<PAGE>
PROSPECTUS SUPPLEMENT
To Prospectus dated September 6, 1996
$50,000,000
Advanta Revolving Home Equity Loan Trust 1996-A
Advanta Revolving Home Equity Loan Asset Backed Certificates,
Series 1996-A
Class A Certificates, Variable Rate Pass-Through Rate
[LOGO] [LOGO]
Advanta National Bank USA Advanta Mortgage Corp. USA
Originator Master Servicer
[LOGO]
Advanta Mortgage Conduit Services, Inc.
Sponsor of the Trust
The Advanta Revolving Home Equity Loan Asset Backed Certificates, Series
1996-A (the "Class A Certificates") will be issued by the Advanta Revolving Home
Equity Loan Trust 1996-A (the "Trust") to be formed pursuant to a Pooling and
Servicing Agreement among Advanta National Bank USA, in its capacity as the
originator (the "Originator") of the Mortgage Loans, Advanta Mortgage Conduit
Services, Inc., in its capacity as the Sponsor (the "Sponsor") of the Trust,
Advanta Mortgage Corp. USA, in its capacity as master servicer (the "Master
Servicer") of the Mortgage Loans and Bankers Trust Company of California, N.A.
as trustee (the "Trustee"). The assets of the Trust will primarily consist of a
pool of adjustable rate home equity revolving credit line loans (the "Mortgage
Loans"). The Mortgage Loans are secured by first or junior mortgages or deeds
of trust on residential properties.
Certain mortgage loans (the "Pre-Funded Mortgage Loans"), in addition to
those held by the Trust initially, may be assigned to the Trust from time to
time during the period beginning on the Closing Date and ending on February 25,
1997 (the "Pre-Funding Period") from funds on deposit in an account (the
"Pre-Funding Account") established with the Trustee. On the Closing Date an
aggregate cash amount of $12,519,391.22 from the proceeds of the sale of the
Class A Certificates (the "Original Pre-Funded Amount") will be deposited in the
Pre-Funding Account.
The Pooling and Servicing Agreement establishes a period of time (the
"Revolving Period") during which the Originator expects that no principal will
be paid to the owners of the Class A Certificates (the "Owners") (i.e., the
Originator expects that the Revolving Period will be an "interest-only period"
with respect to the Class A Certificates), and that only after the end of such
period will the Class A Certificates begin to amortize. Under certain
circumstances described herein, however, the Owners of the Class A Certificates
may receive payments of principal during the Revolving Period. The Revolving
Period will end no later than the November, 1997 Payment Date, and may end
earlier. Following the end of the Revolving Period, the Amortization Period
(as defined herein) will commence.
Distributions of principal and interest on the Class A Certificates will be
made on the twenty-fifth day of each month or, if such date is not a Business
Day, then on the next succeeding Business Day (each such date, a "Payment
Date"), commencing on December 26, 1996. On each Payment Date, the Owners of
the Class A Certificates will be entitled to receive, from and to the extent of
available funds, payments of interest, calculated as set forth herein. On each
Payment Date during the Amortization Period (and, under certain circumstances,
prior to the commencement of the Amortization Period) the Owners of the Class A
Certificates will also be entitled to receive, from and to the extent of
available funds, payments of principal, calculated as set forth herein. The
Class A Certificates are not guaranteed by the Originator, the Sponsor, the
Master Servicer, the Trustee or any affiliate thereof. Certain distributions on
the Class A Certificates, however, will be unconditionally and irrevocably
guaranteed as to the payment on each Payment Date pursuant to the terms of a
financial guaranty insurance policy (the "Policy") to be issued by
[logo of MBIA]
(cover continued on next page)
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION SET FORTH UNDER "RISK
FACTORS" COMMENCING ON PAGE S-18 HEREIN AND ON
PAGE 13 IN THE PROSPECTUS.
THE CLASS A CERTIFICATES DO NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF THE
ORIGINATOR, THE SPONSOR, THE MASTER SERVICER, THE TRUSTEE OR ANY
AFFILIATE THEREOF. NEITHER THE CLASS A CERTIFICATES NOR THE
MORTGAGE LOANS ARE INSURED OR GUARANTEED BY ANY
GOVERNMENTAL AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
================================================================================
Price to Underwriting Proceeds to the
Public Discount(1) Sponsor(2)
- --------------------------------------------------------------------------------
Per Certificate 100.00% 0.40% 99.60%
- --------------------------------------------------------------------------------
Total $50,000,000 $200,000 $49,800,000
================================================================================
(1) The Sponsor has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933.
