular
provisions or terms used in the Pooling Agreement are referred to, the actual
provisions (including definitions of terms) are incorporated by reference.
Option One Mortgage Loan Trust __________ will issue the Class A
Certificates (the "Class A Certificates"), the Class P Certificates and the
Class R Certificates (the "Residual Certificates"). The Class A Certificates,
the Class P Certificates and the Residual Certificates are collectively referred
to herein as the "Certificates." Only the Class A Certificates are offered
hereby (the "Offered Certificates").
The Class A Certificates will be covered by an irrevocable and
unconditional certificate guaranty insurance policy (the "Policy") issued by
__________________ (the "Certificate Insurer") for the benefit of the holders of
the Class A Certificates, pursuant to which the Certificate Insurer will
guarantee payments to such Certificateholders as described herein.
The Offered Certificates will have the respective Original Certificate
Principal Balances specified on the cover hereof, subject to a permitted
variance of plus or minus one percent. The Class P Certificates will have an
original Certificate Principal Balance of $_____ and will not bear interest. The
Class P Certificates will be entitled to all prepayment premiums received in
respect of the Mortgage Loans and such amounts will not be available for
distribution to the holders of the Offered Certificates. The Class R
Certificates will not have Original Certificate Principal Balances and will not
bear interest, but will be entitled to Senior Residual Distribution Amounts and
other amounts, payable in the priorities described under "- Allocation of
Available Funds" below.
The Offered Certificates will be issued in book-entry form as described
below. The Offered Certificates will be issued in minimum dollar denominations
of $50,000 and integral multiples of $1,000 in excess thereof (except that one
certificate of each Class may be issued in a denomination which is not an
integral multiple of $1,000). The assumed final maturity date (each, an "Assumed
Final Distribution Date") for the Offered Certificates is ___________.
Distributions on the Offered Certificates will be made by the Trustee on
the 25th day of each month, or if such day is not a Business Day, on the first
Business Day thereafter, commencing in __________ (each, a "Distribution Date"),
to the persons in whose names such Certificates are registered at the close of
business on the Record Date. The "Record Date" is the business day immediately
preceding such Distribution Date; provided, however, that if any Certificate
becomes a Definitive Certificate (as defined herein), the Record Date for such
Certificate will be the last business day of the month immediately preceding the
month in which the related Distribution Date occurs.
BOOK-ENTRY CERTIFICATES
The Offered Certificates will be book-entry Certificates (the "Book-Entry
Certificates"). Persons acquiring beneficial ownership interests in the Offered
Certificates ("Certificate Owner") will hold such Certificates through The
Depository Trust Company ("DTC") in the United States, or Cedelbank or Euroclear
(in Europe) if they are participants of such systems, or indirectly through
organizations which are participants in such systems. The Book-Entry
Certificates will be issued in one or more certificates which equal the
aggregate Certificate Principal Balance of such Certificates and will initially
be registered in the name of Cede & Co., the nominee of DTC. Cedelbank and
Euroclear will hold omnibus positions on behalf of their participants through
customers' securities accounts in Cedelbank's and Euroclear's names on the books
of their respective depositaries which in turn will hold such positions in
customers' securities accounts in the depositaries' names on the books of DTC.
Citibank will act as depositary for Cedelbank and The Chase Manhattan Bank will
act as depositary for Euroclear (in such capacities, individually the "Relevant
Depositary" and collectively the "European Depositaries"). Investors may hold
such beneficial interests in the Book-Entry Certificates in minimum
denominations of $50,000. Except as described below, no person acquiring a
Book-Entry Certificate
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(each, a "beneficial owner") will be entitled to receive a physical certificate
representing such Certificate (a "Definitive Certificate"). Unless and until
Definitive Certificates are issued, it is anticipated that the only
"Certificateholder" of the Offered Certificates will be Cede & Co., as nominee
of DTC. Certificate Owners will not be Certificateholders as that term is used
in the Pooling Agreement. Certificate Owners are only permitted
to exercise their rights indirectly through Participants and DTC.
The beneficial owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
beneficial owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the beneficial owner's Financial Intermediary is not a DTC participant and on
the records of Cedelbank or Euroclear, as appropriate).
Certificate Owners will receive all distributions of principal of and
interest on the Book-Entry Certificates from the Trustee through DTC and DTC
participants. While the Book-Entry Certificates are outstanding (except under
the circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC is required to
make book-entry transfers among Participants on whose behalf it acts with
respect to the Book-Entry Certificates and is required to receive and transmit
distributions of principal of, and interest on, the Book-Entry Certificates.
Participants and indirect participants with whom Certificate Owners have
accounts with respect to Book-Entry Certificates are similarly required to make
book-entry transfers and receive and transmit such distributions on behalf of
their respective Certificate Owners. Accordingly, although Certificate Owners
will not possess certificates representing their respective interests in the
Book-Entry Certificates, the Rules provide a mechanism by which Certificate
Owners will receive distributions and will be able to transfer their interest.
Certificateholders will not receive or be entitled to receive certificates
representing their respective interests in the Book-Entry Certificates, except
under the limited circumstances described below. Unless and until Definitive
Certificates are issued, Certificateholders who are not Participants may
transfer ownership of Book-Entry Certificates only through Participants and
indirect participants by instructing such Participants and indirect participants
to transfer Book-Entry Certificates, by book-entry transfer, through DTC for the
account of the purchasers of such Book-Entry Certificates, which account is
maintained with their respective Participants. Under the Rules and in accordance
with DTC's normal procedures, transfers of ownership of Book-Entry Certificates
will be executed through DTC and the accounts of the respective Participants at
DTC will be debited and credited. Similarly, the Participants and indirect
participants will make debits or credits, as the case may be, on their records
on behalf of the selling and purchasing Certificateholders.
Because of time zone differences, credits of securities received in
Cedelbank or Euroclear as a result of a transaction with a Participant will be
made during subsequent securities settlement processing and dated the business
day following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or Cedelbank Participants on such business day. Cash received in
Cedelbank or Euroclear as a result of sales of securities by or through a
Cedelbank Participant (as defined below) or Euroclear Participant (as defined
below) to a DTC Participant will be received with value on the DTC settlement
date but will be available in the relevant Cedelbank or Euroclear cash account
only as of the business day following settlement in DTC. For information with
respect to tax documentation procedures relating to the Certificates, see
"Federal Income Tax Consequences--REMICS--Backup Withholding With Respect to
REMIC Certificates" and "--Foreign Investors in REMIC Certificates" in the
Prospectus and "Global Clearance, Settlement and Tax Documentation
Procedures--Certain U.S. Federal Income Tax Documentation Requirements" in Annex
I hereto.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between Cedelbank Participants and Euroclear Participants will occur
in accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedelbank
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the
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relevant European international clearing system by the counterparty in such
system in accordance with its rules and procedures and within its established
deadlines (European time). The relevant European international clearing system
will, if the transaction meets its settlement requirements, deliver instructions
to the Relevant Depositary to take action to effect final settlement on its
behalf by delivering or receiving securities in DTC, and making or receiving
payment in accordance with normal procedures for same day funds settlement
applicable to DTC. Cedelbank Participants and Euroclear Participants may not
deliver instructions directly to the European Depositaries.
DTC which is a New York-chartered limited purpose trust company, performs
services for its participants, some of which (and/or their representatives) own
DTC. In accordance with its normal procedures, DTC is expected to record the
positions held by each DTC participant in the Book-Entry Certificates, whether
held for its own account or as a nominee for another person. In general,
beneficial ownership of Book-Entry Certificates will be subject to the Rules, as
in effect from time to time.
Cedelbank ("Cedelbank"), 67 Bd Grande-Duchesse Charlotte, L-1331
Luxembourg, was incorporated in 1970 as a limited company under Luxembourg law.
Cedelbank is owned by banks, securities dealers and financial institutions, and
currently has about 100 shareholders, including U.S. financial institutions or
their subsidiaries. No single entity may own more than five percent of
Cedelbank's stock.
Cedelbank is registered as a bank in Luxembourg, and as such is subject to
regulation by the Institute Monetaire Luxembourgeois, "IML," the Luxembourg
Monetary Authority, which supervises Luxembourg banks.
Cedelbank holds securities for its customers ("Cedelbank Participants") and
facilitates the clearance and settlement of securities transactions by
electronic book-entry transfers between their accounts. Cedelbank provides
various services, including safekeeping, administration, clearance and
settlement of internationally traded securities and securities lending and
borrowing. Cedelbank also deals with domestic securities markets in several
countries through established depository and custodial relationships. Cedelbank
has established an electronic bridge with Morgan Guaranty Trust as the Euroclear
Operator in Brussels to facilitate settlement of trades between systems.
Cedelbank currently accepts over 70,000 securities issues on its books.
Cedelbank's customers are world-wide financial institutions including
underwriters, securities brokers and dealers, banks, trust companies and
clearing corporations. Cedelbank's United States customers are limited to
securities brokers and dealers and banks. Currently, Cedelbank has approximately
3,000 customers located in over 60 countries, including all major European
countries, Canada, and the United States. Indirect access to Cedelbank is
available to other institutions which clear through or maintain a custodial
relationship with an account holder of Cedelbank.
The Euroclear System ("Euroclear") was created in 1968 to hold securities
for its participants ("Euroclear Participants") and to clear and settle
transactions between Euroclear Participants through simultaneous electronic
book-entry delivery against payment, thereby eliminating the need for physical
movement of certificates and any risk from lack of simultaneous transfers of
securities and cash. Transactions may be settled in any of 29 currencies,
including United States dollars. Euroclear includes various other services,
including securities lending and borrowing and interfaces with domestic markets
in several countries generally similar to the arrangements for cross-market
transfers with DTC described above. Euroclear is operated by the Brussels,
Belgium office of Morgan Guaranty Trust Company of New York (the "Euroclear
Operator"), under contract with Euroclear Clearance Systems S.C., a Belgian
cooperative corporation (the "Cooperative"). All operations are conducted by the
Euroclear Operator, and all Euroclear securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear Operator, not the
Cooperative. The Cooperative establishes policy for Euroclear on behalf of
Euroclear Participants. Euroclear Participants include banks (including central
banks), securities brokers and dealers and other professional financial
intermediaries. Indirect access to Euroclear is also available to other firms
that clear through or maintain a custodial relationship with a Euroclear
Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
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Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions on the Book-Entry Certificates will be made on each
Distribution Date by the Trustee to DTC. DTC will be responsible for crediting
the amount of such payments to the accounts of the applicable DTC participants
in accordance with DTC's normal procedures. Each DTC participant will be
responsible for disbursing such payments to the beneficial owners of the
Book-Entry Certificates that it represents and to each Financial Intermediary
for which it acts as agent. Each such Financial Intermediary will be responsible
for disbursing funds to the beneficial owners of the Book-Entry Certificates
that it represents.
Under a book-entry format, beneficial owners of the Book-Entry Certificates
may experience some delay in their receipt of payments, since such payments will
be forwarded by the Trustee to Cede & Co. Distributions with respect to
Certificates held through Cedelbank or Euroclear will be credited to the cash
accounts of Cedelbank Participants or Euroclear Participants in accordance with
the relevant system's rules and procedures, to the extent received by the
Relevant Depositary. Such distributions will be subject to tax reporting in
accordance with relevant United States tax laws and regulations. See "Federal
Income Tax Consequences--REMICS--Backup Withholding With Respect to REMIC
Certificates" and "--Foreign Investors in REMIC Certificates" in the Prospectus.
Because DTC can only act on behalf of Financial Intermediaries, the ability of a
beneficial owner to pledge Book-Entry Certificates to persons or entities that
do not participate in the Depository system, or otherwise take actions in
respect of such Book-Entry Certificates, may be limited due to the lack of
physical certificates for such Book-Entry Certificates. In addition, issuance of
the Book-Entry Certificates in book-entry form may reduce the liquidity of such
Certificates in the secondary market since certain potential investors may be
unwilling to purchase Certificates for which they cannot obtain physical
certificates.
Monthly and annual reports on the Trust will be provided to Cede & Co., as
nominee of DTC, and may be made available by Cede & Co. to beneficial owners
upon request, in accordance with the rules, regulations and procedures creating
and affecting the Depository, and to the Financial Intermediaries to whose DTC
accounts the Book-Entry Certificates of such beneficial owners are credited.
DTC has advised the Trustee that, unless and until Definitive Certificates
are issued, DTC will take any action permitted to be taken by the holders of the
Book-Entry Certificates under the Pooling Agreement only at the direction of one
or more Financial Intermediaries to whose DTC accounts the Book-Entry
Certificates are credited, to the extent that such actions are taken on behalf
of Financial Intermediaries whose holdings include such Book-Entry Certificates.
Cedelbank or the Euroclear Operator, as the case may be, will take any other
action permitted to be taken by a Certificateholder under the Pooling Agreement
on behalf of a Cedelbank Participant or Euroclear Participant only in accordance
with its relevant rules and procedures and subject to the ability of the
Relevant Depositary to effect such actions on its behalf through DTC. DTC may
take actions, at the direction of the related Participants, with respect to some
Book-Entry Certificates which conflict with actions taken with respect to other
Book-Entry Certificates.
Definitive Certificates will be issued to beneficial owners of the
Book-Entry Certificates, or their nominees, rather than to DTC, only if (a) DTC
or the Depositor advises the Trustee in writing that DTC is no longer willing,
qualified or able to discharge properly its responsibilities as nominee and
depository with respect to the Book-Entry Certificates and the Depositor or the
Trustee is unable to locate a qualified successor, (b) the Depositor, at its
sole option, with the consent of the Trustee, elects to terminate a book-entry
system through DTC or (c) after the occurrence of an Event of Default,
beneficial owners having Percentage Interests aggregating not less than 51% of
the Book-Entry Certificates advise the Trustee and DTC through the Financial
Intermediaries and the DTC participants in writing that the continuation of a
book-entry system through DTC (or a successor thereto) is no longer in the best
interests of beneficial owners.
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Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all beneficial
owners of the occurrence of such event and the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Certificates and instructions for
re-registration, the Trustee will issue Definitive Certificates, and thereafter
the Trustee will recognize the holders of such Definitive Certificates as
Certificateholders under the Pooling Agreement.
Although DTC, Cedelbank and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Book-Entry Certificates among
participants of DTC, Cedelbank and Euroclear, they are under no obligation to
perform or continue to perform such procedures and such procedures may be
discontinued at any time.
Neither the Depositor, the Master Servicer nor the Trustee will have any
responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the Book-Entry Certificates held by
Cede & Co., as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
DTC management is aware that some computer applications, systems, and the
like for processing date ("Systems") that are dependent upon calendar dates,
including dates before, on, and after January 1, 2000, may encounter "Year 2000
problems." DTC has informed its Participants and other members of the financial
community (the "Industry") that it has developed and is implementing a program
so that its Systems, as the same relate to the timely payment of distributions
(including principal and income payments) to securityholders, book-entry
deliveries, and settlement of trades within DTC ("DTC Services"), continue to
function appropriately. This program includes a technical assessment and a
remediation plan, each of which is complete. Additionally, DTC's plan includes a
testing phase, which is expected to be completed within appropriate time frames.
However, DTC's ability to perform properly its services is also dependent
upon other parties, including but not limited to issuers and their agents, as
well as third party vendors from whom DTC licenses software and hardware, and
third party vendors on whom DTC relies for information of the provision of
services, including telecommunication and electrical utility service providers,
among others. DTC has informed the Industry that it is contacting (and will
continue to contact) third party vendors from whom DTC acquires services to: (i)
impress upon them the importance of such services being year 2000 compliant; and
(ii) determine the extent of their efforts for Year 2000 remediation (and, as
appropriate, testing) of their services. In addition, DTC is in the process of
developing such contingency plans as it deems appropriate.
According to DTC, the foregoing information with respect to DTC has been
provided to the Industry for informational purposes only and is not intended to
serve as a representation, warranty, or contract modification of any kind.
ALLOCATION OF AVAILABLE FUNDS
Distributions to holders of the Offered Certificates will be made on each
Distribution Date from Available Funds. "Available Funds" for any Distribution
Date will be equal to the sum of the following amounts with respect to the
Mortgage Loans, net of amounts reimbursable therefrom to the Master Servicer:
(i) the aggregate amount of monthly payments on the Mortgage Loans due on the
related Due Date and received by the Trustee on the 20th day of the month (or,
if such day is not a Business Day, the next succeeding Business Day), after
deduction of the Servicing Fee for such Distribution Date and any accrued and
unpaid Servicing Fees in respect of any prior Distribution Dates, (ii) certain
unscheduled payments in respect of the Mortgage Loans, including prepayments,
insurance proceeds, Net Liquidation Proceeds and proceeds from repurchases of
and substitutions for such Mortgage Loans occurring during the related
Prepayment Period, excluding prepayment premiums, (iii) payments from the Master
Servicer in connection with Advances and Prepayment Interest Shortfalls for such
Distribution Date and (iv) any interest for the Offered Certificates paid under
the Policy plus amounts paid under the Policy in respect of principal. The
holders of the Class P Certificates will be entitled to all prepayment premiums
received on the Mortgage Loans and such amounts will not be available for
distribution to the holders of the Offered Certificates.
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On each Distribution Date the Trustee shall withdraw from the Distribution
Account Available Funds, and make the following disbursements and transfers in
the order of priority described below and to the extent of Available Funds.
(A) The Available Funds will be distributed in the following order of
priority:
(i) to the Certificate Insurer, the amount owing to the Certificate Insurer
under the Insurance Agreement for the premium payable in respect of the Class A
Certificates;
(ii) (A) to the holders of the Class A Certificates, the Interest
Distributable Amount;
(iii) to the Certificate Insurer, the amount owing to the Certificate
Insurer under the Insurance Agreement for reimbursement for prior draws made on
the Policy in respect of the Class A Certificates and any other amounts owing to
the Certificate Insurer under the Insurance Agreement with respect to the Class
A Certificates;
(iv) to the holders of the Class A Certificates, an amount equal to the
Basic Principal Distribution Amount; and
(v) to the holders of the Class A Certificates, an amount equal to the
Extra Principal Distribution Amount.
(B) On each Distribution Date, any remaining amounts after giving effect to
the distributions specified in clause (A) above will be distributed to the
holders of the Class A Certificates to pay the Net WAC Cap Carryover Amount, if
any.
(C) On each Distribution Date, any remaining amounts after giving effect to
the distributions specified in clauses (A) and (B) above will be paid to the
holders of the Residual Certificates; provided that if such Distribution Date is
a Distribution Date following the latest date on which a prepayment premium may
be required to be paid on any Mortgage Loan, then any such remaining amounts
will be distributed FIRST, to the holders of the Class P Certificates, until the
Certificate Principal Balance thereof has been reduced to zero; and SECOND, to
the holders of the Residual Certificates.
DEFINITIONS
The "Accrual Period" for the Certificates for a given Distribution Date
will be the actual number of days (based on a 360-day year) included in the
period commencing on the immediately preceding Distribution Date and ending on
the day immediately preceding the current Distribution Date; provided, however,
that the initial Accrual Period for the Certificates will be the actual number
of days included in the period commencing on the Closing Date and ending on
__________.
The "Basic Principal Distribution Amount" means with respect any
Distribution Date the excess of (i) the Principal Remittance Amount for such
Distribution Date over (ii) the Overcollateralization Release Amount, if any,
for such Distribution Date.
The "Certificate Principal Balance" of any Class of Certificates
immediately prior to any Distribution Date will be equal to the Certificate
Principal Balance thereof on the Closing Date (the "Original Certificate
Principal Balance") reduced by the sum of all amounts actually distributed in
respect of principal of such Class on all prior Distribution Dates.
A Mortgage Loan is "Delinquent" if any monthly payment due on a Due Date is
not made by the close of business on the next scheduled Due Date for such
Mortgage Loan. A Mortgage Loan is "30 days Delinquent" if such monthly payment
has not been received by the close of business on the corresponding day of the
month immediately succeeding the month in which such monthly payment was due or,
if there was no such corresponding day (E.G., as when a 30-day month follows a
31-day month in which a payment was due on the 31st day of such month), then on
the last day of such immediately succeeding month; and similarly for "60 days
Delinquent" and "90 days Delinquent," etc.
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A "Due Period" with respect to any Distribution Date is the period
commencing on the second day of the month preceding the month in which such
Distribution Date occurs and ending on the first day of the month in which such
Distribution Date occurs.
The "Extra Principal Distribution Amount" with respect to any Distribution
Date, is the lesser of (x) the General Excess Available Amount for such
Distribution Date and (y) the Overcollateralization Deficiency Amount for such
Distribution Date.
The "General Excess Available Amount" means with respect to each
Distribution Date, the amount, if any, by which the Available Funds for such
Distribution Date exceeds the aggregate amount distributed on such Distribution
Date pursuant to subclauses (i) through (iv) of clause (A) under "--Allocation
of Available Funds" above.
The "Interest Distributable Amount" for any Distribution Date equals the
sum of (i) the Monthly Interest Distributable Amount for such Distribution Date
and (ii) the Unpaid Interest Shortfall Amount for such Distribution Date.
An "Insurer Default" will occur in the event the Certificate Insurer fails
to make a payment under the Policy or if certain events of bankruptcy or
insolvency occur with respect to the Certificate Insurer.
The "Monthly Interest Distributable Amount" for any Distribution Date
equals the amount of interest accrued during the related Accrual Period at the
related Pass-Through Rate on the Certificate Principal Balance of such Class
immediately prior to such Distribution Date reduced by any Prepayment Interest
Shortfalls to the extent not covered by Compensating Interest paid by the Master
Servicer and shortfalls resulting from the application of the Relief Act.
The "OC Stepdown Date" means the later to occur of (x) the Distribution
Date in [month\year] and (y) the first Distribution Date on which (i) the
related Overcollateralization Target Amount has been met and (ii) the Pool
Balance has been reduced to ___% or less of the Pool Balance as of the Cut-off
Date.
An "Overcollateralization Deficiency Amount" with respect to any
Distribution Date equals the amount, if any, by which the related
Overcollateralization Target Amount exceeds the related Overcollateralized
Amount on such Distribution Date (after giving effect to distributions in
respect of the related Basic Principal Distribution Amount on such Distribution
Date).
"Overcollateralization Deficit" with respect to any Distribution Date is
equal to the aggregate Certificate Principal Balance of the Class A Certificates
and the Class P Certificates then outstanding over (b) the aggregate principal
balances of the Mortgage Loans then outstanding.
"Overcollateralization Release Amount" means, with respect to any
Distribution Date, the lesser of (x) the Principal Remittance Amount for such
Distribution Date and (y) the excess, if any, of (i) the Overcollateralized
Amount for such Distribution Date (assuming that 100% of the Principal
Remittance Amount is applied as a principal payment on such Distribution Date)
over (ii) the Overcollateralization Target Amount for such Distribution Date.
The "Overcollateralization Target Amount" means with respect to any
Distribution Date a specified level of overcollateralization determined in
accordance with the Pooling Agreement.
The "Overcollateralized Amount" for any Distribution Date is the amount, if
any, by which (i) the aggregate principal balance of the Mortgage Loans on the
related Determination Date exceeds (ii) the Certificate Principal Balance as of
such Distribution Date after giving effect to distributions to be made on such
Distribution Date.
The "Prepayment Period" for any Distribution Date is the period commencing
on the day after the Determination Date in the month preceding the month in
which such Distribution Date falls (or, in the case of the first Distribution
Date, from the Cut-off Date) and ending on the Determination Date of the
calendar month in which such Distribution Date falls.
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The "Principal Distribution Amount" for any Distribution Date will equal
the sum of (i) the Basic Principal Distribution Amount for such Distribution
Date and (ii) the Extra Principal Distribution Amount for such Distribution
Date.
The "Principal Remittance Amount" means with respect to any Distribution
Date, the sum of (i) each scheduled payment of principal collected or advanced
on the Mortgage Loans by the Master Servicer that were due during the related
Due Period, (ii) the principal portion of all partial and full principal
prepayments of such Mortgage Loans applied by the Master Servicer during such
Prepayment Period, (iii) the principal portion of all related Net Liquidation
Proceeds and Insurance Proceeds received during such Prepayment Period, (iv)
that portion of the Purchase Price, representing principal of any repurchased
Mortgage Loan, deposited to the Collection Account during such Prepayment
Period, (v) the principal portion of any related Substitution Adjustments
deposited in the Collection Account during such Prepayment Period, and (vi) on
the Distribution Date on which the Trust is to be terminated in accordance with
the Pooling Agreement, that portion of the Termination Price.
"Realized Loss" means, with respect to any defaulted Mortgage Loan that is
finally liquidated (a "Liquidated Mortgage Loan"), the amount of loss realized
equal to the portion of the Principal Balance remaining unpaid after application
of all liquidation proceeds net of amounts reimbursable to the Master Servicer
for related Advances, Servicing Advances and Servicing Fees (such amount, the
"Net Liquidation Proceeds") in respect of such Mortgage Loan.
The "Unpaid Interest Shortfall Amount" means (i) for the Offered
Certificates and the first Distribution Date, zero, and (ii) with respect to the
Offered Certificates and any Distribution Date after the first Distribution
Date, the amount, if any, by which (a) the sum of (1) the Monthly Interest
Distributable Amount for such Class for the immediately preceding Distribution
Date and (2) the outstanding Unpaid Interest Shortfall Amount, if any, for such
Class for such preceding Distribution Date exceeds (b) the aggregate amount
distributed on such Class in respect of interest pursuant to clause (a) of this
definition on such preceding Distribution Date, plus interest on the amount of
interest due but not paid on the Certificates of such Class on such preceding
Distribution Date, to the extent permitted by law, at the Pass-Through Rate for
such Class for the related Accrual Period.
PASS-THROUGH RATES
The "Pass-Through Rate" on any Distribution Date with respect to the
Offered Certificates will equal the lesser of (a) the Formula Rate and (b) the
Net WAC Cap for such Distribution Date. With respect to the Offered
Certificates, interest in respect of any Distribution Date will accrue during
the related Accrual Period on the basis of a 360-day year and the actual number
of days elapsed. The "Formula Rate" is the lesser of (a) the sum of the
interbank offered rate for one-month United States dollar deposits in the London
market (the "Certificate Index") as of the related LIBOR Determination Date (as
defined herein) plus a margin (the "Certificate Margin") or (b) the Maximum Cap.
The Certificate Margin on each Distribution Date on or prior to the Optional
Termination Date will equal ______% and on each Distribution Date after the
Optional Termination Date, the Certificate Margin will equal _____%.
The "Net WAC Cap" for any Distribution Date shall be a per annum rate
(subject to adjustment based on the actual number of days elapsed in the related
Accrual Period) equal to the difference between (A) the average of the Mortgage
Rates of the Mortgage Loans as of the first day of the month preceding the month
of such Distribution Date, weighted on the basis of the related Principal
Balances as of such date and (B) the sum of (i) the Servicing Fee Rate and (ii)
the rate at which the premium payable to the Certificate Insurer is calculated
multiplied by a fraction the numerator of which is the Certificate Principal
Balance of the related Class of Certificates immediately prior to such
Distribution Date and the denominator of which is the aggregate Principal
Balance of the Mortgage Loans as of the first day of the month preceding the
month of such Distribution Date and (iv) 0.50%.
If on any Distribution Date, the Pass-Through Rate for the Offered
Certificates is the Net WAC Cap, the excess of (i) the amount of interest such
Class of Certificates would have been entitled to receive on such Distribution
Date had such Pass-Through Rate not been subject to the Net WAC Cap, over (ii)
the amount of interest such Class of Certificates accrued for such Distribution
Date at the Net WAC Cap, together with the unpaid portion of any such excess
from prior Distribution Dates (and interest accrued thereon at the then
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applicable Pass-Through Rate on such Class of Certificates, without giving
effect to the Net WAC Cap) is the "Net WAC Cap Carryover Amount." Any Net WAC
Cap Carryover Amount on the Offered Certificates will be paid on future
Distribution Dates from and to the extent of funds available therefor. See "-
Allocation of Available Funds" above. The Policy does not cover the payment, nor
do the ratings assigned to the Class A Certificates address the likelihood of
the payment, of any Net WAC Cap Carryover Amount.
The "Maximum Cap" for any Distribution Date is a per annum rate (subject to
adjustment based on the actual number of days elapsed in the related Accrual
Period) equal to the weighted average of the Maximum Loan Rates Mortgage Loans
as of the first day of the month preceding the month of such Distribution Date
less the sum of (i) the Servicing Fee Rate and (ii) the rate at which the
premium payable to the Certificate Insurer is calculated multiplied by a
fraction the numerator of which is the Certificate Principal Balance of the
Class A Certificates immediately prior to such Distribution Date and the
denominator of which is the aggregate Principal Balance of the Mortgage Loans as
of the first day of the month preceding the month of such Distribution Date and
(iv) 0.50%.
CALCULATION OF ONE-MONTH LIBOR
On the second LIBOR Business Day (as defined below) preceding the
commencement of each Accrual Period following the initial Accrual Period (each
such date, a "LIBOR Determination Date"), the Trustee (except for the first
Accrual Period) will determine the Certificate Index for such Accrual Period for
the Class A Certificates on the basis of the London interbank offered rate for
one-month United States dollar deposits, as such rates appear on the Telerate
Page 3750, as of 11:00 a.m. (London time) on such LIBOR Determination Date. If
such rate does not appear on Telerate Page 3750, the rate for that day will be
determined on the basis of the offered rates of the Reference Banks (as defined
herein) for one-month United States dollar deposits, as of 11:00 a.m. (London
time) on such LIBOR Determination Date. The Trustee will request the principal
London office of each of the Reference Banks to provide a quotation of its rate.
If on such LIBOR Determination Date two or more Reference Banks provide such
offered quotations, the Certificate Index for the related Accrual Period will be
the arithmetic mean of such offered quotations (rounded upwards if necessary to
the nearest whole multiple of 0.0625%). If on such LIBOR Determination Date
fewer than two Reference Banks provide such offered quotations, the Certificate
Index for the related Accrual Period shall be the higher of (x) the Certificate
Index as determined on the previous LIBOR Determination Date and (y) the Reserve
Interest Rate (as defined herein).
On the Closing Date, the Certificate Index for the initial Accrual Period
will be determined by the Trustee on the second LIBOR Business Day preceding the
Closing Date.
As used in this section, "LIBOR Business Day" means a day on which banks
are open for dealing in foreign currency and exchange in London and New York
City; "Telerate Page 3750" means the display page currently so designated on the
Dow Jones Telerate Capital Markets Report (or such other page as may replace
that page on that service for the purpose of displaying comparable rates or
prices); "Reference Banks" means leading banks selected by the Trustee and
engaged in transactions in Eurodollar deposits in the international Eurocurrency
market (i) with an established place of business in London, (ii) which have been
designated as such by the Trustee and (iii) not controlling, controlled by or
under common control with, the Depositor, the Master Servicer or any successor
Master Servicer or the Seller; and "Reserve Interest Rate" shall be the rate per
annum that the Trustee determines to be either (i) the arithmetic mean (rounded
upwards if necessary to the nearest whole multiple of 0.0625%) of the one-month
United States dollar lending rates which New York City banks selected by the
Trustee are quoting on the relevant LIBOR Determination Date to the principal
London offices of leading banks in the London interbank market or (ii) in the
event that the Trustee can determine no such arithmetic mean, the lowest
one-month United States dollar lending rate which New York City banks selected
by the Trustee are quoting on such LIBOR Determination Date to leading European
banks.
The establishment of the Certificate Index on each LIBOR Determination Date
by the Trustee and the Trustee's calculation of the rate of interest applicable
to the Class A Certificates for the related Accrual Period will (in the absence
of manifest error) be final and binding.
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THE POLICY
The following summary of the terms of the Policy does not purport to be
complete and is qualified in its entirety by reference to the Policy. A form of
the Policy may be obtained, upon request, from the Depositor.
Simultaneously with the issuance of the Offered Certificates, the
Certificate Insurer will deliver the Policy to the Trustee for the benefit of
the holders of the Offered Certificates. Under the Policy, the Certificate
Insurer will irrevocably and unconditionally guarantee payment to the Trustee on
behalf of the Trust on each Distribution Date for the benefit of the holders of
the Offered Certificates, the full and complete payment of Insured Payments with
respect to the Offered Certificates calculated in accordance with the original
terms of the Offered Certificates when issued and without regard to any
amendment or modification of the Offered Certificates or the Pooling Agreement
except amendments or modifications to which the Certificate Insurer has given
its prior written consent. "Insured Payments" shall mean with respect to the
Offered Certificates as of any Distribution Date, the sum of (i) any shortfall
in amounts available in the Distribution Account (as defined in the Pooling
Agreement) to pay the Interest Distributable Amount on such Certificates for the
related Accrual Period, (ii) the excess, if any, of (a) the aggregate
Certificate Principal Balance of the Offered Certificates then outstanding over
(b) the aggregate principal balances of the Mortgage Loans then outstanding and
(iii) without duplication of the amount specified in clause (ii), the aggregate
Certificate Principal Balance of the Offered Certificates to the extent unpaid
on the final Distribution Date or the earlier termination of the Trust pursuant
to the terms of the Pooling Agreement. Notwithstanding the foregoing, the
Certificate Insurer has the right (but not the obligation) to make payments in
respect of Realized Losses at any time. The Policy does not cover Relief Act
Shortfalls, Prepayment Interest Shortfalls or Net WAC Cap Carryover Amounts.
Payment of claims under the Policy made in respect of Insured Payments will
be made by the Certificate Insurer following Receipt by the Certificate Insurer
of the appropriate notice for payment on the later to occur of (a) 12:00 noon,
New York City time, on the second Business Day following Receipt of such notice
for payment, and (b) 12:00 noon, New York City time, on the relevant
Distribution Date.
If any Insured Payment is avoided as a preference payment under applicable
bankruptcy, insolvency, receivership or similar law, the Certificate Insurer
will pay such amount out of funds of the Certificate Insurer on the later of (a)
the date when due to be paid pursuant to the Order referred to below or (b) the
first to occur of (i) the fourth Business Day following Receipt by the
Certificate Insurer from the Trustee of (A) a certified copy of the order of the
court or other governmental body which exercised jurisdiction to the effect that
a holder of Offered Certificates is required to return principal or interest
distributed with respect to an Offered Certificate during the Term of the Policy
because such distributions were avoidable preferences under applicable
bankruptcy law (the "Order"), (B) a certificate of such holder of Offered
Certificates that the Order has been entered and is not subject to any stay, and
(C) an assignment duly executed and delivered by such holder of Offered
Certificates, in such form as is reasonably required by the Certificate Insurer
and provided to such holder of Offered Certificates by the Certificate Insurer,
irrevocably assigning to the Certificate Insurer all rights and claims of such
holder of Offered Certificates relating to or arising under the Offered
Certificates against the debtor which made such preference payment or otherwise
with respect to such preference payment, or (ii) the date of Receipt by the
Certificate Insurer from the Trustee of the items referred to in clauses (A),
(B) and (C) above if, at least four Business Days prior to such date of Receipt,
the Certificate Insurer shall have Received written notice from the Trustee that
such items were to be delivered on such date and such date was specified in such
notice. Such payment shall be disbursed to the receiver, conservator,
debtor-in-possession or trustee in bankruptcy named in the Order and not to the
Trustee or holder of Offered Certificates directly, unless a holder of Offered
Certificates has previously paid such amount to the receiver, conservator,
debtor-in- possession or trustee in bankruptcy named in the Order, in which case
such payment shall be disbursed to the Trustee for distribution to such holder
of the Offered Certificates upon proof of such payment reasonably satisfactory
to the Certificate Insurer. In connection with the foregoing, the Certificate
Insurer shall have the rights provided pursuant to the Pooling Agreement.
The terms "Receipt" and "Received," with respect to the Policy, means
actual delivery to the Certificate Insurer and to its fiscal agent appointed by
the Certificate Insurer at its option, if any, prior to 12:00 p.m., New York
City time, on a Business Day; delivery either on a day that is not a Business
Day or after 12:00 p.m., New York City time, shall be deemed to be Receipt on
the next succeeding Business Day. If any notice or certificate given under the
Policy by the Trustee is not in proper form or is not properly completed,
executed or delivered,
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it shall be deemed not to have been Received, and the Certificate Insurer or the
fiscal agent shall promptly so advise the Trustee and the Trustee may submit an
amended notice.
Under the Policy, "Business Day" means any day other than (i) a Saturday or
Sunday or (ii) a day on which banking institutions in the City of New York, New
York, the State of New York, the State of Maryland, the State of Delaware, the
State of California, the State of Minnesota, the Commonwealth of Pennsylvania or
in the city in which the corporate trust office of the Trustee is located, are
authorized or obligated by law or executive order to be closed. The Certificate
Insurer's obligations under the Policy to make Insured Payments shall be
discharged to the extent funds are transferred to the Trustee as provided in the
policy, whether or not such funds are properly applied by the Trustee.
"Term of the Policy" means the period from and including the date of
issuance of the Policy to and including the date on which the Certificate
Principal Balances of the Offered Certificates are reduced to zero, plus such
additional period, to the extent specified in the Policy, during which any
payment on the Offered Certificates could be avoided in whole or in part as a
preference payment.
The Certificate Insurer shall be subrogated to the rights of the holders of
the Offered Certificates to receive payments on principal and interest, as
applicable, with respect to distributions on such Certificates to the extent of
any payment by the Certificate Insurer under the Policy. To the extent the
Certificate Insurer makes Insured Payments, either directly or indirectly (as by
paying through the Trustee), to the holders of the Offered Certificates, the
Certificate Insurer will be subrogated to the rights of the holders of the
Offered Certificates, as applicable, with respect to such Insured Payment and
shall be deemed to the extent of the payments so made to be a registered holder
of the Offered Certificates for purposes of payment.
Claims under the Policy constitute direct unsecured and unsubordinated
obligations of the Certificate Insurer, and will rank not less than PARI PASSU
with any other unsecured and unsubordinated indebtedness of the Certificate
Insurer except for certain obligations in respect to tax and other payments to
which preference is or may become afforded by statute. The terms of the Policy
cannot be modified, altered or affected by any other agreement or instrument, or
by the merger, consolidation or dissolution of the Depositor. The Policy by its
terms may not be canceled or revoked prior to distribution in full of all
Guaranteed Distributions (as defined therein). The Policy is governed by the
laws of the State of New York. The Policy is not covered by the
property/casualty insurance security fund specified in Article 76 of the New
York Insurance Law.
To the fullest extent permitted by applicable law, the Certificate Insurer
agrees under the Policy not to assert, and waives, for the benefit of each
holder of the Offered Certificates, all its rights (whether by counterclaim,
setoff or otherwise) and defenses (including, without limitation, the defense of
fraud), whether acquired by subrogation, assignment or otherwise, to the extent
that such rights and defenses may be available to the Certificate Insurer to
avoid payment of its obligations under the Policy in accordance with the express
provisions of the Policy.
Pursuant to the terms of the Pooling Agreement, unless an Insurer Default
exists, the Certificate Insurer will be entitled to exercise certain rights of
the holders of the Offered Certificates, without the consent of such
Certificateholders, and the holders of the Offered Certificates may exercise
such rights only with the prior written consent of the Certificate Insurer. See
"Pooling Agreement--Voting Rights" and "--Certain Matters Regarding the
Certificate Insurer" herein.
The Depositor, the Master Servicer and the Certificate Insurer will enter
into an Insurance and Indemnity Agreement (the "Insurance Agreement") pursuant
to which the Depositor and the Master Servicer will agree to reimburse, with
interest, the Certificate Insurer for amounts paid pursuant to claims under the
Policy. The Depositor and the Master Servicer will further agree to pay the
Certificate Insurer all reasonable charges and expenses which the Certificate
Insurer may pay or incur relative to any amounts paid under the Policy or
otherwise in connection with the transaction and to indemnify the Certificate
Insurer against certain liabilities. Except to the extent provided therein,
amounts owing under the Insurance Agreement will be payable solely from the
Trust. An event of default by the Master Servicer under the Insurance Agreement
will constitute an Event of Default by the Master Servicer under the Pooling
Agreement and allow the Certificate Insurer, among other things, to direct the
Trustee to terminate the Master Servicer. An "event of default" by the Master
Servicer under the Insurance Agreement includes (i) the Master Servicer's
failure to pay when due any amount owed under the Insurance Agreement or certain
other documents, (ii) the Master Servicer's untruth or
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incorrectness in any material respect of any representation or warranty of the
Master Servicer in the Insurance Agreement, the Pooling Agreement (in its
capacity as Master Servicer) or certain other documents, (iii) the Master
Servicer's failure to perform or to observe any covenant or agreement in the
Insurance Agreement, the Pooling Agreement (in its capacity as Master Servicer)
and certain other documents, (iv) the Master Servicer's failure to pay its debts
in general or the occurrence of certain events of insolvency or bankruptcy with
respect to the Master Servicer and (v) the occurrence of an Event of Default
relating to the Master Servicer under the Pooling Agreement or certain other
documents.
OVERCOLLATERALIZATION
The weighted average net Loan Rate for the Mortgage Loans is generally
expected to be higher than the weighted average of the Pass-Through Rates on the
Certificates. As a result, interest collections on the Mortgage Loans are
expected to be generated in excess of the amount of interest payable to the
holders of the Offered Certificates and the fees and expenses payable by the
Trust. Such excess interest generated by the Mortgage Loans will be applied
initially to absorb Realized Losses on the Mortgage Loans and to make principal
distributions on the Offered Certificates. This acceleration feature creates
overcollateralization (i.e., the excess of the aggregate principal balance of
the Mortgage Loans over the aggregate Certificate Principal Balance of the
Certificates). Once the required level of overcollateralization is reached, and
subject to the provisions described in the next paragraph, the acceleration
feature will cease, until necessary to maintain the required level of
overcollateralization.
The aggregate principal balance of the Mortgage Loans as of the Cut-off
Date will exceed the initial aggregate Certificate Principal Balance of the
Offered Certificates and the Class P Certificates by approximately
$______________ which represents approximately ______% of aggregate principal
balance of the Mortgage Loans as of the Cut-off Date.
The Pooling Agreement provides that, subject to certain floors, caps and
triggers, the required level of overcollateralization may increase or decrease
over time. The Certificate Insurer may, in its sole discretion waive any
required increase in the required level of overcollateralization or consent to a
decrease in the level of overcollateralization otherwise required under the
terms of the Pooling Agreement. Any such decrease will have the effect of
reducing the amortization of the Offered Certificates below what it otherwise
would have been.