(2) Before deducting expenses, estimated to be $150,000.00
The Class A Certificates are offered subject to prior sale and subject to
the Underwriter's right to reject orders in whole or in part. It is expected
that delivery of the Class A Certificates will be made in book-entry form only
through the facilities of The Depository Trust Company ("DTC"), CEDEL S.A. and
the Euroclear System on or about November 22, 1996 (the "Closing Date"). The
Class A Certificates will be offered in Europe and in the United States of
America.
LEHMAN BROTHERS
November 15, 1996
There is currently no secondary market for the Class A Certificates.
The Underwriter intends to make a secondary market in the Class A Certificates,
but has no obligation to do so. For a discussion of certain risk factors
regarding an investment in the Class A Certificates, see "Risk Factors" herein
and in the Prospectus.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY
OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE
OF THE CLASS A CERTIFICATES AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL
IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY
TIME.
Until ninety days after the date of this Prospectus Supplement, all
dealers effecting transactions in the Class A Certificates, whether or not
participating in this distribution, may be required to deliver a Prospectus
Supplement and Prospectus. This is in addition to the obligation of dealers
acting as underwriters to deliver a Prospectus Supplement and Prospectus with
respect to their unsold allotments or subscriptions.
------------------------------
AVAILABLE INFORMATION
The Sponsor has filed a Registration Statement under the Securities
Act of 1933, as amended (the "1933 Act"), with the Securities and Exchange
Commission (the "Commission") on behalf of the Trust with respect to the Class
A Certificates offered pursuant to the Prospectus dated September 6, 1996 and
this Prospectus Supplement. For further information, reference is made to the
Registration Statement and amendments thereof and to the exhibits thereto,
which are available for inspection without charge at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549; 7 World Trade Center, 13th Floor, New York, New York 10048; and at
The Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of the Registration Statement and amendments thereof and
exhibits thereto may be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates.
REPORTS TO THE OWNERS
So long as the Class A Certificates are in book-entry form, monthly
and annual reports concerning the Class A Certificates and the Trust will be
sent by the Trustee to Cede & Co., as the nominee of DTC and as registered
Owner of the Class A Certificates pursuant to the Pooling and Servicing
Agreement. DTC will supply such reports to the Owners of the Class A
Certificates in accordance with its procedures. See "Risk Factors,"
"Description of the Securities -- Form of Securities" and "-- Reports to
Securityholders" in the Prospectus. To the extent required by the Securities
Exchange Act of 1934, as amended, the Trust will provide financial information
to the Owners which has been examined and reported upon, with an opinion
expressed by an independent public accountant; to the extent not so required,
such financial information will be unaudited. The Sponsor has determined that
the financial statements of no entity other than the Certificate Insurer are
material to the offering made hereby. The Trust will be formed to hold the
Mortgage Loans and certain other property, and to issue the Class A
Certificates. The Trust will have no assets or obligations prior to issuance of
the Class A Certificates and will engage in no activities other than those
described herein. Accordingly, no financial statements with respect to the
Trust are included in this Prospectus Supplement.
S-2
<PAGE>
SUMMARY
The following summary of certain pertinent information is qualified in
its entirety by reference to the detailed information appearing elsewhere in
this Prospectus Supplement and in the Prospectus. Certain capitalized terms
used in the Summary are defined elsewhere in the Prospectus Supplement or in
the Prospectus. Reference is made to the Index of Defined Terms herein and the
Index of Principal Definitions in the Prospectus for the definitions of certain
capitalized terms.
The Trust.................................. Advanta Revolving Home Equity Loan
Trust 1996-A will be formed
pursuant to a pooling and servicing
agreement (the "Pooling and
Servicing Agreement") to be dated
as of November 1, 1996 among the
Originator, the Sponsor, the Master
Servicer and the Trustee. The
property held by the Trust will
primarily consist of the Mortgage
Loans, which arise under certain
home equity revolving credit line
loan agreements (the "Credit Line
Agreements") and which are secured
by either first or junior mortgages
on residential properties (the
"Mortgaged Properties"). The
Trust's property will additionally
consist of the collections in
respect of the Mortgage Loans
received after the related Cut-Off
Date, property that secured a
Mortgage Loan which has been
acquired by foreclosure or deed in
lieu of foreclosure, the funds on
deposit in the Pre-Funding Account,
the Certificate Account, the
Principal and Interest Account, the
Capitalized Interest Account and
the Revolving Account, rights under
certain hazard insurance policies
covering the Mortgaged Properties
and certain other property, as
described more fully herein.
Any additional balances arising as
a result of future borrowings
("Draws") under the Credit Line
Agreements by Mortgagors subsequent
to the related Cut-Off Date will
automatically be assigned to the
Trust, and will result in an
immediate, corresponding increase
in the Originator's Interest, as
hereinafter described. Such
additional balances so assigned are
"Additional Balances." A
"Mortgagor" is the obligor on a
Credit Line Agreement.
Securities Offered......................... The Class A Certificates will be
issued pursuant to the Pooling and
Servicing Agreement and will
represent undivided interests
issued by the Trust. Each Class A
Certificate represents the right of
the related Owner to receive
payments of interest at the
variable rate described below (the
"Class A Interest Rate"), payable
monthly, and payments of principal
at such times and to the extent
provided below. The Class A
Certificates will be issued in an
original principal amount (the
"Original Class A Principal
Balance") equal to 98% of the sum
of (x) the Cut-Off Date Pool
Balance plus (y) the Original
Pre-Funded Amount.
The outstanding principal amount of
the Class A Certificates (the
"Class A Principal Balance") on any
date is equal to the Original Class
A Principal Balance minus the
aggregate of amounts actually
distributed theretofore as
principal to the Owners of the
Class A Certificates. See
"Description of the Class A
Certificates" herein.
S-3
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Originator................................. Advanta National Bank USA, a
national banking association (the
"Originator").
Sponsor.................................... Advanta Mortgage Conduit Services,
Inc., a Delaware corporation (the
"Sponsor").
Master Servicer............................ Advanta Mortgage Corp. USA, a
Delaware corporation (the "Master
Servicer").
Trustee.................................... Bankers Trust Company of
California, N.A., a national
banking association (the
"Trustee").
Certificate Insurer........................ MBIA Insurance Corporation (the
"Certificate Insurer").
Initial Cut-Off Date....................... With respect to the Initial
Mortgage Loans, the opening of
business on November 1, 1996 (the
"Initial Cut-Off Date").
Cut-Off Date............................... With respect to each Initial
Mortgage Loan, the Initial Cut-Off
Date. With respect to any
Subsequent Mortgage Loan, the
Subsequent Cut-Off Date related to
such Subsequent Mortgage Loan.
Subsequent Cut-Off Date.................... With respect to any Subsequent
Mortgage Loan, the opening of
business on the first day of the
calendar month in which the related
Subsequent Transfer Date occurs
(the "Subsequent Cut-Off Date").
Closing Date............................... On or about November 22, 1996.
The Initial Mortgage Loans................. Unless otherwise noted in this
Prospectus, all statistical
information included herein
relating to the Mortgage Loan pool
has been calculated with respect to
the Initial Mortgage Loans as of
the Initial Cut-Off Date. The
Initial Mortgage Loans consist of
1,282 Mortgage Loans (the "Initial
Mortgage Loans"), which are secured
by either a first or a junior
mortgage on Mortgaged Properties
located in approximately 28 states,
and have an aggregate Principal
Balance as of the Initial Cut-Off
Date of $38,501,016.94 (the
"Cut-Off Date Pool Balance"). See
"Description of the Mortgage Loans"
herein for more statistical
information relating to the pool of
Initial Mortgage Loans.
The Mortgage Loans arise pursuant
to the Credit Line Agreements.
Interest on each Mortgage Loan,
excluding introductory rates
offered from time to time during
promotional periods, is computed
and payable monthly on the average
daily outstanding principal balance
of such loan. From time to time
prior to the expiration of the
related draw period specified in
the related Credit Line Agreement,
principal amounts on the related
Mortgage Loan may be drawn down, or
may be repaid. New Draws under the
Mortgage Loans will automatically
become property of the Trust. As a
result, the aggregate Principal
Balance of the Mortgage Loans will
fluctuate from day to day as new
Draws by Mortgagors are added to
the Trust and principal payments
received are applied in reduction
thereof. Under the Credit Line
Agreements, during the related draw
period, the Mortgagor is obligated
to pay the amount
S-4
<PAGE>
of interest which accrues on the
loan during the billing cycle, but
may also pay all or a portion of the
principal. The interest only payment
obligation terminates at the end of
the related draw period, after which
the Mortgagor must begin paying at
least a minimum monthly portion of
the average outstanding principal
balance of the loan.