REPORTS TO CERTIFICATEHOLDERS
On each Distribution Date, the Trustee will provide or make available to
each holder of a Certificate, the Certificate Insurer and the Rating Agencies a
statement (based on information received from the Master Servicer) generally
setting forth, among other things:
(i) the amount of the distributions, separately identified, with respect to
the Offered Certificates;
(ii) the amount of such distributions set forth in clause (i) allocable to
principal, separately identifying the aggregate amount of any principal
prepayments or other unscheduled recoveries of principal included therein;
(iii) the amount of such distributions set forth in clause (i) allocable to
interest and the calculation thereof;
(iv) the amount of any Unpaid Interest Shortfall Amount with respect to the
Offered Certificates, separately identified;
(v) the Certificate Principal Balance of the Offered Certificates after
giving effect to the distribution of principal on such Distribution Date;
(vi) the Pool Balance at the end of the related Prepayment Period;
(vii) the amount of the Servicing Fee paid to or retained by the Master
Servicer;
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(viii) the amount of the Trustee Fee paid to the Trustee;
(ix) the amount of Advances for the related Due Period;
(x) the number and aggregate Principal Balance of Mortgage Loans that were
(A) delinquent (exclusive of Mortgage Loans in foreclosure) (1) 30 to 59 days,
(2) 60 to 89 days and (3) 90 or more days, (B) in foreclosure and delinquent (1)
30 to 59 days, (2) 60 to 89 days and (3) 90 or more days and (C) in bankruptcy,
in each case as of the close of business on the last day of the calendar month
preceding such Distribution Date;
(xi) for any Mortgage Loan as to which the related Mortgaged Property was
acquired by the Trust in foreclosure or by deed in lieu of foreclosure (any such
property, an "REO Property") during the preceding Prepayment Period, the loan
number, the Principal Balance of such Mortgage Loan as of the close of business
on the last day of such Prepayment Period and the date of acquisition thereof;
(xii) the number of delinquent Mortgage Loans sold during the preceding
Prepayment Period, the aggregate outstanding principal amount of such Mortgage
Loans and the aggregate sale price;
(xiii) the total number and principal balance of any REO Properties as of
the close of business on the last day of the prior calendar month;
(xiv) the Pass-Through Rate for the Offered Certificates for such
Distribution Date; and
(xv) the Net WAC Cap Carryover Amount for the Offered Certificates after
giving effect to distributions thereof on such Distribution Date.
In addition, within a reasonable period of time after the end of each
calendar year, the Trustee will prepare and deliver to each holder of a
Certificate of record during the previous calendar year a statement containing
information necessary to enable holders of the Certificates to prepare their tax
returns. Such statements will not have been examined and reported upon by an
independent public accountant.
THE CERTIFICATE INSURER
The information set forth in this section has been provided by
_________________________ (the "Certificate Insurer"). No representation is made
by any Underwriter, the Seller, the Master Servicer, the Depositor or any of
their affiliates as to the accuracy or completeness of such information or any
information related to the Certificate Insurer incorporated by reference herein.
[INSERT CERTIFICATE INSURER INFORMATION]
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
The yield to maturity of the Offered Certificates will be sensitive to
defaults on the Mortgage Loans. If a purchaser of an Offered Certificate
calculates its anticipated yield based on an assumed rate of default and amount
of losses that is lower than the default rate and amount of losses actually
incurred and is not covered by the Policy, its actual yield to maturity will be
lower than that so calculated. In general, the earlier a loss occurs, the
greater is the effect on an investor's yield to maturity. There can be no
assurance as to the delinquency, foreclosure or loss experience with respect to
the Mortgage Loans. Because the Mortgage Loans were underwritten in accordance
with standards less stringent than those generally acceptable to Fannie Mae and
Freddie Mac with regard to a borrower's credit standing and repayment ability,
the risk of delinquencies with respect to, and losses on, the Mortgage Loans
will be greater than that of mortgage loans underwritten in accordance with
Fannie Mae and Freddie Mac standards.
The rate of principal payments, the aggregate amount of distributions and
the yields to maturity of the Offered Certificates will be affected by the rate
and timing of payments of principal on the Mortgage Loans. The rate of principal
payments on the Mortgage Loans will in turn be affected by the amortization
schedules of the Mortgage Loans and by the rate of principal prepayments
(including for this purpose prepayments resulting
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from refinancing, liquidations of the Mortgage Loans due to defaults, casualties
or condemnations and repurchases by the Seller or Master Servicer). Because
certain of the Mortgage Loans contain prepayment premiums, the rate of principal
payments may be less than the rate of principal payments for mortgage loans that
did not have prepayment premiums. The Mortgage Loans are subject to the
"due-on-sale" provisions included therein which provide that the Mortgage Loan
is assumable by a creditworthy purchaser of the related Mortgaged Property. See
"The Mortgage Pool" herein.
Prepayments, liquidations and purchases of the Mortgage Loans (including
any optional purchase) will result in distributions of principal amounts which
would otherwise be distributed over the remaining terms of the Mortgage Loans.
Since the rate of payment of principal on the Mortgage Loans will depend on
future events and a variety of other factors, no assurance can be given as to
such rate or the rate of principal prepayments. The extent to which the yield to
maturity of the Offered Certificates may vary from the anticipated yield will
depend upon the degree to which such Certificates is purchased at a discount or
premium, and the degree to which the timing of payments thereon is sensitive to
prepayments, liquidations and purchases of the Mortgage Loans. Further, an
investor should consider the risk that, in the case of any Offered Certificate
purchased at a discount, a slower than anticipated rate of principal payments
(including prepayments) on the Mortgage Loans could result in an actual yield to
such investor that is lower than the anticipated yield and, in the case of any
Offered Certificate purchased at a premium, a faster than anticipated rate of
principal payments on the Mortgage Loans could result in an actual yield to such
investor that is lower than the anticipated yield.
The rate of principal payments (including prepayments) on pools of mortgage
loans may vary significantly over time and may be influenced by a variety of
economic, geographic, social and other factors, including changes in mortgagors'
housing needs, job transfers, unemployment, mortgagors' net equity in the
mortgaged properties and servicing decisions. In general, if prevailing interest
rates were to fall significantly below the Loan Rates on the Mortgage Loans,
such Mortgage Loans could be subject to higher prepayment rates than if
prevailing interest rates were to remain at or above the Loan Rates on such
Mortgage Loans. Conversely, if prevailing interest rates were to rise
significantly, the rate of prepayments on such Mortgage Loans would generally be
expected to decrease. The Mortgage Loans may be subject to a greater rate of
principal prepayments in a low interest rate environment. For example, if
prevailing interest rates were to fall, mortgagors with adjustable-rate Mortgage
Loans may be inclined to refinance their adjustable-rate Mortgage Loans with a
fixed-rate loan to "lock in" a lower interest rate or to refinance their
adjustable-rate Mortgage Loans with other more competitive adjustable-rate
mortgage loans. The existence of the applicable Periodic Rate Cap and Maximum
Rate also may affect the likelihood of prepayments resulting from refinancings.
No assurances can be given as to the rate of prepayments on the Mortgage Loans
in stable or changing interest rate environments.
Approximately _____% of the Mortgage Loans, by aggregate principal balance
as of the Cut-off Date, provide for payment by the borrower of a prepayment
premium in limited circumstances on certain prepayments. The holders of the
Class P Certificates will be entitled to all prepayment premiums received on the
Mortgage Loans, and such amounts will not be available for distribution on the
other classes of Certificates. Under certain circumstances, as described in the
Pooling Agreement, the Master Servicer may waive the payment of any otherwise
applicable prepayment premium. Investors should conduct their own analysis of
the effect, if any, that the prepayment premiums, and decisions by the Master
Servicer with respect to the waiver thereof, may have on the prepayment
performance of the Mortgage Loans. The Depositor makes no representations as to
the effect that the prepayment premiums, and decisions by the Master Servicer
with respect to the waiver thereof, may have on the prepayment performance of
the Mortgage Loans.
ADDITIONAL INFORMATION
The Depositor has filed certain yield tables and other computational
materials with respect to the Offered Certificates with the Commission in a
report on Form 8-K and may file certain additional yield tables and other
computational materials with respect to the Offered Certificates with the
Commission in a report on Form 8-K. Such tables and materials were prepared by
[Underwriters] (each, an "Underwriter" and collectively, the "Underwriters") at
the request of certain prospective investors, based on assumptions provided by,
and satisfying the special requirements of, such prospective investors. Such
tables and assumptions may be based on assumptions that differ from the
Structuring Assumptions. Accordingly, such tables and other materials may not be
relevant to or appropriate for investors other than those specifically
requesting them.
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WEIGHTED AVERAGE LIVES
The timing of changes in the rate of principal prepayments on the Mortgage
Loans may significantly affect an investor's actual yield to maturity, even if
the average rate of principal prepayments is consistent with such investor's
expectation. In general, the earlier a principal prepayment on the Mortgage
Loans occurs, the greater the effect of such principal prepayment on an
investor's yield to maturity. The effect on an investor's yield of principal
prepayments occurring at a rate higher (or lower) than the rate anticipated by
the investor during the period immediately following the issuance of the Offered
Certificates may not be offset by a subsequent like decrease (or increase) in
the rate of principal prepayments.
The weighted average life of an Offered Certificates is the average amount
of time that will elapse from the Closing Date, until each dollar of principal
is repaid to the investors in such Certificates. Because it is expected that
there will be prepayments and defaults on the Mortgage Loans, the actual
weighted average lives of the Offered Certificates are expected to vary
substantially from the weighted average remaining terms to stated maturity of
the Mortgage Loans as set forth herein under "The Mortgage Pool."
The "Assumed Final Distribution Date" for the Offered Certificates is as
set forth herein under "Description of the Certificates--General." The Assumed
Final Distribution Date for the Offered Certificates is the Distribution Date in
the month following the latest maturity date of any Mortgage Loan. The weighted
average life of the Offered Certificates is likely to be shorter than would be
the case if payments actually made on the Mortgage Loans conformed to the
foregoing assumptions, and the final Distribution Date with respect to the
Offered Certificates could occur significantly earlier than the related Assumed
Final Distribution Date because (i) prepayments are likely to occur, (ii) excess
cashflow, if any, will be applied as principal of the Offered Certificates as
described herein, (iii) the Overcollateralization Target Amount may change as
described in the Pooling Agreement and (iv) the Master Servicer or the
Certificate Insurer may cause a termination of the Trust as provided herein.
Prepayments of mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement (the
"Prepayment Assumption") assumes a prepayment rate for the Mortgage Loans based
on the Prepayment Vector. A "100% Prepayment Vector" assumes a CPR of ____% per
annum of the then unpaid principal balance of such mortgage loans in the first
month of the life of such mortgage loans and an additional approximately ______%
(precisely ______) per annum in each month until the ___ month. Beginning in the
____ month and in each month thereafter during the life of such mortgage loans,
such prepayment vector assumes a CPR of ____%. CPR is a prepayment assumption
that represents a constant assumed rate of prepayment each month relative to the
then outstanding principal balance of a pool of mortgage loans for the life of
such mortgage loans. Neither model purports to be either a historical
description of the prepayment experience of any pool of mortgage loans or a
prediction of the anticipated rate of prepayment of any mortgage loans,
including the Mortgage Loans to be included in the Trust.
Each of the Prepayment Scenarios in the table below assumes the respective
percentages of the related Prepayment Assumption described thereunder.
The table on page _____ was prepared on the basis of the assumptions in the
following paragraph and the tables set forth below. There are certain
differences between the loan characteristics included in such assumptions and
the characteristics of the actual Mortgage Loans. Any such discrepancy may have
an effect upon the percentages of Original Certificate Principal Balances
outstanding and weighted average lives of the Offered Certificates set forth in
the table. In addition, since the actual Mortgage Loans in the Trust will have
characteristics that differ from those assumed in preparing the tables set forth
below, the distributions of principal of the Offered Certificates may be made
earlier or later than indicated in the tables.
The percentages and weighted average lives in the table on page ____ were
determined assuming that (the "Structuring Assumptions"): (i) the Mortgage Loans
consist of ____ sub-pools of loans with the characteristics set forth in the
table below, (ii) the closing date for the Offered Certificates occurs on
____________ and the Offered Certificates were sold to investors on such date,
(iii) distributions on the Certificates are made on the 25th day of each month
regardless of the day on which the Distribution Date actually occurs, commencing
in _________, in accordance with the allocation of Available Funds set forth
above under "Description of the Certificates--Allocation of Available Funds,"
(iv) the prepayment rates are the percentages of the related Prepayment
Assumption set forth in the "Prepayment Scenarios" table below, (v)
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prepayments include thirty days' interest thereon, (vi) the Seller is not
required to substitute or repurchase any or all of the Mortgage Loans pursuant
to the Pooling Agreement and no optional termination is exercised, except with
respect to the entries identified by the row captioned "Weighted Average Life
(years) to Optional Termination" in the tables below, (vii) the
Overcollateralization Target Amount is as set forth in the Pooling Agreement,
(viii) scheduled payments for all Mortgage Loans are received on the first day
of each month commencing in ________, the principal portion of such payments is
computed prior to giving effect to prepayments received in such month and there
are no losses or delinquencies with respect to such Mortgage Loans, (ix) all
related Mortgage Loans prepay at the same rate and all such payments are treated
as prepayments in full of individual Mortgage Loans, with no shortfalls in
collection of interest, (x) such prepayments are received on the last day of
each month commencing in the month of the Closing Date, (xi) the Certificate
Index is at all times equal to __________%, (xii) the Pass-Through Rate for the
Offered Certificates is as set forth herein, (xiii) the Loan Rate for each
Mortgage Loan is adjusted on its next Adjustment Date (and on subsequent
Adjustment Dates, if necessary) to equal the sum of (a) the assumed level of the
Index and (b) the respective Gross Margin (such sum being subject to the
applicable Periodic Rate Caps, Minimum Loan Rates and Maximum Loan Rates), (xiv)
Six-Month LIBOR is equal to _______%, and (xv) the Servicing Fee for each
Mortgage Loan is _____%. Nothing contained in the foregoing assumptions should
be construed as a representation that the Mortgage Loans will not experience
delinquencies or losses.
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<PAGE>
<TABLE>
<CAPTION>
PREPAYMENT SCENARIOS(1)
SCENARIO SCENARIO SCENARIO SCENARIO SCENARIO SCENARIO SCENARIO SCENARIO
I I III IV V VI VII VIII
- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
- -----% -----% -----% ----% ----% ----% ----% ----%
</TABLE>
___________________________
(1) Percentage of the related Prepayment Assumption.
<TABLE>
<CAPTION>
ASSUMED MORTGAGE LOAN CHARACTERISTICS
Months to Initial Original Remaining
Next Gross Maximum Minimum Periodic Periodic Term to Term to
Principal Loan Rate Adjustment Margin Loan Rate Loan Rate Rate-Cap Rate Cap Maturity Maturity
Balance($) (%) Date (%) (%) (%) (%) (%) (months) (months)
- ---------- ---------- ---------- ------- --------- --------- --------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
Based on the foregoing assumptions, the following tables indicate the
projected weighted average lives of the Offered Certificates, and set forth the
percentages of the Original Certificate Principal Balance the Offered
Certificates that would be outstanding after each of the dates shown, at various
Prepayment Scenarios.
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<TABLE>
<CAPTION>
PERCENT OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING*
CLASS A
PREPAYMENT SCENARIO
-----------------------------------------------------------------------------------------
SCENARIO SCENARIO SCENARIO SCENARIO SCENARIO SCENARIO SCENARIO SCENARIO
Distribution Date I I III IV V VI VII VIII
- ------------ ---- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage
[Date].............
[Date].............
[Date].............
[Date].............
[Date].............
[Date].............
[Date].............
[Date].............
[Date].............
[Date].............
[Date].............
[Date].............
[Date].............
[Date].............
[Date].............
[Date].............
[Date].............
[Date].............
[Date].............
[Date].............
[Date].............
[Date].............
[Date].............
[Date].............
[Date].............
[Date].............
[Date].............
[Date].............
[Date].............
[Date].............
Weighted Average
Life (years) to
maturity (1).......
Weighted Average
Life (years)
to Optional
Termination(1).....
</TABLE>
___________________________
* Rounded to the nearest whole percentage.
(1) The weighted average life of any Class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the principal amount on
each Distribution Date on such Class of Certificates by the number of years
from the date of issuance of the Certificates to the related Distribution
Date, (ii) summing the results, and (iii) dividing the sum by the aggregate
amount of the assumed net reductions in principal amount on such Class of
Certificates.
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USE OF PROCEEDS
The Depositor will apply the net proceeds of the sale of the Class A
Certificates to the purchase of the Mortgage Loans transferred to the Trust.
FEDERAL INCOME TAX CONSEQUENCES
Two elections will be made to treat designated portions of the Trust as a
real estate mortgage investment conduit (a "REMIC") for federal income tax
purposes. Upon the issuance of the Offered Certificates, Thacher Proffitt &
Wood, counsel to the Depositor, will deliver its opinion generally to the effect
that, assuming compliance with all provisions of the Pooling Agreement, for
federal income tax purposes, each of REMIC I and REMIC II (as defined in the
Pooling Agreement) will qualify as a REMIC under Sections 860A through 860G of
the Internal Revenue Code of 1986 (the "Code").
For federal income tax purposes, (i) the Residual Certificates will
represent the sole class of "residual interests" in each of REMIC I and REMIC II
and (ii) the Offered Certificates and the Class P Certificates will be the
"regular interests" in, and will be treated as debt instruments of, REMIC II.
See "Federal Income Tax Consequences--REMIC--Classification of REMICs" in the
Prospectus.
For federal income tax reporting purposes, the Offered Certificates [will]
[will not] 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, premium and market discount, 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 the Prepayment Assumption. No
representation is made that the Mortgage Loans will prepay at such rate or at
any other rate. See "Federal Income Tax Consequences--REMICs--Taxation of Owners
of REMIC Regular Certificates--Original Issue Discount" in the Prospectus.
The Internal Revenue Service (the "IRS") has issued regulations (the "OID
Regulations") under Sections 1271 to 1275 of the Code generally addressing the
treatment of debt instruments issued with original issue discount. Purchasers of
the Offered Certificates should be aware that the OID Regulations do not
adequately address certain issues relevant to, or are not applicable to,
prepayable securities such as the Offered Certificates. In addition, there is
considerable uncertainty concerning the application of the OID Regulations to
REMIC Regular Certificates that provide for payments based on an adjustable rate
such as the Class A-8 Certificates. Because of the uncertainty concerning the
application of Section 1272(a)(6) of the Code to such Certificates and because
the rules of the OID Regulations relating to debt instruments having an
adjustable rate of interest are limited in their application in ways that could
preclude their application to such Certificates even in the absence of Section
1272(a)(6) of the Code, the IRS could assert that the Offered Certificates
should be treated as issued with original issue discount or should be governed
by the rules applicable to debt instruments having contingent payments or by
some other method not yet set forth in regulations. Prospective purchasers of
the Offered Certificates are advised to consult their tax advisors concerning
the tax treatment of such Certificates.
It appears that a reasonable method of reporting original issue discount
with respect to the Offered Certificates, if such Certificates are required to
be treated as issued with original issue discount, generally would be to report
all income with respect to such Certificates as original issue discount for each
period, computing such original issue discount (i) by assuming that the value of
the applicable index will remain constant for purposes of determining the
original yield to maturity of, and projecting future distributions on such
Certificates, thereby treating such Certificates as fixed rate instruments to
which the original issue discount computation rules described in the Prospectus
can be applied, and (ii) by accounting for any positive or negative variation in
the actual value of the applicable index in any period from its assumed value as
a current adjustment to original issue discount with respect to such period. See
"Federal Income Tax Consequences-- REMICs--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount" in the Prospectus.
Certain of the Certificates may be treated for federal income tax purposes
as having been issued at a premium. Whether any holder of a Certificate will be
treated as holding such Certificate with amortizable bond premium will depend on
such Certificateholder's purchase price and the distributions remaining to be
made on
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such Certificate at the time of its acquisition by such Certificateholder.
Holders of such Certificates should consult their own tax advisors regarding the
possibility of making an election to amortize such premium. See "Federal Income
Tax Consequences-- REMICs--Taxation of Owners of REMIC Regular
Certificates--Premium" in the Prospectus.
The Offered Certificates will be treated as assets described in Section
7701(a)(19)(C) of the Code and "real estate assets" under Section 856(c)(4)(A)
of the Code, generally in the same proportion that the assets in the Trust would
be so treated. In addition, interest on the Offered Certificates will be treated
as "interest on obligations secured by mortgages on real property" under Section
856(c)(3)(B) of the Code, generally to the extent that the Offered Certificates
are treated as "real estate assets" under Section 856(c)(4)(A) of the Code. The
Offered Certificates will also be treated as "qualified mortgages" under Section
860G(a)(3) of the Code. See "Federal Income Tax Consequences--
REMICs--Characterization of Investments in REMIC Certificates" in the
Prospectus.
It is not anticipated that the Trust will engage in any transactions that
would subject it to the prohibited transactions tax as defined in Section
860F(a)(2) of the Code, the contributions tax as defined in Section 860G(d) of
the Code or the tax on net income from foreclosure property as defined in
Section 860G(c) of the Code. However, in the event that any such tax is imposed
on the Trust, such tax will be borne (i) by the Trustee, if the Trustee has
breached its obligations with respect to REMIC compliance under the Pooling
Agreement, (ii) by the Master Servicer, if the Master Servicer has breached its
obligations with respect to REMIC compliance under the Pooling Agreement and
(iii) otherwise by the Trust, with a resulting reduction in amounts otherwise
distributable to the holders of the related Offered Certificates. See
"Description of the Securities-- General" and "Federal Income Tax
Consequences--REMICs--Prohibited Transactions and Other Possible REMIC Taxes" in
the Prospectus.
The responsibility for filing annual federal information returns and other
reports will be borne by the Trustee or the Master Servicer. See "Federal Income
Tax Consequences--REMICs-- Reporting and Other Administrative Matters" 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.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA")
imposes certain fiduciary and prohibited transaction restrictions on employee
pension and welfare benefit plans subject to ERISA ("ERISA Plans"). Section 4975
of the Code imposes similar prohibited transaction restrictions on tax-qualified
retirement plans described in Section 401(a) of the Code ("Qualified Retirement
Plans") and on Individual Retirement Accounts ("IRAs") described in Section 408
of the Code (collectively, "Tax-Favored Plans"; Tax-Favored Plans and ERISA
Plans, together, "Plans").
Certain employee benefit plans, such as governmental plans (as defined in
Section 3(32) of ERISA), 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 the ERISA requirements discussed herein. Accordingly, assets of such
plans may be invested in certificates without regard to the ERISA considerations
described below, subject to the provisions of applicable federal and state law.
Any such plan that is a Qualified Retirement Plan 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.
In addition to imposing general fiduciary requirements, including those of
investment prudence and diversification and the requirement that a Plan's
investment be made in accordance with the documents governing the Plan, Section
406 of ERISA and Section 4975 of the Code prohibit a broad range of transactions
involving "Plan Assets," Plans and persons ("parties in interest" under Section
3(14) of ERISA or "disqualified persons" under Section 4975(e)(2) of the Code;
collectively, "Parties In Interest") who have certain specified relationships to
the Plans, unless a statutory, regulatory or administrative exemption is
available. Certain Parties in Interest that participate in a prohibited
transaction may be subject to a penalty, or an excise tax,
S-53
<PAGE>
imposed pursuant to Section 502(i) of ERISA or Section 4975 of the Code, unless
a statutory, regulatory or administrative exemption is available.
Except as noted above, investments by Plans are subject to ERISA's general
fiduciary requirements, including the requirement of investment prudence and
diversification and the requirement that a Plan's investments be made in
accordance with the documents governing the Plan. A fiduciary which decides to
invest the assets of a Plan in the Offered Certificates should consider, among
other factors, the extreme sensitivity of the investments to the rate of
principal payments (including prepayments) on the Mortgage Loans.
The U.S. Department of Labor (the "DOL") has granted to [Underwriter] an
administrative exemption (Prohibited Transaction Exemption _______; Exemption
Application No. _______) (the "Exemption") from certain of the prohibited
transaction rules of ERISA and the related excise tax provisions of Section 4975
of the Code with respect to the initial purchase, the holding and the subsequent
resale by Plans of certificates in pass-through trusts that consist of certain
receivables, loans and other obligations that meet the conditions and
requirements of the Exemption. The Exemption applies to mortgage loans such as
the Mortgage Loans in the Trust.
Among the conditions that must be satisfied for the Exemption to apply are
the following:
(1) the acquisition of the certificates by a Plan is on terms (including
the price for the certificates) that are at least as favorable to the Plan as
they would be in an arm's length transaction with an unrelated party;
(2) the rights and interests evidenced by the certificates acquired by the
Plan are not subordinated to the rights and interests evidenced by other
certificates of the trust;
(3) the certificates acquired by the Plan have received a rating at the
time of such acquisition that is one of the three highest generic rating
categories from Standard & Poor's, a division of The McGraw-Hill Companies, Inc.
("S&P"), Moody's Investors Service, Inc. ("Moody's"), Duff & Phelps Credit
Rating Co. ("DCR") or Fitch IBCA, Inc. ("Fitch" and, together with S&P, Moody's
and DCR, the "Exemption Rating Agencies");
(4) the trustee must not be an affiliate of any other member of the
Restricted Group (as defined below);
(5) the sum of all payments made to and retained by the underwriters in
connection with the distribution of the certificates represents not more than
reasonable compensation for underwriting the certificates; the sum of all
payments made to and retained by the seller pursuant to the assignment of the
loans to the trust represents not more than the fair market value of such loans;
the sum of all payments made to and retained by the servicer and any other
servicer represents not more than reasonable compensation for such person's
services under the agreement pursuant to which the loans are pooled and
reimbursements of such person's reasonable expenses in connection therewith; and
(6) the Plan investing in the certificates is an "accredited investor" as
defined in Rule 501(a)(1) of Regulation D of the Securities and Exchange
Commission under the Securities Act of 1933.
The trust must also meet the following requirements:
(i) the corpus of the trust must consist solely of assets of the type that
have been included in other investment pools;
(ii) certificates in such other investment pools must have been rated in
one of the three highest generic rating categories by an Exemption Rating Agency
for at least one year prior to the Plan's acquisition of certificates; and
S-54
<PAGE>
(iii) certificates evidencing interests in such other investment pools must
have been purchased by investors other than Plans for at least one year prior to
any Plan's acquisition of certificates.
Moreover, the Exemption provides relief from certain self-dealing/conflict
of interest prohibited transactions that may occur when the Plan fiduciary
causes a Plan to acquire certificates in a trust holding receivables as to which
the fiduciary (or its affiliate) is an obligor provided that, among other
requirements, (i) in the case of an acquisition in connection with the initial
issuance of certificates, at least fifty percent (50%) of each class of
certificates in which Plans have invested is acquired by persons independent of
the Restricted Group; (ii) such fiduciary (or its affiliate) is an obligor with
respect to five percent (5%) or less of the fair market value of the obligations
contained in the trust; (iii) the Plan's investment in certificates of any class
does not exceed twenty-five percent (25%) of all of the certificates of that
class outstanding at the time of the acquisition; and (iv) immediately after the
acquisition, no more than twenty-five percent (25%) of the assets of any Plan
with respect to which such person is a fiduciary are invested in certificates
representing an interest in one or more trusts containing assets sold or
serviced by the same entity. The Exemption does not apply to Plans sponsored by
the Depositor, the Underwriters, the Trustee, the Master Servicer, any obligor
with respect to Mortgage Loans included in the Trust constituting more than five
percent of the aggregate unamortized principal balance of the assets in the
Trust, or any affiliate of such parties (the "Restricted Group").
It is expected that the Exemption will apply to the acquisition and holding
by Plans of the Class A Certificates and that all conditions of the Exemption
other than those within the control of the investors will be met.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the applicability of PTCE 83-1
described in the Prospectus and the Exemption, and the potential consequences in
their specific circumstances, prior to making an investment in the Offered
Certificates. Moreover, each Plan fiduciary should determine whether under the
general fiduciary standards of investment prudence and diversification, an
investment in the Offered Certificates is appropriate for the Plan, taking into
account the overall investment policy of the Plan and the composition of the
Plan's investment portfolio.
LEGAL INVESTMENT CONSIDERATIONS
When issued, the Offered Certificates [will] [will not] constitute
"mortgage related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA") [so long as they are rated in one of the two
highest rating categories by at least one nationally recognized statistical
rating organization and, as such, are legal investments for certain entities to
the extent provided for in SMMEA. SMMEA, however, provides for state limitation
on the authority of such entities to invest in "mortgage related securities"
provided that such restrictive legislation was enacted prior to October 3, 1991.
Certain states have enacted legislation which overrides the preemption
provisions of SMMEA.]
The Depositor makes no representations as to the proper characterization of
the Offered Certificates for legal investment or other purposes, or as to the
ability of particular investors to purchase the Offered Certificates under
applicable legal investment restrictions. These uncertainties may adversely
affect the liquidity of the 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 the Offered Certificates constitutes a legal investment or is subject to
investment, capital or other restrictions.
See "Legal Investment" in the Prospectus.
S-55
<PAGE>
EXPERTS
The consolidated balance sheets of ____________________ as of ____________
and ______________ and the related consolidated statements of income, changes in
shareholder's equity and cash flows for each of the three years in the period
ended ________________ incorporated by reference in this Prospectus Supplement,
have been incorporated herein in reliance on the report of ___________________,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the underwriting
agreement, dated __________ (the "Underwriting Agreement"), among the
Underwriters named below, the Seller and the Depositor, the Depositor has agreed
to sell to the Underwriters, and the Underwriters have agreed to purchase from
the Depositor, the principal amount of the Offered Certificates set forth
opposite their respective names.
Original Certificate
Principal Balance of the
Underwriters Offered Certificates
------------ --------------------
[Underwriter]...................... $_________
[Underwriter]...................... $_________
The Depositor has been advised by the Underwriters that they propose
initially to offer the Certificates to the public in Europe and the United
States at the offering price set forth herein and to certain dealers at such
price less a selling concession, not in excess of ____% of the Certificate
balances. The Underwriters may allow and such dealers may reallow a reallowance
discount, not in excess of ____% of the Certificate balances, to certain other
dealers. After the initial public offering, the public offering price, such
concessions and such discounts may be changed.
Until the distribution of the Certificates is completed, rules of the SEC
may limit the ability of the Underwriters and certain selling group members to
bid for and purchase the Certificates. As an exception to these rules, the
Underwriters are permitted to engage in certain transactions that stabilize the
price of the Certificates. Such transactions consist of bids or purchases for
the purpose of pegging, fixing or maintaining the price of the Certificates.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases.
Neither the Depositor nor any of the Underwriters makes any representation
or prediction as to the direction or magnitude of any effect that the
transactions described above may have on the prices of the Certificates. In
addition, neither the Depositor nor any of the Underwriters makes any
representation that the Underwriters will engage in such transactions or that
such transactions, once commenced, will not be discontinued without notice.
The Depositor has been advised by each Underwriter that it intends to make
a market in the Offered Certificates but no Underwriter has any obligation to do
so. There can be no assurance that a secondary market for the Offered
Certificates will develop or, if it does develop, that it will continue.
The Depositor has agreed to indemnify the Underwriters against, or make
contributions to the Underwriters with respect to, certain liabilities,
including liabilities under the Act.
LEGAL MATTERS
S-56
<PAGE>
Certain legal matters with respect to the Offered Certificates will be
passed upon for the Seller, Master Servicer and the Depositor by Thacher
Proffitt & Wood, New York, New York. Certain legal matters will be passed upon
for the Underwriters by _______________, New York, New York.
RATINGS
It is a condition to the issuance of the Offered Certificates that the
Offered Certificates be rated "_____" by _________________ ("____"), "____" by
("________") and "_____" by _________ ("______" and, together with _____ and
________, the "Rating Agencies").
A securities rating addresses the likelihood of the receipt by a
certificateholder of distributions on the Mortgage Loans. The rating takes into
consideration the characteristics of the Mortgage Loans and the structural,
legal and tax aspects associated with the certificates. The ratings on the
Offered Certificates do not, however, constitute statements regarding the
likelihood or frequency of prepayments on the Mortgage Loans, the payment of any
Net WAC Cap Carryover Amount or the possibility that a holder of an Offered
Certificate might realize a lower than anticipated yield.
The ratings assigned to the Offered Certificates will depend primarily upon
the creditworthiness of the Certificate Insurer. Any reduction in a rating
assigned to the claims-paying ability of the Certificate Insurer below the
ratings initially assigned to the Offered Certificates may result in a reduction
of one or more of the ratings assigned to the Offered Certificates.
The Depositor has not engaged any rating agency other than the Rating
Agencies to provide ratings on the Offered Certificates. However, there can be
no assurance as to whether any other rating agency will rate the Offered
Certificates, or, if it does, what rating would be assigned by any such other
rating agency. Any rating on the Offered Certificates by another rating agency,
if assigned at all, may be lower than the ratings assigned to the Offered
Certificates by the Rating Agencies.
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 ratings initially assigned to any
of the Offered Certificates by the Rating Agencies are subsequently lowered for
any reason, no person or entity is obligated to provide any additional support
or credit enhancement with respect to such Offered Certificates.
S-57
<PAGE>
INDEX OF DEFINED TERMS
Page
----
Accrual Period.............................................................S-39
Adjustment Date............................................................S-13
Advance....................................................................S-30
Assumed Final Distribution Date......................................S-34, S-48
Basic Principal Distribution Amount........................................S-39
Book-Entry Certificates....................................................S-34
Business Day...............................................................S-44
Cedelbank..................................................................S-36
Cedelbank Participants.....................................................S-36
Certificate Index..........................................................S-41
Certificate Insurer..................................................S-34, S-46
Certificate Margin.........................................................S-41
Certificate Owner..........................................................S-34
Certificate Principal Balance..............................................S-39
Certificateholder..........................................................S-35
Certificates...............................................................S-34
Class A Certificates.......................................................S-34
Class P Certificates........................................................S-4
Class R Certificates........................................................S-4
Code..................................................................S-6, S-52
Collection Account.........................................................S-29
Compensating Interest......................................................S-31
Cut-off Date Principal Balance.............................................S-11
DCR........................................................................S-54
Definitive Certificate.....................................................S-35
Delayed First Adjustment Mortgage Loan.....................................S-13
Deleted Mortgage Loan......................................................S-29
Delinquent.................................................................S-39
Determination Date.........................................................S-31
Distribution Account.......................................................S-30
Distribution Date..........................................................S-34
DOL........................................................................S-54
DTC..................................................................S-34, S-60
Due Date...................................................................S-12
Due Period.................................................................S-40
Eligible Account...........................................................S-30
ERISA......................................................................S-53
ERISA Plans................................................................S-53
Euroclear..................................................................S-36
Euroclear Operator.........................................................S-36
Euroclear Participants.....................................................S-36
European Depositaries......................................................S-34
Exemption..................................................................S-54
Exemption Rating Agencies..................................................S-54
Extra Principal Distribution Amount........................................S-40
Fitch......................................................................S-54
General Excess Available Amount............................................S-40
Global Securities..........................................................S-60
Gross Margin...............................................................S-13
Index......................................................................S-22
Initial Periodic Rate Cap..................................................S-13
Insurance Agreement........................................................S-44
Insurer Default............................................................S-40
Interest Distributable Amount..............................................S-40
IRAs.......................................................................S-53
IRS........................................................................S-52
LIBOR Business Day.........................................................S-42
LIBOR Determination Date...................................................S-42
Liquidated Mortgage Loan...................................................S-41
Master Servicer Extension Notice...........................................S-33
Maximum Cap................................................................S-42
Maximum Loan Rate..........................................................S-13
Minimum Loan Rate..........................................................S-13
Monthly Interest Distributable Amount......................................S-40
Moody's..............................................................S-54, S-57
Mortgage Loan Purchase Agreement...........................................S-12
Mortgage Loan Schedule.....................................................S-28
Mortgage Loans.............................................................S-11
Mortgage Pool..............................................................S-11
Net Liquidation Proceeds...................................................S-41
Net WAC Cap................................................................S-41
OC Stepdown Date...........................................................S-40
Offered Certificates.......................................................S-34
OID Regulations............................................................S-52
Option One.................................................................S-22
Option One Guidelines......................................................S-25
Optional Termination Date..................................................S-32
Original Certificate Principal Balance.....................................S-39
Overcollateralization Deficiency Amount....................................S-40
Overcollateralization Deficit..............................................S-40
Overcollateralization Release Amount.......................................S-40
Overcollateralization Target Amount........................................S-40
Overcollateralized Amount..................................................S-40
Parties In Interest........................................................S-53
Periodic Rate Cap..........................................................S-13
Plans......................................................................S-53
Policy.....................................................................S-34
Pooling Agreement..........................................................S-28
Prepayment Assumption......................................................S-48
Prepayment Interest Shortfall..............................................S-31
Prepayment Period..........................................................S-40
Prepayment Scenarios.......................................................S-48
Principal Balance..........................................................S-11
Principal Distribution Amount..............................................S-41
Principal Remittance Amount................................................S-41
Purchase Price.............................................................S-29
Qualified Retirement Plans.................................................S-53
Qualified Substitute Mortgage Loan.........................................S-29
Qualifying Rate............................................................S-25
Rating Agencies............................................................S-57
Realized Loss..............................................................S-41
S-58
<PAGE>
Record Date................................................................S-34
Reference Banks............................................................S-42
Related Documents..........................................................S-28
Relevant Depositary........................................................S-34
Relief Act..................................................................S-9
REMIC......................................................................S-52
REO Property...............................................................S-46
Reserve Interest Rate......................................................S-42
Residual Certificates......................................................S-34
Restricted Group...........................................................S-55
S&P..................................................................S-54, S-57
Servicing Advance..........................................................S-31
Servicing Fee..............................................................S-31
Servicing Fee Rate.........................................................S-31
Six Month LIBOR............................................................S-22
SMMEA.................................................................S-6, S-55
Structuring Assumptions....................................................S-48
Substitution Adjustment....................................................S-29
Tax-Favored Plans..........................................................S-53
Term of the Policy.........................................................S-44
Termination Price..........................................................S-32
Trust......................................................................S-11
U.S. Person................................................................S-63
Underwriters...............................................................S-47
Underwriting Agreement.....................................................S-56
Unpaid Interest Shortfall Amount...........................................S-41
S-59
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND
TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the Offered Certificates will be
offered globally (the "Global Securities") and will be available only in
book-entry form. Investors in the Global Securities may hold such Global
Securities through any of The Depository Trust Company ("DTC"), Cedelbank or
Euroclear. The Global Securities will be tradable as home market instruments in
both the European and U.S. domestic markets. Initial settlement and all
secondary trades will settle in same-day funds.
Secondary market trading between investors holding Global Securities
through Cedelbank and Euroclear will be conducted in the ordinary way in
accordance with their normal rules and operating procedures and in accordance
with conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations.
Secondary cross-market trading between Cedelbank or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of Cedelbank and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the Global Securities will
be represented through financial institutions acting on their behalf as direct
and indirect Participants in DTC. As a result, Cedelbank and Euroclear will hold
positions on behalf of their participants through their respective Depositaries,
which in turn will hold such positions in accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC will follow
the settlement practices applicable to conventional eurobonds, except that there
will be no temporary global security and no "lock-up" or restricted period.
Investor securities custody accounts will be credited with their holdings
against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Cedelbank or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no 'lock-up' or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
TRADING BETWEEN DTC PARTICIPANTS. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior mortgage
loan asset-backed certificates issues in same-day funds.
S-60
<PAGE>
TRADING BETWEEN CEDELBANK AND/OR EUROCLEAR PARTICIPANTS. Secondary market
trading between Cedelbank Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
TRADING BETWEEN DTC SELLER AND CEDELBANK OR EUROCLEAR PURCHASER. When
Global Securities are to be transferred from the account of a DTC Participant to
the account of a Cedelbank Participant or a Euroclear Participant, the purchaser
will send instructions to Cedelbank or Euroclear through a Cedelbank Participant
or Euroclear Participant at least one business day prior to settlement.
Cedelbank or Euroclear will instruct the respective Depositary, as the case may
be, to receive the Global Securities against payment. Payment will include
interest accrued on the Global Securities from and including the last coupon
payment date to and excluding the settlement date, on the basis of the actual
number of days in such accrual period and a year assumed to consist of 360 days.
For transactions settling on the 31st of the month, payment will include
interest accrued to and excluding the first day of the following month. Payment
will then be made by the respective Depositary of the DTC Participant's account
against delivery of the Global Securities. After settlement has been completed,
the Global Securities will be credited to the respective clearing system and by
the clearing system, in accordance with its usual procedures, to the Cedelbank
Participant's or Euroclear Participant's account. The securities credit will
appear the next day (European time) and the cash debt will be back-valued to,
and the interest on the Global Securities will accrue from, the value date
(which would be the preceding day when settlement occurred in New York). If
settlement is not completed on the intended value date (i.e., the trade fails),
the Cedelbank or Euroclear cash debt will be valued instead as of the actual
settlement date.
Cedelbank Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Cedelbank or Euroclear. Under
this approach, they may take on credit exposure to Cedelbank or Euroclear until
the Global Securities are credited to their accounts one day later.
As an alternative, if Cedelbank or Euroclear has extended a line of credit
to them, Cedelbank Participants or Euroclear Participants can elect not to
preposition funds and allow that credit line to be drawn upon the finance
settlement. Under this procedure, Cedelbank Participants or Euroclear
Participants purchasing Global Securities would incur overdraft charges for one
day, assuming they cleared the overdraft when the Global Securities were
credited to their accounts. However, interest on the Global Securities would
accrue from the value date. Therefore, in many cases the investment income on
the Global Securities earned during that one-day period may substantially reduce
or offset the amount of such overdraft charges, although this result will depend
on each Cedelbank Participant's or Euroclear Participant's particular cost of
funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Securities to
the respective European Depositary for the benefit of Cedelbank Participants or
Euroclear Participants. The sale proceeds will be available to the DTC seller on
the settlement date. Thus, to the DTC Participants a cross-market transaction
will settle no differently than a trade between two DTC Participants.
TRADING BETWEEN CEDELBANK OR EUROCLEAR SELLER AND DTC PURCHASER. Due to
time zone differences in their favor, Cedelbank Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Global Securities are to be transferred by the respective clearing system,
through the respective Depositary, to a DTC Participant. The seller will send
instructions to Cedelbank or Euroclear through a Cedelbank Participant or
Euroclear Participant at least one business day prior to settlement. In these
cases Cedelbank or Euroclear will instruct the respective Depositary, as
appropriate, to deliver the Global Securities to the DTC Participant's account
against payment. Payment will include interest accrued on the Global Securities
from and including the last coupon payment to and excluding the settlement date
on the basis of the actual number of days in such accrual period and a year
assumed to consist of 360 days. For transactions settling on the 31st of the
month, payment will include interest accrued to and excluding the first day of
the following month. The payment will then be reflected in the account of the
Cedelbank Participant or Euroclear Participant the following day, and receipt of
the cash proceeds in the Cedelbank Participant's or Euroclear Participant's
account would be back-valued to the value date (which would be the preceding
day, when settlement occurred in New York). Should the Cedelbank Participant or
Euroclear Participant have a line of
S-61
<PAGE>
credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the back-valuation
will extinguish any overdraft incurred over that one-day period. If settlement
is not completed on the intended value date (i.e., the trade fails), receipt of
the cash proceeds in the Cedelbank Participant's or Euroclear Participant's
account would instead be valued as of the actual settlement date.
Finally, day traders that use Cedelbank or Euroclear and that purchase
Global Securities from DTC Participants for delivery to Cedelbank Participants
or Euroclear Participants should note that these trades would automatically fail
on the sale side unless affirmative action were taken. At least three techniques
should be readily available to eliminate this potential problem:
(a) borrowing through Cedelbank or Euroclear for one day (until the
purchase side of the day trade is reflected in their Cedelbank or Euroclear
accounts) in accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant no
later than one day prior to settlement, which would give the Global Securities
sufficient time to be reflected in their Cedelbank or Euroclear account in order
to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade so
that the value date for the purchase from the DTC Participant is at least one
day prior to the value date for the sale to the Cedelbank Participant or
Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through
Cedelbank or Euroclear (or through DTC if the holder has an address outside the
U.S.) will be subject to the 30% U.S. withholding tax that generally applies to
payments of interest (including original issue discount) on registered debt
issued by U.S. Persons, unless (i) each clearing system, bank or other financial
institution that holds customers' securities in the ordinary course of its trade
or business in the chain of intermediaries between such beneficial owner and the
U.S. entity required to withhold tax complies with applicable certification
requirements and (ii) such beneficial owner takes one of the following steps to
obtain an exemption or reduced tax rate:
EXEMPTION FOR NON-U.S. PERSONS (FORM W-8). Beneficial owners of Global
Securities that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of such change.
EXEMPTION FOR NON-U.S. PERSONS WITH EFFECTIVELY CONNECTED INCOME (FORM
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States).
EXEMPTION OR REDUCED RATE FOR NON-U.S. PERSONS RESIDENT IN TREATY COUNTRIES
(FORM 1001). Non-U.S. Persons that are Certificate Owners residing in a country
that has a tax treaty with the United States can obtain an exemption or reduced
tax rate (depending on the treaty terms) by filing Form 1001 (Ownership,
Exemption or Reduced Rate Certificate). If the treaty provides only for a
reduced rate, withholding tax will be imposed at that rate unless the filer
alternatively files Form W-8. Form 1001 may be filed by the Certificate Owners
or his agent.
EXEMPTION FOR U.S. PERSONS (FORM W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. FEDERAL INCOME TAX REPORTING PROCEDURE. The Certificate Owner of a
Global Security or, in the case of a Form 1001 or a Form 4224 filer, his agent,
files by submitting the appropriate form to the person
S-62
<PAGE>
through whom it holds (the clearing agency, in the case of persons holding
directly on the books of the clearing agency). Form W-8 and Form 1001 are
effective for three calendar years and Form 4224 is effective for one calendar
year.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation, partnership or other entity treated as a corporation
or partnership for United States federal income tax purposes organized in or
under the laws of the United States or any state thereof or the District of
Columbia (unless, in the case of a partnership, Treasury regulations provide
otherwise) or (iii) an estate the income of which is includible in gross income
for United States tax purposes, regardless of its source, or (iv) a trust if a
court within the United States is able to exercise primary supervision over the
administration of the trust and one or more United States persons have authority
to control all substantial decisions of the trust. Notwithstanding the preceding
sentence, to the extent provided in Treasury regulations, certain trusts in
existence on August 20, 1996, and treated as United States persons prior to such
date, that elect to continue to be treated as United States persons will also be
a U.S. Person. This summary does not deal with all aspects of U.S. Federal
income tax withholding that may be relevant to foreign holders of the Global
Securities. Investors are advised to consult their own tax advisors for specific
tax advice concerning their holding and disposing of the Global Securities.
S-63
<PAGE>
================================================================================
$______________ (APPROXIMATE)
OPTION ONE MORTGAGE LOAN TRUST ________
OPTION ONE MORTGAGE ACCEPTANCE CORPORATION
Depositor
OPTION ONE MORTGAGE CORPORATION
SELLER AND MASTER SERVICER
ASSET-BACKED CERTIFICATES, SERIES ________
_____________________
PROSPECTUS SUPPLEMENT
_____________________
[UNDERWRITERS]
You should rely only on the information contained or incorporated by reference
in this prospectus supplement and the accompanying prospectus. We have not
authorized anyone to provide you with different information.
We are not offering the Asset-Backed Certificates, Series _______ in any state
where the offer is not permitted.
We do not claim that the information in this prospectus supplement and
prospectus is accurate as of any date other than the dates stated on the
respective covers.
Dealers will deliver a prospectus supplement and prospectus when acting as
underwriters of the Asset-Backed Certificates, Series ___________ and with
respect to their unsold allotments or subscriptions. In addition, all
dealers selling the Asset-Backed Certificates, Series _________ will
be required to deliver a prospectus supplement and prospectus for
ninety days following the date of this prospectus supplement.
[Date]
================================================================================
<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed the the
Securities and Exchange Commission is effective. The prospectus is nnot an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED MAY 21, 1999
[VERSION 2]
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED ____________)
$_______________ (APPROXIMATE)
OPTION ONE MORTGAGE LOAN TRUST ______
ASSET-BACKED CERTIFICATES, SERIES_______
OPTION ONE MORTGAGE ACCEPTANCE CORPORATION
DEPOSITOR
-----------------------
OPTION ONE MORTGAGE CORPORATION
SELLER AND MASTER SERVICER
-----------------------
<TABLE>
<CAPTION>
<S> <C>
- -------------------------------------
Only the ________ classes of certificates identified below are being offered by this
CONSIDER CAREFULLY THE RISK prospectus supplement and the accompanying prospectus.
FACTORS BEGINNING ON PAGE S-___
IN THIS PROSPECTUS SUPPLEMENT
AND ON PAGE __ IN THE THE OFFERED CERTIFICATES
PROSPECTUS. o Represent ownership interests in a trust consisting primarily of a pool of
The certificates represent residential fixed-rate mortgage loans.
obligations of the trust only and
do not represent an interest in or o Will represent senior and subordinate interests in the trust and will receive
obligation of Option One distributions from the assets of the trust.
Mortgage Acceptance
Corporation, Option One CREDIT ENHANCEMENT
Mortgage Corporation or any of
their affiliates. This prospectus o The senior certificates will have credit enhancement in the form of
supplement may be used to offer subordination.
and sell the certificates only if
accompanied by the prospectus. o The offered subordinate certificates will have credit enhancement in the form
of subordination provided by certain classes of non-offered subordinate certificates and
offered subordinate certificates with lower payment priorities.
- -------------------------------------
</TABLE>
<TABLE>
<CAPTION>
ORIGINAL
CERTIFICATE PASS-THROUGH UNDERWRITING PROCEEDS TO THE
CLASS PRINCIPAL BALANCE RATE PRICE TO PUBLIC(1) DISCOUNT DEPOSITOR(1)(2)
------------ ----------------- ------------- ------------------ ------------ ---------------
<S> <C> <C> <C> <C> <C>
Class A-1 ....... $_________ _____% _____________% _______% _________%
Class A-2 ....... $_________ _____% _____________% _______% _________%
Class A-3 ....... $_________ _____% _____________% _______% _________%
Class A-4 ....... $_________ _____% _____________% _______% _________%
Class A-5 ....... $_________ _____% _____________% _______% _________%
Class A-6 ....... $_________ _____% _____________% _______% _________%
Class XS ....... $_________(3) Variable (4) _____________% _______% _________%
Class B-1 ....... $_________ _____% _____________% _______% _________%
Class B-2 ....... $_________ _____% _____________% _______% _________%
Class B-3 ....... $_________ _____% _____________% _______% _________%
</TABLE>
(1) Plus accrued interest from _________.
(2) Before deducting expenses estimated to be $___________.
(3) Approximate Initial Notional Amount.
(4) Calculated as described herein.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED THESE
SECURITIES OR DETERMINED THAT THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS
ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Delivery of the offered certificates will be made in book-entry form through the
facilities of The Depository Trust Company on or about _____________.
[UNDERWRITER]
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
Page
----
SUMMARY OF TERMS ................................................. S-3
RISK FACTORS ..................................................... S-7
THE MORTGAGE POOL ................................................ S-10
OPTION ONE MORTGAGE CORPORATION .................................. S-17
THE POOLING AGREEMENT ............................................ S-23
DESCRIPTION OF THE CERTIFICATES .................................. S-28
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS .................... S-39
USE OF PROCEEDS .................................................. S-48
FEDERAL INCOME TAX CONSEQUENCES .................................. S-48
ERISA CONSIDERATIONS ............................................. S-49
LEGAL INVESTMENT CONSIDERATIONS .................................. S-52
METHOD OF DISTRIBUTION ........................................... S-53
LEGAL MATTERS .................................................... S-53
RATINGS .......................................................... S-53
INDEX OF DEFINED TERMS ........................................... S-55
S-2
<PAGE>
SUMMARY OF TERMS
O THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS DOCUMENT AND DOES
NOT CONTAIN ALL OF THE INFORMATION THAT YOU NEED TO CONSIDER IN MAKING YOUR
INVESTMENT DECISION. TO UNDERSTAND ALL OF THE TERMS OF THE OFFERING OF THE
CERTIFICATES, READ CAREFULLY THIS ENTIRE DOCUMENT AND THE ACCOMPANYING
PROSPECTUS.
O THIS SUMMARY PROVIDES AN OVERVIEW OF CERTAIN CALCULATIONS, CASH FLOW
PRIORITIES AND OTHER INFORMATION TO AID YOUR UNDERSTANDING AND IS QUALIFIED
BY THE FULL DESCRIPTION OF THESE CALCULATIONS, CASH FLOW PRIORITIES AND
OTHER INFORMATION IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS. SOME OF THE INFORMATION CONSISTS OF FORWARD-LOOKING STATEMENTS
RELATING TO FUTURE ECONOMIC PERFORMANCE OR PROJECTIONS AND OTHER FINANCIAL
ITEMS. FORWARD-LOOKING STATEMENTS ARE SUBJECT TO A VARIETY OF RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER FROM THE PROJECTED
RESULTS. THOSE RISKS AND UNCERTAINTIES INCLUDE, AMONG OTHERS, GENERAL
ECONOMIC AND BUSINESS CONDITIONS, REGULATORY INITIATIVES AND COMPLIANCE
WITH GOVERNMENTAL REGULATIONS, AND VARIOUS OTHER MATTERS, ALL OF WHICH ARE
BEYOND OUR CONTROL. ACCORDINGLY, WHAT ACTUALLY HAPPENS MAY BE VERY
DIFFERENT FROM WHAT WE PREDICT IN OUR FORWARD-LOOKING STATEMENTS.
OFFERED CERTIFICATES
The Offered Certificates will have the characteristics shown in the table on the
cover of this prospectus supplement. The pass-through rates on each class of
Offered Certificates (other than the Class XS Certificates) are fixed and shown
in the table on the cover of this prospectus supplement. The pass-through rate
on the Class XS Certificates is variable and will be calculated for each
distribution date as described under "Description of the
Certificates--Pass-Through Rate" herein. The initial variable pass-through rate
for the Class XS Certificates is approximately _____% per annum.
The Offered Certificates will be sold by the Depositor to the Underwriter on the
closing date.
The Offered Certificates will initially be represented by one or more global
certificates registered in the name of CEDE & Co., as nominee of the Depository
Trust Company in minimum denominations of $[10,000] and integral multiples of
$[1.00] in excess thereof. See "Description of the Certificates --Registration
of the Book-Entry Certificates" herein.
The Class XS Certificates will be offered in registered, certificated form,
generally in minimum denominations of $[10,000] and integral multiples of
$[1,000] in excess thereof.
OTHER CERTIFICATES
CLASS B-4 CERTIFICATES, CLASS B-5 CERTIFICATES AND CLASS B-6 CERTIFICATES. Such
Certificates are not offered hereby. Such certificates have in the aggregate an
initial certificate principal balance of approximately $____________, evidencing
an aggregate initial undivided interest in the trust of approximately _____%.
Such Certificates will be sold by the Depositor to _________________ on the
closing date.
RESIDUAL CERTIFICATES. The Class R Certificates are the class of certificates
representing the residual interests in the trust, but are not offered by this
prospectus supplement. [The Class R Certificates will be delivered to the Seller
as partial consideration for the mortgage loans.]
CUT-OFF DATE
_____________ or, for mortgage loans originated in ___________, the date of
origination.
CLOSING DATE
On or about ___________.
THE DEPOSITOR
Option One Mortgage Acceptance Corporation, a Delaware corporation and a wholly
owned subsidiary of Option One Mortgage Corporation. WE REFER YOU TO "THE
DEPOSITOR" IN THE PROSPECTUS FOR ADDITIONAL INFORMATION.
SELLER AND MASTER SERVICER
Option One Mortgage Corporation.
WE REFER YOU TO "OPTION ONE MORTGAGE CORPORATION" IN THIS PROSPECTUS SUPPLEMENT
AND "THE MASTER SERVICER" IN THE PROSPECTUS FOR ADDITIONAL INFORMATION.
S-3
<PAGE>
TRUSTEE
- --------------.
WE REFER YOU TO "THE POOLING AGREEMENT--THE TRUSTEE" IN THIS PROSPECTUS
SUPPLEMENT FOR ADDITIONAL INFORMATION.
MORTGAGE LOANS
The trust will contain approximately _____ conventional, one- to four-family,
fixed-rate mortgage loans secured by first liens on residential real properties.
The mortgage loans have an aggregate principal balance of approximately
$__________ as of _________ __ ____.
The mortgage loans have original terms to maturity of not greater than [30]
years and the following characteristics as of
- ---------- --, ----.
Range of mortgage rates _____% to _____%.
(approximate):
Weighted average mortgage ______%.
rate (approximate):
Weighted average remaining ___ years and ___ term to stated maturity months.
(approximate):
Range of principal balances $__________ to
(approximate): $____________.
Average principal balance: $_____________.
Range of loan-to-value ratios _____% to _____%.
(approximate):
Weighted average ______%.
loan-to-value ratio
(approximate):
For additional information regarding the mortgage loans, see "The Mortgage Pool"
herein.
DISTRIBUTION DATES
The Trustee will make distributions on the certificates on the 25th day of each
calendar month beginning in _________ to the holder of record of the
certificates generally as of the business day preceding such date of
distribution. If the 25th day of a month is not a business day, then the
distribution will be made on the next business day.
ADVANCES
The Master Servicer will make cash advances to cover delinquent payments of
principal and interest to the extent it reasonably believes that the cash
advances are recoverable from future payments on the related mortgage loans.
Advances are intended to maintain a regular flow of scheduled interest and
principal payments on the certificates and are not intended to guarantee or
insure against losses.
WE REFER YOU TO "THE POOLING AGREEMENT--ADVANCES" IN THIS PROSPECTUS SUPPLEMENT
AND "DESCRIPTION OF THE CERTIFICATES--ADVANCES" IN THE PROSPECTUS FOR ADDITIONAL
INFORMATION.
OPTIONAL TERMINATION
The Master Servicer may purchase all of the mortgage loans and retire the
certificates when the current principal balance of the mortgage loans, in
aggregate, is equal to or less than [10]% of the principal balance of the
mortgage loans as of the Cut-off Date.
WE REFER YOU TO "THE POOLING AGREEMENT --TERMINATION" AND "DESCRIPTION OF THE
CERTIFICATES--PASS-THROUGH RATES" IN THIS PROSPECTUS SUPPLEMENT AND "POOLING
AGREEMENT--TERMINATION; RETIREMENT" IN THE PROSPECTUS FOR ADDITIONAL
INFORMATION..
CREDIT ENHANCEMENT
The credit enhancement provided for the benefit of the holders of the Offered
Certificates consists of subordination as described below and under "Description
of the Certificates--Allocation of Losses; Subordination" herein.
SUBORDINATION. The rights of the holders of the Class B-1 Certificates, the
Class B-2 Certificates, the Class B-3 Certificates, the Class B-4 Certificates,
the Class B-5 Certificates and the Class B-6 Certificates (the "Subordinate
Certificates") to receive distributions will be subordinated, to the extent
described herein, to the rights of the holders of each class of Class A
Certificates.
In addition, the rights of the holders of Subordinate Certificates with higher
numerical class designations will be subordinated to the rights of holders of
Subordinate Certificates with lower numerical class designations, to the extent
described herein.
Subordination is intended to enhance the likelihood of regular distributions on
the more senior certificates in respect of interest and
S-4
<PAGE>
principal and to afford such certificates protection against realized losses on
the mortgage loans as described below.
ALLOCATION OF LOSSES. Except as described below, if Subordinate Certificates
remain outstanding, losses on the mortgage loans will be allocated first to the
class of Subordinate Certificates with the lowest payment priority, and the
other classes of certificates will not bear any portion of such losses. If none
of the Subordinate Certificates remain outstanding, losses on mortgage loans
will generally be allocated to the Class A Certificates.
Not all losses will be allocated in the priority set forth above. Losses due to
natural disasters such as floods and earthquakes, fraud by a mortgagor,
bankruptcy of a mortgagor or certain other extraordinary events will be
allocated as described above only up to specified amounts. Losses of these types
in excess of the specified amount will, in general, be allocated to all
outstanding classes of certificates (other than the Class XS Certificates) PRO
RATA in proportion to their remaining principal balances. Therefore, the
Subordinate Certificates do not act as credit enhancement for such losses.
RATINGS
It is a condition to the issuance of the certificates that the Offered
Certificates receive the following ratings from [______________ ("_____") and
___________ ("_________")]:
Offered
Certificates [RA] [RA]
- ------------ ---- ----
Class A-1 AAA AAA
through Class A-7
Class XS AAA AAA[r]
Class B-1 AA AA
Class B-2 A A
Class B-3 BBB BBB
- ---------------------
[(1) Not rated.]
A security rating does not address the frequency of prepayments on the mortgage
loans, the corresponding effect on yield to investors or whether investors in
the Class XS Certificates may fail to recover fully their initial investment.
[The "r" symbol in certain _____________ ratings is attached to highlight
certificates that __________ believes may experience high volatility or high
variability in expected returns due to non-credit risks. The absence of an "r"
symbol should not be taken as an indication that a certificate will exhibit no
volatility or variability in total return.]
WE REFER YOU TO "RATINGS" IN THIS PROSPECTUS SUPPLEMENT AND "RATING" IN THE
PROSPECTUS FOR ADDITIONAL INFORMATION.
TAX STATUS
An election will be made to treat the trust as a real estate mortgage investment
conduit for federal income tax purposes.
WE REFER YOU TO "FEDERAL INCOME TAX CONSEQUENCES" IN THIS PROSPECTUS SUPPLEMENT
AND IN THE PROSPECTUS FOR ADDITIONAL INFORMATION.
ERISA CONSIDERATIONS
The U.S. Department of Labor has issued an individual exemption, Prohibited
Transaction Exemption _______ to the [Underwriter]. Such exemption generally
exempts from the application of certain of the prohibited transaction provisions
of Section 406 of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and the excise taxes imposed on such prohibited transactions
by Section 4975(a) and (b) of the Internal Revenue Code of 1986 (the "Code") and
Section 502(i) of ERISA, transactions relating to the purchase, sale and holding
of pass-through certificates underwritten by the Underwriter. Such exemption
generally applies to certificates such as the Class A Certificates and the Class
XS Certificates, and the servicing and operation of asset pools such as the
mortgage pool, provided that certain conditions are satisfied
Such exemption will only apply to the Class A Certificates and the Class XS
Certificates. ACCORDINGLY, THE OTHER CLASSES OF CERTIFICATES MAY NOT BE ACQUIRED
BY OR ON BEHALF OF A PLAN EXCEPT AS DESCRIBED HEREIN.
WE REFER YOU TO "ERISA CONSIDERATIONS" IN THIS PROSPECTUS SUPPLEMENT AND IN THE
PROSPECTUS FOR ADDITIONAL INFORMATION.
S-5
<PAGE>
LEGAL INVESTMENT
The Offered Certificates (other than the Class ___ and Class ___ 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
not lower than the second highest rating category by one or more nationally
recognized statistical rating organizations and, as such, will be legal
investments for certain entities to the extent provided in SMMEA and applicable
state laws. The Class ___ Certificates and the Class ___ Certificates will not
constitute "mortgage related securities" for purposes of SMMEA.
WE REFER YOU TO "LEGAL INVESTMENT CONSIDERATIONS" IN THIS PROSPECTUS SUPPLEMENT
AND "LEGAL INVESTMENT MATTERS" IN THE PROSPECTUS FOR ADDITIONAL INFORMATION.
S-6
<PAGE>
RISK FACTORS
THE FOLLOWING INFORMATION, WHICH YOU SHOULD CAREFULLY CONSIDER, IDENTIFIES
CERTAIN SIGNIFICANT SOURCES OF RISK ASSOCIATED WITH AN INVESTMENT IN THE
CERTIFICATES. YOU SHOULD ALSO CAREFULLY CONSIDER THE INFORMATION SET FORTH UNDER
"RISK FACTORS" IN THE PROSPECTUS.
[ADDITIONAL APPROPRIATE RISK FACTORS AS NECESSARY]
[CERTAIN MORTGAGE LOANS HAVE HIGH LOAN-TO-VALUE RATIOS WHICH MAY PRESENT A
GREATER RISK OF LOSS WITH RESPECT TO SUCH MORTGAGE LOANS
Approximately _____% of the mortgage loans, by aggregate principal balance
as of _________ __, ____, had a loan-to-value ratio at origination in excess of
80%. No mortgage loan in the mortgage pool with a loan-to-value ratio at
origination in excess of 80% will be covered by a primary mortgage insurance
policy. No mortgage loan will have a loan-to-value ratio exceeding __% at
origination. Mortgage loans with higher loan-to-value ratios may present a
greater risk of loss. In addition, an overall decline in the residential real
estate market, a rise in interest rates over a period of time and the general
condition of a mortgaged property, as well as other factors, may have the effect
of reducing the value of such mortgaged property from the appraised value at the
time the mortgage loan was originated. If there is a reduction in value of the
mortgaged property, the loan-to-value ratio may increase over what it was at the
time the mortgage loan was originated. Such an increase may reduce the
likelihood of liquidation or other proceeds being sufficient to satisfy the
mortgage loan. There can be no assurance that the loan-to-value ratio of any
mortgage loan determined at any time after origination is less than or equal to
its original loan-to-value ratio. See "The Mortgage Pool--General" herein].
[CERTAIN MORTGAGE LOANS ARE DELINQUENT AS OF THE CUT-OFF DATE, WHICH MAY PRESENT
A GREATER RISK OF LOSS WITH RESPECT TO SUCH MORTGAGE LOANS
Approximately ____% of the mortgage loans, by aggregate principal balance
as of ________ __, ____, were thirty days or more but less than sixty days
delinquent in their monthly payments as of _______ __, ____. Approximately ____%
of the mortgage loans, by aggregate principal balance as of ________ __, ____,
were sixty days or more but less than ninety days delinquent in their monthly
payments as of the _________ __, ____. However, investors in the mortgage loans
should realize that approximately _____% of the mortgage loans, by aggregate
principal balance as of ________ __, ____, have a first payment date occurring
on or after _________ __, ____ and, therefore, such mortgage loans could not
have been delinquent as of ________ __, ____].
[THE MORTGAGE LOANS ARE CONCENTRATED IN THE [STATE OF ___________], WHICH MAY
PRESENT A GREATER RISK OF LOSS WITH RESPECT TO SUCH MORTGAGE LOANS
Approximately _____% of the mortgage loans, by aggregate principal balance
of the mortgage loans as of __________ __, ____, are secured by mortgaged
properties located in the State of _________. The aggregate principal balance of
mortgage loans in the ________ zip code with the largest amount of such mortgage
loans, by aggregate principal balance as of ________ __, ____, was approximately
$_____________. If the __________ residential real estate market should
experience an overall decline in property values after the dates of origination
of the mortgage loans, the rates of delinquencies, foreclosures, bankruptcies
and losses on the mortgage loans may increase over historical levels of
comparable type loans, and may increase substantially.
[THE CERTIFICATES ARE OBLIGATIONS OF THE TRUST ONLY
The certificates will not represent an interest in or obligation of the
Depositor, the Master Servicer, the Seller, the Trustee or any of their
respective affiliates. Neither the certificates nor the underlying mortgage
loans will be guaranteed or insured by any governmental agency or
instrumentality, or by the Depositor, the Master Servicer, the Trustee or any of
their respective affiliates. Proceeds of the assets included in the trust will
be the sole source of payments on the Offered Certificates, and there will be no
recourse to the Depositor, the Master Servicer, the Seller, the Trustee or any
other entity in the event that such proceeds are insufficient or otherwise
unavailable to make all payments provided for under the Offered Certificates].
S-7
<PAGE>
[THE RATE AND TIMING OF PRINCIPAL DISTRIBUTIONS ON THE OFFERED CERTIFICATES WILL
BE AFFECTED BY PREPAYMENT SPEEDS
The rate and timing of distributions allocable to principal on the Class A
Certificates will depend, in general, on the rate and timing of principal
payments (including prepayments and collections upon defaults, liquidations and
repurchases) on the mortgage loans and the allocation thereof to pay principal
on such certificates as provided herein. The rate and timing of distributions
allocable to principal on the other classes of Offered Certificates, other than
the Class XS Certificates, will depend in general, on the rate and timing of
principal payments (including prepayments and collections upon defaults,
liquidations and repurchases) on all of the mortgage loans and the allocation
thereof to pay principal on such certificates as provided herein. As is the case
with mortgage pass-through certificates generally, the Offered Certificates are
subject to substantial inherent cash-flow uncertainties because the mortgage
loans may be prepaid at any time. However, with respect to approximately _____%
of the mortgage loans, by aggregate principal balance as of ________ __, ____, a
prepayment may subject the related mortgagor to a prepayment charge, which may
act as a deterrent to prepayment of such mortgage loan. See "The Mortgage Pool"
herein.
Generally, when prevailing interest rates are increasing, prepayment rates
on mortgage loans tend to decrease. A decrease in the prepayment rates on the
mortgage loans will result in a reduced rate of return of principal to investors
in the Class A Certificates at a time when reinvestment at such higher
prevailing rates would be desirable. A decrease in the prepayment rates on all
of the mortgage loans will result in a reduced rate of return of principal to
investors in the other classes of Offered Certificates, other than the Class XS
Certificates, at a time when reinvestment at such higher prevailing rates would
be desirable.
Conversely, when prevailing interest rates are declining, prepayment rates
on mortgage loans tend to increase. An increase in the prepayment rates on the
mortgage loans will result in a greater rate of return of principal to investors
in the related Class A Certificates, at time when reinvestment at comparable
yields may not be possible. An increase in the prepayment rates on all of the
mortgage loans will result in a greater rate of return of principal to investors
in the other classes of Offered Certificates, other than the Class XS
Certificates, at a time when reinvestment at comparable yields may not be
possible.
Prior to the distribution date in _______ ____, the Subordinate
Certificates will be entitled to receive distributions allocable to principal
based on a disproportionately small percentage of principal prepayments on the
mortgage loans, and the Class A Certificates will be entitled to receive
distributions allocable to principal based on a disproportionately large
percentage (which may be 100%) of principal prepayments on the mortgage loans.
To the extent that no principal prepayments or a disproportionately small
percentage of such prepayments are distributed on the Subordinate Certificates,
the subordination afforded to the Class A Certificates, in the absence of losses
allocated to such certificates, will be increased.
For further information regarding the effect of principal prepayments on
the weighted average lives of the Offered Certificates, see "Yield on the
Certificates" herein, including the table entitled "Percent of Initial
Certificate Principal Balance Outstanding at the Following Percentages of the
Prepayment Assumption"].
[THE YIELD TO MATURITY ON THE OFFERED CERTIFICATES WILL DEPEND ON A VARIETY OF
FACTORS
The yield to maturity on the Offered Certificates, particularly the Class
XS Certificates, will depend, in general, on:
o the applicable purchase price; and
o the rate and timing of principal payments (including prepayments and
collections upon defaults, liquidations and repurchases) on the
related mortgage loans and the allocation thereof to reduce the
certificate principal balance or notional amount of such certificates,
as well as other factors.
The yield to investors on the Offered Certificates will be adversely
affected by any allocation thereto of interest shortfalls on the mortgage loans.
S-8
<PAGE>
In general, if the Offered Certificates, other than the Class XS
Certificates, are 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 the Offered Certificates, other than the Class XS
Certificates, are purchased at a discount and principal distributions thereon
occur at a rate slower than that anticipated at the time of purchase, the
investor's actual yield to maturity will be lower than that originally assumed.
The proceeds to the Depositor from the sale of the Offered Certificates
were determined based on a number of assumptions, including a prepayment
assumption of ____% of the standard prepayment assumption, and weighted average
lives corresponding thereto. No representation is made that the mortgage loans
will prepay at such rate or at any other rate, or that the mortgage loans will
prepay at the same rate. The yield assumptions for the Offered Certificates will
vary as determined at the time of sale. See "Yield on the Certificates" herein].
[THE MULTIPLE CLASS STRUCTURE OF THE OFFERED CERTIFICATES CAUSES THE YIELD OF
CERTAIN CLASSES TO BE PARTICULARLY SENSITIVE TO CHANGES IN THE RATES OF
PREPAYMENT OF THE RELATED MORTGAGE LOANS AND OTHER FACTORS
CLASS XS CERTIFICATES: The Class XS Certificates will receive a portion of
the interest payments ONLY from mortgage loans that have net mortgage rates
higher than ____%. Therefore, the yield on the Class XS Certificates will be
extremely sensitive to the rate and timing of principal prepayments and defaults
on such mortgage loans. Investors in the Class XS Certificates should be aware
that mortgage loans with higher mortgage rates may prepay faster than mortgage
loans with lower mortgage rates. If the mortgage loans that have net mortgage
rates higher than ____% are prepaid at a rate faster than an investor assumed at
the time of purchase, the yield to investors in the Class XS Certificates will
be adversely affected. Investors in the Class XS Certificates should fully
consider the risk that a rapid rate of prepayments on the mortgage loans that
have net mortgage rates higher than ____% could result in the failure of such
investors to fully recover their investments.
SUBORDINATE CERTIFICATES: The weighted average lives of, and the yield to
maturity on, the Class B-1 Certificates, the Class B-2 Certificates and the
Class B-3 Certificates will be progressively more sensitive, in increasing order
of their numerical class designations, to losses due to defaults on the mortgage
loans (and the timing thereof), to the extent such losses are not covered by
subordinate certificates with a higher numerical class designation (including
covered by the Class B-4, Class B-5 and Class B-6 Certificates which are not
offered hereby). Furthermore, as described herein, the timing of receipt of
principal and interest by any class of subordinate certificates may be adversely
affected by losses even if such class does not ultimately bear such loss].
[VIOLATION OF VARIOUS FEDERAL AND STATE LAWS MAY RESULT IN LOSSES ON THE
MORTGAGE LOANS
Applicable state laws generally regulate interest rates and other charges,
require certain disclosure, and require licensing of the Seller. In addition,
other state laws, public policy and general principles of equity relating to the
protection of consumers, unfair and deceptive practices and debt collection
practices may apply to the origination, servicing and collection of the mortgage
loans.
The mortgage loans are also subject to federal laws, including:
o the Federal Truth-in-Lending Act and Regulation Z promulgated
thereunder, which require certain disclosures to the borrowers
regarding the terms of the mortgage loans;
o the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race,
color, sex, religion, marital status, national origin, receipt of
public assistance or the exercise of any right under the Consumer
Credit Protection Act, in the extension of credit; and
o the Fair Credit Reporting Act, which regulates the use and reporting
of information related to the borrower's credit experience.
S-9
<PAGE>
Depending on the provisions of the applicable law and the specific facts
and circumstances involved, violations of these federal or state laws, policies
and principles may limit the ability of the trust to collect all or part of the
principal of or interest on the mortgage loans, may entitle the borrower to a
refund of amounts previously paid and, in addition, could subject the Seller to
damages and administrative enforcement.
The Seller will represent that as of the closing date, each mortgage loan
is in compliance with applicable federal and state laws and regulations. In the
event of a breach of such representation, it will be obligated to cure such
breach or repurchase or replace the affected mortgage loan in the manner
described in the prospectus].
[YEAR 2000 SYSTEMS RISK COULD AFFECT THE ABILITY OF THE MASTER SERVICER TO
PERFORM ITS DUTIES
As is the case with most companies using computers in their operations, the
Master Servicer is faced with the task of completing its compliance goals in
connection with the year 2000 issue. The year 2000 issue is the result of prior
computer programs being written using two digits, rather than four digits, to
define the applicable year. Any of the Master Servicer's computer programs that
have time-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. Any such occurrence could result in major computer
system failure or miscalculations. The Master Servicer is presently engaged in
various procedures to ensure that its computer systems and software will be year
2000 compliant. However, in the event that the Master Servicer, or any of its
suppliers, customers, brokers or agents do not successfully and timely achieve
year 2000 compliance, the performance of obligations of the Master Servicer
under the pooling and servicing agreement could be materially adversely
affected].
THE MORTGAGE POOL
The information set forth in the following paragraphs has been provided by
the Seller. Neither of the Depositor nor any other affiliate of the Seller, nor
the Underwriters, the Trustee, the Certificate Insurer or any of their
respective affiliates have made or will make any representation as to the
accuracy or completeness of such information.
Unless otherwise noted, all statistical percentages set forth in this
prospectus supplement are measured as a percentage of the aggregate balance of
the Mortgage Loans or the number of Mortgage Loans as of the Cut-off Date
Certain information with respect to the Mortgage Loans to be included in
the Mortgage Pool is set forth herein. Prior to the Closing Date, Mortgage Loans
may be substituted therefor. Some amortization of the Mortgage Loans may occur
prior to the Closing Date. Moreover, certain of the Mortgage Loans may prepay in
full, or may be determined not to meet the eligibility requirements for the
final pool of Mortgage Loans acquired by the Trust on the Closing Date. The
Seller believes that the information set forth herein with respect to the
Mortgage Pool is representative of the characteristics of the Mortgage Pool as
it will be constituted at the Closing Date, although certain characteristics of
the Mortgage Loans may vary.
GENERAL
Option One Mortgage Loan Trust __________ (the "Trust") will consist of
first lien, fixed-rate mortgage loans (the "Mortgage Loans" or the "Mortgage
Pool"). The Mortgage Loans have original terms to maturity ranging from 10 to 30
years and an aggregate principal balance as of the Cut-off Date of approximately
$__________. All Mortgage Loan statistics set forth herein are based on
principal balances, interest rates, terms to maturity, mortgage loan counts and
similar statistics as of the Cut-off Date. All weighted averages specified
herein are based on the principal balances of the Mortgage Loans as of the
Cut-off Date, as adjusted for the scheduled principal payments received or
advanced on or before such date (each, a "Cut-off Date Principal Balance"). The
"Principal Balance" of a Mortgage Loan, as of any date, is equal to the
principal balance of such Mortgage Loan at its origination, less the sum of
scheduled and unscheduled payments in respect of principal made on such Mortgage
Loan. References to percentages of the Mortgage Loans mean percentages based on
the aggregate of the Cut-off Date Principal Balances of the Mortgage Loans,
unless otherwise specified. The Mortgage Loans are subject to the "due-on-sale"
provisions included therein which provide that the Mortgage Loan is assumable by
a creditworthy purchaser of the related Mortgaged Property.
S-10
<PAGE>
The Depositor will purchase the Mortgage Loans from the Seller pursuant to
the Mortgage Loan Purchase Agreement (the "Mortgage Loan Purchase Agreement"),
dated as of the Cut-off Date, between the Seller and the Depositor. Pursuant to
the Agreement, the Depositor will cause the Mortgage Loans and the Depositor's
rights under the Mortgage Loan Purchase Agreement to be assigned to the Trustee
for the benefit of the Certificateholders. See "The Pooling Agreement" herein
and "The Pooling Agreement" in the Prospectus.
Each of the Mortgage Loans in the Mortgage Pool were selected from the
Seller's portfolio of mortgage loans. The Mortgage Loans were originated by the
Seller or acquired by the Seller in the secondary market in the ordinary course
of its business and were underwritten or re-underwritten by the Seller in
accordance with its underwriting standards as described in "Option One Mortgage
Corporation--Underwriting Standards."
Under the Mortgage Loan Purchase Agreement, the Seller will make certain
representations and warranties to the Trustee relating to, among other things,
the due execution and enforceability of the Mortgage Loan Purchase Agreement and
certain characteristics of the Mortgage Loans and, subject to certain
limitations, will be obligated to repurchase or substitute a similar mortgage
loan for any Mortgage Loan as to which there exists deficient documentation or
an uncured breach of any such representation or warranty, if such breach of any
such representation or warranty materially and adversely affects the
Certificateholders' interests in such Mortgage Loan. The Seller is selling the
Mortgage Loans without recourse and will have no obligation with respect to the
Certificates in its capacity as Seller other than the repurchase or substitution
obligations described above.
Substantially all of the Mortgage Loans in the Mortgage Pool have scheduled
monthly payments due on the first day of the month (with respect to each
Mortgage Loan, a "Due Date"). No Mortgage Loan in the Mortgage Pool will be
covered by a primary mortgage insurance policy.
The Mortgage Loans consist of _______ fixed-rate Mortgage Loans with an
aggregate principal balance of approximately $______________ as of the Cut-off
Date.
Approximately ______% of the Mortgage Loans provide for payment by the
borrower of a prepayment premium in limited circumstances on certain
prepayments. Generally, each such Mortgage Loan provides for payment of a
prepayment premium on partial prepayments and prepayments in full made within a
stated number of months that is between [6 and 60] months from the date of
origination of such Mortgage Loan. The amount of the prepayment premium is
provided in the related mortgage note and is generally equal to six months'
interest on any amounts prepaid in excess of 20% of the original principal
balance of the related Mortgage Loan in any 12 month period.
MORTGAGE LOANS STATISTICS
The Mortgage Loans have original terms to maturity of 30 years. The
following statistical information, unless otherwise specified, is based upon the
aggregate principal balance of the Mortgage Loans as of the Cut-off Date.
The Mortgage Loans are secured by Mortgages creating first liens on
Mortgaged Properties. Approximately _____% of the Mortgage Loans had
Loan-to-Value Ratios at origination in excess of 80.00%. Approximately ______%
of the Mortgage Loans had Loan-to-Value Ratios at origination greater than
_____% but not more than _____%. There can be no assurance that the
Loan-to-Value Ratio of any Mortgage Loan determined at any time after
origination is less than or equal to its original Loan-to-Value Ratio.
None of the Mortgage Loans are Balloon Loans.
Approximately ______% of the Mortgage Loans provide for the payment of
prepayment premiums by the related borrowers in certain instances.
The weighted average remaining term to maturity of the Mortgage Loans will
be approximately ____ months as of the Cut-off Date. None of the Mortgage Loans
had a first Due Date prior to [month/year] or after [month/year] or will have a
remaining term to maturity of less than ___ months or greater than 30 years as
of the Cut-off Date. The latest maturity date of any Mortgage Loan is
[month\year].
S-11
<PAGE>
The average Principal Balance of the Mortgage Loans at origination was
approximately $__________. The average Cut-off Date Principal Balance of the
Mortgage Loans was approximately $__________.
No Mortgage Loan had a Cut-off Date Principal Balance of greater than
approximately $________ or less than approximately $___________.
The Mortgage Loans had Loan Rates as of the Cut-off Date of not less than
_______% per annum and not more than ________% per annum and the weighted
average Loan Rate was approximately _______% per annum.
The Mortgage Loans are expected to have the following characteristics as of
the Cut-off Date (the sum in any column may not equal the total indicated due to
rounding):
CREDIT GRADE FOR THE MORTGAGE LOANS(1)
% of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Credit Grade of Mortgage Loans the Cut-off Date the Cut-off Date
- --------------- ----------------- -------------------- -------------------
Total .......
______________________
(1) For a description of each credit grade, see "Option One Mortgage
Corporation - Underwriting Standards" herein.
<PAGE>
CUT-OFF DATE PRINCIPAL BALANCES OF THE MORTGAGE LOANS(1)
% of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Principal Balance($) of Mortgage Loans the Cut-off Date the Cut-off Date
- -------------------- ----------------- ----------------- ------------------
241,158 - 250,000
250,001 - 275,000
275,001 - 300,000
300,001 - 325,000
325,001 - 350,000
350,001 - 375,000
375,001 - 400,000
400,001 - 425,000
425,001 - 450,000
450,001 - 475,000
475,001 - 500,000
625,001 - 650,000
650,001 - 675,000
825,001 - 830,474
Total .............
- ----------------------
(1) The average Cut-off Date Principal Balance of the Mortgage Loans was
approximately $_____________.
REMAINING TERMS TO MATURITY OF THE MORTGAGE LOANS(1)
% of Aggregate
Principal Balance Principal Balance
Remaining Term Number Outstanding as of Outstanding as of
(months) of Mortgage Loans the Cut-off Date the Cut-off Date
- ---------------- ----------------- ----------------- ------------------
352-360 ........
Total ..........
_______________
(1) The weighted average remaining term of the Mortgage Loans was approximately
_____ months.
S-13
<PAGE>
<TABLE>
<CAPTION>
PROPERTY TYPES OF THE MORTGAGE LOANS
% of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Property Type of Mortgage Loans the Cut-off Date the Cut-off Date
- ----------------------------- ----------------- ----------------- ------------------
<S> <C> <C> <C>
Single Family Detached ......
PUD Detached (1) ............
Condo Low-Rise ..............
Attached ....................
Single Family Attached ......
2-4 Units Detached ..........
Condo High-Rise .............
Attached ....................
PUD Attached (1) ............
Total ..............
___________________
(1) PUD refers to a home or "unit" in a Planned Unit Development.
</TABLE>
OCCUPANCY STATUS OF THE MORTGAGE LOANS
% of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Occupancy Status(1) of Mortgage Loans the Cut-off Date the Cut-off Date
- ------------------- ----------------- ----------------- ------------------
Primary ...........
Non-owner .........
Second Home .......
Total .........
_________________
(1) Occupancy as represented by the borrower at the time of origination.
PURPOSE OF THE MORTGAGE LOANS
% of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Purpose of Mortgage Loans the Cut-off Date the Cut-off Date
- ----------------------- ----------------- ----------------- -----------------
Cash Out Refinance ....
Purchase ..............
Rate/Term Refinance ...
Total ........
S-14
<PAGE>
CURRENT LOAN RATES OF THE MORTGAGE LOANS(1)
% of Aggregate
Principal Balance Principal Balance
Current Loan Rate Number Outstanding as of Outstanding as of
(%) of Mortgage Loans the Cut-off Date the Cut-off Date
- -------------------- ----------------- ----------------- ------------------
6.75 -
7.00 ...........
7.01 -
8.00 ...........
8.01 -
9.00 ...........
9.01 -
10.00 ...........
10.01 -
11.00 ...........
11.01 -
12.00 ...........
12.01 -
12.85 ...........
Total ........
__________________
(1) The weighted average Loan Rate of the Mortgage Loans as of the Cut-off Date
was approximately _______% per annum.
ORIGINAL LOAN-TO-VALUE RATIOS OF THE MORTGAGE LOANS(1)(2)
% of Aggregate
Principal Balance Principal Balance
Original Loan-to-Value Number Outstanding as of Outstanding as of
Ratio(%) of Mortgage Loans the Cut-off Date the Cut-off Date
- ---------------------- ----------------- ----------------- -----------------
17.17 - 20.00 ......
45.01 - 50.00 ......
50.01 - 55.00 ......
55.01 - 60.00 ......
60.01 - 65.00 ......
65.01 - 70.00 ......
70.01 - 75.00 ......
75.01 - 80.00 ......
80.01 - 85.00 ......
85.01 - 90.00 ......
90.01 - 95.00 ......
Total .......
___________________
(1) The weighted average original Loan-to-Value Ratio of the Mortgage Loans as
of the Cut-off Date was approximately _______%.
(2) For a description of the determination of Loan-to-Value Ratio by the Master
Servicer see "Option One Mortgage Corporation - Underwriting Standards"
herein.
S-15
<PAGE>
GEOGRAPHIC DISTRIBUTION OF THE MORTGAGED PROPERTIES(1)
% of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Location of Mortgage Loans the Cut-off Date the Cut-off Date
- ---------------------- ----------------- ----------------- -----------------
Arizona ..............
California ...........
Colorado .............
Connecticut ..........
Delaware .............
District of Columbia .
Florida ..............
Georgia ..............
Illinois .............
Kentucky .............
Maine ................
Maryland .............
Massachusetts ........
Michigan .............
Minnesota ............
Missouri .............
Nevada ...............