The "Principal Balance" of a
Mortgage Loan (other than a
Liquidated Mortgage Loan) on any
date is equal to its original
Principal Balance as of the related
Cut-Off Date plus (i) any
Additional Balances in respect of
such Mortgage Loan minus (ii) all
collections credited against the
Principal Balance of such Mortgage
Loan in accordance with the related
Credit Line Agreement prior to such
day. The "Principal Balance" of a
Liquidated Mortgage Loan after
final recovery of related
Liquidation Proceeds shall be zero.
Following the Closing Date, the
Trust may accept the transfer from
the Originator of certain Mortgage
Loans in addition to those
transferred to the Trust on the
Closing Date; such Mortgage Loans
may be transferred to the Trust (i)
as Pre-Funded Mortgage Loans, in
response to the Pre-Funding Account
feature of the Trust, (ii) as
Additional Mortgage Loans, in
response to the Revolving Period
feature of the Trust, or (iii) as
Mortgage Loans assigned to the
Trust in response to the
overcollateralization feature of
the Trust (the "O/C Mortgage
Loans"). The Pre-Funded Mortgage
Loans, the Additional Mortgage
Loans and the O/C Mortgage Loans
are collectively referred to as the
"Subsequent Mortgage Loans."
The Subsequent Mortgage Loans will
(subject to the availability
thereof and to certain limitations
and conditions) be assigned to the
Trust and will be required to meet
certain criteria specified in the
Pooling and Servicing Agreement as
of their respective Cut-Off Dates.
Pre-Funding Account Feature................ On the Closing Date, approximately
$12,519,391.22 (the "Original
Pre-Funded Amount") will be
deposited in the Pre-Funding
Account from the proceeds of the
sale of the Class A Certificates.
During the period (the "Pre-Funding
Period") from the Closing Date
until the earliest of (i) the date
on which the amount on deposit in
the Pre-Funding Account is less
than $100,000, (ii) the date on
which a Rapid Amortization Event
occurs or (iii) February 25, 1997,
the Originator may deliver the
Pre-Funded Mortgage Loans to the
Trustee in exchange for a
corresponding release of money from
the Pre-Funding Account in an
amount equal to the Principal
Balance of such Pre-Funded Mortgage
Loans as of the related Subsequent
Transfer Date. The Originator
expects that the Original
Pre-Funded Amount will be reduced
to less than $100,000 by February
25, 1997. Any amount remaining in
the Pre-Funding Account on the
Payment Date which immediately
follows the end of the Pre-Funding
Period will be used to prepay the
Class A Certificates; provided,
that if such remaining amount is
less than $100,000, such amount
shall be deposited in the Revolving
Account.
S-5
<PAGE>
Capitalized Interest Account............... On the Closing Date the Trustee
will be required to deposit a
portion of the proceeds of the sale
of the Class A Certificates in an
account (the "Capitalized Interest
Account") in the name of the
Trustee on behalf of the Trust. The
amount deposited therein will be
used, as necessary, by the Trustee
during the Pre-Funding Period and
the Revolving Period. Any amounts
deposited to the Capitalized
Interest Account and not so used
will be released to the Originator.
Revolving Period Feature................... On each Payment Date during the
Revolving Period, the Trustee will
be required to re- invest Net
Principal Collections on the
Mortgage Loans in additional
Mortgage Loans ("Additional
Mortgage Loans") rather than
applying all or any portion of such
amounts to the payment of the Class
A Principal Balance, thus resulting
(subject to the exceptions
described below) in an
"interest-only period" with respect
to the Class A Certificates. The
"Revolving Period" is the period
commencing on the Closing Date and
ending on the earliest of (i)
November 25, 1997, (ii) the
commencement of the Amortization
Period and (iii) the first Payment
Date on which Additional Mortgage
Loans having an aggregate,
cumulative Principal Balance
(calculated as of the related
Subsequent Transfer Dates) equal to
$10,204,081.63 have been assigned
to the Trust.
The "Rapid Amortization Period" is
the period commencing on the
earlier to occur of (A) the
occurrence of a Rapid Amortization
Event and (B) the termination of
the Managed Amortization Period,
and ending on the termination of
the Trust. The Rapid Amortization
Period and the Managed Amortization
Period, together, comprise the
"Amortization Period."
The "Net Principal Collections"
with respect to a Payment Date is
the excess of (x) Principal
Collections with respect to the
related Remittance Period over (y)
the aggregate principal amount of
all Additional Balances arising
during such related Remittance
Period, provided that in no event
will Net Principal Collections be
less than zero with respect to any
Payment Date.
The Owners of the Class A
Certificates may receive payments
of principal during the Revolving
Period as a result of any of the
following events:
Failure to utilize Pre-Funding
Account money -- If the amount
remaining in the Pre- Funding
Account on the Payment Date
immediately following the end of
the Pre- Funding Period is $100,000
or more, such remaining amount will
be paid to the Owners of the Class
A Certificates on such Payment Date
as a payment of principal.
Failure in availability of
Additional Mortgage Loans -- If,
during the Revolving Period, the
Trustee cannot reinvest Net
Principal Collections on any
Payment Date in Additional Mortgage
Loans due to the failure of the
Originator to supply a sufficient
amount of Additional Mortgage
Loans, the Trustee will hold such
Net Principal
S-6
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Collections in an account (the
"Revolving Account") pending the
availability, on future Payment
Dates during the Revolving Period,
of sufficient Additional Mortgage
Loans. If, however, on any Payment
Date the amount on deposit in the
Revolving Account (including any
such Net Principal Collections and
any Excess Cashflow deposited
therein, as described immediately
below) exceeds $3,000,000, then such
excess amount will be paid to the
Owners of the Class A Certificates
as a payment of principal.
Failure in availability of O/C
Mortgage Loans -- If the Trustee
cannot, during the Revolving
Period, reinvest Excess Cashflow on
any Payment Date during the
Revolving Period in O/C Mortgage
Loans due to the failure of the
Originator to supply a sufficient
number of O/C Mortgage Loans, the
Trustee will deposit such Excess
Cashflow to the Revolving Account
if, and only to the extent
necessary, to increase the
Overcollateralization Amount to the
Specified Overcollateralization
Amount. If, however, on any Payment
Date the amount on deposit in the
Revolving Account (including any
such Net Principal Collections and
any Excess Cashflow deposited
therein, as described immediately
below) exceeds $3,000,000 then such
excess amount will be paid to the
Owners of the Class A Certificates
as a payment of principal. See
"Overcollateralization Feature"
below.
The occurrence of any of the three
events described above will not, in
and of itself, result in the
termination of the Revolving Period
and the early commencement of the
Amortization Period.
The occurrence of any of the three
events described above would
result, generally, from a shortage
in availability of qualifying
Subsequent Mortgage Loans during
the Revolving Period. The
Originator does not, as of the date
of this offering, expect that any
such shortage in availability will
in fact arise during the Revolving
Period, and has agreed to
originate, and subsequently deliver
to the Trustee, a sufficient amount
of Subsequent Mortgage Loans such
that none of the events described
above will occur.
The Originator's Interest ................. Due to the overcollateralization
feature described below, as well as
the provisions which result in the
automatic assignment to the Trust
of the Additional Balances, the
interests of the Class A
Certificates with respect thereto,
as of any date, may represent less
than the full value of the property
of the Trust; as of any date, the
excess, if any, of the value of the
Trust property over the percentage
interests of the Class A
Certificates with respect thereto
is the "Originator's Interest". The
dollar amount of the Originator's
Interest, as of any Payment Date,
is the excess, if any, of (x) the
Trust Collateral Value as of such
Payment Date over (y) the Class A
Principal Balance as of such
Payment Date (after taking into
account reductions therein on such
Payment Date). The "Trust
Collateral Value" as of any Payment
Date is the sum of (i) the Pool
Balance at the end of the prior
calendar month, (ii) the aggregate
Principal Balances as of the
related Cut-Off Dates of all
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<PAGE>
Subsequent Mortgage Loans previously
assigned to the Trust during the
calendar month in which such Payment
Date occurs and (iii) the amounts,
if any, on deposit in the
Pre-Funding Account and the
Revolving Account at the close of
business on such Payment Date.
As of any date of determination,
all or a portion of the
Originator's Interest may be
subordinated to the interests of
the Class A Certificates; the
amount of the Originator's Interest
which is so subordinated is the
"Overcollateralization Amount".