New Hampshire ........
New Jersey ...........
New York .............
Ohio .................
Oregon ...............
Pennsylvania .........
Tennessee ............
Texas ................
Vermont ..............
Virginia .............
Washington ...........
Wisconsin ............
Total ...........
___________________
(1) The greatest ZIP Code geographic concentration of the Mortgage Loans, by
Loan Balance as of the Cut-off Date, was approximately ______% in the
_______ ZIP Code.
S-16
<PAGE>
<TABLE>
<CAPTION>
DOCUMENTATION LEVELS OF THE MORTGAGE LOANS(1)
% of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Documentation Level of Mortgage Loans the Cut-off Date the Cut-off Date
- --------------------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
Full Documentation ..............
Lite Documentation ..............
Stated Income Documentation .....
Total ..................
</TABLE>
_______________________
(1) For a description of each documentation level, see "Option One Mortgage
Corporation - Underwriting Standards" herein.
OPTION ONE MORTGAGE CORPORATION
GENERAL
The information set forth in the following paragraphs has been provided by
Option One Mortgage Corporation ("Option One"). Neither the Depositor nor any
other affiliate of Option One, nor the Trustee, the Underwriters or any of their
affiliates has made or will make any representation as to the accuracy or
completeness of such information.
Option One, a California corporation, headquartered in Irvine, California,
will serve as the Master Servicer pursuant to the Agreement for the Mortgage
Loans.
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.
Option One is a wholly-owned subsidiary of Block Financial, which is in
turn a wholly-owned subsidiary of H&R Block, Inc. As of December 31, _____,
Option One had ______ loan origination centers in [state], ____ loan origination
centers in [state] and _____ loan origination center in each of [state] and
[state].
Option One operates as a stand-alone mortgage banking company and is a
Fannie Mae and Freddie Mac approved servicer.
The following tables set forth, as of December 31, ____, ____, ____ and
_____ 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 has not been paid by the next scheduled
due date for such mortgage loan.
DELINQUENCIES AND FORECLOSURES
(Dollars in Thousands)
S-17
<PAGE>
<TABLE>
<CAPTION>
At December 31, ____ At December 31, ____
-------------------------------------------- ----------------------------------------------
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 ......
Period of Delinquency
31-59 Days ...........
60-89 Days ...........
90 days or more ......
Total Delinquent Loans
Loans in Foreclosure(1)
</TABLE>
<TABLE>
<CAPTION>
At December 31, ____ At December 31, ____
-------------------------------------------- ----------------------------------------------
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 ......
Period of Delinquency
31-59 Days ...........
60-89 Days ...........
90 days or more ......
Total Delinquent Loans
Loans in Foreclosure(1)
</TABLE>
S-18
<PAGE>
<TABLE>
<CAPTION>
REAL ESTATE OWNED
(Dollars in Thousands)
At December 31, ___ At December 31, ____ At December 31, ____ At December 31, ____
-------------------- --------------------- -------------------- ----------------------
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
Foreclosed Loans(2)
Foreclosure Ratio(3)
</TABLE>
_______________________
(1) Loans in foreclosure are also included under the heading "Total Delinquent
Loans."
(2) For the purpose 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.
(3) 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.
LOAN LOSS EXPERIENCE ON OPTION ONE'S SERVICING PORTFOLIO OF MORTGAGE LOANS
(Dollars in Thousands)
Year Ended December 31,
------------------------------------- --------------
---- ---- ----- -----
------------------------------------- --------------
Total Portfolio (1)
Net Losses (2)(3)
Net Losses as a Percentage
of Total Portfolio
________________________
(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) "Net Losses" means "Gross Losses" minus "Recoveries." "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. "Recoveries" are
recoveries from liquidation proceeds and deficiency judgments.
(3) "Net Losses" are computed on a loan-by-loan basis and are reported with
respect to the period in which the loan is liquidated. If additional costs
are incurred or recoveries are received after the end of the period, the
amounts are adjusted with respect to the period in which the related loan
was liquidated. Accordingly, the Net Losses reported in the table may
change in future periods. The information in this table reflects costs and
recoveries through ___________.
It is unlikely that the delinquency experience of the Mortgage Loans
included in the Mortgage Pool will correspond to the delinquency experience of
Option One's mortgage portfolio set forth in the foregoing tables. The
statistics shown above represent the delinquency experience for Option One's
mortgage servicing portfolio only for the periods presented, whereas the
aggregate delinquency experience on the Mortgage Loans included in the Mortgage
Pool will depend on the results obtained over the life of the Mortgage Pool. In
particular, investors should note that newly originated mortgage loans will not
be added to the Mortgage Pool after the Closing Date, and the Mortgage Pool will
therefore consist of a static group of Mortgage Loans, whereas new mortgage
loans are continually being originated and added to the group for which such
statistics above are compiled. Accordingly the actual loss and delinquency
percentages with respect to the Mortgage Pool are likely to be substantially
higher than those indicated in the tables above. In addition, 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 Option One. Furthermore, adverse economic conditions
may affect the timely payment by
S-19
<PAGE>
Mortgagors of scheduled payments of principal and interest on such Mortgage
Loans and, accordingly, the actual rates of delinquencies and foreclosures with
respect to the Mortgage Pool.
UNDERWRITING STANDARDS
The 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 intended to assess (i) the value of the
mortgaged property and to evaluate the adequacy of such property as collateral
for the mortgage loan and (ii) the creditworthiness of the related mortgagor.
The Mortgage Loans were also generally underwritten with a view toward the
resale thereof in the secondary market. The Mortgage Loans generally bear higher
rates of interest than mortgage loans that are originated in accordance with
Fannie Mae and Freddie Mac 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 Fannie Mae and Freddie Mac.
The Option One Guidelines require a review of the appraisal by a loan
underwriter, who may request a written review by an independent appraiser
retained by Option One.
[The Mortgage Loans were originated consistent with and generally conform
to the Option One Guidelines' "Full Documentation," "Lite 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 ratio 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
$350,000. Mortgage loans may, however, be originated generally up to $950,000.
The Option One Guidelines permit one to four-family loans to have LTVs at
origination of generally up to 80% (except as otherwise described below),
depending on, among other things, the purpose of the mortgage loan, a
mortgagor's credit history, repayment ability and debt service-to-income ratio,
as well as the type and use of the property. With respect to mortgage loans
where the review of the appraisal results in a valuation of the mortgaged
property that is more than (i) 10% less in the case of mortgage loans with LTVs
less than or equal to 80% or (ii) 5% less in the case of mortgage loans with
LTVs in excess of 80%, the LTV of the related mortgage loan is based on the
valuation obtained in the review of the original appraisal. With respect to
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. There can be no assurance that
the value of a Mortgaged Property estimated in any appraisal or review is equal
to the actual value of such Mortgaged Property at the time of such appraisal or
review. Furthermore, there can be no assurance that the actual value of a
Mortgaged Property has not declined subsequent to the time of such appraisal or
review.]
S-20
<PAGE>
[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 verification
of stable income for 24 months (or, if the LTV is less than or equal to 80%, for
12 months). Under the Lite Documentation program, applicants generally are
required to submit 3 months bank statements or a paystub as verification of
income. 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 within the last 12 months, and no 60-day late
payments within the last 24 months is acceptable on an existing mortgage loan.
An existing mortgage loan must be current at the time of application and
funding. No open collection accounts or open charge-offs filed in the last 24
months may remain open after the funding of the loan. No bankruptcy or notice of
default filings may have occurred during the preceding five years. A minimum
FICO score of 640 is required if the LTV is less than or equal to 90%, a minimum
FICO score of 648 is required if the LTV is greater than 90%. The mortgaged
property must be in at least average condition. A maximum LTV of 95% is
permitted for a mortgage loan on a single family owner-occupied property. The
debt service-to-income ratio must not exceed 45%.]
["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 chapter 13
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
on LTVs less than or equal to 80%. The mortgaged property must be in at least
average condition. A maximum LTV of 95% is permitted for a mortgage loan on a
single family owner-occupied property. A maximum LTV of 90% is permitted for a
mortgage loan on an owner-occupied condominium or a maximum LTV of 80% is
permitted on a two to four-family residential property. 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 filed within the last 24 months may
remain open after funding of the loan if the LTV is greater than 80%; if the LTV
is less than or equal to 80%, then up to $500 may remain open after funding of
the loan. No bankruptcy filings may have occurred during the preceding two
years; provided, however, that if the borrower's chapter 13 bankruptcy has been
discharged during the past two 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, if the LTV is less
than or equal to 80%. No notice of default filings may have occurred during the
preceding three years if the LTV is greater than 80% or two years if the LTV is
less than or equal to 80%. The mortgaged property must be in at least average
condition. A maximum LTV of 90% is permitted for a mortgage loan on a single
family or condo owner-occupied property. A maximum LTV of 75% (or 60% for
mortgage loans originated under the Stated Income Documentation program) is
permitted for a mortgage loan on a non-owner-occupied property. However, for
most refinance mortgage loans under the Full Documentation program, a maximum
LTV of 80% is permitted for a mortgage loan on an owner-occupied property, and a
maximum LTV of 75% is permitted only for a mortgage loan on a non-owner-occupied
property. The debt service-to-income ratio generally ranges from 45% or less to
55% or less depending on the Qualifying Rate and the LTV.]
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["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,
or, if the LTV is less than or equal to 80%, two 30-day late payments, and one
60-day late payment in 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, unless there has been a 60-day late payment in the
last 12 months. 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 if the LTV is greater than
80% or $1,500 if the LTV is less than or equal to 80% in open charge-offs or
collection accounts filed within the last 24 months 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 with respect to loans with LTVs
that are less than or equal to 80% or the preceding 24 months with respect to
loans with LTVs that are greater than 80%; provided, however, that if the
borrower's chapter 13 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, if the LTV is less than or equal to 80%. The mortgaged
property must be in at least average condition. A maximum LTV of 85% is
permitted for a mortgage loan on an owner-occupied property for the Full
Documentation program or 80% for the Stated Income Documentation program. A
maximum LTV of 75% (or 60% for mortgage loans originated under the Stated Income
Documentation program) is permitted for a mortgage loan on a non-owner-occupied
property. The debt service-to-income ratio generally ranges from 45% 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 months 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 $3,000 in open charge-offs or collection accounts filed within the last 24
months 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 12
months; provided, however, that if the borrower's chapter 13 bankruptcy has been
discharged during the past 12 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 adequate condition. Generally, a maximum LTV of 75% for a
mortgage loan on an owner-occupied property for the Full Documentation program
or 70% for the Lite Documentation program is permitted. A maximum LTV of 70% is
permitted for a mortgage loan on a single family, detached non-owner-occupied
property. A maximum LTV of 65% is permitted under the Full Documentation program
or Lite Documentation program for all other acceptable types of properties. The
debt service-to-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, mortgage
delinquency, including foreclosure proceedings, will be considered on a
case-by-case basis. 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. The mortgaged property may exhibit some deferred
maintenance. A maximum LTV of 65% (or 60% non-owner-occupied for mortgage loans
originated under the Lite 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.]
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THE POOLING AGREEMENT
GENERAL
The Certificates will be issued pursuant to the Pooling and Servicing
Agreement, dated as of ____________ (the "Agreement"), among the Depositor, the
Master Servicer and the Trustee. The Trust created under the Agreement will
consist of (i) all of the Depositor's right, title and interest in the Mortgage
Loans, the related mortgage notes, mortgages and other related documents, (ii)
all payments on or collections in respect of the Mortgage Loans due after the
Cut-off Date, together with any proceeds thereof, (iii) any Mortgaged Properties
acquired on behalf of Certificateholders by foreclosure or by deed in lieu of
foreclosure, and any revenues received thereon, (iv) the rights of the Trustee
under all insurance policies required to be maintained pursuant to the Agreement
and (v) the rights of the Depositor under the Mortgage Loan Purchase Agreement
between the Depositor and the Seller. The Offered Certificates will be
transferable and exchangeable at the corporate trust offices of the Trustee.
ASSIGNMENT OF THE MORTGAGE LOANS
On the Closing Date, the Depositor will transfer to the Trust all of its
right, title and interest in and to each Mortgage Loan, the related mortgage
note, mortgage, assignment of mortgage in recordable form to the Trustee and
other related documents (collectively, the "Related Documents"), including all
scheduled payments with respect to each such Mortgage Loan due on or after the
Cut-off Date. The Trustee, concurrently with such transfer, will deliver the
Certificates to the Depositor. Each Mortgage Loan transferred to the Trust will
be identified on a schedule (the "Mortgage Loan Schedule") delivered to the
Trustee pursuant to the Agreement. Such schedule will include information such
as the Principal Balance of each Mortgage Loan as of the Cut-off Date, its Loan
Rate as well as other information.
The Agreement will require that, within the time period specified therein,
the Seller will deliver or cause to be delivered to the Trustee (or a custodian,
as the Trustee's agent for such purpose) the mortgage notes endorsed to the
Trustee on behalf of the Certificateholders and the Related Documents. In lieu
of delivery of original mortgages or mortgage notes, if such original is not
available or lost, the Seller, upon the consent of the Certificate Insurer, may
deliver or cause to be delivered true and correct copies thereof, or, with
respect to a lost mortgage note, a lost note affidavit executed by the Seller.
The assignments of mortgage are generally required to be recorded by or on
behalf of the Seller in the appropriate offices for real property records;
provided, however, that such assignments of mortgage are not required to be
recorded if the Seller furnishes to the Trustee, on or before the Closing Date,
at the Seller's expense, an opinion of counsel with respect to the relevant
jurisdictions that such recording is not necessary to perfect the Trustee's
interest in the related Mortgage Loan; provided further, however,
notwithstanding the delivery of such opinion of counsel, upon the occurrence of
certain events set forth in the Agreement, each such assignment of mortgage
shall be recorded by the Master Servicer or the Trustee as set forth in the
Agreement. The Seller expects to deliver such an opinion of counsel and as a
result of which the assignments of mortgage for substantially all of the
Mortgage Loans will not initially be recorded. Any cost associated with the
recording of such assignments of mortgage will be borne by the Seller; provided,
however, if the Seller fails to pay the cost of recording, such expense will be
paid by the Master Servicer or the Trustee, as applicable, and will be
reimbursable to such party (other than the Master Servicer so long as the Master
Servicer is also the Seller) by the Trust prior to any distribution to
Certificateholders.
On or prior to the Closing Date, the Trustee will review the Mortgage Loans
and the Related Documents pursuant to the Agreement and if any Mortgage Loan or
Related Document is found to be defective in any material respect and such
defect is not cured within 90 days following notification thereof to the Seller
by the Trustee, the Seller will be obligated to either (i) substitute for such
Mortgage Loan a Qualified Substitute Mortgage Loan; however, such substitution
is permitted only within two years of the Closing Date and may not be made
unless an opinion of counsel is provided to the effect that such substitution
will not disqualify the Trust (as defined in the Agreement) as a REMIC or result
in a prohibited transaction tax under the Code or (ii) purchase such Mortgage
Loan at a price (the "Purchase Price") equal to the outstanding Principal
Balance of such Mortgage Loan as of the date of purchase, plus all accrued and
unpaid interest thereon, computed at the Loan Rate through the end of the
calendar month in which the purchase is effected, plus the amount of any
unreimbursed Advances and Servicing Advances made by the Master Servicer. The
Purchase Price will be deposited in the Collection Account on or prior to the
next succeeding Determination Date after such obligation arises. The obligation
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of the Seller to repurchase or substitute for a Deleted Mortgage Loan is the
sole remedy regarding any defects in the Mortgage Loans and Related Documents
available to the Trustee or the Certificateholders.
In connection with the substitution of a Qualified Substitute Mortgage
Loan, the Seller will be required to deposit in the Collection Account on or
prior to the next succeeding Determination Date after such obligation arises an
amount (the "Substitution Adjustment") equal to the excess of the Principal
Balance of the related Deleted Mortgage Loan over the Principal Balance of such
Qualified Substitute Mortgage Loan.
A "Qualified Substitute Mortgage Loan" is a mortgage loan substituted by
the Seller for a Deleted Mortgage Loan which must, on the date of such
substitution, (i) have an outstanding Principal Balance (or in the case of a
substitution of more than one Mortgage Loan for a Deleted Mortgage Loan, an
aggregate Principal Balance), not in excess of, and not more than 5% less than,
the Principal Balance of the Deleted Mortgage Loan; (ii) have a Loan Rate and
Minimum Loan Rate not less than the respective rate for the Deleted Mortgage;
(iii) have the same Due Date as the Deleted Mortgage Loan; (iv) have a remaining
term to maturity not more than one year earlier and not later than the remaining
term to maturity of the Deleted Mortgage Loan; (v) comply with each
representation and warranty as to the Mortgage Loans set forth in the Mortgage
Loan Purchase Agreement (deemed to be made as of the date of substitution); (vi)
have been underwritten or reunderwritten by the Seller in accordance with the
same underwriting criteria and guidelines as the Mortgage Loans being replaced;
(vii) be of the same or better credit quality as the Mortgage Loan being
replaced; and (viii) satisfy certain other conditions specified in the
Agreement.
The Seller will make certain representations and warranties as to the
accuracy in all material respects of certain information furnished to the
Trustee with respect to each Mortgage Loan (e.g., Cut-off Date Principal Balance
and the Loan Rate). In addition, the Seller will represent and warrant, on the
Closing Date, that, among other things: (i) at the time of transfer to the
Depositor, the Seller has transferred or assigned all of its right, title and
interest in each Mortgage Loan and the Related Documents, free of any lien; and
(ii) each Mortgage Loan complied, at the time of origination, in all material
respects with applicable state and federal laws. Upon discovery of a breach of
any such representation and warranty which materially and adversely affects the
interests of the Certificate Insurer or the Certificateholders in the related
Mortgage Loan and Related Documents, the Seller will have a period of 90 days
after discovery or notice of the breach to effect a cure. If the breach cannot
be cured within the 90-day period, the Seller will be obligated to (i)
substitute for such Deleted Mortgage Loan a Qualified Substitute Mortgage Loan
or (ii) purchase such Deleted Mortgage Loan from the Trust. The same procedure
and limitations that are set forth above for the substitution or purchase of
Deleted Mortgage Loans as a result of deficient documentation relating thereto
will apply to the substitution or purchase of a Deleted Mortgage Loan as a
result of a breach of a representation or warranty in the Mortgage Loan Purchase
Agreement that materially and adversely affects the interests of the
Certificateholders.
Mortgage Loans required to be transferred to the Seller as described in the
preceding paragraphs are referred to as "Deleted Mortgage Loans."
Pursuant to the Agreement, the Master Servicer will service and administer
the Mortgage Loans as more fully set forth therein.
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO COLLECTION ACCOUNT AND DISTRIBUTION
ACCOUNT
The Master Servicer shall establish and maintain or cause to be maintained
a separate trust account (the "Collection Account") for the benefit of the
holders of the Certificates and the Certificate Insurer. The Collection Account
will be an Eligible Account (as defined herein). Upon receipt by the Master
Servicer of amounts in respect of the Mortgage Loans (excluding amounts
representing the Servicing Fee or other servicing compensation, reimbursement
for Advances and Servicing Advances and insurance proceeds to be applied to the
restoration or repair of a Mortgaged Property or similar items), the Master
Servicer will deposit such amounts in the Collection Account. Amounts so
deposited may be invested in Eligible Investments (as described in the
Agreement) maturing no later than one Business Day prior to the date on which
the amount on deposit therein is required to be deposited in the Distribution
Account. The Trustee will establish an account (the "Distribution Account") into
which will be deposited amounts withdrawn from the Collection Account for
distribution to Certificateholders on a Distribution Date. The Distribution
Account will be an Eligible Account. Amounts on deposit therein may be invested
in Eligible Investments maturing on or before the Business Day prior to the
related Distribution Date unless such Eligible Investments are invested in
investments managed or advised by the Trustee or an affiliate thereof, in which
case such Eligible Investments may mature on the related Distribution Date.
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<PAGE>
An "Eligible Account" is a segregated account that is (i) an account or
accounts maintained with a federal or state chartered depository institution or
trust company the short-term unsecured debt obligations of which (or, in the
case of a depository institution or trust company that is the principal
subsidiary of a holding company, the short-term unsecured debt obligations of
such holding company) are rated P-1 by Moody's and A-1 by Standard & Poor's (or
comparable ratings if Moody's and Standard & Poor's are not the Rating Agencies)
at the time any amounts are held on deposit therein, (ii) an account or accounts
the deposits in which are fully insured by the Federal Deposit Insurance
Corporation (to the limits established by such corporation), the uninsured
deposits in which account are otherwise secured such that, as evidenced by an
opinion of counsel delivered to the Trustee and to each Rating Agency, the
Certificateholders will have a claim with respect to the funds in such account
or a perfected first priority security interest against such collateral (which
shall be limited to Eligible Investments) securing such funds that is superior
to claims of any other depositors or creditors of the depository institution
with which such account is maintained, (iii) a trust account or accounts
maintained with the trust department of a federal or state chartered depository
institution, national banking association or trust company acting in its
fiduciary capacity or (iv) otherwise acceptable to the Certificate Insurer and
to each Rating Agency without reduction or withdrawal of their then current
ratings of the Certificates as evidenced by a letter from each Rating Agency to
the Trustee and the Certificate Insurer. Eligible Investments are specified in
the Agreement and are limited to investments which meet the criteria of the
Rating Agencies from time to time as being consistent with their then current
ratings of the Certificates and which are acceptable to the Certificate Insurer.
ADVANCES
Subject to the following limitations, the Master Servicer will be obligated
to advance or cause to be advanced on or before each Distribution Date its own
funds, or funds in the Collection Account that are not included in the Available
Funds for such Distribution Date, in an amount equal to the aggregate of all
payments of principal and interest (net of Servicing Fees) that were due during
the related Due Period on the Mortgage Loans and that were delinquent on the
related Determination Date, plus certain amounts representing assumed payments
not covered by any current net income on the Mortgaged Properties acquired by
foreclosure or deed in lieu of foreclosure (any such advance, an "Advance").
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 condemnation proceeds. 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, however, 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. Subject to the recoverability
standard above, the Master Servicer's obligation to make Advances as to any
Mortgage Loan will continue until the Mortgage Loan is paid in full or until the
recovery of all Liquidation Proceeds thereon.
All Advances will be reimbursable to the Master Servicer from late
collections, insurance proceeds, condemnation proceeds and liquidation proceeds
from the Mortgage Loan as to which such unreimbursed Advance was made. The
Master Servicer may recover from amounts in the Collection Account the amount of
any Advance that remains unreimbursed to the Master Servicer from the related
liquidation proceeds after the final liquidation of the related Mortgage Loan,
and such reimbursement amount will not be available for remittance to the
Trustee for distribution on the Certificates. In addition, the Master Servicer
may, if consented to by the Certificate Insurer and so provided in the
Agreement, withdraw from the Collection Account funds that were not included in
Available Funds for the preceding Distribution Date to cover Advances previously
made by the Master Servicer. In the event the Master Servicer fails in its
obligation to make any required Advance, the Trustee, in its capacity as
successor Master Servicer, will be obligated to make any such Advance, to the
extent required in the Pooling and Servicing Agreement.
In the course of performing its servicing obligations, the Master Servicer
will pay all reasonable and customary "out-of-pocket" costs and expenses
(including reasonable attorney's fees and disbursements) incurred in the
performance of its servicing obligations, including, but not limited to, the
cost of (i) the preservation, restoration, inspection and protection of the
Mortgaged Properties, (ii) any enforcement or judicial proceedings, including
foreclosures, and (iii) the management and liquidation of Mortgaged Properties
acquired in satisfaction of the related mortgage. Each such expenditure will
constitute a "Servicing Advance." The Master Servicer is obligated to pay
certain insurance premiums and certain ongoing expenses associated with the
Mortgage Pool and incurred by the
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<PAGE>
Master Servicer in connection with its responsibilities under the Agreement and
is entitled to reimbursement therefor as provided in the Agreement.
The Master Servicer's right to reimbursement for Servicing Advances is
limited to late collections on the related Mortgage Loan, including liquidation
proceeds, released mortgaged property proceeds, insurance proceeds and such
other amounts as may be collected by the Master Servicer from the related
Mortgagor or otherwise relating to the Mortgage Loan in respect of which such
unreimbursed amounts are owed, unless such amounts are deemed to be
nonrecoverable by the Master Servicer, in which event reimbursement will be made
to the Master Servicer from general funds in the Collection Account.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The principal compensation (the "Servicing Fee") to be paid to the Master
Servicer in respect of its servicing activities for the Certificates will be at
the "Servicing Fee Rate" of _____% per annum on the Principal Balance of each
Mortgage Loan. As additional servicing compensation, the Master Servicer is
entitled to retain all service-related fees, including assumption fees,
modification fees, extension fees, late payment charges and Prepayment Interest
Excess (as defined in the Agreement) and other ancillary fees (but not
prepayment premiums, which will be distributed to the holders of the Class P
Certificates), to the extent collected from mortgagors, together with any
interest or other income earned on funds held in the Collection Account and any
Servicing Accounts. The Master Servicer is obligated to deposit into the
Collection Account the amount of any Prepayment Interest Shortfall (payments
made by the Master Servicer in satisfaction of such obligation, "Compensating
Interest") but only in an amount up to its Servicing Fee for the related
Distribution Date.
The "Determination Date" with respect to any Distribution Date will be the
15th day of the calendar month in which such Distribution Date occurs or, if
such 15th day is not a Business Day, the Business Day immediately preceding such
15th day. With respect to any Determination Date and each Mortgage Loan as to
which a principal prepayment was applied during the portion of the related
Prepayment Period (as defined below) occurring in the month preceding the month
of such Determination Date, the "Prepayment Interest Shortfall" is an amount
equal to the interest at the applicable Loan Rate (net of the Servicing Fee) on
the amount of such principal prepayment for the number of days from the date on
which the principal prepayment is applied until the last day of such preceding
calendar month.
THE TRUSTEE
______________________, a ___________________ organized and existing under
the laws of __________________, will be named Trustee pursuant to the Agreement.
The Trustee will provide a monthly statement to Certificateholders containing
information regarding the Certificates. The Trustee may make such statement
available each month, to any interested party, via the Trustee's website,
electronic bulletin board and its fax-on-demand service. The Trustee's website
can be accessed at "http://www.____________.com." The Trustee's electronic
bulletin board may be accessed by calling _________________ and its
fax-on-demand service may be accessed by calling __________. The Trustee will
also distribute to Certificateholders hard copies of such reports.
The principal compensation to be paid to the Trustee in respect of its
obligations under the Agreement will be equal to certain investment earnings on
the amounts on deposit in the Distribution Account. The Agreement will provide
that the Trustee and any director, officer, employee or agent of the Trustee
will be indemnified by the Master Servicer (and to the extent the Master
Servicer fails to indemnify the Trustee, by the Trust) and will be held harmless
against any loss, liability or expense (not including expenses, disbursements
and advances incurred or made by the Trustee, including the compensation and the
expenses and disbursements of its agents and counsel, in the ordinary course of
the Trustee's performance in accordance with the provisions of the Agreement)
incurred by the Trustee arising out of or in connection with the acceptance or
administration of its obligations and duties under the Agreement, other than any
loss, liability or expense (i) that constitutes a specific liability of the
Trustee under the Agreement or (ii) incurred by reason of willful misfeasance,
bad faith or negligence in the performance of the Trustee's duties under the
Agreement or as a result of a breach, or by reason of reckless disregard, of the
Trustee's obligations and duties under the Agreement. The Agreement will provide
that the Trustee may withdraw amounts owing to it under the Agreement prior to
distributions to Certificateholders.
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<PAGE>
VOTING RIGHTS
At all times, __% of all Voting Rights will be allocated among the holders
of the Certificates (other than the Class XS Certificates and the Residual
Certificates) in proportion to the then outstanding Certificate Principal
Balances of their respective Certificates, __% of all Voting Rights will be
allocated among the holders of the Class XS Certificates in proportion to the
then outstanding Notional Amounts of their respective Certificates and __% of
all Voting Rights will be allocated among the holders of the Residual
Certificates in proportion to the percentage interests in each such class
evidenced by their respective Certificates.
AMENDMENT
The Agreement may be amended under the circumstances set forth under "The
Pooling Agreement--Amendment" in the Prospectus.
TERMINATION
The Master Servicer, or if the Master Servicer does not exercise such
option, the Certificate Insurer, will have the right to repurchase all of the
Mortgage Loans and REO Properties and thereby effect the early retirement of the
Certificates, on any Distribution Date on which the aggregate Principal Balance
of such Mortgage Loans and REO Properties in the Trust is equal to or less than
[10]% of the aggregate Principal Balance of the Mortgage Loans as of the Cut-off
Date. The first Distribution Date on which such option could be exercised is
referred to herein as the "Optional Termination Date." In the event that the
option is exercised, the repurchase will be made at a price (the "Termination
Price") generally equal to the greater of par or the fair market value of the
Mortgage Loans and REO Properties, in each case plus accrued interest for each
Mortgage Loan at the related Loan Rate to but not including the first day of the
month in which such repurchase price is paid plus the amount of any unreimbursed
Advances and Servicing Advances made by the Master Servicer plus any amounts due
to the Certificate Insurer under the Insurance Agreement plus the unpaid Net WAC
Cap Carryover Amount, if any (provided, however, that the Policy will not cover
such Net WAC Cap Carryover Amount). Proceeds from such repurchase will be
included in Available Funds and will be distributed to the holders of the
Certificates in accordance with the Agreement. Any such repurchase of the
Mortgage Loans and REO Properties will result in the early retirement of the
Certificates. See "The Pooling Agreement--Termination; Retirement of
Certificates" in the Prospectus.
MASTER SERVICER ALTERNATIVES TO FORECLOSURE
The Master Servicer may foreclose on any delinquent Mortgage Loan or,
subject to certain limitations set forth in the Agreement, work out an agreement
with the mortgagor, which may involve waiving or modifying any term of the
mortgage loan. The Master Servicer may also sell any Mortgage Loan that is at
least 90 days delinquent. If the Master Servicer sells any such Mortgage Loan
for less than its outstanding Principal Balance plus all prior Servicing
Advances thereon, or extends the payment period or accepts a lesser amount than
stated in the mortgage note in satisfaction of the mortgage note, your yield may
be reduced.
OPTIONAL PURCHASE OF DEFAULTED LOANS
As to any Mortgage Loan which is delinquent in payment by 90 days or more,
the Master Servicer may, at its option, purchase such Mortgage Loan from the
Trust at the Purchase Price for such Mortgage Loan; provided, however, that the
Seller must first purchase the Mortgage Loan that, as of the time of such
purchase, has been delinquent for the greatest period before purchasing Mortgage
Loans that have been delinquent lesser periods.
EVENTS OF DEFAULT
In addition to those Events of Default described under "The Pooling
Agreement--Events of Default" in the Prospectus, upon the occurrence of certain
loss and delinquency triggers with respect to the Mortgage Loans or upon the
occurrence of certain other defaults set forth in the Agreement, the Master
Servicer may be removed as Master Servicer in accordance with the terms of the
Agreement.
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DESCRIPTION OF THE CERTIFICATES
GENERAL
Option One Mortgage Loan Trust _____________ (the "Trust") will consist of
________ classes of certificates (collectively, the "Certificates"), designated
as: (i) the Class A-1 Certificates, the Class A-2 Certificates, the Class A-3
Certificates, the Class A-4 Certificates and the Class A-5 Certificates (the
"Senior Sequential Certificates"); (ii) the Class A-6 Certificates (the "Lockout
Certificates", and together with the Senior Sequential Certificates, the "Class
A Certificates"); (iii) the Class XS Certificates (the Class A Certificates and
the Class XS Certificates, together, the "Senior Certificates"); (iv) the Class
B-1 Certificates, the Class B-2 Certificates, the Class B-3 Certificates, the
Class B-4 Certificates, the Class B-5 Certificates and the Class B-6
Certificates (collectively, the "Subordinate Certificates"); and (v) the Class R
Certificates (the "Residual Certificates"). Only the Senior Certificates, the
Class B-1 Certificates, the Class B-2 Certificates, the Class B-3 Certificates
(collectively, the "Offered Certificates") are offered hereby.
The Certificates represent in the aggregate the entire beneficial ownership
interest in the Trust consisting primarily of a segregated pool (the "Mortgage
Pool") of conventional, one- to four-family, fixed-rate, fully-amortizing, first
lien mortgage loans having original terms to maturity of not greater than 30
years (the "Mortgage Loans") and an aggregate principal balance as of _______
__, ____ (the "Cut-off Date"), after application of scheduled payments due
whether or not received, of approximately $___________, subject to a permitted
variance as described herein under "The Mortgage Pool".
Each class of the Offered Certificates will have the approximate initial
Certificate Principal Balance or Notional Amount, as applicable, and
Pass-Through Rate as set forth on the cover hereof. The Class B-4 Certificates,
Class B-5 Certificates and Class B-6 Certificates have in the aggregate an
initial Certificate Principal Balance of approximately $__________ and a fixed
Pass-Through Rate for each Distribution Date of ____% per annum. The Class B-4
Certificates, the Class B-5 Certificates and the Class B-6 Certificates, which
are not being offered hereby, will be sold by the Depositor to
__________________ on the Closing Date.
The Class A Certificates will be issued, maintained and transferred on the
book-entry records of DTC and its Participants (Class A Certificates so issued,
maintained and transferred, the "Book-Entry Certificates") in minimum
denominations of $_____ and integral multiples of $____ in excess thereof. The
Class XS Certificates and the Subordinate Certificates will be issued in
registered, certificated form, in minimum percentage interests corresponding to
initial Certificate Principal Balances or notional amounts, as applicable, of
$______ and integral multiples of $_____ in excess thereof, except that one
Certificate of each such class may be issued evidencing an amount equal to
either (i) the sum of an otherwise authorized denomination thereof plus the
remainder of the aggregate initial Certificate Principal Balance or Notional
Amount, as applicable, for such class or (ii) such remainder.
The Book-Entry Certificates will initially be represented by one or more
global certificates registered in the name of a nominee of DTC (together with
any successor clearing agency selected by the Depositor, the "Clearing Agency"),
except as provided below. The Depositor has been informed by DTC that DTC's
nominee will be CEDE & Co. ("CEDE"). No person acquiring an interest in any
class of the Book-Entry Certificates (a "Certificate Owner") will be entitled to
receive a certificate representing such person's interest, except as set forth
below under "--Definitive Certificates". Unless and until Definitive
Certificates are issued under the limited circumstances described herein, all
references to actions by Certificateholders with respect to the Book-Entry
Certificates shall refer to actions taken by DTC upon instructions from its
Participants (as defined below), and all references herein to distributions,
notices, reports and statements to Certificateholders with respect to the
Book-Entry Certificates shall refer to distributions, notices, reports and
statements to DTC or CEDE, as the registered holder of the Book-Entry
Certificates, for distribution to Certificate Owners in accordance with DTC
procedures. See "--Registration of the Book-Entry Certificates" and
"--Definitive Certificates" herein.
The Class XS Certificates, the Class B-1 Certificates, the Class B-2
Certificates, the Class B-3 Certificates and the Definitive Certificates will be
transferable and exchangeable at the offices of the Trustee. The Subordinate
Certificates may not be purchased by or transferred to a Plan (as defined
herein) except upon delivery of a certification of facts or an opinion of
counsel, as provided herein. See "--Restrictions on Transfer of the Subordinate
Certificates" and "ERISA Considerations" herein. No service charge will be
imposed for any registration of transfer
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or exchange, but the Trustee may require payment of a sum sufficient to cover
any tax or other governmental charge imposed in connection therewith.
All distributions to holders of the Certificates, other than the final
distribution on any class of Certificates, will be made on each Distribution
Date by or on behalf of the Trustee to the persons in whose names such
Certificates are registered at the close of business on the related Record Date.
The "Record Date" for each Distribution Date (i) with respect to any Book-Entry
Certificate will be the close of business on the business day immediately
preceding such Distribution Date or (ii) with respect to any other class of
Certificates, including any Definitive Certificates, will be the close of
business on the last business day of the month preceding the month in which such
Distribution Date occurs. Such distributions will be made either (a) by check
mailed to the address of each such Certificateholder as it appears in the
Certificate Register or (b) upon written request to the Trustee at least five
business days prior to the relevant Record Date by any holder of Certificates
having an aggregate initial Certificate Principal Balance or Notional Amount, as
applicable, that is in excess of the lesser of (i) $5,000,000 or (ii) two-thirds
of the initial aggregate Certificate Principal Balance or Notional Amount, as
applicable, of such class of Certificates, by wire transfer in immediately
available funds to the account of such Certificateholder specified in the
request. The final distribution on any class of Certificates will be made in
like manner, but only upon presentment and surrender of such Certificates at the
corporate trust office of the Trustee or such other location specified in the
notice to Certificateholders of such final distribution.
REGISTRATION OF THE BOOK-ENTRY CERTIFICATES
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code, and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934, as amended. DTC was created to hold securities
for its participating organizations ("Participants") and to facilitate the
clearance and settlement of securities transactions between Participants through
electronic book entries, thereby eliminating the need for physical movement of
certificates. Participants include securities brokers and dealers (including the
Underwriter), banks, trust companies and clearing corporations. Indirect access
to the DTC system is also available to others such as banks, brokers, dealers,
and trust companies that clear through or maintain a custodial relationship with
a Participant, either directly or indirectly ("Indirect Participants").
Certificate Owners that are not Participants or Indirect Participants but
desire to purchase, sell or otherwise transfer ownership of, or other interests
in, the Book-Entry Certificates may do so only through Participants and Indirect
Participants. In addition, Certificate Owners will receive all distributions of
principal of and interest on the Book-Entry Certificates from the Trustee
through DTC and DTC Participants. The Trustee will forward payments to DTC in
same day funds and DTC will forward such payments to Participants in next day
funds settled through the New York Clearing House. Each Participant will be
responsible for disbursing such payments to Indirect Participants or to
Certificate Owners. Unless and until Definitive Certificates are issued, it is
anticipated that the only Certificateholder of the Book-Entry Certificates will
be CEDE, as nominee of DTC. Certificate Owners will not be recognized by the
Trustee as Certificateholders, as such term is used in the Agreement and
Certificate Owners will be permitted to exercise the rights of
Certificateholders only indirectly through DTC and its Participants.
Under the rules, regulations and procedures creating and affecting DTC and
its operations (the "Rules"), DTC is required to make book-entry transfers of
Book-Entry Certificates among Participants and to receive and transmit
distributions of principal of, and interest on, the Book-Entry Certificates.
Participants and Indirect Participants with which Certificate Owners have
accounts with respect to the Book-Entry Certificates similarly are required to
make book-entry transfers and receive and transmit such payments on behalf of
their respective Certificate Owners. Accordingly, although Certificate Owners
will not possess Definitive Certificates, the Rules provide a mechanism by which
Certificate Owners through their Participants and Indirect Participants will
receive payments and will be able to transfer their interest.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and on behalf of certain banks, the ability of a
Certificate Owner to pledge Book-Entry Certificates to persons or entities that
do not participate in the DTC system, or to otherwise act with respect to such
Certificates, may be limited due to the absence of physical certificates for the
Book-Entry Certificates. In addition, under a book-entry format, Certificate
Owners may experience delays in their receipt of payments since distribution
will be made by the Trustee to CEDE, as nominee for DTC.
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Under the Rules, DTC will take action permitted to be taken by a
Certificateholder under the Agreement only at the direction of one or more
Participants to whose DTC account the Book-Entry Certificates are credited.
Additionally, under the Rules, DTC will take such actions with respect to
specified Voting Rights only at the direction of and on behalf of Participants
whose holdings of Book-Entry Certificates evidence such specified Voting Rights.
DTC may take conflicting actions with respect to Voting Rights, to the extent
that Participants whose holdings of Book-Entry Certificates evidence such Voting
Rights, authorize divergent action.
DTC management is aware that some computer applications, systems and
similar items for processing data ("Systems") that are dependent upon calendar
dates, including dates before, on and after January 1, 2000, may encounter "Year
2000 problems". DTC has informed its Participants and other members of the
financial community (collectively, the "Industry") that it has developed and is
implementing a program so that its Systems, as the same relate to the timely
payment of distributions (including principal and income payments) to
securityholders, book-entry deliveries and settlement of trades within DTC ("DTC
Services"), continue to function appropriately. This program includes a
technical assessment and a remediation plan, each of which is complete.
Additionally, DTC's plan includes a testing phase, which is expected to be
completed within appropriate time frames.
However, DTC's ability to perform properly its services is also dependent
upon other parties, including but not limited to, issuers and their agents, as
well as third party vendors from whom DTC licenses software and hardware, and
third party vendors on which DTC relies for information or the provision of
services, including telecommunication and electrical utility service providers,
among others. DTC has informed the Industry that it is contacting (and will
continue to contact) third party vendors from whom DTC acquires services to: (i)
impress upon them the importance of such services being Year 2000 compliant and
(ii) determine the extent of their efforts for Year 2000 remediation (and, as
appropriate, testing) of their services. In addition, DTC is in the process of
developing such contingency plans as it deems appropriate.
According to DTC, the foregoing information with respect to DTC has been
provided to the Industry for informational purposes only and is not intended to
serve as a representation, warranty or contract modification of any kind.
The Depositor, the Master Servicer and the Trustee will have no liability
for any aspect of the records relating to or payments made on account of
beneficial ownership interests in the Book-Entry Certificates held by CEDE, as
nominee for DTC, or for maintaining, supervising or reviewing any records
relating to such beneficial ownership interests.
DEFINITIVE CERTIFICATES
Definitive Certificates will be issued to Certificate Owners or their
nominees, respectively, rather than to DTC or its nominee, only if (i) the
Depositor advises the Trustee in writing that DTC is no longer willing or able
to discharge properly its responsibilities as Clearing Agency with respect to
the Book-Entry Certificates and the Depositor is unable to locate a qualified
successor, (ii) the Depositor, at its option, elects to terminate the book-entry
system through DTC, or (iii) after the occurrence of an Event of Default,
Certificate Owners representing in the aggregate not less than 51% of the Voting
Rights of the Book-Entry Certificates advise the Trustee and DTC through
Participants, in writing, that the continuation of a book-entry system through
DTC (or a successor thereto) is no longer in the Certificate Owners' best
interest.
Upon the occurrence of any event described in the immediately preceding
paragraph, the Trustee is required to notify all Certificate Owners through
Participants of the availability of Definitive Certificates. Upon surrender by
DTC of the Definitive Certificates representing the Book-Entry Certificates and
receipt of instructions for re-registration, the Trustee will reissue the
Book-Entry Certificates as Definitive Certificates issued in the respective
principal amounts owned by individual Certificate Owners, and thereafter the
Trustee will recognize the holders of such Definitive Certificates as
Certificateholders under the Agreement. Such Definitive Certificates will be
issued in minimum denominations of $______, except that any beneficial ownership
represented by a Book-Entry Certificate in an amount less than $______
immediately prior to the issuance of a Definitive Certificate shall be issued in
a minimum denomination equal to the amount of such beneficial ownership.
DISTRIBUTIONS--GENERAL
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The "Due Period" with respect to any Distribution Date commences on the
second day of the month immediately preceding the month in which such
Distribution Date occurs and ends on the first day of the month in which such
Distribution Date occurs. The "Prepayment Period" with respect to any
Distribution Date is the calendar month immediately preceding the month in which
such Distribution Date occurs. The "Determination Date" with respect to any
Distribution Date is on the 15th day of the month in which such Distribution
Date occurs or, if such day is not a business day, on the immediately preceding
business day.
PASS-THROUGH RATES
The Pass-Through Rate for each class of Certificates (other than the Class
XS Certificates) is ____% per annum. The Pass-Through Rate applicable to the
calculation of the Interest Distribution Amount for the Class XS Certificates
for any Distribution Date is the rate per annum expressed as the percentage
equivalent of a fraction, the numerator of which is equal to (i) (A) the amount
of interest accrued on the Mortgage Loans for the immediately preceding calendar
month at the Net Mortgage Rate minus (B) the aggregate amount of interest
payable on the Certificates (other than the XS Certificates), and the
denominator of which is equal to (ii) the Notional Amount of the Class XS
Certificates. The "Net Mortgage Rate" on any Mortgage Loan is equal to the then
applicable Mortgage Rate thereon minus the sum of (i) the Servicing Fee Rate and
(ii) the Trustee's Fee Rate. The "Mortgage Rate" on each Mortgage Loan is the
per annum rate of interest specified in the related mortgage note. The Servicing
Fee Rate on each Mortgage Loan is equal to ____% per annum. The Trustee's Fee
Rate for each Mortgage Loan is equal to ______% per annum. The initial variable
Pass-Through Rate for the Class IO Certificates is approximately ______% per
annum.
INTEREST DISTRIBUTIONS
Distributions on each Distribution Date will be made to the extent of the
Available Distribution Amount for such Distribution Date. The Available
Distribution Amount for any Distribution Date generally includes scheduled
payments on the Mortgage Loans due during the related Due Period and received on
or prior to the related Determination Date, prepayments and other unscheduled
collections received on the Mortgage Loans during the related Prepayment Period,
any P&I Advances made by the Master Servicer for such Distribution Date and with
respect to each Mortgage Loan with a first payment date occurring in _________
____, a cash amount equal to interest on such Mortgage Loan, net of the amount
of any prepayment charges received on the Mortgage Loans and net of fees payable
to the Master Servicer and the Trustee and certain amounts reimbursable to the
Master Servicer, the Depositor and the Trustee as provided in the Agreement.
Distributions in respect of interest will be made (i) on each Distribution
Date to the holders of the Senior Certificates in an aggregate amount equal to
the Senior Interest Distribution Amount and (ii) on each Distribution Date to
the holders of the Subordinate Certificates, in an aggregate amount equal to the
Subordinate Interest Distribution Amount, to the extent of the portion of the
Available Distribution Amount remaining after the distribution on such date of
the Senior Interest Distribution Amount and the Senior Principal Distribution
Amount. The Senior Interest Distribution Amount on each Distribution Date is
equal to the aggregate of the Interest Distribution Amounts for such
Distribution Date on all of the Senior Certificates. The Subordinate Interest
Distribution Amount on each Distribution Date is equal to the aggregate of the
Interest Distribution Amounts for such Distribution Date on all of the
Subordinate Certificates.
Distributions of the Subordinate Interest Distribution Amount on each
Distribution Date will be made first, to the holders of the Class B-1
Certificates, second to the holders of the Class B-2 Certificates, third to the
holders of the Class B-3 Certificates, and then to the holders of the remaining
classes of Subordinate Certificates, in each case to the extent of available
funds and in each case to the extent of the Interest Distribution Amount for
such Certificates for such Distribution Date.
The Interest Distribution Amount for the Certificates of any class on any
Distribution Date is equal to interest accrued during the related Interest
Accrual Period on the Certificate Principal Balance or Notional Amount, as
applicable, of such Certificates immediately prior to such Distribution Date at
the then applicable Pass-Through Rate for such class, plus, in the case of each
such class, any such amount remaining unpaid from previous Distribution Dates,
and reduced (to not less than zero), in the case of each such class, by the
allocable share for such class of Prepayment Interest Shortfalls to the extent
not covered by Compensating Interest paid by the applicable Master Servicer,
shortfalls resulting from the application of the Relief Act and certain other
interest shortfalls not
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covered by the subordination provided by more subordinate classes of
Certificates. Any Prepayment Interest Shortfalls for any Distribution Date to
the extent not covered by Compensating Interest paid by the applicable Master
Servicer will be allocated among the holders of the Certificates on a pro rata
basis based on the respective amounts of interest accrued on such Certificates
for such Distribution Date. In addition, any shortfalls resulting from the
application of the Relief Act will be allocated among the holders of all of the
Certificates on a pro rata basis as described above.
The Pass-Through Rate applicable to the calculation of the Interest
Distribution Amounts for each class of Class A Certificates is fixed and is set
forth on the cover hereof. The Pass-Through Rate applicable to the calculation
of the Interest Distribution Amount for the Class XS Certificates for any
Distribution Date is the rate per annum expressed as the percentage equivalent
of a fraction, the numerator of which is equal to (i) (A) the amount of interest
accrued on the Mortgage Loans for the immediately preceding calendar month at
the Net Mortgage Rate minus (B) the aggregate amount of interest payable on the
Certificates (other than the XS Certificates), and the denominator of which is
equal to (ii) the Notional Amount of the Class XS Certificates. The Net Mortgage
Rate for any Mortgage Loan is equal to the Mortgage Rate for such Mortgage Loan
minus the sum of the Servicing Fee Rate and the Trustee's Fee Rate for such
Mortgage Loan. The Servicing Fee Rate for each Mortgage Loan is equal to _____%
per annum. The Trustee's Fee Rate for each Mortgage Loan is equal to ______% per
annum. The initial variable Pass-Through Rate for the Class XS Certificates is
approximately _______% per annum.
The Interest Accrual Period for each class of Certificates for any
Distribution Date is the one-month period preceding the month in which such
Distribution Date occurs. All distributions of interest will be based on a
360-day year consisting of twelve 30-day months. Except as otherwise described
herein, on any Distribution Date, distributions of the Interest Distribution
Amount for a class of Certificates will be made in respect of such class of
Certificates, to the extent provided herein, on a pari passu basis, based on the
Certificate Principal Balance or Notional Amount, as applicable, of the
Certificates of each such class.
The Certificate Principal Balance of a Certificate (other than a Class XS
Certificate) outstanding at any time represents the then maximum amount that the
holder thereof is thereafter entitled to receive as distributions allocable to
principal from the cash flow on the Mortgage Loans and the other assets in the
Trust. The Certificate Principal Balance of any class of Certificates (other
than the Class XS Certificates) 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) without duplication of amounts described in clause (a)
above, any reductions in the Certificate Principal Balance thereof deemed to
have occurred in connection with allocations thereto of (i) Realized Losses on
the Mortgage Loans and (ii) Extraordinary Trust Expenses, in either case as
described below.
The Notional Amount of the Class XS Certificates as of any date of
determination is equal to the aggregate principal balance of the then
outstanding Mortgage Loans. Reference to the Notional Amount of the Class XS
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
Distributions in respect of principal will be made on each Distribution
Date to the holders of the class or classes of the Class A Certificates then
entitled to distributions in respect of principal in an aggregate amount equal
to the Senior Principal Distribution Amount.
Holders of the Class A Certificates then entitled to distributions in
respect of principal will be entitled to receive on each Distribution Date
distributions allocable to principal in reduction of the Certificate Principal
Balances of the Class A Certificates equal to the sum of the following:
(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 during the related Due Period, whether or not
received;
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(2) the principal portion of all proceeds received in respect of
the repurchase of a Mortgage Loan (or, in the case of a substitution,
certain amounts received representing a principal adjustment) as
required by the Agreement during the related Prepayment Period; and
(3) the principal portion of all other unscheduled collections
(other than amounts described in clauses (ii) and (iii) hereof),
including insurance proceeds and liquidation proceeds, received during
the related Prepayment Period, to the extent applied as recoveries of
principal;
(ii) the product of (A) the then applicable Senior Prepayment
Percentage and (B) the aggregate of all full and partial principal
prepayments received during the related Prepayment Period;
(iii) with respect to the net liquidation proceeds received and
allocable to principal of any Mortgage Loan that was finally liquidated
during the related Prepayment Period, the lesser of (a) the then applicable
Senior Prepayment Percentage multiplied by such net liquidation proceeds
and (b) the then applicable Senior Percentage multiplied by the Scheduled
Principal Balance of such Mortgage Loan at the time of liquidation; and
(iv) any amounts allocable to principal for any previous Distribution
Date (calculated pursuant to the three preceding clauses) that remain
undistributed, to the extent that any such amounts are not attributable to
Realized Losses that were allocated to the Subordinate Certificates.
With respect to any Distribution Date, the lesser of (a) the balance of the
Available Distribution Amount remaining after the Senior Interest Distribution
Amount is distributed and (b) the sum of the amounts described in clauses (i)
through (iv) above is hereinafter referred to as the "Senior Principal
Distribution Amount".
Holders of the Class XS Certificates are not entitled to receive any
distributions allocable to principal.
The Senior Percentage, which initially will equal approximately _____%, and
will in no event exceed ___%, will be adjusted for each Distribution Date after
the first Distribution Date to be the percentage equal to the aggregate
Certificate Principal Balances of the Class A Certificates immediately prior to
such Distribution Date divided by the aggregate of the Scheduled Principal
Balance of each of the Mortgage Loans immediately prior to such Distribution
Date. The Subordinate Percentage as of any date of determination is equal to
___% minus the Senior Percentage as of such date. The Scheduled 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 (x) the principal portion of all monthly payments due on
or before the date of determination, whether or not received, (y) all amounts
allocable to unscheduled principal that were received prior to the calendar
month in which the date of determination occurs, and (z) any Bankruptcy Loss
occurring out of a Deficient Valuation (as defined herein) that was incurred
prior to the calendar month in which the date of determination occurs.
Except as described below, the Senior Prepayment Percentage for any
Distribution Date occurring prior to the Distribution Date in ________ ____ will
equal ___%. Except as described below, the Senior Prepayment Percentage for any
Distribution Date occurring after the first five years will be as follows: for
any Distribution Date during the _____ year after the Closing Date, the Senior
Percentage for such Distribution Date plus ___% of the Subordinate Percentage
for such Distribution Date; for any Distribution Date during the _______ year
after the Closing Date, the Senior Percentage for such Distribution Date plus
__% of the Subordinate Percentage for such Distribution Date; for any
Distribution Date during the ______ year after the Closing Date, the Senior
Percentage for such Distribution Date plus __% of the Subordinate Percentage for
such Distribution Date; for any Distribution Date during the _______ year after
the Closing Date, the Senior Percentage for such Distribution Date plus __% 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 Prepayment Percentage for such Distribution
Date will equal ___%). Any scheduled reduction to the Senior Prepayment
Percentage described above shall not be made as of any Distribution Date unless
(i) the outstanding principal balance of Mortgage Loans delinquent 60 days or
more (including real estate owned and Mortgage Loans in foreclosure) averaged
over the last six months does not exceed 50% of the sum of the then current
Certificate Principal Balances of the Subordinate Certificates and (ii) Realized
Losses on the Mortgage Loans to date are less than the then applicable Trigger
Amount. The Trigger Amount for any Distribution Date occurring after the first
____ years will be as follows: for any Distribution Date during the _____ year
after the
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Closing Date, __% of the initial sum of the Certificate Principal Balances of
the Subordinate Certificates; for any Distribution Date during the seventh year
after the Closing Date, __% of the initial sum of the Certificate Principal
Balances of the Subordinate Certificates; for any Distribution Date during the
______ year after the Closing Date, __% of the initial sum of the Certificate
Principal Balances of the Subordinate Certificates; and for any Distribution
Date during the _____ year after the Closing Date, __% of the initial sum of the
Certificate Principal Balances of the Subordinate Certificates. Notwithstanding
the foregoing, upon reduction of the Certificate Principal Balances of the
Senior Certificates to zero, the Senior Prepayment Percentage will equal 0%.
The disproportionate allocation of certain unscheduled payments in respect
of principal will have the effect of accelerating the amortization of the Senior
Certificates (other than the Class XS Certificates) while, in the absence of
Realized Losses, increasing the respective percentage interest in the principal
balance of the Mortgage Loans evidenced by the Subordinate Certificates.
Increasing the respective percentage interest in the Trust of the Subordinate
Certificates relative to that of the Senior Certificates is intended to preserve
the availability of the subordination provided by the Subordinate Certificates.
If on any Distribution Date the allocation to the Senior Certificates
(other than the Class XS Certificates) of full and partial principal prepayments
and other amounts in the percentage required above would reduce the aggregate
outstanding Certificate Principal Balance of such Class A Certificates below
zero, such Senior Prepayment Percentage for such Distribution Date will be
limited to the percentage necessary to reduce the aggregate Certificate
Principal Balance of such Senior Certificates to zero.
For purposes of all principal distributions described above and for
calculating the Senior Percentage, the Subordinate Percentage and the Senior
Prepayment Percentage, the applicable Certificate Principal Balance for any
Distribution Date shall be determined after the allocation of losses on the
Mortgage Loans in, and Extraordinary Trust Expenses attributable to, the
Mortgage Pool to be made on such Distribution Date as described under
"--Allocation of Losses; Subordination" below.
PRIORITY OF PRINCIPAL DISTRIBUTIONS ON THE CLASS A CERTIFICATES
Distributions of the Senior Principal Distribution Amount on the Class A
Certificates on each Distribution Date will be made as follows:
(i) First, to the holders of the Lockout Certificates, the Lockout
Distribution Percentage of the Senior Principal Distribution Amount, until
the Certificate Principal Balance thereof has been reduced to zero;
(ii) Second, to the holders of the Class A-1 Certificates, until the
Certificate Principal Balance thereof has been reduced to zero;
(iii) Third, to the holders of the Class A-2 Certificates, until the
Certificate Principal Balance thereof has been reduced to zero;
(iv) Fourth, to the holders of the Class A-3 Certificates, until the
Certificate Principal Balance thereof has been reduced to zero;
(v) Fifth, to the holders of the Class A-4 Certificates, until the
Certificate Principal Balance thereof has been reduced to zero;
(vi) Sixth, to the holders of the Class A-5 Certificates, until the
Certificate Principal Balance thereof has been reduced to zero;
(vii) Seventh, to the holders of the Lockout Certificates, until the
Certificate Principal Balance thereof has been reduced to zero.
Notwithstanding the foregoing priorities, upon the reduction of the
Certificate Principal Balances of the Subordinate Certificates to zero, the
priority of distributions of principal among the Class A Certificates will be
disregarded and distributions allocable to principal will be paid on each
succeeding Distribution Date to holders of the Class A Certificates, on a pro
rata basis, based on the Certificate Principal Balances thereof.
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The "Lockout Certificate Percentage" will be calculated for each
Distribution Date to be the percentage equal to the aggregate Certificate
Principal Balance of the Lockout Certificates divided by the sum of the
aggregate Certificate Principal Balances of the Class A Certificates. The
"Lockout Distribution Percentage" for any Distribution Date occurring prior to
the Distribution Date in _________ ____ will be equal to 0%. The "Lockout
Distribution Percentage" for any Distribution Date occurring after the first
____ years following the Closing Date will be as follows: for any Distribution
Date during the _______ year after the Closing Date, __% of the Lockout
Certificate Percentage for such Distribution Date; for any Distribution Date
during the ______ year after the Closing Date, __% of the Lockout Certificate
Percentage for such Distribution Date; for any Distribution Date during the
_______ year after the Closing Date, ___% of the Lockout Certificate Percentage
for such Distribution Date, and for any Distribution Date thereafter, the lesser
of (x) 300% of the Lockout Certificate Percentage and (y) 100%. Notwithstanding
the foregoing, if the Certificate Principal Balances of the Class A Certificates
(other than the Lockout Certificates) have been reduced to zero, the Lockout
Distribution Percentage will be equal to 100%.
PRINCIPAL DISTRIBUTION ON THE SUBORDINATE CERTIFICATES
Holders of each class of Subordinate Certificates will be entitled to
receive on each Distribution Date, to the extent of the portion of the Available
Distribution Amount remaining after distribution on such date of the Senior
Interest Distribution Amount, the Senior Principal Distribution Amount and the
Subordinate Interest Distribution Amount, distributions allocable to principal
in reduction of the Certificate Principal Balances thereof equal to the sum of
the following:
(i) the product of (A) the then applicable related Class B Percentage
and (B) the aggregate of the following amounts:
(1) the principal portion of all scheduled monthly payments on
the Mortgage Loans due during the related Due Period, whether or not
received;
(2) the principal portion of all proceeds received in respect of
the repurchase of a Mortgage Loan (or, in the case of a substitution,
certain amounts received representing a principal adjustment) as
required by the Agreement during the related Prepayment Period; and
(3) the principal portion of all other unscheduled collections
(other than amounts described in clauses (ii) and (iii) hereof),
including insurance proceeds and liquidation proceeds, received during
the related Prepayment Period, to the extent applied as recoveries of
principal;
(ii) the portion allocable to such class of Subordinate Certificates,
as described below, of the product of (A) the then applicable Subordinate
Prepayment Percentage and (B) the aggregate of all full and partial
principal prepayments received during the related Prepayment Period;
(iii) the portion allocable to such class of Subordinate Certificates,
as described below, of net liquidation proceeds received and allocable to
principal of any Mortgage Loan that was finally liquidated during the
related Prepayment Period, to the extent of the amount, if any, by which
such net liquidation proceeds exceed the amount distributable to the Class
A Certificates in respect of such net liquidation proceeds pursuant to
clause (iii) of the definition of Senior Principal Distribution Amount; and
(iv) any amounts allocable to principal for any previous Distribution
Date (calculated pursuant to the three preceding clauses) that remain
undistributed, to the extent that any such amounts are not attributable to
Realized Losses that were allocated to classes of the Subordinate
Certificates bearing a higher numerical class designation.
With respect to any Distribution Date, the lesser of (a) the balance of the
Available Distribution Amount remaining after the distribution of the Senior
Interest Distribution Amount, the Senior Principal Distribution Amount and the
Subordinate Interest Distribution Amount and (b) the aggregate of the sum for
each class of Subordinate Certificates of the amounts described in clauses (i)
through (iv) of the immediately preceding paragraph is hereinafter referred to
as the "Subordinate Principal Distribution Amount".
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The Class B Percentage for the Class B-1 Certificates, the Class B-2
Certificates, the Class B-3 Certificates, the Class B-4 Certificates, the Class
B-5 Certificates and the Class B-6 Certificates (with respect to each such
class, the related "Class B Percentage") initially will equal approximately
____%, approximately ____%, approximately ____%, approximately ____%,
approximately ____% and approximately ____%, respectively, and will in no event
exceed 100%, and will be adjusted for each Distribution Date to be the
percentage equal to the Certificate Principal Balance of the related class of
Subordinate Certificates immediately prior to such Distribution Date divided by
the aggregate of the Scheduled Principal Balance of each of the Mortgage Loans
immediately prior to such Distribution Date. The Subordinate Prepayment
Percentage for any Distribution Date will equal 100% minus the Senior Prepayment
Percentage.
On any Distribution Date, the portion of (a) all principal prepayments on
the Mortgage Loans and (b) net liquidation proceeds allocable to principal of
any Mortgage Loan that was finally liquidated during the related Prepayment
Period, in each case not included in the Senior Principal Distribution Amount
will be allocated on a pro rata basis among the following classes of Subordinate
Certificates in proportion to the respective outstanding Certificate Principal
Balances thereof: (i) the Class B-1 Certificates; (ii) the Class B-2
Certificates, if on such Distribution Date the aggregate percentage interest in
the Trust evidenced by the Class B-2 Certificates, the Class B-3 Certificates,
the Class B-4 Certificates, the Class B-5 Certificates and the Class B-6
Certificates equals or exceeds ____% before giving effect to distributions on
such Distribution Date; (iii) the Class B-3 Certificates, if on such
Distribution Date the aggregate percentage interest in the Trust evidenced by
the Class B-3 Certificates, the Class B-4 Certificates, the Class B-5
Certificates and the Class B-6 Certificates equals or exceeds ____% before
giving effect to distributions on such Distribution Date; (iv) the Class B-4
Certificates, if on such Distribution Date the percentage interest in the Trust
evidenced by the Class B-4 Certificates, the Class B-5 Certificates and the
Class B-6 Certificates equals or exceeds ____% before giving effect to
distributions on such Distribution Date; (v) the Class B-5 Certificates, if on
such Distribution Date the percentage interest in the Trust evidenced by the
Class B-5 Certificates and the Class B-6 Certificates equals or exceeds ____%
before giving effect to distributions on such Distribution Date; and (vi) the
Class B-6 Certificates, if on such Distribution Date the percentage interest in
the Trust evidenced by the Class B-6 Certificates equals or exceeds ____% before
giving effect to distributions on such Distribution Date.
For purposes of all principal distributions described above and for
calculating the Subordinate Percentage, the applicable Certificate Principal
Balance for any Distribution Date shall be determined after the allocation of
losses on the Mortgage Loans in, and Extraordinary Trust Expenses attributable
to, the Mortgage Pool to be made on such Distribution Date as described under
"--Allocation of Losses; Subordination" below.
As stated above under "--Principal Distributions on the Senior
Certificates", for each Distribution Date occurring prior to the Distribution
Date in ________ ____, the Senior Prepayment Percentage will equal 100%, and
until the earlier of such date and the date on which the Class A Certificates
are paid in full, no distributions based on principal prepayments or, in certain
instances, net liquidation proceeds, on the Mortgage Loans will be distributed
to the Subordinate Certificates. Thereafter, unless the Certificate Principal
Balances of the Senior Certificates have been reduced to zero, the Subordinate
Prepayment Percentage may continue to be 0% or otherwise be disproportionately
small relative to the Subordinate Percentage. See "--Principal Distributions on
the Senior Certificates" herein.
Distributions of the Subordinate Principal Distribution Amount on each
Distribution Date will be made as follows: first to the holders of the Class B-1
Certificates, second to the holders of the Class B-2 Certificates, third to the
holders of the Class B-3 Certificates, and then to the holders of the remaining
classes of Subordinate Certificates, in each case to the extent of available
funds and in each case to the extent of the portion of the Subordinate Principal
Distribution Amount payable in respect of each such class of Subordinate
Certificates for such Distribution Date.
ALLOCATION OF LOSSES; SUBORDINATION
Realized Losses (other than Excess Losses) and any Extraordinary Trust
Expenses will be allocated on any Distribution Date as follows: first, to the
Class B-6 Certificates; second, to the Class B-5 Certificates; third, to the
Class B-4 Certificates; fourth, to the Class B-3 Certificates; fifth, to the
Class B-2 Certificates; and sixth, to the Class B-1 Certificates, in each case
until the Certificate Principal Balance of such class has been reduced to zero.
Thereafter, such Realized Losses and any Extraordinary Trust Expenses will be
allocated on any Distribution Date among the Class A Certificates on a pro rata
basis. Excess Special Hazard Losses, Excess Bankruptcy Losses, Excess Fraud
Losses and Extraordinary Losses (collectively, "Excess Losses") will be
allocated on any Distribution Date among all the Certificates (other than the
Class XS Certificates) on a pro rata basis. Any allocation of a
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Realized Loss to a Certificate will be made by reducing the Certificate
Principal Balance thereof by the amount so allocated as of the Distribution Date
in the month following the calendar month in which such Realized Loss was
incurred.
An allocation of a Realized Loss on a pro rata basis among two or more
classes of Certificates means an allocation to each such class of Certificates
on the basis of its then outstanding Certificate Principal Balance prior to
giving effect to distributions to be made on such Distribution Date.
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 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 P&I Advances, Servicing Fees and Servicing Advances) 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".
In the event that Realized Losses are incurred that are covered by
subordination, such losses will be allocated to the most subordinate class of
Certificates then outstanding. The priorities for distribution of cash flows
described herein, in certain circumstances, may result in cash flow shortfalls
to any class of Subordinate Certificates even if it is not the most subordinate
class of Certificates then outstanding; however, the interest portion of any
such shortfall would be distributable as unpaid Interest Distribution Amount on
future Distribution Dates as cash flows allow, to the extent of available funds,
and the principal portion of any such shortfall would not result in a reduction
of the Certificate Principal Balance of such class. In such event, the
percentage interest represented by such class would increase relative to the
respective Certificate Principal Balances of the more subordinate classes of
Certificates. With respect to the most subordinate class of the Certificates
outstanding at the time any Realized Loss is incurred, the total amount of the
Realized Loss allocated to such class may be greater than the concurrent
reduction in the Certificate Principal Balance thereof because such reduction
will not reflect any undistributed Interest Distribution Amount on such class.
Such undistributed Interest Distribution Amount on the most subordinate class of
the Certificates outstanding will not be distributable on any future
Distribution Date. As a result, it is possible that the total amount of Realized
Losses that may be allocated to any class of Subordinate Certificates may exceed
the initial Certificate Principal Balance thereof.
In order to maximize the likelihood of distribution in full of the Senior
Interest Distribution Amount and the Senior Principal Distribution Amount, on
each Distribution Date, holders of Senior Certificates have a right to
distributions of the Available Distribution Amount that is prior to the rights
of the holders of the Subordinate Certificates, to the extent necessary to
satisfy the Senior Interest Distribution Amount and the Senior Principal
Distribution Amount.
The application of the Senior Prepayment Percentage (when it exceeds the
Senior Percentage) to determine the Senior Principal Distribution Amount will
accelerate the amortization of the Class A Certificates relative to the actual
amortization of the Mortgage Loans. To the extent that the Class A Certificates
are amortized faster than the Mortgage Loans, in the absence of offsetting
Realized Losses allocated to the Subordinate Certificates, the percentage
interest evidenced by the Class A Certificates in the Trust will be decreased
(with a corresponding increase in the percentage interest in the Trust evidenced
by the Subordinate Certificates), thereby increasing, relative to their
respective Certificate Principal Balances, the subordination afforded the Senior
Certificates by the Subordinate Certificates.
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 approximately $_________. As of any
date of determination following the Cut-off Date, the Special Hazard Amount
shall equal approximately $_________ less the sum of (A) any amounts allocated
through subordination in respect of Special Hazard Losses and (B) the Adjustment
Amount. The Adjustment Amount will be equal to an amount calculated pursuant to
the terms of the Agreement.
The aggregate amount of Realized Losses which may be allocated in
connection with Fraud Losses (the "Fraud Loss Amount") through subordination
shall initially be equal to approximately $_________. 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-
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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
through subordination with respect to Fraud Losses on the Mortgage Loans up to
such date of determination, (Y) from the first to the second 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 amounts allocated
through subordination with respect to Fraud Losses on the Mortgage Loans since
the most recent anniversary of the Cut-off Date up to such date of determination
and (Z) from the second to the 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 amounts allocated through subordination
with respect to Fraud Losses on the Mortgage Loans since the most recent
anniversary of the Cut-off Date up to such date of determination. On and after
the fifth anniversary of the Cut-off Date, the Fraud Loss Amount shall be zero.
The aggregate amount of Realized Losses which may be allocated in
connection with Bankruptcy Losses (the "Bankruptcy Amount") through
subordination will initially be equal to approximately $_______. As of any date
of determination, the Bankruptcy Amount shall equal the initial Bankruptcy
Amount less the sum of any amounts allocated through subordination for such
losses up to such date of determination.
The Special Hazard Amount, Fraud Loss Amount and Bankruptcy Amount may be
reduced or modified upon confirmation from ____________ and ___________ that
such reduction or modification will not adversely affect the then-current
ratings assigned to the Offered Certificates rated thereby. Such a reduction or
modification may adversely affect the coverage provided by the subordination
with respect to Special Hazard Losses, Fraud Losses and Bankruptcy Losses.
A "Special Hazard Loss" is a loss incurred in respect of any defaulted
Mortgage Loan as a result of direct physical loss or damage to the Mortgaged
Property (except as a result of the exclusions described below), which is not
insured against under the standard hazard insurance policy or blanket policy
insuring against hazard losses which the Master Servicer is required to cause to
be maintained on each Mortgage Loan. See "Description of Primary Insurance
Policies--Primary Hazard Insurance Policies" in the Prospectus.
Special Hazard Losses will not include any loss resulting from:
(i) wear and tear, deterioration, rust or corrosion, mold, wet or
dry rot; inherent vice or latent defect; animals, birds, vermin, insects;
(ii) smog, smoke, vapor, liquid or dust discharge from
agricultural or industrial operations; pollution; contamination;
(iii) settling, subsidence, cracking, shrinkage, bulging or
expansion of pavements, foundations, walls, floors, roofs or ceilings;
(iv) errors in design, faulty workmanship or faulty materials,
unless the collapse of the property or a part thereof ensues and then only
for the ensuing loss;
Special Hazard Losses also will not include any loss (each, an "Extraordinary
Loss") resulting from:
(i) nuclear or chemical reaction or nuclear radiation or
radioactive or chemical contamination, all whether controlled or
uncontrolled and whether such loss be direct or indirect, proximate or
remote or be in whole or in part caused by, contributed to or aggravated by
a peril covered by the definition of the term "Special Hazard Loss";
(ii) hostile or warlike action in time of peace or war, including
action in hindering, combating or defending against an actual, impending or
expected attack by any government or sovereign power, de jure or de facto,
or by any authority maintaining or using military, naval or air forces, or
by military, naval or air forces, or by an agent of any such government,
power, authority or forces;
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(iii) any weapon of war employing atomic fission or radioactive
forces whether in time of peace or war; and
(iv) insurrection, rebellion, revolution, civil war, usurped
power or action taken by governmental authority in hindering, combating or
defending against such an occurrence, seizure or destruction under
quarantine or customs regulations, confiscation by order of any government
or public authority, or risks of contraband or illegal transactions or
trade.
"Excess Special Hazard Losses" are Special Hazard Losses in excess of the
Special Hazard Amount.
A "Fraud Loss" is a loss incurred on a defaulted Mortgage Loan as to which
there was intentional fraud, dishonesty or misrepresentation in the origination
of such Mortgage Loan.
"Excess Fraud Losses" are Fraud Losses in excess of the Fraud Loss Amount.
A "Bankruptcy Loss" is a Deficient Valuation or a Debt Service Reduction.
With respect to any Mortgage Loan, a "Deficient Valuation" is a valuation by a
court of competent jurisdiction of the Mortgaged Property in an amount less than
the then outstanding indebtedness under the Mortgage Loan, which valuation
results from a proceeding initiated under the United States Bankruptcy Code. A
"Debt Service Reduction" is any reduction in the amount which a mortgagor is
obligated to pay on a monthly basis with respect to a Mortgage Loan as a result
of any proceeding initiated under the United States Bankruptcy Code, other than
a reduction attributable to a Deficient Valuation.
"Excess Bankruptcy Losses" are Bankruptcy Losses in excess of the
Bankruptcy Amount.
An "Extraordinary Trust Expense" is an unanticipated, non-Mortgage Loan
specific Trust expense, including certain reimbursements to the Master Servicer
or Depositor, certain reimbursements to the Trustee described under "Pooling
Agreement--The Trustee" herein and certain taxes that may be payable by the
Trust as described herein under "Federal Income Tax Consequences".
RESTRICTIONS ON TRANSFER OF THE SUBORDINATE CERTIFICATES
Because the Subordinate Certificates are subordinate to the Senior
Certificates, the Subordinate Certificates of any class may not be purchased by
or transferred to a Plan (as defined herein) except upon the delivery of a
certification of facts or an opinion of counsel, as provided herein. See "ERISA
Considerations" herein.
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
DELAY IN DISTRIBUTIONS ON THE OFFERED CERTIFICATES
The effective yield to holders of the Offered Certificates of each class
will be less than the yields otherwise produced by their respective Pass-Through
Rates and purchase prices because (i) on the first Distribution Date one month's
interest is payable thereon even though __ days will have elapsed from the date
on which interest begins to accrue thereon, (ii) on each succeeding Distribution
Date the interest payable thereon is the interest accrued during the month
preceding the month of such Distribution Date, which ends __ days prior to such
Distribution Date and (iii) during each Interest Accrual Period (other than the
first Interest Accrual Period), interest accrues on a Certificate Principal
Balance or Notional Amount that is less than the Certificate Principal Balance
or Notional Amount of such class actually outstanding for the first __ days of
such Interest Accrual Period.
CERTAIN SHORTFALLS IN COLLECTIONS OF INTEREST
When a principal prepayment in full is made on a Mortgage Loan, the
mortgagor is charged interest only for the period from the Due Date of the
preceding monthly payment up to the date of such prepayment, instead of for a
full month. When a partial principal prepayment is made on a Mortgage Loan, the
mortgagor is not charged interest on the amount of such prepayment for the month
in which such prepayment is made. In addition, the application of the Soldiers'
and Sailors' Civil Relief Act of 1940, as amended (the "Relief Act"), to
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any Mortgage Loan will adversely affect, for an indeterminate period of time,
the ability of the Master Servicer to collect full amounts of interest on such
Mortgage Loan. See "Certain Legal Aspects of the Mortgage Loans--Soldiers' and
Sailors' Civil Relief Act of 1940" in the Prospectus. The Master Servicer is
obligated to pay from its own funds only those interest shortfalls attributable
to full and partial prepayments by the mortgagors on the Mortgage Loans master
serviced by it, but only to the extent of its aggregate Servicing Fee for the
related Due Period. See "Pooling Agreement--Servicing and Other Compensation and
Payment of Expenses" herein. Accordingly, the effect of (i) any principal
prepayments on the Mortgage Loans, to the extent that any resulting shortfall (a
"Prepayment Interest Shortfall") exceeds any payments made by the Master
Servicer from its own funds ("Compensating Interest") or (ii) any shortfalls
resulting from the application of the Relief Act, will be to reduce the
aggregate amount of interest collected that is available for distribution to
holders of the Certificates. Any such shortfalls will be allocated among the
Certificates as provided herein under "Description of the Certificates--Interest
Distributions".
GENERAL PREPAYMENT CONSIDERATIONS
The rate of principal payments on each class of Offered Certificates (other
than the Class XS Certificates), the aggregate amount of distributions on each
class of Offered Certificates and the yield to maturity of each class of Offered
Certificates will be related to the rate and timing of payments of principal on
the Mortgage Loans. The rate of principal payments on the Mortgage Loans will in
turn be affected by the amortization schedules of such Mortgage Loans and by the
rate of principal prepayments thereon (including for this purpose payments
resulting from refinancings, liquidations of the Mortgage Loans due to defaults,
casualties, condemnations and repurchases, whether optional or required, by the
Depositor, the Seller or the Master Servicer, as the case may be). The Mortgage
Loans generally may be prepaid by the mortgagors at any time; however, as
described under "The Mortgage Pool" herein, with respect to approximately _____%
of the Mortgage Loans, by aggregate principal balance as of the Cut-off Date, a
prepayment may subject the related mortgagor to a prepayment charge. All of the
Mortgage Loans contain due-on-sale clauses. As described under "Description of
the Certificates--Principal Distributions on the Senior Certificates" herein,
prior to the Distribution Date in ________ ____, all principal prepayments on
the Mortgage Loans will be allocated to the Senior Certificates (other than the
Class XS Certificates). Thereafter, as further described herein, during certain
periods, subject to certain loss and delinquency criteria described herein, the
Senior Prepayment Percentage may continue to be disproportionately large
(relative to the Senior Percentage) and the percentage of principal prepayments
payable to the Subordinate Certificates may continue to be disproportionately
small.
Prepayments, liquidations and repurchases of the Mortgage Loans will result
in distributions in respect of principal to the holders of the class or classes
of Offered Certificates then entitled to receive such distributions that
otherwise would be distributed over the remaining terms of the Mortgage Loans.
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. The
extent to which the yield to maturity of any class of Offered Certificates
(other than the Class XS Certificates) may vary from the anticipated yield will
depend upon the degree to which they are purchased at a discount or premium and
the degree to which the timing of payments thereon is sensitive to prepayments
on the Mortgage Loans. Further, an investor should consider, in the case of any
such Certificate purchased at a discount, the risk that a slower than
anticipated rate of principal payments on the Mortgage Loans could result in an
actual yield to such investor that is lower than the anticipated yield and, in
the case of any such Certificate purchased at a premium, the risk that a faster
than anticipated rate of principal payments could result in an actual yield to
such investor that is lower than the anticipated yield. In general, the earlier
a prepayment of principal on the Mortgage Loans, the greater will be the effect
on the investor's yield to maturity. As a result, the effect on an investor's
yield of principal payments occurring at a rate higher (or lower) than the rate
anticipated by the investor during the period immediately following the issuance
of such Certificates would not be fully offset by a subsequent like reduction
(or increase) in the rate of principal payments.
The yield to maturity on the Class XS Certificates will be extremely
sensitive to prepayments on the Mortgage Loans generally, and most sensitive to
prepayments on Mortgage Loans with relatively high Mortgage Rates. See "--Yield
Sensitivity of the Class XS Certificates" herein.
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It is highly unlikely that the Mortgage Loans will prepay at any constant
rate until maturity or that all of the Mortgage Loans will prepay at the same
rate. Moreover, the timing of prepayments on the Mortgage Loans may
significantly affect the actual yield to maturity on the Offered Certificates,
even if the average rate of principal payments experienced over time is
consistent with an investor's expectation.
Because principal distributions are paid to certain classes of Offered
Certificates before other such classes, holders of classes of Offered
Certificates having a later priority of payment bear a greater risk of losses
(because such Certificates will represent an increasing percentage interest in
the Trust during the period prior to the commencement of distributions of
principal thereon) than holders of classes having earlier priorities for
distribution of principal. In particular with respect to the Lockout
Certificates, as described under "Description of the Certificates--Principal
Distributions on the Senior Certificates" herein, during certain periods, no
principal payments or a disproportionately small portion of the Senior Principal
Distribution Amount will be distributed on the Lockout Certificates, and during
certain other periods, a disproportionately large portion of the Senior
Principal Distribution Amount will be distributed on the Lockout Certificates.
Unless the Certificate Principal Balances of the Class A Certificates (other
than the Lockout Certificates) have been reduced to zero, the Lockout
Certificates will not be entitled to receive any distributions of principal
payments prior to the Distribution Date in ________ ____.
The rate of payments (including prepayments) on pools of mortgage loans is
influenced by a variety of economic, geographic, social and other factors. If
prevailing mortgage rates fall 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 rise significantly above the
Mortgage Rates on the Mortgage Loans, the rate of prepayment on the Mortgage
Loans would be expected to decrease. Other factors affecting prepayment of
mortgage loans include changes in mortgagors' housing needs, job transfers,
unemployment, mortgagors' net equity in the mortgaged properties and servicing
decisions. There can be no certainty as to the rate of prepayments on the
Mortgage Loans during any period or over the life of the Certificates. See
"Yield Considerations" and "Maturity and Prepayment Considerations" in the
Prospectus.
In general, defaults on mortgage loans are expected to occur with greater
frequency in their early years. In addition, default rates generally are higher
for mortgage loans used to refinance an existing mortgage loan. In the event of
a mortgagor's default on a Mortgage Loan, there can be no assurance that
recourse beyond the specific Mortgaged Property pledged as security for
repayment will be available. See "Option One Mortgage Corporation--Underwriting
Standards" herein.
MARKET INTEREST RATE AND SUBORDINATION YIELD CONSIDERATIONS
Because the Mortgage Rates on the Mortgage Loans and the Pass-Through Rates
on the Offered Certificates (other than the Class XS Certificates) are fixed,
such rates will not change in response to changes in market interest rates.
Accordingly, if mortgage market interest rates or market yields for securities
similar to such Offered Certificates were to rise, the market value of such
Offered Certificates may decline.
As described under "Description of the Certificates--Allocation of Losses;
Subordination", amounts otherwise distributable to holders of the Subordinate
Certificates may be made available to protect the holders of the Senior
Certificates against interruptions in distributions due to certain mortgagor
delinquencies, to the extent not covered by P&I Advances, and amounts otherwise
distributable to holders of the Subordinate Certificates with a higher numerical
class designation may be made available to protect the holders of Subordinate
Certificates with a lower numerical class designation against such interruptions
in distributions. Such delinquencies may affect the yield to investors on such
classes of the Subordinate Certificates, and, even if subsequently cured, will
affect the timing of the receipt of distributions by the holders of such classes
of Subordinate Certificates. In addition, a larger than expected rate of
delinquencies or losses will affect the rate of principal payments on each class
of the Subordinate Certificates if it delays the scheduled reduction of the
Senior Prepayment Percentage, triggers an increase of the Senior Prepayment
Percentage to [100]% or triggers a lockout of one or more classes of Subordinate
Certificates from distributions of certain portions of the Subordinate Principal
Distribution Amount. See "Description of the Certificates--Principal
Distributions on the Senior Certificates" and "--Principal Distributions on the
Subordinate Certificates" herein.
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WEIGHTED AVERAGE LIFE
Weighted average life refers to the amount of time that will elapse from
the date of issuance of a security until each dollar of principal of such
security will be repaid to the investor. The weighted average life of the
Offered Certificates of each class will be influenced by the rate at which
principal on the Mortgage Loans is paid, which may be in the form of scheduled
payments or prepayments (including prepayments of principal by the mortgagor as
well as amounts received by virtue of condemnation, insurance or foreclosure
with respect to the Mortgage Loans), and the timing thereof.
Except as otherwise described under "Description of the
Certificates--Principal Distributions on the Senior Certificates" herein,
distributions of principal will be made to the classes of Class A Certificates
according to the priorities described herein, rather than on a pro rata basis
among such classes, unless the Certificate Principal Balances of the Subordinate
Certificates have been reduced to zero. The timing of commencement of principal
distributions to each class of the Class A Certificates and the weighted average
life of each such class will be affected by the rates of prepayment on the
Mortgage Loans experienced both before and after the commencement of principal
distributions on each such class. Moreover, because the Lockout Certificates do
not receive (unless the Certificate Principal Balances of the Class A
Certificates, other than the Lockout Certificates, have been reduced to zero)
any portion of principal payments prior to the Distribution Date occurring in
________ ____ and thereafter will receive (unless the Certificate Principal
Balances of the Class A Certificates, other than the Lockout Certificates, have
been reduced to zero) a disproportionately small or large portion of principal
payments, the weighted average life of the Lockout Certificates will be longer
or shorter than would otherwise be the case, and the effect on the market value
of the Lockout Certificates of changes in market interest rates or market yields
for similar securities may be greater or lesser than for the other classes of
Class A Certificates entitled to principal distributions.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement (the
"Prepayment Assumption") assumes a prepayment rate for the Mortgage Loans of
___% of the Prepayment Vector. A ___% Prepayment Vector assumes that the
outstanding balance of a pool of mortgage loans prepays at a rate of ____% CPR
in the first month of the life of such pool, such rate increasing by an
additional approximate ____% CPR (precisely __/__, expressed as a percentage)
each month thereafter through the eleventh month of the life of such pool, and
such rate thereafter remaining constant at __% CPR for the remainder of the life
of such pool. An __% Prepayment Vector assumes, for example, that the
outstanding balance of a pool of mortgage loans prepays at a rate of ____% CPR
in the first month of the life of such pool, such rate increasing by an
additional approximate ____% CPR (precisely _____/__, expressed as a percentage)
each month thereafter through the ________ month of the life of such pool, and
such rate thereafter remaining constant at __% CPR for the remainder of the life
of such pool. No representation is made that the Mortgage Loans in the Mortgage
Pool will prepay at the above-described rates or any other rate. CPR refers to
the Constant Prepayment Rate model, which assumes that the outstanding principal
balance of a pool of mortgage loans prepays at a specified constant annual rate
or CPR. In generating monthly cash flows, this rate is converted to an
equivalent constant monthly rate. To assume __% CPR or any other CPR percentage
is to assume that the stated percentage of the outstanding principal balance of
the pool is prepaid over the course of a year.