Such portion so subordinated as of
any date will be equal to the
lesser of (x) the Originator's
Interest as of such date and (y)
the Specified Overcollateralization
Amount (defined below) for such
date. Any portion of the
Originator's Interest not
represented by the
Overcollateralization Amount is the
"Non-Subordinated Originator's
Interest" as of such date.
The excess of (x) the Trust
Collateral Value over (y) the
Non-Subordinated Originator's
Interest is sometimes referred to
as the "Invested Amount".
The "Minimum Originator's
Interest", as of any date of
determination, is an amount equal
to 2% of the Trust Collateral Value
as of such date.
The "Floating Allocation
Percentage", as of any Payment
Date, is the percentage equivalent
of a fraction, the numerator of
which is the Invested Amount as of
such Payment Date and the
denominator of which is the Trust
Collateral Value as of such Payment
Date.
Overcollateralization Feature.............. The Certificate Insurer will
require, based upon the terms and
conditions hereinafter described,
that the Overcollateralization
Amount be maintained at a certain
specified level, the "Specified
Overcollateralization Amount."
The Overcollateralization Amount as
of the Closing Date will be less
than the initial Specified
Overcollateralization Amount, thus
requiring an increase in the
Overcollateralization Amount on
future Payment Dates until the
Overcollateralization Amount equals
the Specified Overcollateralization
Amount.
Certain excess cashflow (the
"Excess Cashflow"), generally
consisting of the Floating
Allocation Percentage of the sum of
(i) excess interest (i.e., the
excess of interest collections on
the Mortgage Loans over Class A
Certificate interest payable, plus
certain fees) together with (ii)
Principal Collections not required
to be applied to Class A
Certificate principal amortization
or to Reimbursement Amounts, will
be applied on each Payment Date to
maintain the Overcollateralization
Amount at, or to increase it to,
the Specified Overcollateralization
Amount. The requirement to maintain
the Overcollateralization Amount at
the Specified Overcollateralization
Amount, or to increase it to the
Specified Overcollateralization
Amount, is not an obligation of the
Sponsor, the Originator, the Master
Servicer, the Trustee or any other
person, including the Certificate
Insurer.
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<PAGE>
Since the Overcollateralization
Amount will equal the subordinated
portion of the Originator's
Interest, which itself is equal to
the difference between the Trust
Collateral Value and the Class A
Principal Balance, the
Overcollateralization Amount may be
increased either by increasing the
Trust Collateral Value, decreasing
(i.e., amortizing) the Class A
Principal Balance, or a combination
of both.
Since the Originator intends to
maintain the Revolving Period as an
"interest-only" period, during the
Revolving Period the
overcollateralization requirements
of the Trust will be met (to the
extent of the Excess Cashflow
available), to the extent that
sufficient, qualifying O/C Mortgage
Loans are available, by the
Originator's delivery of O/C
Mortgage Loans to the Trustee in
exchange for the release of Excess
Cashflow to the Originator in an
amount equal to the aggregate
Principal Balances (as of the
related Subsequent Transfer Dates)
of such O/C Mortgage Loans; the
delivery of such O/C Mortgage Loans
will increase the Trust Collateral
Value and the Originator's
Interest, and thus the
Overcollateralization Amount.
If, on any Payment Date during the
Revolving Period, the Originator
cannot deliver to the Trustee
sufficient O/C Mortgage Loans to
satisfy the Specified
Overcollateralization Amount, the
Trustee will be required to deposit
the Excess Cashflow for such
Payment Date to the Revolving
Account. If, however, on any
Payment Date the amount on deposit
in the Revolving Account (including
any such Net Principal Collections
and any such Excess Cashflow
deposited therein) exceeds
$3,000,000, then such excess amount
will be paid to the Owners of the
Class A Certificates as a payment
of principal.
If, on any Payment Date during the
Amortization Period, to the extent
that the Overcollateralization
Amount is less than the Specified
Overcollateralization Amount, the
Trustee shall apply the Excess
Cashflow to the payment of Class A
Principal Balance (but only to the
extent necessary to increase the
Overcollateralization Amount to the
then Specified
Overcollateralization Amount).
The Certificate Insurer may permit
the Specified Overcollateralization
Amount to decrease over time,
subject to certain floors and
triggers. Since the
Overcollateralization Amount will
equal the lesser of (x) the
Originator's Interest as of such
date and (y) the Specified
Overcollateralization Amount for
such date, to the extent that
clause (y) controls (i.e., to the
extent that the Originator's
Interest is greater than the
Specified Overcollateralization
Amount), a reduction in the
Specified Overcollateralization
Amount will result in an automatic,
corresponding increase in the
Non-Subordinated Originator's
Interest (the dollar amount of any
such increase in the
Non-Subordinated Originator's
Interest on any Payment Date, the
"Overcollateralization Release
Amount"). Any such increases in the
Non-Subordinated Originator's
Interest which result from such
step-downs in the Specified
Overcollateralization Amount may be
released to the Originator, in cash
or as removed Mortgage Loans, as
Step-Down Amounts (net of any
S-9
<PAGE>
Reimbursement Amounts) on Payment
Dates occurring after such
step-downs take effect.
Priority of Claims on
Subsequent Mortgage Loans.................. On Payment Dates during the
Revolving Period there may be three
separate and distinct claims of the
Trust on the Originator's
production of loans which are
eligible to be assigned to the
Trust as Subsequent Mortgage Loans:
(i) the requirements of the Pre-
Funding Account feature, (ii) the
requirements of the Revolving
Period feature and (iii) the
requirements of the
overcollateralization feature. In
the event that the Originator does
not have available sufficient
production to satisfy completely
all such claims on any Payment Date
during the Revolving Period (which
the Originator expects to be the
case only on the December 26, 1996,
January 25, 1997 and February 25,
1997 Payment Dates, due to the
requirements of the Pre-Funding
Account feature on such Payment
Dates), the available production of
the Originator will be allocated:
first, to the requirements of the
Pre-Funding Account feature,
second, to the requirements of the
Revolving Period feature and third,
to the requirements of the
overcollateralization feature. A
result of the foregoing is that no
Subsequent Mortgage Loans will be
delivered to the Trustee as O/C
Mortgage Loans until all
Pre-Funding Account and Revolving
Account monies have been used.
Removal of Certain Mortgage Loans.......... Subject to certain conditions, and
upon notice to the Rating Agencies,
on any Payment Date the Originator
may, but shall not be obligated to
(except upon a breach of a
representation or warranty), remove
from the Trust certain Mortgage
Loans without notice to the Owners
of the Class A Certificates. The
Originator is permitted to
designate the Mortgage Loans to be
removed. Mortgage Loans so
designated will only be removed
upon satisfaction of certain
conditions specified in the Pooling
and Servicing Agreement, including:
(i) the Overcollateralization
Amount as of such Payment Date
(after giving effect to such
removal) exceeds the then Specified
Overcollateralization Amount; (ii)
the Originator's Interest as of
such Payment Date (after giving
effect to such removal) exceeds the
Minimum Originator's Interest;
(iii) the Originator shall have
delivered to the Trustee and the
Certificate Insurer and the Rating
Agencies a "Mortgage Loan Schedule"
containing a list of all Mortgage
Loans remaining in the Trust after
such removal; (iv) the Originator
shall represent and warrant that
random selection procedures were
used in selecting the Mortgage
Loans and no other selection
procedures which are adverse to the
interests of the Owners of the
Class A Certificates or the
Certificate Insurer were used by
the Originator in selecting such
Mortgage Loans; (v) no Rapid
Amortization Event shall have
theretofore occurred or will occur
as a result of such removal; and
(vi) the Originator shall have
delivered to the Trustee and the
Certificate Insurer an officer's
certificate confirming the
conditions set forth in clauses (i)
through (v) above.
Collections................................ All collections on the Mortgage
Loans will generally be allocated
in accordance with the Credit Line
Agreements between amounts
collected in respect of interest
and amounts collected in respect of
principal.
S-10
<PAGE>
As to any Payment Date, "Interest
Collections" will be equal to the
amounts collected during the
related Remittance Period,
including the portion of Net
Liquidation Proceeds (as defined
below) allocated to interest
pursuant to the terms of the Credit
Line Agreements, less the Servicing
Fee for the related Remittance
Period, together with certain
investment earnings.
As to any Payment Date, "Principal
Collections" will be equal to the
amounts collected during the
related Remittance Period,
including the portion of Net
Liquidation Proceeds, allocated to
principal pursuant to the terms of
the Credit Line Agreements.
"Net Liquidation Proceeds" with
respect to a Mortgage Loan are the
proceeds (excluding amounts drawn
on the Policy) received in
connection with the liquidation of
any