The tables following the next paragraph indicate the percentage of the
initial Certificate Principal Balance of the indicated classes of Certificates
that would be outstanding after each of the dates shown at various constant
percentages of the Prepayment Assumption and the corresponding weighted average
life of such class of Certificates. The table is based on the following
assumptions (the "Modeling Assumptions"): (i) the Mortgage Pool consists of ____
Mortgage Loans with the characteristics set forth in the table below, (ii)
distributions on such Certificates are received, in cash, on the __th day of
each month, commencing in ________ ____, (iii) the Mortgage Loans prepay at the
constant percentages of the Prepayment Assumption indicated, (iv) no defaults or
delinquencies occur in the payment by mortgagors of principal and interest on
the Mortgage Loans and no shortfalls due to the application of the Relief Act
are incurred, (v) none of the Depositor, the Seller, the Master Servicer or any
other person purchases from the Trust any Mortgage Loan pursuant to any
obligation or option under the Agreement (except as indicated in footnote (2) in
the tables), (vi) scheduled monthly payments on the Mortgage Loans are received
on the first day of each month commencing in ________ ____, and are computed
prior to giving effect to any prepayments received in the prior month, (vii)
prepayments representing payment in full of individual Mortgage Loans are
received on the last day of each month commencing in _______ ____, and include
30 days' interest thereon, (viii) the scheduled monthly
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<PAGE>
payment for each Mortgage Loan is calculated based on its principal balance,
Mortgage Rate and remaining term to maturity such that the Mortgage Loan will
amortize in amounts sufficient to repay the remaining principal balance of such
Mortgage Loan by its remaining term to maturity, (ix) the Certificates are
purchased on _______ __, ____ and (x) the Servicing Fee Rate is ____% per annum
and the Trustee's Fee Rate is _____% per annum.
ASSUMED MORTGAGE LOAN CHARACTERISTICS
Original Remaining
Principal Balance Term Term
as of the Mortgage to Maturity to Maturity
Cut-off Date Rate (Months) (Months)
------------------ ------------- -------------- ------------
There will be discrepancies between the characteristics of the actual
Mortgage Loans and the characteristics assumed in preparing the table below. Any
such discrepancy may have an effect upon the percentages of the initial
Certificate Principal Balances outstanding (and the weighted average lives) of
the classes of Certificates set forth in the table. In addition, to the extent
that the actual Mortgage Loans included in the Mortgage Pool have
characteristics that differ from those assumed in preparing the table below,
such classes of Certificates may mature earlier or later than indicated by the
table below. Based on the foregoing assumptions, the table below indicates the
weighted average life of each class of the Class A Certificates and the
Subordinate Certificates and sets forth the percentage of the initial
Certificate Principal Balance of each such class of Certificates that would be
outstanding after each of the dates shown, at various percentages of the
Prepayment Assumption. Neither the prepayment model used herein nor any other
prepayment model or assumption purports to be a historical description of
prepayment experience or a prediction of the anticipated rate of prepayment of
any pool of mortgage loans, including the Mortgage Loans included in the Trust.
Variations in the prepayment experience and the balance of the Mortgage Loans
that prepay may increase or decrease the percentages of initial Certificate
Principal Balance (and weighted average lives) shown in the following table.
Such variations may occur even if the average prepayment experience of all such
Mortgage Loans equals any of the specified percentages of the Prepayment
Assumption.
S-43
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE
SPECIFIED PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS A-1 CERTIFICATES CLASS A-2 CERTIFICATES
-------------------------------------- -------------------------------------
Distribution Date 0% 25% 50% 75% 100% 125% 150% 0% 25% 50% 75% 100% 125% 150%
-- --- --- --- ---- ---- ---- -- --- --- --- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
...................................
...................................
...................................
Weighted Average Life
in Years(1) ......................
Weighted Average Life
in Years(2) ......................
</TABLE>
CLASS A-3 CERTIFICATES
------------------------------------------
Distribution Date 0% 25% 50% 75% 100% 125% 150%
-- --- --- --- ---- ---- ----
...................................
...................................
...................................
Weighted Average Life
in Years(1) ......................
Weighted Average Life
in Years(2) ......................
__________________
(1) The weighted average life of a Certificate is determined by (a) multiplying
the amount of each distribution of principal by the number of years from
the date of issuance of the Certificate to the related Distribution Date,
(b) adding the results and (c) dividing the sum by the initial Certificate
Principal Balance of the Certificate.
(2) Calculated pursuant to footnote one but assumes the Master Servicer
exercises its option to purchase the Mortgage Loans. See "Pooling and
Servicing Agreement-- Termination" herein.
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE
SPECIFIED PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS A-4 CERTIFICATES CLASS A-5 CERTIFICATES
----------------------------------------- --------------------------------------
Distribution Date 0% 25% 50% 75% 100% 125% 150% 0% 25% 50% 75% 100% 125% 150%
- ----------------- -- --- --- --- ---- ---- ---- -- --- --- --- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
...................................
...................................
...................................
Weighted Average Life
in Years(1) ......................
Weighted Average Life
in Years(2) ......................
</TABLE>
__________________
(1) The weighted average life of a Certificate is determined by (a) multiplying
the amount of each distribution of principal by the number of years from
the date of issuance of the Certificate to the related Distribution Date,
(b) adding the results and (c) dividing the sum by the initial Certificate
Principal Balance of the Certificate.
(2) Calculated pursuant to footnote one but assumes the Master Servicer
exercises its option to purchase the Mortgage Loans. See "Pooling and
Servicing Agreement-- Termination" herein.
(Table continued on next page.)
S-45
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE
SPECIFIED PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS A-6 CERTIFICATES SUBORDINATE CERTIFICATES
------------------------------------ -----------------------------------------
Distribution Date 0% 25% 50% 75% 100% 125% 150% 0% 25% 50% 75% 100% 125% 150%
----------------- -- --- --- --- ---- ---- ---- -- --- --- --- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
....................................
....................................
....................................
Weighted Average Life
in Years(1) ......................
Weighted Average Life
in Years(2) ......................
</TABLE>
_________________________
(1) The weighted average life of a Certificate is detemined by (a) multiplying
the amount of each distribution of principal by the number of years from
the date of issuance of the Certificate to the related Distribution Date,
(b) adding the results and (c) dividing the sum by the initial Certificate
Principal Balance of the Certificate.
(2) Calculated pursuant to footnote one but assumes the Master Servicer
exercises its option to purchase the Mortgage Loans. See "Pooling and
Servicing Agreement-- Termination" herein.
S-46
<PAGE>
There is no assurance that prepayments of the Mortgage Loans will conform
to any of the levels of the Prepayment Assumption indicated in the table above
or to any other level, or that the actual weighted average life of any class of
Certificates will conform to any of the weighted average lives set forth in the
table above. Furthermore, the information contained in the table with respect to
the weighted average life of each specified class of Certificates is not
necessarily indicative of the weighted average life of each such class that
might be calculated or projected under different or varying prepayment
assumptions.
The characteristics of the Mortgage Loans will differ from those assumed in
preparing the table above. In addition, it is unlikely that any Mortgage Loan
will prepay at any constant percentage of the Prepayment Assumption until
maturity or that all of the Mortgage Loans will prepay at the same rate. The
timing of changes in the rate of prepayments may significantly affect the actual
yield to maturity to investors, even if the average rate of principal
prepayments is consistent with the expectations of investors.
YIELD SENSITIVITY OF THE CLASS XS CERTIFICATES
The yield to maturity of the Class XS Certificates will be extremely
sensitive to the prepayment, repurchase and default experience on the Mortgage
Loans, which may fluctuate significantly from time to time. A rapid rate of
principal payments on the Mortgage Loans will have a materially negative effect
on the yield to maturity of the Class XS Certificates, and principal prepayments
on Mortgage Loans with higher Mortgage Rates will have a greater negative impact
on the yield to maturity of the Class XS Certificates than principal prepayments
on Mortgage Loans with lower Mortgage Rates. There can be no assurance that the
Mortgage Loans will prepay at any particular rate. Prospective investors in the
Class XS Certificates should fully consider the associated risks, including the
risk that such investors may not fully recover their initial investment.
The following table indicates the sensitivity of the yield of the Class XS
Certificates to various rates of prepayment on the Mortgage Loans and the
corresponding pre-tax yield on a corporate bond equivalent basis. The table set
forth below has been prepared based on the Modeling Assumptions.
PRE-TAX YIELD TO MATURITY ON THE CLASS XS CERTIFICATES
AT VARIOUS PERCENTAGES OF THE PREPAYMENT ASSUMPTION
Percentages of the Prepayment Assumption
Assumed Aggregate ------------------------------------------------------
Purchase Price 0% 25% 50% 75% 100% 125% 150%
- ------------------- ------- ------ ------ ------ ------- ------- -------
$ ................ % % % % % % %
On the basis of a constant prepayment rate of approximately ___% of the
Prepayment Assumption and the purchase price assumed above, the yield to
maturity of the Class XS Certificates would be approximately __%. If the actual
prepayment rate were to exceed such rate, initial investors in the Class XS
Certificates would not fully recover their initial investment.
The pre-tax yields set forth in the preceding table were calculated by
determining the monthly discount rates that, when applied to the assumed streams
of cash flows to be paid on the Class XS Certificates, would cause the
discounted present value of such assumed stream of cash flows to equal the
assumed purchase price of such Class XS Certificates, and by converting such
monthly rates to corporate bond equivalent rates. Such calculation does not take
into account shortfalls in collection of interest due to prepayments (or other
liquidations) on the Mortgage Loans or the interest rates at which investors may
be able to reinvest funds received by them as distributions on the Class XS
Certificates and consequently does not purport to reflect the return on any
investment in the Class XS Certificates when such reinvestment rates are
considered.
The characteristics of the Mortgage Loans will differ from those assumed in
preparing the table above. There can be no assurance that the cash flows on the
Class XS Certificates will correspond to those used to determine the pre-tax
yields shown above or that the aggregate purchase price of the Class XS
Certificates will be as assumed. It is unlikely that any Mortgage Loan will
prepay at the specified percentages of the Prepayment Assumption until maturity
or that all of the Mortgage Loans will prepay at the same rate. The timing of
changes in the rate of prepayments may significantly affect the actual yield to
maturity to investors, even if the average rate of principal prepayments is
consistent with the expectations of investors. The portion of interest payments
on the Mortgage Loans distributable to the Class XS Certificates will vary from
Mortgage Loan to Mortgage Loan, and will be greater with respect to Mortgage
Loans with higher Mortgage Rates. Accordingly, the yield on the Class XS
Certificates will be lower than indicated in the applicable table above with
respect to any particular average prepayment rate if Mortgage Loans with higher
Mortgage Rates prepay
S-47
<PAGE>
faster than Mortgage Loans with lower Mortgage Rates, assuming no variation in
Mortgage Loan principal balance. Moreover, the variable Pass-Through Rate on the
Class XS Certificates will generally decrease as the Certificate Principal
Balances of Class A Certificates with lower fixed Pass-Through Rates decline.
There can be no assurance that the Mortgage Loans will prepay at any of the
rates shown in the table or at any other particular rate, or that Mortgage Loans
with relatively high Mortgage Rates will prepay at the same rate as the Mortgage
Loans generally. Investors must make their own decisions as to the appropriate
prepayment assumptions to be used in deciding whether to purchase the Class XS
Certificates.
YIELD SENSITIVITY OF THE SUBORDINATE CERTIFICATES
If the Certificate Principal Balances of the Class B-6 Certificates, Class
B-5 Certificates, Class B-4 Certificates, Class B-3 Certificates and Class B-2
Certificates have been reduced to zero, the yield to maturity on the Class B-1
Certificates will become extremely sensitive to losses on the Mortgage Loans
(and the timing thereof) that are covered by subordination, because the entire
amount of such losses will be allocated to the Class B-1 Certificates. If the
Certificate Principal Balances of the Class B-6 Certificates, Class B-5
Certificates, Class B-4 Certificates and Class B-3 Certificates have been
reduced to zero, the yield to maturity on the Class B-2 Certificates will become
extremely sensitive to losses on the Mortgage Loans (and the timing thereof)
that are covered by subordination, because the entire amount of such losses will
be allocated to the Class B-2 Certificates. If the Certificate Principal
Balances of the Class B-6 Certificates, Class B-5 Certificates and Class B-4
Certificates have been reduced to zero, the yield to maturity on the Class B-3
Certificates will become extremely sensitive to losses on the Mortgage Loans
(and the timing thereof) that are covered by subordination, because the entire
amount of such losses will be allocated to the Class B-3 Certificates. The
initial undivided interest in the Trust evidenced by the Class B-1 Certificates,
the Class B-2 Certificates, the Class B-3 Certificates, the Class B-4
Certificates, the Class B-5 Certificates and the Class B-6 Certificates is
approximately ____%, approximately ____%, approximately ____%, approximately
____%, approximately ____% and approximately ____%, respectively. Investors in
the Subordinate Certificates should fully consider the risk that Realized Losses
on the Mortgage Loans could result in the failure of such investors to fully
recover their investments. For additional considerations relating to the yield
on the Subordinate Certificates, see "Yield Considerations" and "Maturity and
Prepayment Considerations" in the Prospectus.
USE OF PROCEEDS
The Depositor will apply the net proceeds of the sale of the Offered
Certificates to the purchase of the Mortgage Loans transferred to the Trust.
FEDERAL INCOME TAX CONSEQUENCES
Two elections will be made to treat designated portions of the Trust as a
real estate mortgage investment conduit (a "REMIC") for federal income tax
purposes. Upon the issuance of the Offered Certificates, Thacher Proffitt &
Wood, counsel to the Depositor, will deliver its opinion generally to the effect
that, assuming compliance with all provisions of the Agreement, for federal
income tax purposes, the Trust will qualify as a REMIC under Sections 860A
through 860G of the Internal Revenue Code of 1986 (the "Code").
For federal income tax purposes, (i) the Residual Certificates will
represent the sole class of "residual interests" in the Trust and (ii) the
Offered Certificates and the Class P Certificates will be the "regular
interests" in, and will be treated as debt instruments of the Trust. See
"Federal Income Tax Consequences--REMIC--Classification of REMICs" in the
Prospectus.
For federal income tax reporting purposes, the Offered Certificates [will]
[will not] 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, premium and market discount, 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 the Prepayment Assumption. No
representation is made that the Mortgage Loans will prepay at such rate or at
any other rate. See "Federal Income Tax Consequences--REMICs--Taxation of Owners
of REMIC Regular Certificates--Original Issue Discount" in the Prospectus.
The Internal Revenue Service (the "IRS") has issued regulations (the "OID
Regulations") under Sections 1271 to 1275 of the Code generally addressing the
treatment of debt instruments issued with original issue discount. Purchasers of
the Offered Certificates should be aware that the OID Regulations do not
adequately address certain issues relevant to, or are not applicable to,
prepayable securities such as the Offered
S-48
<PAGE>
Certificates. In addition, there is considerable uncertainty concerning the
application of the OID Regulations to REMIC Regular Certificates that provide
for payments based on an adjustable rate such as the Class A-8 Certificates.
Because of the uncertainty concerning the application of Section 1272(a)(6) of
the Code to such Certificates and because the rules of the OID Regulations
relating to debt instruments having an adjustable rate of interest are limited
in their application in ways that could preclude their application to such
Certificates even in the absence of Section 1272(a)(6) of the Code, the IRS
could assert that the Offered Certificates should be treated as issued with
original issue discount or should be governed by the rules applicable to debt
instruments having contingent payments or by some other method not yet set forth
in regulations. Prospective purchasers of the Offered Certificates are advised
to consult their tax advisors concerning the tax treatment of such Certificates.
It appears that a reasonable method of reporting original issue discount
with respect to the Offered Certificates, if such Certificates are required to
be treated as issued with original issue discount, generally would be to report
all income with respect to such Certificates as original issue discount for each
period, computing such original issue discount (i) by assuming that the value of
the applicable index will remain constant for purposes of determining the
original yield to maturity of, and projecting future distributions on such
Certificates, thereby treating such Certificates as fixed rate instruments to
which the original issue discount computation rules described in the Prospectus
can be applied, and (ii) by accounting for any positive or negative variation in
the actual value of the applicable index in any period from its assumed value as
a current adjustment to original issue discount with respect to such period. See
"Federal Income Tax Consequences-- REMICs--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount" in the Prospectus.
Certain of the Certificates may be treated for federal income tax purposes
as having been issued at a premium. Whether any holder of a Certificate will be
treated as holding such 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 such Certificates should consult their own tax
advisors regarding the possibility of making an election to amortize such
premium. See "Federal Income Tax Consequences-- REMICs--Taxation of Owners of
REMIC Regular Certificates--Premium" in the Prospectus.
The Offered Certificates will be treated as assets described in Section
7701(a)(19)(C) of the Code and "real estate assets" under Section 856(c)(4)(A)
of the Code, generally in the same proportion that the assets in the Trust would
be so treated. In addition, interest on the Offered Certificates will be treated
as "interest on obligations secured by mortgages on real property" under Section
856(c)(3)(B) of the Code, generally to the extent that the Offered Certificates
are treated as "real estate assets" under Section 856(c)(4)(A) of the Code. The
Offered Certificates will also be treated as "qualified mortgages" under Section
860G(a)(3) of the Code. See "Federal Income Tax Consequences--
REMICs--Characterization of Investments in REMIC Certificates" in the
Prospectus.
It is not anticipated that the Trust will engage in any transactions that
would subject it to the prohibited transactions tax as defined in Section
860F(a)(2) of the Code, the contributions tax as defined in Section 860G(d) of
the Code or the tax on net income from foreclosure property as defined in
Section 860G(c) of the Code. However, in the event that any such tax is imposed
on the Trust, such tax will be borne (i) by the Trustee, if the Trustee has
breached its obligations with respect to REMIC compliance under the Agreement,
(ii) by the Master Servicer, if the Master Servicer has breached its obligations
with respect to REMIC compliance under the Agreement and (iii) otherwise by the
Trust, with a resulting reduction in amounts otherwise distributable to the
holders of the related Offered Certificates. See "Description of the
Securities-- General" and "Federal Income Tax Consequences--REMICs--Prohibited
Transactions and Other Possible REMIC Taxes" in the Prospectus.
The responsibility for filing annual federal information returns and other
reports will be borne by the Trustee or the Master Servicer. See "Federal Income
Tax Consequences--REMICs-- Reporting and Other Administrative Matters" 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.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA")
imposes certain fiduciary and prohibited transaction restrictions on employee
pension and welfare benefit plans subject to ERISA ("ERISA Plans"). Section 4975
of the Code imposes similar prohibited transaction restrictions on
S-49
<PAGE>
tax-qualified retirement plans described in Section 401(a) of the Code
("Qualified Retirement Plans") and on Individual Retirement Accounts ("IRAs")
described in Section 408 of the Code (collectively, "Tax-Favored Plans";
Tax-Favored Plans and ERISA Plans, together, "Plans").
Certain employee benefit plans, such as governmental plans (as defined in
Section 3(32) of ERISA), 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 the ERISA requirements discussed herein. Accordingly, assets of such
plans may be invested in certificates without regard to the ERISA considerations
described below, subject to the provisions of applicable federal and state law.
Any such plan that is a Qualified Retirement Plan 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.
In addition to imposing general fiduciary requirements, including those of
investment prudence and diversification and the requirement that a Plan's
investment be made in accordance with the documents governing the Plan, Section
406 of ERISA and Section 4975 of the Code prohibit a broad range of transactions
involving "Plan Assets," Plans and persons ("parties in interest" under Section
3(14) of ERISA or "disqualified persons" under Section 4975(e)(2) of the Code;
collectively, "Parties In Interest") who have certain specified relationships to
the Plans, unless a statutory, regulatory or administrative exemption is
available. Certain Parties in Interest that participate in a prohibited
transaction may be subject to a penalty, or an excise tax, imposed pursuant to
Section 502(i) of ERISA or Section 4975 of the Code, unless a statutory,
regulatory or administrative exemption is available.
Except as noted above, investments by Plans are subject to ERISA's general
fiduciary requirements, including the requirement of investment prudence and
diversification and the requirement that a Plan's investments be made in
accordance with the documents governing the Plan. A fiduciary which decides to
invest the assets of a Plan in the Offered Certificates should consider, among
other factors, the extreme sensitivity of the investments to the rate of
principal payments (including prepayments) on the Mortgage Loans.
The U.S. Department of Labor (the "DOL") has granted to [Underwriter] an
administrative exemption (Prohibited Transaction Exemption _______; Exemption
Application No. _______) (the "Exemption") from certain of the prohibited
transaction rules of ERISA and the related excise tax provisions of Section 4975
of the Code with respect to the initial purchase, the holding and the subsequent
resale by Plans of certificates in pass-through trusts that consist of certain
receivables, loans and other obligations that meet the conditions and
requirements of the Exemption. The Exemption applies to mortgage loans such as
the Mortgage Loans in the Trust.
Among the conditions that must be satisfied for the Exemption to apply are
the following:
(1) the acquisition of the certificates by a Plan is on terms (including
the price for the certificates) that are at least as favorable to the Plan as
they would be in an arm's length transaction with an unrelated party;
(2) the rights and interests evidenced by the certificates acquired by the
Plan are not subordinated to the rights and interests evidenced by other
certificates of the trust;
(3) the certificates acquired by the Plan have received a rating at the
time of such acquisition that is one of the three highest generic rating
categories from Standard & Poor's, a division of The McGraw-Hill Companies, Inc.
("S&P"), Moody's Investors Service, Inc. ("Moody's"), Duff & Phelps Credit
Rating Co. ("DCR") or Fitch IBCA, Inc. ("Fitch" and, together with S&P, Moody's
and DCR, the "Exemption Rating Agencies");
(4) the trustee must not be an affiliate of any other member of the
Restricted Group (as defined below);
(5) the sum of all payments made to and retained by the underwriters in
connection with the distribution of the certificates represents not more than
reasonable compensation for underwriting the certificates; the sum of all
payments made to and retained by the seller pursuant to the assignment of the
loans to the trust represents not more than the fair market value of such loans;
the sum of all payments made to and retained by the servicer and any other
servicer represents not more than reasonable compensation for such person's
services under the agreement pursuant to which the loans are pooled and
reimbursements of such person's reasonable expenses in connection therewith; and
(6) the Plan investing in the certificates is an "accredited investor" as
defined in Rule 501(a)(1) of Regulation D of the Securities and Exchange
Commission under the Securities Act of 1933.
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<PAGE>
The trust must also meet the following requirements:
(i) the corpus of the trust must consist solely of assets of the type that
have been included in other investment pools;
(ii) certificates in such other investment pools must have been rated in
one of the three highest generic rating categories by an Exemption Rating Agency
for at least one year prior to the Plan's acquisition of certificates; and
(iii) certificates evidencing interests in such other investment pools must
have been purchased by investors other than Plans for at least one year prior to
any Plan's acquisition of certificates.
Moreover, the Exemption provides relief from certain self-dealing/conflict
of interest prohibited transactions that may occur when the Plan fiduciary
causes a Plan to acquire certificates in a trust holding receivables as to which
the fiduciary (or its affiliate) is an obligor provided that, among other
requirements, (i) in the case of an acquisition in connection with the initial
issuance of certificates, at least fifty percent (50%) of each class of
certificates in which Plans have invested is acquired by persons independent of
the Restricted Group; (ii) such fiduciary (or its affiliate) is an obligor with
respect to five percent (5%) or less of the fair market value of the obligations
contained in the trust; (iii) the Plan's investment in certificates of any class
does not exceed twenty-five percent (25%) of all of the certificates of that
class outstanding at the time of the acquisition; and (iv) immediately after the
acquisition, no more than twenty-five percent (25%) of the assets of any Plan
with respect to which such person is a fiduciary are invested in certificates
representing an interest in one or more trusts containing assets sold or
serviced by the same entity. The Exemption does not apply to Plans sponsored by
the Depositor, the Underwriters, the Trustee, the Master Servicer, any obligor
with respect to Mortgage Loans included in the Trust constituting more than five
percent of the aggregate unamortized principal balance of the assets in the
Trust, or any affiliate of such parties (the "Restricted Group").
It is expected that the Exemption will apply to the acquisition and holding
by Plans of the Senior Certificates and that all conditions of the Exemption
other than those within the control of the investors will be met.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the applicability of PTCE 83-1
described in the Prospectus and the Exemption, and the potential consequences in
their specific circumstances, prior to making an investment in the Offered
Certificates. Moreover, each Plan fiduciary should determine whether under the
general fiduciary standards of investment prudence and diversification, an
investment in the Offered Certificates is appropriate for the Plan, taking into
account the overall investment policy of the Plan and the composition of the
Plan's investment portfolio.
Because the characteristics of the Subordinate Certificates will not meet
the requirements of Prohibited Transaction Class Exemption ("PTCE") 83-1 (as
described in the Prospectus) or the Exemption, the purchase, sale or holding of
the Subordinate Certificates by, on behalf of or with Plan Assets of any Plan
may result in prohibited transactions or the imposition of excise taxes or civil
penalties. Therefore, the Agreement provides that transfers of Subordinate or to
a Plan, a trustee or other person acting on behalf of any Plan or to any person
using Plan Assets to effect such acquisition will not be registered by the
Trustee unless the purchaser thereof provides the Depositor, the Trustee and the
Master Servicer with either (i) an opinion of counsel satisfactory to the
Depositor, the Trustee and the Master Servicer, which opinion will not be at the
expense of the Depositor, the Master Servicer, the Trustee or the Trust, to the
effect that the purchase of such Certificates is permissible under applicable
law, will not constitute or result in any non-exempt prohibited transaction
under ERISA or Section 4975 of the Code and will not subject the Depositor, the
Master Servicer, the Trustee or the Trust to any obligation in addition to those
undertaken in the Agreement or (ii) a certification of facts (which in the case
of the Class B-1 Certificates, the Class B-2 Certificates and the Class B-3
Certificates, the purchaser will be deemed to have represented such
certification of facts) substantially to the effect that the purchase of Offered
Certificates by or on behalf of such Plan is permissible under applicable law,
will not constitute or result on a non-exempt prohibited transaction under ERISA
or Section 4975 of the Code, will not subject the Depositor, the Trustee or the
Master Servicer to any obligation in addition to those undertaken in the
Agreement and the following conditions are met: (a) the transferee is an
insurance company and (i) the source of funds used to purchase such Offered
Certificates is an "insurance company general account" (as such term is defined
in PTCE 95-60), (ii) the conditions set forth in Sections I and III of PTCE
95-60 have been satisfied and (iii) there is no Plan with respect to which the
amount of such general account's reserves and liabilities for contracts held by
or on behalf of such Plan and all other Plans maintained by the same employer
(or any "affiliate" thereof, as defined in PTCE 95-60) or by the same employee
organization, exceeds 10% of the total of all reserves and liabilities of such
general account (as determined under PTCE 95-60) as of the date of the
acquisition of such Certificates; (b) the transferee is an insurance company and
(i) the source of funds used to purchase such Certificates is an insurance
company general account, (ii) the
S-51
<PAGE>
requirements of Sections 401(c) of ERISA and the regulations to be promulgated
thereunder have been satisfied and will continue to be satisfied and (iii) the
insurance company represents that it understands that the operation of the
general account after December 31, 1998 may affect its ability to continue to
hold such Certificates after the date which is 18 months after the 401(c)
Regulations become final and that unless a Class Exemption or an exception under
Section 401(c) of ERISA is then available for the continued holding of such
Certificates, it will dispose of such Certificates prior to the date which is 18
months after the 401(c) Regulations become final; (c) the transferee is an
insurance company and (i) the source of funds used to purchase such Certificates
is an "insurance company pooled separate account" (as such term is defined in
PTCE 90-1), (ii) the conditions set forth in PTCE 90-1 have been satisfied and
(iii) there is no Plan, together with all other Plans maintained by the same
employer (or any "affiliate" thereof, as defined in PTCE 90-1) or by the same
employee organization, with assets which exceed 10% of the total of all assets
in such pooled separate account (as determined under PTCE 90-1) as of the date
of the acquisition of such Certificates; (d) the transferee is a bank and (i)
the source of funds used to purchase such Certificates is a "collective
investment fund" (as defined in PTCE 91-38), (ii) the conditions set forth in
PTCE 91-38 have been satisfied and (iii) there is no Plan, the interests of
which, together with the interests of any other Plans maintained by the same
employer or employee organization, in the collective investment fund exceed 10%
of the total of all assets in the collective investment fund (as determined
under PTCE 91-38) as of the date of acquisition of such Certificates; (e) the
transferee is a "qualified professional asset manager" described in PTCE 84-14
and the conditions set forth in PTCE 84-14 have been satisfied and will continue
to be satisfied; or (f) the transferee is an "in-house asset manager" described
in PTCE 96-23 and the conditions set forth in PTCE 96-23 have been satisfied and
will continue to be satisfied. The Subordinate Certificates will contain a
legend describing such restrictions on transfer.
Before purchasing a Subordinate Certificate, a fiduciary of a Plan should
itself confirm that the conditions to such purchase described above would be
satisfied. Any Plan fiduciary that proposes to cause a Plan to purchase a
Certificate should consult with its counsel with respect to the potential
applicability to such investment of the fiduciary responsibility and prohibited
transaction provisions of ERISA and the Code to the proposed investment. For
further information regarding the ERISA considerations of investing in the
Certificates, see "ERISA Considerations" in the Prospectus.
LEGAL INVESTMENT CONSIDERATIONS
When issued, the Senior Certificates and the Class B-1 Certificates will
constitute "mortgage related securities" for purposes of the Secondary Mortgage
Market Enhancement Act of 1984 ("SMMEA") so long as they are rated in one of the
two highest rating categories by at least one nationally recognized statistical
rating organization and, as such, are legal investments for certain entities to
the extent provided for in SMMEA. SMMEA, however, provides for state limitation
on the authority of such entities to invest in "mortgage related securities"
provided that such restrictive legislation was enacted prior to October 3, 1991.
Certain states have enacted legislation which overrides the preemption
provisions of SMMEA. The Class B-2 and the Class B-3 Certificates will not
constitute "mortgage related securities" for purposes of SMMEA.
The Depositor makes no representations as to the proper characterization of
the Offered Certificates for legal investment or other purposes, or as to the
ability of particular investors to purchase the Offered Certificates under
applicable legal investment restrictions. These uncertainties may adversely
affect the liquidity of the 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 the Offered Certificates constitutes a legal investment or is subject to
investment, capital or other restrictions.
See "Legal Investment" in the Prospectus.
S-52
<PAGE>
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the underwriting
agreement, dated __________ (the "Underwriting Agreement"), among the
Underwriters named below, the Seller and the Depositor, the Depositor has agreed
to sell to the Underwriters, and the Underwriters have agreed to purchase from
the Depositor, the principal amount of the Offered Certificates set forth
opposite their respective names.
[INSERT CHART]
The Depositor has been advised by the Underwriters that they propose
initially to offer the Certificates to the public the United States at the
offering price set forth herein and to certain dealers at such price less a
selling concession, not in excess of ____% of the Certificate balances. The
Underwriters may allow and such dealers may reallow a reallowance discount, not
in excess of ____% of the Certificate balances, to certain other dealers. After
the initial public offering, the public offering price, such concessions and
such discounts may be changed.
Until the distribution of the Certificates is completed, rules of the SEC
may limit the ability of the Underwriters and certain selling group members to
bid for and purchase the Certificates. As an exception to these rules, the
Underwriters are permitted to engage in certain transactions that stabilize the
price of the Certificates. Such transactions consist of bids or purchases for
the purpose of pegging, fixing or maintaining the price of the Certificates.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases.
Neither the Depositor nor any of the Underwriters makes any representation
or prediction as to the direction or magnitude of any effect that the
transactions described above may have on the prices of the Certificates. In
addition, neither the Depositor nor any of the Underwriters makes any
representation that the Underwriters will engage in such transactions or that
such transactions, once commenced, will not be discontinued without notice.
The Depositor has been advised by each Underwriter that it intends to make
a market in the Offered Certificates but no Underwriter has any obligation to do
so. There can be no assurance that a secondary market for the Offered
Certificates will develop or, if it does develop, that it will continue.
The Depositor has agreed to indemnify the Underwriters against, or make
contributions to the Underwriters with respect to, certain liabilities,
including liabilities under the Act.
LEGAL MATTERS
Certain legal matters with respect to the Offered Certificates will be
passed upon for the Seller, Master Servicer and the Depositor by Thacher
Proffitt & Wood, New York, New York. Certain legal matters will be passed upon
for the Underwriters by _______________, New York, New York.
RATINGS
It is a condition to the issuance of the Offered Certificates that the
Offered Certificates be rated "____" by _________________ ("____"), "____" by
("________") and "_____" by _________ ("______" and, together with _____ and
________, the "Rating Agencies").
A securities rating addresses the likelihood of the receipt by a
certificateholder of distributions on the Mortgage Loans. The rating takes into
consideration the characteristics of the Mortgage Loans and the structural,
legal and tax aspects associated with the certificates. The ratings on the
Offered Certificates do not, however, constitute statements regarding the
likelihood or frequency of prepayments on the Mortgage Loans, the payment of any
Net WAC Cap Carryover Amount or the possibility that a holder of an Offered
Certificate might realize a lower than anticipated yield.
The ratings assigned to the Offered Certificates will depend primarily upon
the creditworthiness of the Certificate Insurer. Any reduction in a rating
assigned to the claims-paying ability of the Certificate Insurer below the
ratings initially assigned to the Offered Certificates may result in a reduction
of one or more of the ratings assigned to the Offered Certificates.
S-53
<PAGE>
The Depositor has not engaged any rating agency other than the Rating
Agencies to provide ratings on the Offered Certificates. However, there can be
no assurance as to whether any other rating agency will rate the Offered
Certificates, or, if it does, what rating would be assigned by any such other
rating agency. Any rating on the Offered Certificates by another rating agency,
if assigned at all, may be lower than the ratings assigned to the Offered
Certificates by the Rating Agencies.
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 ratings initially assigned to any
of the Offered Certificates by the Rating Agencies are subsequently lowered for
any reason, no person or entity is obligated to provide any additional support
or credit enhancement with respect to such Offered Certificates.
<PAGE>
INDEX OF DEFINED TERMS
<PAGE>
INDEX OF DEFINED TERMS
Page
----
Advance ..............................................................S-25
Agreement ............................................................S-23
Bankruptcy Amount ....................................................S-38
Bankruptcy Loss ......................................................S-39
Book-Entry Certificates ..............................................S-28
CEDE .................................................................S-28
Certificate Owner ....................................................S-28
Certificates .........................................................S-28
Class A Certificates .................................................S-28
Class B Percentage ...................................................S-36
Clearing Agency ......................................................S-28
Code ............................................................S-5, S-48
Collection Account ...................................................S-24
Compensating Interest ..........................................S-26, S-40
Cut-off Date .........................................................S-28
Cut-off Date Principal Balance .......................................S-10
DCR ..................................................................S-50
Debt Service Reduction ...............................................S-39
Deficient Valuation ..................................................S-39
Deleted Mortgage Loan ................................................S-24
Determination Date .............................................S-26, S-31
Distribution Account .................................................S-24
DOL ..................................................................S-50
DTC Services .........................................................S-30
Due Date .............................................................S-11
Due Period ...........................................................S-31
Eligible Account .....................................................S-25
ERISA ...........................................................S-5, S-49
ERISA Plans ..........................................................S-49
Excess Bankruptcy Losses .............................................S-39
Excess Fraud Losses ..................................................S-39
Excess Losses ........................................................S-36
Excess Special Hazard Losses .........................................S-39
Exemption ............................................................S-50
Exemption Rating Agencies ............................................S-50
Extraordinary Loss ...................................................S-38
Extraordinary Trust Expense ..........................................S-39
Fitch ................................................................S-50
Fraud Loss ...........................................................S-39
Fraud Loss Amount ....................................................S-37
Indirect Participants ................................................S-29
Industry .............................................................S-30
IRAs .................................................................S-50
IRS ..................................................................S-48
Lockout Certificate Percentage .......................................S-35
Lockout Certificates .................................................S-28
Lockout Distribution Percentage ......................................S-35
Modeling Assumptions .................................................S-42
Moody's ..............................................................S-50
Mortgage Loan Purchase Agreement .....................................S-11
Mortgage Loan Schedule ...............................................S-23
Mortgage Loans .................................................S-10, S-28
Mortgage Pool ..................................................S-10, S-28
Mortgage Rate ........................................................S-31
Net Mortgage Rate ....................................................S-31
Offered Certificates .................................................S-28
OID Regulations ......................................................S-48
Option One ...........................................................S-17
Option One Guidelines ................................................S-20
Optional Termination Date ............................................S-27
Participants .........................................................S-29
Parties In Interest ..................................................S-50
Plans ................................................................S-50
Prepayment Assumption ................................................S-42
Prepayment Interest Shortfall ..................................S-26, S-40
Prepayment Period ....................................................S-31
Principal Balance ....................................................S-10
PTCE .................................................................S-51
Purchase Price .......................................................S-23
Qualified Retirement Plans ...........................................S-50
Qualified Substitute Mortgage Loan ...................................S-24
Qualifying Rate ......................................................S-20
Rating Agencies ......................................................S-53
Realized Losses ......................................................S-37
Record Date ..........................................................S-29
Related Documents ....................................................S-23
Relief Act ...........................................................S-39
REMIC ................................................................S-48
Residual Certificates ................................................S-28
Restricted Group .....................................................S-51
Rules ................................................................S-29
S&P ..................................................................S-50
Senior Certificates ..................................................S-28
Senior Principal Distribution Amount .................................S-33
Senior Sequential Certificates .......................................S-28
Servicing Advance ....................................................S-25
Servicing Fee ........................................................S-26
Servicing Fee Rate ...................................................S-26
SMMEA ...........................................................S-6, S-52
Special Hazard Amount ................................................S-37
Special Hazard Loss ..................................................S-38
Subordinate Certificates ........................................S-4, S-28
Subordinate Principal Distribution Amount ............................S-35
Substitution Adjustment ..............................................S-24
Systems ..............................................................S-30
Tax-Favored Plans ....................................................S-50
Termination Price ....................................................S-27
Trust ..........................................................S-10, S-28
Underwriting Agreement ...............................................S-53
S-55
<PAGE>
================================================================================
$______________ (APPROXIMATE)
OPTION ONE MORTGAGE LOAN TRUST ________
OPTION ONE MORTGAGE ACCEPTANCE CORPORATION
Depositor
OPTION ONE MORTGAGE CORPORATION
Seller and Master Servicer
ASSET-BACKED CERTIFICATES, SERIES ________
______________________
PROSPECTUS SUPPLEMENT
______________________
[UNDERWRITERS]
You should rely only on the information contained or incorporated by reference
in this prospectus supplement and the accompanying prospectus. We have not
authorized anyone to provide you with different information.
We are not offering the Asset-Backed Certificates, Series _______ in any state
where the offer is not permitted.
We do not claim that the information in this prospectus supplement and
prospectus is accurate as of any date other than the dates stated
on the respective covers.
Dealers will deliver a prospectus supplement and prospectus when acting as
underwriters of the Asset-Backed Certificates, Series ___________ and
with respect to their unsold allotments or subscriptions. In addition,
all dealers selling the Asset-Backed Certificates, Series _________
will be required to deliver a prospectus supplement and prospectus
for ninety days following the date of this prospectus supplement.
[Date]
================================================================================
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THE PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED MAY 21, 1999
PROSPECTUS
Mortgage Pass-Through Certificates
(ISSUABLE IN SERIES)
Option One Mortgage Acceptance Corporation
(DEPOSITOR)
- --------------------------------------------------------------------------------
YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 4 OF THIS
PROSPECTUS.
The certificates will represent obligations only of a trust fund and will not
represent ownership interests in or obligations of any other entity.
This prospectus may be used to offer and sell the certificates only if
accompanied by a prospectus supplement.
- --------------------------------------------------------------------------------
THE CERTIFICATES:
Option One Mortgage Acceptance Corporation, as depositor, will issue the
certificates. Each issue of certificates will have its own series designation
and will evidence ownership interests in certain trust fund assets.
O CERTIFICATES = OWNERSHIP INTERESTS IN TRUST FUND ASSETS
Each series of certificates will include one or more classes. Each class of
certificates of any series will represent the right, which may be senior to the
rights of one or more of the other classes of the certificates, to receive a
specified portion of future payments of principal and interest on the assets in
the related trust fund. 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 that differ as to the timing, sequential order or amount of
distributions of principal or interest or both. The related prospectus
supplement will specify each of these features.
THE TRUST FUND AND ITS ASSETS:
As specified in the related prospectus supplement, the assets of a trust fund
consist primarily of a segregated pool of one- to four-family residential first
lien and/or junior lien mortgage loans or manufactured housing conditional sales
contracts and installment loan agreements.
O TRUST FUND ASSETS = RESIDENTIAL MORTGAGE LOANS
The depositor will acquire the mortgage loans from its corporate parent Option
One Mortgage Corporation or from another affiliate and will deposit the mortgage
loans into the trust fund. The assets of a trust fund may also include
reinvestment income, reserve funds, cash accounts and various forms of credit
enhancement.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THESE SECURITIES OR DETERMINED THAT THIS PROSPECTUS IS
ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Offers of the certificates may be made through one or more different methods,
including through underwriters as we describe in "Methods of Distribution" in
the related prospectus supplement.
The date of this prospectus is April 26, 1999.
<PAGE>
TABLE OF CONTENTS
Caption Page
- ------- ----
RISK FACTORS...................................................................4
THE MORTGAGE POOLS............................................................11
General ............................................................11
The Mortgage Loans...................................................13
Underwriting Standards...............................................17
Qualifications of Originators and Sellers............................18
Representations by Sellers...........................................19
SERVICING OF MORTGAGE LOANS...................................................21
General ............................................................21
The Master Servicer..................................................21
Collection and Other Servicing Procedures;
Mortgage Loan Modifications........................................22
Subservicers.........................................................24
Special Servicers....................................................24
Realization Upon or Sale of Defaulted
Mortgage Loans.....................................................24
Servicing and Other Compensation and
Payment of Expenses; Spread........................................26
Evidence as to Compliance............................................27
DESCRIPTION OF THE CERTIFICATES...............................................28
General ............................................................28
Form of Certificates.................................................29
Assignment of Trust Fund Assets......................................31
Certificate Account..................................................33
Distributions........................................................37
Distributions of Interest and Principal
on the Certificates................................................38
Pre-Funding Account..................................................39
Distributions on the Certificates in Respect
of Prepayment Premiums.............................................40
Allocation of Losses and Shortfalls..................................40
Advances ............................................................40
Reports to Certificateholders........................................41
DESCRIPTION OF CREDIT ENHANCEMENT.............................................43
General ............................................................43
Subordinate Certificates.............................................44
Overcollateralization................................................44
Financial Guaranty Insurance Policy..................................44
Mortgage Pool Insurance Policies.....................................45
Letter of Credit.....................................................46
Special Hazard Insurance Policies....................................47
Bankruptcy Bonds.....................................................48
Reserve Funds........................................................48
Maintenance of Credit Enhancement....................................49
Reduction or Substitution of Credit
Enhancement........................................................52
PURCHASE OBLIGATIONS..........................................................52
PRIMARY MORTGAGE INSURANCE, HAZARD
INSURANCE; CLAIMS THEREUNDER..................................................53
General ............................................................53
Primary Mortgage Insurance Policies..................................53
Hazard Insurance Policies............................................53
FHA Insurance........................................................54
THE DEPOSITOR.................................................................55
THE POOLING AGREEMENT.........................................................55
General ............................................................55
Certain Matters Regarding the Master Servicer
and the Depositor..................................................55
Events of Default....................................................56
Rights Upon Event of Default.........................................57
Amendment............................................................58
Termination; Retirement of Certificates..............................58
The Trustee..........................................................59
Duties of the Trustee................................................59
Certain Matters Regarding the Trustee................................59
Resignation and Removal of the Trustee...............................60
YIELD CONSIDERATIONS..........................................................60
MATURITY AND PREPAYMENT
CONSIDERATIONS.......................................................63
CERTAIN LEGAL ASPECTS OF MORTGAGE
LOANS................................................................64
Single Family Loans..................................................64
Contracts............................................................65
Foreclosure on Mortgages.............................................67
Foreclosure on Mortgaged Properties
Located in the Commonwealth of
Puerto Rico........................................................69
Repossession with respect to Contracts...............................69
Rights of Redemption.................................................71
Anti-Deficiency Legislation and Other
Limitations on Lenders.............................................71
Junior Mortgages.....................................................74
Consumer Protection Laws with respect to
Contracts..........................................................75
Environmental Legislation............................................76
Enforceability of Certain Provisions.................................77
Subordinate Financing................................................78
Installment Contracts................................................78
Applicability of Usury Laws..........................................79
Alternative Mortgage Instruments.....................................80
Formaldehyde Litigation with respect to
Contracts..........................................................80
Leasehold Considerations.............................................81
Soldiers' and Sailors' Civil Relief Act
of 1940............................................................81
Forfeitures in Drug and RICO Proceedings.............................82
Negative Amortization Loans..........................................82
FEDERAL INCOME TAX CONSEQUENCES...............................................82
General ............................................................82
REMICS ............................................................83
Grantor Trust Funds.................................................101
STATE AND OTHER TAX CONSEQUENCES.............................................111
ERISA CONSIDERATIONS.........................................................111
Tax-Exempt Investors................................................113
LEGAL INVESTMENT MATTERS.....................................................113
USE OF PROCEEDS..............................................................115
METHODS OF DISTRIBUTION......................................................115
LEGAL MATTERS................................................................116
FINANCIAL INFORMATION........................................................116
RATING ....................................................................116
AVAILABLE INFORMATION........................................................117
REPORTS TO CERTIFICATEHOLDERS................................................117
INCORPORATION OF CERTAIN INFORMATION
BY REFERENCE.................................................................117
INDEX OF PRINCIPAL DEFINITIONS...............................................118
-2-
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION IN THIS PROSPECTUS
AND EACH ACCOMPANYING PROSPECTUS SUPPLEMENT
Information about each series of certificates is contained in two separate
documents:
o this prospectus, which provides general information, some of
which may not apply to a particular series; and
o the accompanying prospectus supplement for a particular
series, which describes the specific terms of the certificates
of that series. If the prospectus supplement contains
information about a particular series that differs from the
information contained in this prospectus, you should rely on
the information in the prospectus supplement.
You should rely only on the information contained in this prospectus and the
accompanying prospectus supplement. We have not authorized anyone to provide you
with information that is different from that contained in this prospectus and
the accompanying prospectus supplement. The information in this prospectus is
accurate only as of the date of this prospectus.
Beginning with the section titled "The Mortgage Pools", certain capitalized
terms are used in this prospectus to assist you in understanding the terms of
the certificates. The capitalized terms used in this prospectus are defined on
the pages indicated under the caption "Index of Principal Definitions" beginning
on page 118 in
this prospectus.
If you require additional information, the mailing address of our principal
executive offices is 3 Ada, Irvine, California 92618 and the telephone number is
(949) 790-8300. For other means of acquiring additional information about us or
a series of certificates, see "Incorporation of Certain Information by
Reference" beginning on page 117 of this prospectus.
-3-
<PAGE>
RISK FACTORS
The certificates are not suitable investments for all investors. In
particular, you should not purchase the certificates unless you understand and
are able to bear the prepayment, credit, liquidity and market risks associated
with such certificates.
THE CERTIFICATES WILL HAVE LIMITED LIQUIDITY.
There can be no assurance that a resale market for the certificates of
any series will develop following the issuance and sale of any series of
certificates. Even if a resale market does develop, it may not provide
certificateholders with liquidity of investment or continue for the life of the
certificates of any series. The prospectus supplement for any series of
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 of such certificate. The
certificates will not be listed on any securities exchange.
THE CERTIFICATES WILL BE LIMITED OBLIGATIONS OF THE RELATED TRUST FUND
ANY NOT OF ANY OTHER PARTY.
Unless the applicable prospectus supplement provides otherwise, the
certificates of each series will be payable solely from the assets of the
related trust fund, including any applicable credit support, and will not have
any claims against the assets of any other trust fund or recourse to any other
party. The certificates will not represent an interest in or obligation of the
depositor, the master servicer or any of their respective affiliates. Unless the
applicable prospectus supplement provides otherwise, the only obligations of the
foregoing entities with respect to the certificates, any mortgage loan or any
other trust fund asset will be the repurchase or substitution obligations (if
any) of the depositor or the seller pursuant to certain limited representations
and warranties made with respect to the mortgage loans or other trust fund
assets and 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).
Unless otherwise specified in the related prospectus supplement,
neither the certificates nor the underlying mortgage loans or other trust fund
assets will be guaranteed or insured by any governmental agency or
instrumentality, by the depositor, the master servicer or any of their
respective affiliates or by any
other person.
CREDIT ENHANCEMENT WILL BE LIMITED, AND THE FAILURE OF CREDIT
ENHANCEMENT TO COVER LOSSES ON THE MORTGAGE LOANS MAY RESULT IN LOSSES BEING
ALLOCATED TO THE CERTIFICATES.
Credit enhancement is intended to reduce the effect of delinquent
payments or losses on the underlying mortgage loans on those classes of
certificates that have the benefit of the credit enhancement. With respect to
each series of certificates, credit enhancement will be provided in limited
amounts, in one or more of the forms referred to 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 enhancement 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 support or losses of a type
-4-
<PAGE>
not covered by any credit support occur, such losses will be borne by the
holders of the related certificates (or certain classes thereof). See
"Description of Credit Enhancement".
THE PAYMENT PERFORMANCE OF THE CERTIFICATES WILL BE RELATED TO THE
PAYMENT PERFORMANCE OF THE MORTGAGE LOANS IN THE RELATED TRUST FUNDS; GREATER
RISK OF LOSS IS ASSOCIATED WITH CERTAIN MORTGAGE LOANS.
The certificates will be backed by mortgage loans. Certain mortgage
loans may have a greater likelihood of delinquency and foreclosure, and a
greater likelihood of loss in the event thereof. Defaults and losses on the
mortgage loans may affect the yield to maturity of the related certificates. In
addition, in the event that the mortgaged properties fail to provide adequate
security for the mortgage loans included in a trust fund, any resulting defaults
or losses, to the extent not covered by credit enhancement, will be allocated to
the related certificates in the manner described in the related prospectus
supplement, negatively affecting the yield of the certificates bearing such
losses and possibly negatively affecting the yield of other classes of
certificates as well. You should consider the following risks associated with
mortgage loans having the characteristics described below, because mortgage
loans having some or all of such characteristics may be included in the trust
fund relating to your certificates:
NON-CONFORMING MORTGAGE LOANS. Non-conforming mortgage loans
are mortgage loans that do not qualify for purchase by government
sponsored agencies such as Fannie Mae and Freddie Mac due to credit
characteristics that to not satisfy Fannie Mae and Freddie Mac
guidelines, including loans to mortgagors whose creditworthiness and
repayment ability do not satisfy Fannie Mae and Freddie Mac
underwriting guidelines and loans to mortgagors who may have a record
of credit write-offs, outstanding judgments, prior bankruptcies and
other derogatory credit items. Accordingly, non-conforming mortgage
loans are likely to experience rates of delinquency, foreclosure and
loss that are higher, and that may be substantially higher, than
mortgage loans originated in accordance with Fannie Mae or Freddie Mac
underwriting guidelines. The principal differences between conforming
mortgage loans and non-conforming mortgage loans include the applicable
loan-to-value ratios, the credit and income histories of the related
mortgagors, the documentation required for approval of the related
mortgage loans, the types of properties securing the mortgage loans,
the loan sizes and the mortgagors' occupancy status with respect to the
mortgaged properties. As a result of these and other factors, the
interest rates charged on non-conforming mortgage loans are often
higher than those charged for conforming mortgage loans. The
combination of different underwriting criteria and higher rates of
interest may also lead to higher delinquency, foreclosure and losses on
non-conforming mortgage loans as compared to conforming mortgage loans.
JUNIOR LIEN MORTGAGE LOANS. In the case of mortgage loans
secured by junior lien mortgages on the related mortgaged properties,
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 senior lien
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 such
holder 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. A 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 may, at its option,
advance such amounts to the extent deemed
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recoverable and prudent. The rate of default of junior lien mortgage
loans may be greater than the rate of default of mortgage loans secured
by first liens on comparable properties. In addition, various factors
may affect the prepayment rate of junior lien mortgage loans. These
factors include the principal balances of, and interest on, the related
senior mortgage loans and the relatively more likely use of junior lien
mortgage loans as shorter-term financing for a variety of purposes,
such as home improvement, educational expenses and purchases of
consumer durables such as automobiles, rather than as longer-term
financing of home ownership. Accordingly, junior lien mortgage loans
may experience a higher rate of prepayments than traditional senior
lien mortgage loans. In addition, any future additional limitations on
the rights of borrowers to deduct interest payments on junior lien
mortgage loans for federal income tax purposes may further increase the
rate of prepayments on junior lien mortgage loans.
MORTGAGE LOANS THAT ARE GEOGRAPHICALLY CONCENTRATED. 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. 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. If the
mortgage loans in a trust fund are geographically concentrated, such
concentration may present risks to holders of the certificates in
addition to those that would generally be present for similar
mortgage-backed securities without such geographic concentration.
NEGATIVELY AMORTIZING MORTGAGE LOANS. In the case of mortgage
loans that are subject to negative amortization, 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 defaults and losses on such mortgage
loans.
BUYDOWN MORTGAGE LOANS AND VARIABLE PAYMENT MORTGAGE LOANS.
Buydown mortgage loans are subject to temporary buydown plans pursuant
to which the monthly payments made by the mortgagor during the early
years of such mortgage loan will be less than the scheduled monthly
payments needed to amortize the mortgage loan, the resulting difference
to be made up from (i) an amount contributed by the borrower, the
seller of the mortgaged property or another source and placed in a
custodial account, (ii) investment earnings on the amount, if any,
contributed by the borrower, or (iii) additional buydown funds to be
contributed over time by the mortgagor's employer or another source.
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 monthly payments after the buydown funds have
been depleted and, for certain buydown mortgage loans, during the
initial buydown period. The inability of a mortgagor to make such
larger monthly payments could lead to defaults and losses on such
mortgage loans.
Certain mortgage loans may provide for escalating or variable
payments by the related mortgagor. Generally, the mortgagor under such
a mortgage loan will be qualified at the applicable initial monthly
payment amount. In some instances, mortgagors may not be able to make
their monthly payments as such payments increase, and thus the
likelihood of default will increase.
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BALLOON MORTGAGE 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.
MORTGAGE LOANS WITH LIMITED RECOURSE. Some or all of the
mortgage loans in a trust fund may 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.
THE RISK OF LOSSES ON THE MORTGAGE LOANS DEPENDS IN PART ON THE VALUES
OF THE MORTGAGED PROPERTIES.
An investment in securities such as the certificates which represent
interests in mortgage loans or manufactured housing conditional sales contracts
and installment loan agreements may be affected by a decline in real estate
values or changes in the borrowers' financial condition. The depositor cannot
assure you that values of the mortgaged properties have remained or will remain
at the appraised values 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
trust fund 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.
Mortgaged properties with high loan-to-value ratios are at greater risk since
such properties initially have less equity than mortgaged properties with low
loan-to-value ratios, and therefore a decline in property values could dissipate
equity more quickly. Delinquencies, foreclosures and losses due to declining
values of mortgaged properties, especially those with high loan-to-value ratios,
would cause losses to the trust fund, and such losses may negatively affect your
yield on the certificates.
VARYING UNDERWRITING STANDARDS OF UNAFFILIATED MORTGAGE LOAN SELLERS
MAY PRESENT A GREATER RISK OF LOSS.
Mortgage loans to be included in a trust fund will have been purchased
by the depositor, either directly or indirectly from mortgage loan sellers. Such
mortgage loans will generally have been originated in accordance with
underwriting standards acceptable to the depositor and generally described
herein under "Mortgage Loan Program--Underwriting Standards", as more
particularly described in the underwriting
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criteria included in the related prospectus supplement. Nevertheless, in some
cases, particularly those involving unaffiliated mortgage loan sellers, the
depositor 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 and will reflect
what, if any, re-underwriting of the related mortgage loans was completed by the
depositor or any of its affiliates. To the extent the mortgage loans cannot be
re-underwritten or the underwriting criteria cannot be verified, the mortgage
loans might suffer losses greater than they would had they been directly
underwritten by the depositor or its affiliates.
Such losses may negatively affect your yield on the certificates.
VIOLATIONS OF LAWS OR REGULATIONS MAY RESULT IN LOSSES ON THE MORTGAGE
LOANS.
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. 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 payment interruptions or
losses on the mortgage loans, your yield on the certificates may be negatively
affected.
YOUR YIELD ON THE CERTIFICATES WILL DEPEND ON A VARIETY OF FACTORS INCLUDING
PREPAYMENTS OF THE MORTGAGE LOANS.
The rate and timing of principal payments on the certificates of a
series will be affected by the rate and timing of principal payments on the
mortgage loans in the related trust fund, which in turn will be affected by a
number of factors, including the following:
o the amount and timing of prepayments on the mortgage loans in the
trust fund;
o how payments of principal are allocated among the classes of
certificates as specified in the related prospectus supplement;
o whether any party who has an option to terminate the trust fund
early actually exercises such option;
o the amount and timing of defaults, liquidations and losses on the
mortgage loans in the trust fund; and
o repurchases of mortgage loans in the trust fund that may occur as
a result of material breaches of representations and warranties
made by the depositor, the master servicer or mortgage loan
seller, or as a result of other repurchase rights or obligations
of such parties as specified in the related prospectus
supplement.
The rate and timing of principal payments on the certificates of a
series will also be affected by the allocation of any interest on the mortgage
loans to pay principal on the certificates, if so specified in the related
prospectus supplement.
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Prepayments on mortgage loans are influenced by a number of factors,
including prevailing mortgage market interest rates, local and regional economic
conditions and homeowner mobility.
In general, if you purchase a class of offered certificates at a price
higher than its outstanding principal balance and principal distributions on
such class occur faster than you anticipate at the time of purchase, the yield
will be lower than you anticipate. Conversely, if you purchase a class of
offered certificates at a price lower than its outstanding principal balance and
principal distributions on that class occur more slowly than you anticipate at
the time of purchase, the yield will be lower than you anticipate.
The yield to maturity on certain types of classes of certificates may
be relatively more sensitive to the rate and timing of prepayment on the related
mortgage loans than other types. Certificates that are relatively more sensitive
to prepayments include strip certificates, accrual certificates, certificates
with pass-through rates that fluctuate inversely with an index and certain
certificates in a series that includes more than one class of certificates.
These types of classes of certificates are described herein.
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
early payment of principal.
See "Yield Considerations" and "Maturity and Prepayment Considerations"
herein.
MORTGAGED PROPERTIES ARE SUBJECT TO ENVIRONMENTAL RISKS, AND THE COST
OF ENVIRONMENTAL CLEAN-UP MAY INCREASE LOSSES ON THE RELATED MORTGAGE LOANS.
To the extent the master servicer acquires title to any mortgaged
property contaminated with or affected by hazardous wastes or hazardous
substances, the trust fund may incur losses or expenses. Such losses or
expenses, to the extent not covered by credit enhancement, may negatively affect
your yield on the certificates. See "Servicing of Mortgage Loans--Realization
Upon or Sale of Defaulted Mortgage Loans" and "Certain Legal Aspects of Mortgage
Loans--Environmental Legislation" herein.
ERISA CONSIDERATIONS MAY PERTAIN TO AN INVESTMENT IN THE CERTIFICATES.
If you are buying the offered certificates on behalf of an employee
benefit plan or other arrangement subject to the Employment Retirement Income
Security Act of 1974, as amended ("ERISA"), then special rules may apply to you.
Due to the complexity of regulations that govern such plans and arrangements, if
you are such a plan or arrangement or if you are using the assets of such a plan
or arrangement to make an investment in the offered certificates, then you
should consult your own counsel regarding any consequences under ERISA of your
acquisition, ownership and disposition of the offered certificates. See "ERISA
Considerations" herein.
IF YOU BECOME AN OWNER OF REMIC RESIDUAL CERTIFICATES (WHICH WE DEFINE
LATER IN THIS PROSPECTUS), THERE ARE SOME FEDERAL TAX CONSIDERATIONS THAT APPLY
TO YOU THAT ARE DIFFERENT FROM THE FEDERAL TAX CONSIDERATIONS THAT APPLY TO
OTHER KINDS OF 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 (which term is defined herein and refers to an
election which may be made relating to the federal tax treatment of a trust fund
or portion of a trust fund). Holders of REMIC Residual Certificates will be
required to report this ordinary income regardless of the amount or timing of
their receipt of cash payments, as we describe under "Federal
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Income Tax Consequences--REMICs" herein. Accordingly, under certain
circumstances, holders of offered certificates that are 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 certificate 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 the such a holder's share of
the REMIC taxable income may be treated as "excess inclusion" income to such
holder which (i) generally 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 the REMIC
Residual Certificate may be significantly less than that of a corporate bond or
stripped instrument having similar cash flow characteristics.
THE RATINGS OF THE CERTIFICATES ARE LIMITED IN WHAT THEY ADDRESS. A
DOWNGRADING OF THE RATING OF ANY THE CERTIFICATES MAY ADVERSELY AFFECT THE
LIQUIDITY OR MARKET VALUE OF SUCH CERTIFICATES.
It is a condition to the issuance of the certificates that each class
of offered 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
security, and accordingly, you cannot be assured that the ratings assigned to
any certificate on the date on which such certificates is originally issued will
not be lowered or withdrawn by a rating agency at any time thereafter. A rating
of any certificate by any 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 initial rating analysis. Unless specified in the related prospectus
supplement, no person will have any obligation to replace or supplement any
credit support following any downgrading of the obligations of any credit
support provider. In the event any rating is revised or withdrawn, the liquidity
or the market value of the affected certificates may suffer. See "Rating"
herein.
FORECLOSURES OF MORTGAGE LOANS MAY RESULT IN LIMITATIONS OR DELAYS IN
COLLECTIONS ON SUCH MORTGAGE LOANS.
Even assuming that the mortgaged properties provide adequate security
for the mortgage loans, substantial delays can be encountered in connection with
the liquidation of defaulted mortgage loans, and corresponding delays in the
receipt of related proceeds by the holders of the certificates could occur.
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
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difficulties in locating necessary defendants. Furthermore, in some states an
action to obtain a deficiency judgment is not permitted following a non-judicial
sale of a mortgaged property. 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. In the event of a default by a mortgagor, these restrictions,
among other things, may impede the ability of the master servicer to foreclose
on or sell the mortgaged property or to obtain liquidation proceeds sufficient
to repay all amounts due on the related mortgage loan.
The master servicer will be entitled to deduct from liquidation
proceeds all expenses reasonably incurred in attempting to recover amounts due
on the related liquidated mortgage loan and not yet repaid, including payments
to prior lienholders, accrued servicing fees, legal fees and costs of legal
action, real estate taxes, and maintenance and preservation expenses.
Liquidation expenses with respect to defaulted mortgage loans do not vary
directly with the outstanding principal balance of the loan at the time of
default. Therefore, assuming that a servicer takes the same steps in realizing
upon a defaulted mortgage loan having a small remaining principal balance as it
would in the case of a defaulted mortgage loan having a larger principal
balance, the amount realized after expenses of liquidation would be less as a
percentage of the outstanding principal balance of the smaller principal balance
mortgage loan than would be the case with a larger principal balance loan.
The effect of such statutes, judicial principles, delays and expenses
may be to delay and/or reduce distributions on the certificates. See "Certain
Legal Aspects of Mortgage Loans--Foreclosure on Mortgage Loans."
ADDITIONAL RISK FACTORS WILL BE SET FORTH IN THE PROSPECTUS SUPPLEMENT
RELATED TO A SERIES OF CERTIFICATES.
The prospectus supplement relating to a series of offered certificates
will set forth additional risk factors pertaining to the characteristics or
behavior of the mortgage loans to be included in a particular trust fund and, if
applicable, certain legal aspects of such mortgage loans as well as any risk
factors pertaining to the investment in a particular class of offered
certificates.
THE MORTGAGE POOLS
GENERAL
Each series of Mortgage Pass-Through Certificates will represent in the
aggregate the entire beneficial ownership interest in a related trust fund (the
"Trust Fund" or "Trust Fund Assets") consisting primarily of a segregated pool
(a "Mortgage Pool") of mortgage loans and/or manufactured housing conditional
sales contracts and installment loan agreements (collectively, the "Mortgage
Loans"), exclusive of any portion of interest payments (the "Spread") or any
other interest retained by the Option One Mortgage Acceptance Corporation (the
"Depositor") or any affiliate of the Depositor. 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
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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 Depositor,
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 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 Depositor for inclusion in a
Mortgage Pool from among those purchased by the Depositor, 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 Depositor ("Unaffiliated
Sellers") or from Option One Mortgage Corporation ("OOMC"), the parent of the
Depositor, 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 Depositor 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 Depositor 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 Depositor
by one or more Sellers identified in the related Prospectus Supplement,
concurrently with the issuance of the related series of Certificates (a
"Designated
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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 Depositor 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 Depositor 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 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; -------- * 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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(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
(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
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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 "Lock-out 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 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.
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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 Depositor, 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 Depositor 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 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 close of
business on the first day of the month of formation of the related Trust Fund
(the "Cut-off Date") and to the extent then available to the Depositor, on an
approximate basis, as to (i) the aggregate principal balance of the Mortgage
Loans,
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(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 Depositor will cause the Mortgage Loans constituting each Mortgage
Pool to be assigned, without recourse, to the trustee named in the related
Prospectus Supplement (the "Trustee"), 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 Depositor, either directly or indirectly from Sellers. Such
Mortgage Loans will generally have been originated in accordance with
underwriting standards acceptable to the Depositor and generally described
below. Any Mortgage Loan not directly underwritten by the Depositor or its
affiliates will be reunderwritten by the Depositor or 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
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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 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".
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
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Seller Transactions, each Seller must satisfy certain criteria as to financial
stability evaluated on a case-by-case basis by the Depositor.
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 Depositor; (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 Depositor 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; and (vii)
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 Depositor; 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 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 Depositor will be certain limited representations of the Depositor
and the Master Servicer described under "Description of the
Certificates--Assignment of Trust Fund Assets" below.
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The Depositor 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 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,
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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 Depositor or any other party. In the case of a
Designated Seller Transaction where the Seller fails to repurchase a Mortgage
Loan and neither the Depositor nor any other entity has assumed the
representations and warranties, such repurchase obligation of the Seller will
not become an obligation of the Depositor 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 Depositor 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 Depositor 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 Depositor or the Master Servicer, as described below under "Description of
the Certificates--Assignment of Trust Fund Assets," the Depositor 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 Depositor. The Master
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Servicer is required to maintain a fidelity bond and errors and omissions policy
with respect to its officers 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.
In certain instances in which a Mortgage Loan is in default (or if
default is reasonably foreseeable), and if determined by the Master Servicer to
be in the best interests of the related Certificateholders, the Master Servicer
may permit certain modifications of the Mortgage Loan rather than proceeding
with foreclosure. Such modifications may have the effect of reducing the
Mortgage Rate, forgiving the payment of principal or interest or extending the
final maturity date of the Mortgage Loan. Any such modified Mortgage Loan may
remain in the related Trust Fund, and the reduction in collections resulting
from such modification may result in reduced distributions of interest (or other
amounts) on, or may extend the final maturity of, one or more classes of the
related Certificates. If no satisfactory arrangement can be made for the
collection of such delinquent payments, the Master Servicer may sell any such
delinquent Mortgage Loan.
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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 mortgage insurance policy
relating to such Mortgage Loan or any 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 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.
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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."
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
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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 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
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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 tax-related 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 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
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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 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 Depositor 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
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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 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 Depositor 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 mortgage insurance policies
and FHA insurance policies, if any, maintained in respect of Mortgage Loans in
the Trust
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Fund and certain proceeds of such policies; (v) certain rights of the Depositor
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
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 nationally recognized statistical rating agencies (each, a "Rating
Agency"). 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
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
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"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 Depositor 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 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 Depositor, 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
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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 Depositor 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 Depositor 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 Depositor 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 Depositor 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
Depositor 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 Depositor 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 Depositor 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 Depositor 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 Depositor 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 Depositor 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 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
Depositor or the originator of such Mortgage Loan, or except as otherwise
specified in the
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related Prospectus Supplement as to any series of Certificates. In addition,
unless specified in the related Prospectus Supplement, the Depositor 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 Depositor 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.
With respect to any Mortgage Loan secured by a Mortgaged Property
located in Puerto Rico (a "Puerto Rico Mortgage Loan"), the Mortgages with
respect to such Mortgage Loans either (i) secure a specific obligation for the
benefit of a specified person (a "Direct Puerto Rico Mortgage") or (ii) secure
an instrument transferable by endorsement (an "Endorsable Puerto Rico
Mortgage"). Endorsable Puerto Rico Mortgages do not require an assignment to
transfer the related lien. Rather, transfer of such mortgages follows an
effective endorsement of the related Mortgage Note and, therefore, delivery of
the assignment referred to in the preceding paragraph would be inapplicable.
Direct Puerto Rico Mortgages, however, require an assignment to be recorded with
respect to any transfer of the related lien and such assignment would be
delivered to the Trustee.
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 Depositor, 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 Depositor 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 Depositor or the
Master Servicer.
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With respect to the Mortgage Loans in a Mortgage Pool, except in the
case of a Designated Seller Transaction, the Depositor 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 Depositor 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, the Depositor 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 Depositor. 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 Permitted Investments will not cause the Depositor to
register under the Investment Company Act of 1940. 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):
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(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
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 Depositor, 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
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(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 Depositor 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 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 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 Pool Insurer or other 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:
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(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
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 Depositor, 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
Depositor";
(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;
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(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 Depositor, 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
(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. "Distribution Date" refers to
the day of each month specified in the related Prospectus Supplement upon which
distributions are made on the Certificates. 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
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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 Pass- Through Rate, the method for determining the
Pass-Through Rate, for each class. "Pass-Through Rate" refers to the specified
interest rate or rates upon which distributions of interest on an
interest-bearing class of Certificates is based.
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 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
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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 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.
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The Depositor 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 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
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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;
(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;
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(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 benefitting 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
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Credit Enhancement--Reduction or Substitution of Credit Enhancement." If
specified 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
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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 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 Depositor 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 mortgage 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 mortgage 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
mortgage 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
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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.
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 Depositor 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
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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. 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 Depositor 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
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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.
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 Depositor.
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 Depositor 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 Depositor 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,
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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 Depositor, 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.
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
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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 Depositor, 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 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
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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 mortgage 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
mortgage 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 mortgage 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.
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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 Depositor, 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
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 Depositor 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.
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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). 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
Unless specified in the related Prospectus Supplement, no Mortgage Loan
will be covered by a primary mortgage guaranty insurance policy, even if such
Mortgage Loan has a Loan-to-Value Ratio at origination in excess of 80%.
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
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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, 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
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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 DEPOSITOR
The Depositor is a limited-purpose wholly-owned subsidiary of OOMC. The
Depositor was incorporated in the State of Delaware on October 7, 1996. The
Depositor was organized for the purpose of serving as a private secondary
mortgage market conduit. The Depositor 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. OOMC is a subsidiary of Block Financial, which is in turn a
subsidiary of H&R Block, Inc.
The Depositor maintains its principal office at 3 Ada, Irvine,
California 92618. Its telephone number is (949) 790-8300.
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 Depositor, 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 Depositor 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
Depositor".
CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE DEPOSITOR
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
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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 Depositor, nor any director, officer,
employee or agent of the Master Servicer or the Depositor 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 Depositor, 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 Depositor, and any
director, officer, employee or agent of the Master Servicer or the Depositor 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 Depositor 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 Depositor 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 resulting therefrom will be expenses, costs and
liabilities of the Trust Fund, and the Master Servicer or the Depositor, as the
case may be, will be entitled to be reimbursed therefor out of funds otherwise
distributable to 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 Depositor, or to the Master Servicer, the Depositor 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 Depositor, or to the Master Servicer, the Depositor and the
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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, marshaling
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 Depositor
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 Depositor 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 Depositor and with the Depositor'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.
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.
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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 Depositor, 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
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 Depositor, 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 Depositor 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 Depositor 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 Depositor, 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 Depositor. 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
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cancellation of the Certificates at an office or agency appointed by the Trustee
which will be specified in the notice of 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 Depositor 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 Depositor
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, which percentage shall be 10% or less, 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 Depositor 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.
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
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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 Depositor will
be obligated to appoint a successor Trustee. The Depositor 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 Depositor 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 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 Depositor, 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
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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.
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".
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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 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
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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 Depositor, the Master Servicer, or any of their
affiliates will be obligated to refinance or repurchase any Mortgage Loan or to
sell the Mortgaged Property.
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
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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 Depositor 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 Depositor 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. In addition, the Depositor is not aware of
any historical prepayment experience with respect to Mortgage Loans secured by
Mortgaged Properties located in Puerto Rico and, accordingly, prepayments on
such Mortgage Loans may not occur at the same rate or be affected by the same
factors as other Mortgage Loans.
Under certain circumstances, the Master Servicer, the Depositor 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."
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 from state to state), 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,
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and may have first, second or third priority. If specified in the Prospectus
Supplement relating to a series of Securities, a Trust Fund may also contain
Contracts evidencing both (a) the obligation of the obligor to repay the loan
evidenced thereby and (b) the grant of a security interest in the related
Manufactured Home to secure repayment of such loan.
Mortgages, deed of trust and deeds to secure debt are herein
collectively referred to as "mortgages". In some states, a mortgage or deed of
trust creates a lien upon the real property encumbered by the mortgage or deed
of trust. However, in other states, the mortgage or deed of trust conveys legal
title to the property respectively, to the mortgagee or to a trustee for the
benefit of the mortgagee subject to a condition subsequent (i.e., the payment of
the indebtedness secured thereby). 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, the
mortgagor, who is the borrower and homeowner, and the mortgagee, who is the
lender. Under the mortgage instrument, the mortgagor delivers to the mortgagee a
note or bond and the mortgage. In certain states, three parties may be involved
in a mortgage financing when title to the property is held by a land trustee who
is the land trustee under a land trust agreement of which the borrower is the
beneficiary; at origination of a mortgage loan, the land trustee, as fee owner
of the property, executes the mortgage and the borrower executes (1) a separate
undertaking to make payments on the mortgage note and (2) an assignment of
leases and rents. Although a deed of trust is similar to a mortgage, a deed of
trust has three parties: the trustor who is the borrower-homeowner; the
beneficiary who is the lender; and a third-party grantee called the trustee.
Under a deed of trust, the borrower grants the property, irrevocably until the
debt is paid, in trust, generally with a power of sale, to the trustee to secure
payment of the obligation. A deed to secure debt typically has two parties,
pursuant to which 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. The trustee's authority under a deed of trust, the grantee's
authority under a deed to secure debt and the mortgagee's authority under a
mortgage are governed by the law of the state in which the real property is
located, the express provisions of the deed of trust, mortgage, or deed to
secure debt, and, in certain 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 year
period. 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 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.
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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
Depositor.
The Depositor will assign or cause to be assigned a security interest
in the Manufactured Homes to the Trustee, on behalf of the Certificateholders.
Neither the Depositor, 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 Depositor 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 Depositor's rights as the secured party. However, in some states there
exists a risk that, in the absence of an amendment to the certificate of title
(or the filing of a UCC-3 statement), such assignment of the security interest
in the Manufactured Home might not be held to be effective or such security
interest may not be perfected and in the absence of such notation or delivery to
the Trustee, the assignment of the security interest in the manufactured home
may not be effective against creditors of the Depositor or Seller or a trustee
in bankruptcy of the Depositor 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 Depositor 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 Depositor
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 interest in
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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 Depositor 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 Depositor 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 Depositor would
receive notice of surrender if the security interest in the Manufactured Home is
noted on the certificate of title. Accordingly, the Depositor 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
Depositor 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
Although a deed of trust or deed to secure debt may also be foreclosed
by judicial action, foreclosure of a deed of trust or deed to secure debt is
generally accomplished by a non-judicial trustee's or grantee's, as applicable,
sale under a specific provision in the deed of trust or deed to secure debt
which authorizes the trustee or grantee, as applicable, to sell the property
upon any default by the borrower under the terms of the note or deed of trust or
deed to secure debt. In addition to any notice requirements contained in a deed
of trust or deed to secure debt, in some states, prior to a sale the trustee or
grantee, as applicable, 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, in some states, prior to such
sale, the trustee or grantee, as applicable, must provide notice to any other
individual having an interest of record in the real property, including any
junior lienholders. If the deed of trust or deed to secure deed 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 a specified manner prior to the date of trustee's sale. In
addition, some states' 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 and
serving necessary parties, including borrowers located outside the jurisdiction
in which the mortgaged property is located. 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.
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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.
In the case of foreclosure under a mortgage, a deed of trust, or a deed
to secure debt the sale by the referee or other designated officer or by the
trustee or grantee, as applicable, is generally a public sale. However, because
of the difficulty a potential third-party buyer at the sale might 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, or grantee, as applicable, for a credit bid less than or equal to the
unpaid principal amount of note plus the accrued and unpaid interest and the
expense of foreclosure, in which case the mortgagor's debt will be extinguished
unless the lender purchases the property for a lesser amount in order to
preserve its right against a borrower to seek a deficiency judgment and such
remedy is available under state law and the related loan documents. In the same
states, there is a statutory minimum purchase price which the lender may offer
for the property and 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, paying taxes and
making such repairs at its own expense as are necessary to render the property
suitable for sale. Generally, the lender will 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, the lender may be entitled to a deficiency judgment. In some cases, a
deficiency judgment may be pursued in lieu of foreclosure. 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 in a senior
mortgage, the junior mortgagee may be required to pay the full amount of the
senior mortgages to the senior mortgagees to avoid foreclosure. 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 proceedings.
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
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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.
FORECLOSURE ON MORTGAGED PROPERTIES LOCATED IN THE COMMONWEALTH OF PUERTO RICO
Under the laws of the Commonwealth of Puerto Rico the foreclosure of a
real estate mortgage usually follows an ordinary "civil action" filed in the
Superior Court for the district where the mortgage property is located. If the
defendant does not contest the action filed, a default judgment is rendered for
the plaintiff and the mortgaged property is sold at public auction, after
publication of the sale for two weeks, by posting written notice in three public
places in the municipality where the auction will be held, in the tax collection
office and in the public school of the municipality where the mortgagor resides,
if known. If the residence of the mortgagor is not known, publication in one of
the newspapers of general circulation in the Commonwealth of Puerto Rico must be
made at least once a week for two weeks. There may be as many as three public
sales of the mortgaged property. If the defendant contests the foreclosure, the
case may be tried and judgment rendered based on the merits of the case.
There are no redemption rights after the public sale of a foreclosed
property under the laws of the Commonwealth of Puerto Rico. Commonwealth of
Puerto Rico law provides for a summary proceeding for the foreclosure of a
mortgage, but it is very seldom used because of concerns regarding the validity
of such actions. The process may be expedited if the mortgagee can obtain the
consent of the defendant to the execution of a deed in lieu of foreclosure.
Under Commonwealth of Puerto Rico law, in the case of the public sale
upon foreclosure of a mortgaged property that (a) is subject to a mortgage loan
that was obtained for a purpose other than the financing or refinancing of the
acquisition, construction or improvement of such property and (b) is occupied by
the mortgagor as his principal residence, the mortgagor of such property has a
right to be paid the first $1,500 from the proceeds obtained on the public sale
of such property. The mortgagor can claim this sum of money from the mortgagee
at any time prior to the public sale or up to one year after such sale. Such
payment would reduce the amount of sales proceeds available to satisfy the
Contract and may increase the amount of the loss.
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
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manufactured housing units. 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 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
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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.
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 or a grantee under a deed to secure debt. In some states
including California, statutes limit the right of the beneficiary, mortgagee or
grantee to obtain a deficiency judgment against the borrower following
foreclosure. A deficiency judgment is a personal
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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 or deed to secure debt, even if obtainable under
applicable law, may be of little value to the beneficiary, grantee or mortgagee
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, grantee 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 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
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confirmed pursuant to Chapter 13 except with respect to mortgage payment
arrearages, which may be cured within a reasonable time period.
The Bankruptcy Reform Act of 1994 established the National Bankruptcy
Review Commission ("NBRC") for purposes of analyzing the nation's bankruptcy
laws and making recommendations to Congress for legislative changes to the
bankruptcy laws. A similar commission was involved in developing the Bankruptcy
Code. The NBRC delivered its report to Congress, the President of the United
States and the Chief Justice of the Supreme Court on October 20, 1997. Among
other topics, high leverage loans were addressed in the NBRC's report. Despite
certain ambiguities, the NBRC'S report appears to recommend that Congress amend
Bankruptcy Code section 1322(b)(2) by treating a claim secured only by a junior
security interest in a debtor's principal residence as protected only to the
extent that the claim was secured when the security interest was made if the
value of the property securing the junior security interest is less than such
amount. However, the express language of the report implies that a claim secured
only by a junior security interest in a debtor's principal residence may not be
modified to reduce such claim below the appraised value of the property at the
time the security interest was made. A strong dissent by certain members of the
NBRC recommends that the protections of Bankruptcy Code section 1322(b)(2) be
extended to creditors principally secured by the debtor's principal residence.
Additionally, the NBRC's report recommends that a creditor's secured claim in
real property should be determined by the property's fair market value, less
hypothetical costs of sale. The standard advocated by this recommendation would
not apply to mortgages on the primary residence of a Chapter 11 or 13 debtor who
retains the residence if such mortgages are protected from modification such as
those senior mortgages not subject to modification pursuant to Bankruptcy Code
Sections 1322(b)(2) and 1123(b)(5). The final NBRC report may ultimately lead to
substantive changes to the existing Bankruptcy Code, such as reducing
outstanding loan balances to the appraised value of a debtor's principal
residence at the time the security interest in the property was taken, which
could affect the Mortgage Loans and the enforcement of rights therein.
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, deed of trust or deed to secure debt. 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.
In addition, certain of the Mortgage Loans are also subject to the Home
Ownership and Equity Protection Act of 1994 (the "Homeownership Act") (such
mortgage loans, "High Cost Loans"), if such Mortgage Loans were originated on or
after October 1, 1995, are not mortgage loans made to finance the purchase of
the mortgaged property and have interest rates or origination costs in excess of
certain prescribed levels. The Homeownership Act requires certain additional
disclosures, specifies the timing of such disclosures and limits or prohibits
inclusion of certain provisions in mortgages subject to the Homeownership Act.
Remedies available to the mortgagor include monetary penalties, as well as
recission rights if the appropriate disclosures were not given as required or if
the particular mortgage includes provisions prohibited by law. The Homeownership
Act also provides that any purchaser or assignee of a mortgage covered by the
Homeownership Act is subject to all of the claims and defenses to loan payment,
whether under the Federal Truth-in-Lending Act, as amended by the Homeownership
Act or other law, which the borrower could assert against the original lender
unless the purchaser or assignee did not know and could not with reasonable
diligence have determined that the Mortgage Loan was subject to the provisions
of the Homeownership Act. The maximum damages that may be recovered
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under the Homeownership Act from an assignee is the remaining amount of
indebtedness plus the total amount paid by the borrower in connection with the
Mortgage Loan.
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 mortgagee under
a junior mortgage, are subordinate to those of the mortgagee under the senior
mortgage, including the prior rights of the senior mortgagee to receive hazard
insurance and condemnation proceeds and to cause the property securing the
Contract to be sold upon default of the mortgagor, which may extinguish the
junior mortgagee's lien unless the junior mortgagee asserts its subordinate
interest in the property in foreclosure litigation and, in certain cases, either
reinitiates or satisfies the defaulted senior loan or loans. A junior mortgagee
may satisfy a defaulted senior loan in full or, in some states, may cure such
default and bring the senior loan current thereby reinstating the senior loan,
in either event usually adding the amounts expended to the balance due on the
junior loan. In most states, absent a provision in the mortgage or deed of
trust, no notice of default is required to be given to a junior mortgagee. Where
applicable law or the terms of the senior mortgage or deed of trust do not
require notice of default to the junior mortgagee, the lack of any such notice
may prevent the junior mortgagee from exercising any right to reinstate the loan
which applicable law may provide.
The standard form of the mortgage or deed of trust used by most
institutional lenders confers on the mortgagee the right both to receive all
proceeds collected under any hazard insurance policy and all awards made in
connection with condemnation proceedings, and to apply such proceeds and awards
to any indebtedness secured by the mortgage or deed of trust, in such order as
the mortgagee may determine. Thus, in the event improvements on the property are
damaged or destroyed by fire or other casualty, or in the event the property is
taken by condemnation, the mortgagee or beneficiary under underlying senior
mortgages will have the prior right to collect any insurance proceeds payable
under a hazard insurance policy and any award of damages in connection with the
condemnation and to apply the same to the indebtedness secured by the senior
mortgages. Proceeds in excess of the amount of senior mortgage indebtedness, in
most cases, may be applied to the indebtedness of junior mortgages in the order
of their priority. Another provision sometimes found in the form of the mortgage
or deed of trust used by institutional lenders obligates the mortgagor to pay
before delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property which are prior to the mortgage
or deed of trust, to provide and maintain fire insurance on the property, to
maintain and repair the property and not to commit or permit any waste thereof,
and to appear in and defend any action or proceeding purporting to affect the
property or the rights of the mortgagee under the mortgage. Upon a failure of
the mortgagor to perform any of these obligations, the mortgagee or beneficiary
is given the right under certain mortgages or deeds of trust to perform the
obligation itself, at its election, with the mortgagor agreeing to reimburse the
mortgagee for any sums expended by the mortgagee on behalf of the
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mortgagor. All sums so expended by a senior mortgagee become part of the
indebtedness secured by the senior mortgage.
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. In addition, certain of the Contracts may be subject to
special rules, disclosure requirements and other provisions that are applicable
to High Cost Loans discussed above.
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.
Most of the Contracts in a Trust Fund will be subject to the
requirements of the FTC Rule. Accordingly, the Trustee, 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. If an obligor is successful in asserting any such claim or
defense, and if the Seller had or should have had knowledge of such claim or
defense, the Master Servicer will have the right to require the Seller to
repurchase the Contract because of a breach of its Seller's representation and
warranty that no claims or defenses exist that would affect the obligor's
obligation to make the required payments under the Contract. The Seller would
then have the right to require the originating dealer
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to repurchase the Contract from it and might also have the right to recover from
the dealer for any losses suffered by the Seller with respect to which the
dealer would have been primarily liable to the obligor.
ENVIRONMENTAL LEGISLATION
Under the federal Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended ("CERCLA"), and under state law in certain
states, a secured party which takes a deed-in-lieu of foreclosure, purchases a
mortgaged property at a foreclosure sale, or operates a mortgaged property may
become liable in certain circumstances for the costs of cleaning up hazardous
substances regardless of whether they have contaminated the property. CERCLA
imposes strict, as well as joint and several, liability on several classes of
potentially responsible parties, including current owners and operators of the
property who did not cause or contribute to the contamination. Furthermore,
liability under CERCLA is not limited to the original or unamortized principal
balance of a loan or to the value of the property securing a loan. Lenders may
be held liable under CERCLA as owners or operators unless they qualify for the
secured creditor exemption to CERCLA. This exemption exempts from the definition
of owners and operators those who, without participating in the management of a
facility, hold indicia of ownership primarily to protect a security interest in
the facility.
The Asset Conservation, Lender Liability and Deposit Insurance Act of
1996 (the "Conservation Act") amended, among other things, the provisions of
CERCLA with respect to lender liability and the secured creditor exemption. The
Conservation Act offers substantial protection to lenders by defining the
activities in which a lender can engage and still have the benefit of the
secured creditor exemption. In order for a lender to be deemed to have
participated in the management of a mortgaged property, the lender must actually
participate in the operational affairs of the mortgaged property. The
Conservation Act provides that "merely having the capacity to influence, or
unexercised right to control" operations does not constitute participation in
management. A lender will lose the protection of the secured creditor exemption
only if it exercises decision-making control over the borrower's environmental
compliance and hazardous substance handling and disposal practices, or assumes
day-to-day management of substantially all of the operational functions of the
mortgaged property. The Conservation Act also provides that a lender will
continue to have the benefit of the secured creditor exemption even if it
forecloses on a mortgaged property, purchases it at a foreclosure sale or
accepts a deed-in-lieu of foreclosure provided that the lender seeks to sell the
mortgaged property at the earliest practicable commercially reasonable time on
commercially reasonable terms.
Other federal and state laws in certain circumstances may impose
liability on a secured party which takes a deed-in-lieu of foreclosure,
purchases a mortgaged property at a foreclosure sale, or operates a mortgaged
property on which contaminants other than CERCLA hazardous substances are
present, including petroleum, agricultural chemicals, hazardous wastes,
asbestos, radon, and lead-based paint. Such cleanup costs may be substantial. It
is possible that such cleanup costs could become a liability of a Trust Fund and
reduce the amounts otherwise distributable to the holders of the related series
of Certificates. Moreover, certain federal statutes and certain states by
statute impose a lien for any cleanup costs incurred by such state on the
property that is the subject of such cleanup costs (an "Environmental Lien").
All subsequent liens on such property generally are subordinated to such an
Environmental Lien and, in some states, even prior recorded liens are
subordinated to Environmental Liens. In the latter states, the security interest
of the Trustee in a related parcel of real property that is subject to such an
Environmental Lien could be adversely affected.
Traditionally, many residential mortgage lenders have not taken steps
to evaluate whether contaminants are present with respect to any mortgaged
property prior to the origination of the mortgage loan or prior to foreclosure
or accepting a deed-in-lieu of foreclosure. Accordingly, the Depositor has not
made and will not
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make such evaluations prior to the origination of the Secured Contracts. Neither
the Depositor nor any replacement Servicer will be required by any Agreement to
undertake any such evaluations prior to foreclosure or accepting a deed-in-lieu
of foreclosure. The Depositor does not make any representations or warranties or
assume any liability with respect to the absence or effect of contaminants on
any related real property or any casualty resulting from the presence or effect
of contaminants. However, the Depositor will not be obligated to foreclose on
related real property or accept a deed-in-lieu of foreclosure if it knows or
reasonably believes that there are material contaminated conditions on such
property. A failure so to foreclose may reduce the amounts otherwise available
to Certificateholders of the related series.
ENFORCEABILITY OF CERTAIN PROVISIONS
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.
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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 obligating the borrower to
pay a late charge or additional interest if payments are not timely made, and in
some circumstances may provide for prepayment fees or yield maintenance
penalties if the obligation is paid prior to maturity. In addition to
limitations imposed by FHA Regulations with respect to Contracts partially
insured by the FHA pursuant to Title I, in certain states, there are or may be
specific limitations upon the late charges that 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. Most conventional single-family mortgage loans may be
prepaid in full or in part without penalty. The regulations of the Federal Home
Loan Bank Board, as succeeded by the Office of Thrift Supervision ("OTS"),
prohibit the imposition of a prepayment penalty or equivalent fee for or in
connection with the acceleration of a loan by exercise of a due-on-sale clause.
A mortgagee to whom a prepayment in full has been tendered may be compelled to
give either a release of the mortgage or an instrument assigning the existing
mortgage. The absence of a restraint on prepayment, particularly with respect to
Contracts having higher mortgage rates, may increase the likelihood of
refinancing or other early retirements of the Contracts.
SUBORDINATE FINANCING
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.
INSTALLMENT CONTRACTS
The Trust Fund may also consist of installment sales contracts. Under
an installment contract ("Installment Contract") the seller (hereinafter
referred to in this section as the "lender") retains legal title to the property
and enters into an agreement with the purchaser (hereinafter referred to in this
section as the "borrower") for the payment of the purchase price, plus interest,
over the term of such contract. Only after full performance by the borrower of
the Installment Contract is the lender obligated to convey title to the property
to the purchaser. As with mortgage or deed of trust financing, during the
effective period of the Installment Contract, the borrower is generally
responsible for the maintaining the property in good condition and for paying
real estate taxes, assessments and hazard insurance premiums associated with the
property.
The method of enforcing the rights of the lender under an Installment
Contract varies on a state-by-state basis depending upon the extent to which
state courts are willing, or able pursuant to state statute, to enforce the
contract strictly according to its terms. The terms of Installment Contracts
generally provide that upon a default by the borrower, the borrower loses his or
her right to occupy the property, the entire indebtedness is
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accelerated and the buyer's equitable interest in the property is forfeited. The
lender in such a situation is not required to foreclose in order to obtain title
to the property, although in some cases a quiet title action is in order if the
borrower has filed the Installment Contract in local land records and an
ejectment action may be necessary to recover possession. In a few states,
particularly in cases of borrower default during the early years of an
Installment Contract, the courts will permit ejectment of the buyer and a
forfeiture of his or her interest in the property. However, most state
legislatures have enacted provisions by analogy to mortgage law protecting
borrowers under Installment Contracts from the harsh consequences of forfeiture.
Under such statutes, a judicial or nonjudicial foreclosure may be required, the
lender may be required to give notice of default and the borrower may be granted
some grace period during which the Installment Contract may be reinstated upon
full payment of the defaulted amount and the borrower may have a
post-foreclosure statutory redemption right. In other states, courts in equity
may permit a borrower with significant investment in the property under an
Installment Contract for the sale of real estate to share in the proceeds of
sale of the property after the indebtedness is repaid or may otherwise refuse to
enforce the forfeiture clause. Nevertheless, the lender's procedures for
obtaining possession and clear title under an Installment Contract in a given
state are simpler and less time consuming and costly than are the procedures for
foreclosing and obtaining clear title to a property subject to one or more
liens.
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 OTS 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 contract that is secured by a first
lien on certain kinds of consumer goods. 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 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 that 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.
Title V further 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
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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.
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 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 OTS, 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 Depositor 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
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result that recoveries from such manufacturers, suppliers or other persons may
be limited to their corporate assets without the benefit of insurance.
LEASEHOLD CONSIDERATIONS
Mortgage Loans may contain leasehold Mortgages which are each secured
by a lien on the related Mortgagor's leasehold interest in the related Mortgaged
Property. Mortgage loans secured by a lien on the borrower's leasehold interest
under a ground lease are subject to certain risks not associated with mortgage
loans secured by a lien on the fee estate of the borrower. The most significant
of these risks is that if the borrower's leasehold were to be terminated (for
example, as a result of a lease default or the bankruptcy of the ground lessor
or the borrower/ground lessee), the leasehold mortgagee would be left without
its security. In the case of each Mortgage Loan secured by a lien on the related
Mortgagor's leasehold interest under a ground lease, such ground lease generally
contains provisions protective of the leasehold mortgagee, such as a provision
that requires the ground lessor to give the leasehold mortgagee notices of
lessee defaults and an opportunity to cure them, a provision that permits the
leasehold estate to be assigned to the leasehold mortgagee or the purchaser at a
foreclosure sale and thereafter to be assigned by the leasehold mortgagee or
such purchaser at a foreclosure sale to any financially responsible third party
that executes an agreement obligating itself to comply with the terms and
conditions of the ground lease and a provision that gives the leasehold
mortgagee the right to enter into a new ground lease with the ground lessor on
the same terms and conditions as the old ground lease upon any termination of
the old ground lease.
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 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.
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FORFEITURES IN DRUG AND RICO PROCEEDINGS
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations ("RICO") statute can be seized by the government if the
property was used in, or purchased with the proceeds of, such crimes. Under
procedures contained in the Comprehensive Crime Control Act of 1984 (the "Crime
Control Act"), the government may seize the property even before conviction. The
government must publish notice of the forfeiture proceeding and may give notice
to all parties "known to have an alleged interest in the property," including
the holders of mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (i) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (ii) the lender was, at the
time of execution of the mortgage, "reasonably without cause to believe" that
the property was used in, or purchased with the proceeds of, illegal drug or
RICO activities.
NEGATIVE AMORTIZATION LOANS
A recent case decided by the United States Court of Appeals, First
Circuit, held that state restrictions on the compounding of interest are not
preempted by the provisions of the Depository Institutions Deregulation and
Monetary Control Act of 1980 ("DIDMC") and as a result, a mortgage loan that
provided for negative amortization violated New Hampshire's requirement that
first mortgage loans provide for computation of interest on a simple interest
basis. The holding was limited to the effect of DIDMC on state laws regarding
the compounding of interest and the court did not address the applicability of
the Alternative Mortgage Transaction Parity Act of 1982, which authorizes a
lender to make residential mortgage loans that provide for negative
amortization. As a result, the enforceability of compound interest on mortgage
loans that provide for negative amortization is unclear. The First Circuit's
decision is binding authority only on Federal District Courts in Maine, New
Hampshire, Massachusetts, Rhode Island and Puerto Rico.
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 Depositor with respect to that series on the material matters associated
with such consequences, subject to any qualifications set forth herein. Counsel
to the Depositor 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
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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 ("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.
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. On or prior to the date of the related
Prospectus Supplement with respect to the proposed issuance of each series of
REMIC Certificates, Thacher Proffitt & Wood, counsel to the Depositor, will
deliver its opinion (and file such opinion under Form 8-K) generally to the
effect that, assuming compliance with all provisions of the related Pooling and
Servicing Agreement and upon issuance of such REMIC Certificates, 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
Depositor for the applicable series as specified in the related Prospectus
Supplement, subject to any qualifications set forth herein. In addition, counsel
to the Depositor 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
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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 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)(4)(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 (including temporary investments of such
payments) pending distribution on the REMIC Certificates and may include
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)(4)(A) of the Code. Furthermore, foreclosure
property will qualify as "real estate assets" under Section 856(C)(4)(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
Depositor,
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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)(4)(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 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 Depositor, 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
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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 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 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
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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 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
(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 plus (ii) the daily portions of original issue discount for
all days during such accrual period prior to such day minus (iii) any payments
of amounts included in the stated redemption price made during such accrual
period prior to such day with respect to such Certificates.
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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.
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
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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 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. By analogy to recently finalized bond premium regulations
and allocable premium in excess of the interest income may be deductible to the
extent of prior accruals of interest. 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
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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 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 activity 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
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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"
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 amortization of 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 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 above, 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
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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 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
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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.
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
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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.
Recently enacted provisions governing the relationship between excess
inclusions and the alternative minimum tax provide that (i) the alternative
minimum taxable income of the taxpayer is based on the taxpayer's regular
taxable income computed without regard to the rule that taxable income cannot be
less than the amount of excess inclusions, (ii) the alternative minimum taxable
of a taxpayer for a taxable year cannot be less than the amount of excess
inclusions for that year, and (iii) the amount of any alternative minimum tax
net operating loss is computed without regard to any excess inclusions.
Under Treasury regulations yet to be issued, in the case of any REMIC
Residual Certificates held by a real estate investment trust, the aggregate
excess inclusions with respect to such 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. A similar rule will apply with respect
to regulated investment companies, common trust funds and certain cooperatives.
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 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
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purchaser at some future date may be disregarded in accordance with the
above-described rules which would result in the retention of tax liability by
such purchaser.
The related Prospectus Supplement will disclose whether offered REMIC
Residual Certificates may be considered "noneconomic" residual interests under
the REMIC Regulations; provided, however, that any disclosure that a REMIC
Residual Certificate will not be considered "noneconomic" will be based upon
certain assumptions, and the Depositor will make no representation that a REMIC
Residual Certificate will not be considered "noneconomic" for purposes of the
above-described rules. See "--Foreign Investors in REMIC 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 24, 1996, the IRS released final
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, any REMIC Residual Certificate acquired after
January 4, 1995 will not be treated as a security and therefore generally may
not be marked to market.
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 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 the case of a
partnership that has 100 or more partners and elects to be treated as an
"electing large partnership," 70 percent of such partnership's miscellaneous
itemized deductions will be disallowed, although the remaining deductions will
generally be allowed at the partnership level and will not be subject to the 2
percent floor that would otherwise be applicable to individual partners. 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
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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 five 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.
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."
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
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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, 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
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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. Notwithstanding the preceding two
sentences, in the case of a REMIC Residual Certificate held by an "electing
large partnership," all interests in such partnership shall be treated as held
by disqualified organizations (without regard to whether the record holders of
the partnership furnish statements described in the preceding sentence) and the
amount that would be subject to tax under the second preceding sentence is
excluded from the gross income of the partnership (in lieu of a deduction in the
amount of such tax generally allowed to pass-through entities).
For these purposes, a "disqualified organization" means (i) the United
States, any State or political subdivision thereof, any foreign government, any
international organization, or any agency or instrumentality of the foregoing
(but would not include instrumentalities described in Section 168(h)(2)(D) of
the Code or the Federal Home Loan Mortgage Corporation), (ii) any organization
(other than a cooperative described in Section 521 of the Code) that is exempt
from federal income tax, unless it is subject to the tax imposed by Section 511
of the Code or (iii) any organization described in Section 1381(a)(2)(C) of the
Code. For these purposes, a "pass-through entity" means any regulated investment
company, real estate investment trust, trust, partnership or certain other
entities described in Section 860E(e)(6) of the Code. In addition, a person
holding an interest in a pass-through entity as a nominee for another person
will, with respect to such interest, be treated as a pass-through entity.
TERMINATION. A REMIC will terminate immediately after the Distribution
Date following receipt by the REMIC of the final payment in respect of the
Mortgage Loans or upon a sale of the REMIC's assets following the adoption by
the REMIC of a plan of complete liquidation. The last distribution on a REMIC
Regular Certificate will be treated as a payment in retirement of a debt
instrument. In the case of a REMIC Residual Certificate, if the last
distribution on such REMIC Residual Certificate is less than the REMIC
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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. If the REMIC adopts a plan of complete liquidation, within the
meaning of Section 860F(a)(4)(A)(i) of the Code, which may be accomplished by
designating in the REMIC's final tax return a date on which such adoption is
deemed to occur, and sells all of its assets (other than cash) within a 90-day
period beginning on such date, the REMIC will not be subjected to any
"prohibited transactions taxes" solely on account of such qualified liquidation,
provided that the REMIC credits or distributes in liquidation all of the sale
proceeds plus its cash (other than the amounts retained to meet claims) to
holders of Regular and Residual Certificates within the 90-day period.
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 certain trusts and individual holders of
REMIC Regular Interests and the IRS; holders of REMIC Regular Certificates that
are corporations, trusts described in Sections 664(c) and 4947(a)(11) of the
Code, 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
qualification of the REMIC's assets will be made as required under the Treasury
regulations, generally on a quarterly basis.
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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. Treasury regulations
(the "Final Withholding Regulations"), which are generally effective with
respect to payments made after December 31, 1999, consolidate and modify the
current certification requirements and means by which a holder may claim
exemption from United States federal income tax withholding and provide certain
presumptions regarding the status of holders when payments to the holders cannot
be reliably associated with appropriate documentation provided to the payor. All
holders should consult their tax advisors regarding the application of the Final
Withholding Regulations. 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). The Final Withholding Regulations consolidate and modify the
current certification requirements and means by which a non-United States person
may claim exemption from United States federal income tax withholding. All
holders that are non-United States persons should consult their tax advisors
regarding the application of the Final Withholding Regulations, which are
generally effective with respect to payments made after December 31, 1999. For
these purposes, "United States person" means a citizen or resident of the United
States, a corporation or partnership or entity treated as a partnership or
corporation for United States Federal income tax purposes created or organized
in, or under the laws of, the United States, any state thereof or the District
of Columbia (except, in the case of a partnership, to the extent provided in
regulations), 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 persons have the authority to control all substantial
decisions of the trust. To the extent prescribed in regulations by the Secretary
of the Treasury, which regulations have not yet been issued, a trust which was
in existence on August 20, 1996 (other than a trust treated as owned by the
grantor under subpart E of part I of subchapter J of chapter 1 of the Code), and
which was treated as a United States person on August 19, 1996, may elect to
continue to be treated as a United States person notwithstanding the previous
sentence. It is possible that the IRS may assert that the foregoing tax
exemption should not apply with respect to a REMIC
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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.
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. On or prior to the date of the
related Prospectus Supplement with respect the proposed issuance of each series
of Grantor Trust Certificates, Thacher Proffitt & Wood, counsel to the
Depositor, will deliver its opinion (and will file such opinion under Form 8-K)
to the effect that, assuming compliance with all provisions of the related
Pooling Agreement and upon issuance of such Grantor Trust Certificates, 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
Depositor for the applicable series as specified in the related Prospectus
Supplement, subject to any qualifications set forth herein. In addition, counsel
to the Depositor 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.
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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 and subject to the discussion below with respect to
Buydown Mortgage Loans, counsel to the Depositor 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
Depositor 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.
The assets constituting certain Grantor Trust Funds may include Buydown
Mortgage Loans. The characterization of an investment in Buydown Mortgage Loans
will depend upon the precise terms of the related Buydown Agreement, but to the
extent that such Buydown Mortgage Loans are secured by a bank account or other
personal property, they may not be treated in their entirety as assets described
in the foregoing sections of the Code. No directly applicable precedents exist
with respect to the federal income tax treatment or the characterization of
investments in Buydown Mortgage Loans. Accordingly, holders of Grantor Trust
Certificates should consult their own tax advisors with respect to the
characterization of investments in Grantor Trust Certificates representing an
interest in a Grantor Trust Fund that includes Buydown Mortgage Loans.
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)(4)(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 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 Depositor 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
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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 Depositor 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 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
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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 Depositor, the Master Servicer, any subservicer
or their respective affiliates, but will include such Certificateholder's share
of any reasonable servicing fees and other expenses.
To the extent the Grantor Trust Fractional Interest Certificates
represent an interest in any pool of debt instruments the yield on which may be
affected by reason of prepayments, 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. It is unclear whether
those provisions would be applicable to the Grantor Trust Fractional Interest
Certificates that do not represent an interest in any pool of debt instruments
the yield on which may be affected by reason of prepayments. 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 with respect to
Grantor Trust Fractional Interest Certificates and, in particular, whether a
prepayment assumption should be used in reporting original issue discount.
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 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.
It is currently intended to base information reports or returns to the
IRS and Certificateholders in transactions subject to the stripped bond rules on
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 Depositor,
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
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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.
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.
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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. Section
1272(a)(6) of the Code requires that a prepayment assumption be made in
computing yield with respect to any pool of debt instruments the yield on which
may be affected by reason of prepayments. Accordingly, for certificates backed
by such pools, it is intended to base information reports and returns to the IRS
and Certificateholders, on the use of a prepayment assumption.
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.
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.
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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.
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.
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
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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 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. To the extent the
Grantor Trust Strip Certificates represent an interest in any pool of debt
instruments the yield on which may be affected by reason of prepayments, those
provisions will apply to the Grantor Trust Strip Certificates. It is 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. 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 Depositor, 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
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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 to the extent subject to Section 1272(a)(6) of the Code as
described above, 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.
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.
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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.
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 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
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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.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA") imposes certain fiduciary and prohibited transaction restrictions on
employee pension and welfare benefit plans subject to ERISA ("ERISA Plans").
Section 4975 of the Code imposes similar prohibited transaction restrictions on
tax-qualified retirement plans described in Section 401(a) of the Code
("Qualified Retirement Plans") and on Individual Retirement Accounts ("IRAs")
described in Section 408 of the Code (collectively, "Tax-Favored Plans";
Tax-Favored Plans and ERISA Plans, collectively, "Plans").
Certain employee benefit plans, such as governmental plans (as defined
in Section 3(32) of ERISA), 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 the ERISA requirements discussed herein. Accordingly, assets of such
plans may be invested in Certificates without regard to the ERISA considerations
described below, subject to the provisions of applicable federal and state law.
Any such plan that is a Qualified Retirement Plan 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.
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In addition to imposing general fiduciary requirements, including those
of investment prudence and diversification and the requirement that a Plan's
investment be made in accordance with the documents governing the Plan, Section
406 of ERISA and Section 4975 of the Code prohibit a broad range of transactions
involving "Plan Assets", Plans and persons ("parties in interest" under Section
3(14) of ERISA or "disqualified persons" under Section 4975(e)(2) of the Code;
collectively, "Parties In Interest") who have certain specified relationships to
the Plans, unless a statutory, regulatory or administrative exemption is
available. Certain Parties in Interest that participate in a prohibited
transaction may be subject to a penalty, or an excise tax, imposed pursuant to
Section 502(i) of ERISA or Section 4975 of the Code, unless a statutory,
regulatory or administrative exemption is available.
Plan Asset Regulations. Certain transactions involving a Trust Fund
might be deemed to constitute prohibited transactions under ERISA and the Code
with respect to a Plan that purchases the Certificates, if the underlying
Mortgage Loans and other assets included in the Trust Fund are deemed to be
assets of the
Plan.
The U.S. Department of Labor (the "DOL") has promulgated regulations at 29
C.F.R. ss.2510.3-101 (the "Plan Asset Regulations") defining the term "Plan
Assets" for purposes of applying the general fiduciary responsibility provisions
of ERISA and the prohibited transaction provisions of ERISA and the Code. Under
the Plan Asset Regulations, generally, when a Plan acquires an "equity interest"
in another entity (such as the Trust Fund), the underlying assets of that entity
may be considered to be Plan Assets unless certain exceptions apply. In addition
to several exceptions not applicable to an entity like the Trust Fund, a Plan's
Assets will not include an undivided interest in each asset of an entity in
which such Plan makes an equity investment if Benefit Plan Investors (i.e.,
Plans and certain employee benefit plans not subject to ERISA) do not own 25% or
more in value of any class of equity securities issued by the entity. Neither
Plans nor persons investing Plan Assets should acquire or hold Certificates in
reliance upon the availability of any exception under the Plan Asset
Regulations. The Plan Asset Regulations provide that the term "equity interest"
means any interest in an entity other than an instrument which is treated as
indebtedness under applicable local law and which has no "substantial equity
features." Under the Plan Asset Regulations, Plan Assets will be deemed to
include an interest in the instrument evidencing the equity interest of a Plan
(such as a Certificate), and, because of the factual nature of certain of the
rules set forth in the Plan Asset Regulations, Plan Assets may be deemed to
include an interest in the underlying assets of the entity in which a Plan
acquires an interest (such as the Trust Fund). Without regard to whether the
Certificates are characterized as equity interests, the purchase, sale and
holding of Certificates by or on behalf of a Plan could be considered to give
rise to a prohibited transaction if the Issuer, the applicable Trustee or any of
their respective affiliates is or becomes a Party in Interest with respect to
such Plan.
Any person who has discretionary authority or control respecting the
management or disposition of Plan Assets, and any person who provides investment
advice with respect to such assets for a fee, is a fiduciary of the investing
Plan. If the Mortgage Loans and other assets included in a Trust Fund constitute
Plan Assets, then any party exercising management or discretionary control
regarding those assets, such as the Master Servicer, any Servicer, any
sub-servicer, the Trustee, the obligor under any credit enhancement mechanism,
or certain affiliates thereof may be deemed to be a Plan "fiduciary" and thus
subject to the fiduciary responsibility provisions and prohibited transaction
provisions of ERISA and the Code with respect to the investing Plan. In
addition, if the Mortgage Loans and other assets included in a Trust Fund
constitute Plan Assets, the purchase of Certificates by a Plan, as well as the
operation of the Trust Fund, may constitute or involve a prohibited transaction
under ERISA or the Code.
Any fiduciary or other Plan investor which proposes to purchase
Certificates on behalf of or with Plan Assets should consult with its counsel
with respect to the potential applicability of ERISA and the Code to such
investment and the availability a prohibited transaction class exemption or
other exemption in connection
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therewith. In particular, in connection with a contemplated purchase of
Certificates representing a beneficial ownership interest in a pool of
single-family residential first mortgage loans, such fiduciary or other Plan
investor should consider the availability of Prohibited Transaction Class
Exemption ("PTCE") 83-1 ("PTCE 83-1") for certain transactions involving
mortgage pool investment trusts. However, PTCE 83-1 may not provide exemptive
relief for Certificates having certain cash-flow characteristics that may be
issued by a Trust Fund. In addition, such fiduciary or other Plan investor
should consider the availability of PTCE 96-23, regarding transactions effected
by "in-house asset managers", PTCE 95-60, regarding investments by insurance
company general accounts, PTCE 90-1, regarding investments by insurance company
pooled separate accounts, PTCE 91-38, regarding investments by bank collective
investment funds, and PTCE 84-14, regarding transactions effected by "qualified
professional asset managers." The Prospectus Supplement with respect to a Series
of Certificates may contain additional information regarding the application of
PTCE 83-1 or any other exemption with respect to the Certificates offered
thereby. There can be no assurance that any of these exemptions will apply with
respect to any particular Plan's or other Plan investor's investment in the
Certificates or, even if an exemption were deemed to apply, that any exemption
would apply to all prohibited transactions that may occur in connection with
such investment.
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 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 "Tax-Exempt Investor") nonetheless will be subject to federal
income taxation to the extent that its income is "unrelated business taxable
income" ("UBTI") within the meaning of Section 512 of the Code.
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
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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.
On April 23, 1998, the Federal Financial Institutions Examination
Council issued a revised supervisory policy statement (the "1998 Policy
Statement") applicable to all depository institutions, setting forth guidelines
for investments in "high-risk mortgage securities". The 1998 Policy Statement
has been adopted by the Federal Reserve Board, the Office of the Comptroller of
the Currency, the FDIC, the National Credit Union Administration (the "NCUA")
and the OTS with an effective date of May 26, 1998. The 1998 Policy Statement
rescinds a 1992 policy statement that had required, prior to purchase, a
depository institution 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. The 1998
Policy Statement eliminates former constraints on investing in certain
"high-risk" mortgage derivative products and substitutes broader guidelines for
evaluating and monitoring investment risk.
On December 1, 1998, the OTS issued Thrift Bulletin 13a, entitled,
"Management of Interest Rate Risk, Investment Securities, and Derivatives
Activities" ("TB 13a"), which is applicable to thrift institutions regulated by
the OTS. TB 13a has an effective date of December 1, 1998. One of the primary
purposes of TB 13a is to require thrift institutions, prior to taking any
investment position, to (i) conduct a pre-purchase portfolio sensitivity
analysis for any "significant transaction" involving securities or financial
derivatives and (ii) conduct a pre-purchase price sensitivity analysis of any
"complex security" or financial derivative. For the purposes of TB 13a, "complex
security" includes among other things any collateralized mortgage obligation
("CMO") or REMIC security, other than any "plain vanilla" mortgage pass-through
security (that is, securities that are part of a single class of securities in
the related pool, that are non-callable and do not have any special features).
Accordingly, the offered securities may be viewed as "complex securities". The
OTS recommends that while a thrift institution should conduct its own in-house
pre-acquisition analysis, it may rely on an analysis conducted by an independent
third-party as long as management understands the analysis and its key
assumptions. Further, TB 13a recommends that the use of "complex securities with
high price sensitivity" be limited to transactions and strategies that lower a
thrift institution's portfolio interest rate risk. TB 13a warns that an
investment in complex securities by thrift institutions that do not have
adequate risk measurement, monitoring and control systems may be viewed by the
OTS examiners as an unsafe and unsound practice.
Prospective investors in the Certificates, including in particular the
classes of Certificates that do not constitute "mortgage related securities" for
purposes of SMMEA 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 Depositor 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
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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 Depositor 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 Depositor
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 Depositor, 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 Depositor
from such sale.
The Depositor 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 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 Depositor with institutional investors
through dealers; and
3. By direct placements by the Depositor 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 Depositor whose
identities and relationships to the Depositor 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.
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<PAGE>
In connection with the sale of the Offered Certificates, underwriters
may receive compensation from the Depositor 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 Depositor 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 Depositor will indemnify the
several underwriters and the underwriters will indemnify the Depositor 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 Depositor and
purchasers of Offered Certificates of such series.
The Depositor 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.
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
Depositor 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
-116-
<PAGE>
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.
AVAILABLE INFORMATION
The Depositor is subject to the informational requirements of the
Securities Exchange Act of 1934 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 Depositor can be
inspected and copied at the public reference facilities maintained by the
Commission at its Public Reference Section, 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, Suite 1300, 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
Depositor does not intend to send any financial reports to Certificateholders
(as defined herein).
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 Depositor has filed with the Commission under the
Securities Act of 1933 and to which reference is hereby made.
REPORTS TO CERTIFICATEHOLDERS
The Trustee will mail monthly reports concerning each Trust Fund to all
registered holders of Certificates (the "Certificateholders") of the related
series. With respect to each series of Certificates, Certificateholders will be
referred to as the "Certificateholders". See "Description of the
Certificates--Reports to Certificateholders".
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
These are incorporated herein by reference all documents and reports
filed or caused to be filed by the Depositor 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 Securities offered hereby evidencing interest
therein. The Depositor 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 Certificates offered hereby, a copy of any or all
documents or reports incorporated herein by reference, in each case to the
extent such documents or 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
to the Depositor should be directed in writing to its principal executive office
at 2020 East First Street, Suite 100, Santa Ana, California 92705, or by
telephone at (949) 790-8300. The Depositor has determined that its financial
statements are not material to the offering of any Securities offered hereby.
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<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
Page
----
1998 Policy Statement........................................................114
Accrual Certificates..........................................................38
Accrued Certificate Interest..................................................38
Affiliated Sellers............................................................12
ARM Loans ............................................................13
Available Distribution Amount.................................................37
Balloon Loans ............................................................14
Balloon Payment ............................................................14
Bankruptcy Code ............................................................72
Bankruptcy Loss ............................................................43
Beneficial Owner ............................................................30
Buydown Account ............................................................16
Buydown Agreement ............................................................35
Buydown Funds ............................................................16
Buydown Mortgage Loans........................................................16
Buydown Period ............................................................16
CERCLA ............................................................76
Certificate ............................................................55
Certificate Account...........................................................33
Certificate Register..........................................................30
Certificate Registrar.........................................................30
Certificateholder ............................................................30
Certificateholders...........................................................117
Closing Date ............................................................85
CMO ...........................................................114
Code ............................................................82
Commission ...........................................................117
Committee Report ............................................................85
Conservation Act ............................................................76
Contingent Payment Regulations...............................................109
Contracts ............................................................12
Contributions Tax ............................................................97
Convertible Mortgage Loan.....................................................16
Crime Control Act ............................................................82
Cut-off Date ............................................................16
Debt Service Reduction........................................................48
Defaulted Mortgage Loss.......................................................43
Deferred Interest ............................................................14
Deficient Valuation...........................................................48
Deleted Mortgage Loan.........................................................20
Depositor ............................................................11
Designated Seller Transaction.................................................12
Determination Date............................................................37
DIDMC ............................................................82
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<PAGE>
Direct Puerto Rico Mortgage...................................................32
Distribution Date ............................................................37
DOL ...........................................................112
DTC ............................................................30
DTC Registered Certificates...................................................30
Due Period ............................................................40
Endorsable Puerto Rico Mortgage...............................................32
Environmental Lien............................................................76
ERISA ........................................................9, 111
ERISA Plans ...........................................................111
Excess Interest ............................................................44
Extraordinary Losses..........................................................43
FDIC ............................................................12
FHA ............................................................12
FHA Loans ............................................................12
FHLMC ............................................................18
Final Withholding Regulations................................................100
Financial Guaranty Insurance Policy...........................................44
FIRREA ............................................................18
FNMA ............................................................18
Fraud Loss ............................................................43
FTC Rule ............................................................75
Garn-St Germain Act...........................................................77
Grantor Trust Certificates....................................................83
Grantor Trust Fractional Interest Certificate................................101
Grantor Trust Fund............................................................83
Grantor Trust Strip Certificate..............................................101
High Cost Loans ............................................................73
Holder ............................................................30
Homeownership Act ............................................................73
Housing Act ............................................................18
Index ............................................................13
Installment Contract..........................................................78
Insurance Proceeds............................................................34
Insurer ............................................................44
Intermediaries ............................................................30
IRAs ...........................................................111
IRS ............................................................82
Issue Premium ............................................................92
Letter of Credit ............................................................46
Letter of Credit Bank.........................................................46
Liquidated Mortgage Loan......................................................25
Liquidation Proceeds..........................................................34
Loan-to-Value Ratio...........................................................15
Lock-out Expiration Date......................................................15
Lock-out Period ............................................................15
Manufactured Homes............................................................12
Manufacturer's Invoice Price..................................................15
-119-
<PAGE>
Mark-to-Market Regulations....................................................95
Master Servicer ............................................................21
Mortgage Loans ............................................................11
Mortgage Notes ............................................................11
Mortgage Pool ............................................................11
Mortgage Rate ............................................................13
Mortgages ............................................................11
NBRC ............................................................73
NCUA ...........................................................114
Net Mortgage Rate ............................................................60
Nonrecoverable Advance........................................................41
Note Margin ............................................................13
Offered Certificates..........................................................29
OID Regulations ............................................................83
OTS ............................................................78
Overcollateralization.........................................................44
Participants ............................................................30
Parties In Interest..........................................................112
Pass-Through Rate ............................................................38
Percentage Interest...........................................................38
Permitted Investments.........................................................33
Plan Asset Regulations.......................................................112
Plans ...........................................................111
Pool Insurer ............................................................35
Pooling Agreement ............................................................55
Pre-Funding Account...........................................................39
Prepayment Assumption.........................................................85
Prepayment Interest Shortfall.................................................61
Prepayment Penalty............................................................15
Prohibited Transactions Tax...................................................97
PTCE ...........................................................113
PTCE 83-1 ...........................................................113
Puerto Rico Mortgage Loan.....................................................32
Purchase Obligation...........................................................52
Purchase Price ............................................................20
Qualified Retirement Plans...................................................111
Qualified Substitute Mortgage Loan............................................20
Realized Losses ............................................................43
Record Date ............................................................37
Related Proceeds ............................................................40
Relief Act ............................................................81
REMIC ............................................................83
REMIC Administrator...........................................................83
REMIC Certificates............................................................83
REMIC Provisions ............................................................83
REMIC Regular Certificates....................................................83
REMIC Regulations ............................................................83
REMIC Residual Certificates...................................................83
-120-
<PAGE>
REO Mortgage Loan ............................................................25
REO Property ............................................................24
Reserve Fund ............................................................48
RICO..........................................................................82
RTC ............................................................12
Securities Act ...........................................................116
Sellers ............................................................12
Senior Certificates...........................................................29
Senior Liens ............................................................14
Senior/Subordinate Series.....................................................29
Servicing Standard............................................................22
Single Family Loans...........................................................12
Single Family Property........................................................12
SMMEA ...........................................................113
Special Hazard Instrument.....................................................43
Special Hazard Insurance Policy...............................................47
Special Hazard Insurer........................................................47
Special Hazard Loss...........................................................43
Special Hazard Losses.........................................................47
Special Servicer ............................................................24
Spread ............................................................11
Strip Certificates............................................................29
Subordinate Certificates......................................................29
Subservicer ............................................................24
Subservicers ............................................................17
Tax-Exempt Investor..........................................................113
Tax-Favored Plans ...........................................................111
TB 13a ...........................................................114
Tiered REMICs ............................................................84
Title V ............................................................79
Title VIII ............................................................80
Trust Fund ............................................................11
Trust Fund Assets ............................................................11
Trustee ............................................................17
Unaffiliated Sellers..........................................................12
United States person.........................................................100
Value ............................................................15
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<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
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.
SEC Registration Fee............................. $ 278,000.00
Printing and Engraving Fees...................... 20,000.00*
Legal Fees and Expenses.......................... 150,000.00*
Accounting Fees and Expenses..................... 50,000.00*
Trustee Fees and Expenses........................ 20,000.00*
Rating Agency Fees............................... 75,000.00*
Miscellaneous.................................... 15,000.00*
Total....................................... $ 608,000.00
=============
---------
* Based on the offering of a single series of Securities.
Item 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under Section 8(b) of the proposed form of Underwriting Agreement, the
Underwriters are obligated under certain circumstances to indemnify certain
controlling persons of the Depositor against certain liabilities, including
liabilities under the Securities Act of 1933.
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, 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 cor poration, 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 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
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 con nection 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 of any claim, issue or matter as to which
II - 1
[TPW: NY05:7018501.1] 18091-00000 05/21/99 10:30AM
<PAGE>
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 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 ex penses 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
"Depositor") provide, in effect, that to the extent and under the circumstances
permitted by subsections (a) and (b) of Section 145 of the General Corporation
Law of Delaware, the Depositor (i) shall indemnify and hold harmless each person
who was or is a party or is threatened to be made a party to any action, suit or
proceeding described in subsections (a) and (b) 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 Depositor against expenses, judgments, fines and amounts paid
in settlement, and (ii) shall indemnify and hold harmless each person who was or
is a party or is threatened to be made a party to any such action, suit or
proceeding if such person is or was serving at the request of the Depositor as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise.
Pursuant to Section 145 of the General Corporation Law of Delaware,
liability insurance is maintained covering directors and principal officers of
the Depositor.
The Pooling and Servicing Agreement with respect to each series of
Certificates will provide that no director, officer, employee or agent of the
Depositor 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 Agreement or Trust Agreement with respect to each series
of Certificates will further provide that, with the exceptions stated above, a
director, officer, employee or agent of the Depositor is entitled to be
indemnified against any loss, liability or expense incurred in connection with
legal action relating to such Pooling and Servicing Agreement, Trust Agreement
and related Certoficates other than such expenses related to particular Mortgage
Loans.
II - 2
<PAGE>
Item 16. EXHIBITS.
1.1 Form of Underwriting Agreement is incorporated by
reference from Registration Statement on Form S-3
(File No. 333-14625).
3.1 Amended and Restated Articles of Incorporation of the
Registrant is incorporated by reference from
Registration Statement on Form S-3 (File No.
333-14625).
3.2 Restated By-laws of the Registrant are incorporated
by reference from Registration Statement on Form S-3
(File No. 333-14625).
4.1 Form of Pooling and Servicing Agreement, for a series
consisting of Senior and Subordinate Certificates is
incorporated by reference from Registration Statement
on Form S-3 (File No. 333-14625).
4.2 Form of Pooling and Servicing Agreement, for
alternate forms of credit support is incorporated by
reference from Registration Statement on Form S-3
(File No. 333-14625).
5.1 Opinion of Thacher Proffitt & Wood.
8.1 Opinion of Thacher Proffitt & Wood with respect to
certain tax matters (included as part of Exhibit
5.1).
23.1 Consent of Thacher Proffitt & Wood (included as part
of Exhibits 5.1 and 8.1).
24.1 Power of Attorney is incorporated by reference from
Registration Statement on Form S-3 (File No.
333-14625).
II - 3
<PAGE>
Item 17. UNDERTAKINGS.
A. UNDERTAKING PURSUANT TO RULE 415.
The Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933; (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; (iii) to include
any material information with respect to the plan of distribution not
previously disclosed in the Registration Statement or any material
change of such information in the Registration Statement;
PROVIDED, HOWEVER, that paragraphs (i) and (ii) do not apply if the
information required to be included in the post-effective amendment is
contained in periodic reports filed by the Registrant pursuant to
Section 13 or Section 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. UNDERTAKING IN CONNECTION WITH INCORPORATION BY REFERENCE OF CERTAIN
FILINGS UNDER THE SECURITIES EXCHANGE ACT OF 1934.
The Registrant hereby undertakes that, for 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 Section 15(d) of the Securities
Exchange Act of 1934 that is incorporated by reference in the Registration
Statement shall be deemed to be a new Registration Statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
C. UNDERTAKING IN RESPECT OF INDEMNIFICATION.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions described in Item 15 above,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for
II - 4
<PAGE>
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 against the Registrant 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
issues.
II - 5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, 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 and has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of Irvine,
State of California, on the 21st day of May, 1999.
OPTION ONE MORTGAGE
ACCEPTANCE CORPORATION
By /s/ William L. O'Neill
------------------------------------
Name: William L. O'Neill
Title: Director and Treasurer
<PAGE>
Pursuant to the requirements of the Securities Act of 1933,
this 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>
/s/ William L. O'Neill* Director and President May 21, 1999
- ------------------------------------------- (Principal Executive Officer)
Robert E. Dubrish
/s/ William L. O'Neill* Director and Secretary May 21, 1999
- ------------------------------------------
Steven L. Nadon
/s/ William L. O'Neill (Principal Financial Officer and
- ------------------------------------------ Principal Accounting Officer)
William L. O'Neill
</TABLE>
By: /s/ William L. O'Neill
-----------------------------------
William L. O'Neill
Attorney-in-fact
<PAGE>
EXHIBIT INDEX
Exhibit
Number
- ------
1.1 Form of Underwriting Agreement is incorporated by reference from
Registration Statement on Form S-3 (File No. 333-14625).
3.1 Amended and Restated Articles of Incorporation of the Registrant is
incorporated by reference from Registration Statement on Form S-3 (File No.
333-14625).
3.2 Restated By-laws of the Registrant are incorporated by reference from
Registration Statement on Form S-3 (File No. 333-14625).
4.1 Form of Pooling and Servicing Agreement, for a series consisting of Senior
and Subordinate Certificates is incorporated by reference from Registration
Statement on Form S-3 (File No. 333-14625).
4.2 Form of Pooling and Servicing Agreement, for alternate forms of credit
support is incorporated by reference from Registration Statement on Form
S-3 (File No. 333-14625).
5.1 Opinion of Thacher Proffitt & Wood.
8.1 Opinion of Thacher Proffitt & Wood with respect to certain tax matters
(included as part of Exhibit 5.1).
23.1 Consent of Thacher Proffitt & Wood (included as part of Exhibits 5.1 and
8.1).
24.1 Power of Attorney is incorporated by reference from Registration Statement
on Form S-3 (File No. 333-14625).
EXHIBITS 5.1, 8.1, 23.1
[Letterhead of Thacher Proffitt & Wood]
May 21, 1999
Option One Mortgage Acceptance Corporation
2020 East First Street, Suite 100
Santa Ana, California 92705
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.
<PAGE>
Option One Mortgage Acceptance Corporation
May 21, 1999 Page 2.
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 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.
<PAGE>
Option One Mortgage Acceptance Corporation
May 21, 1999 Page 3.
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 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/ Richard M. Horowitz
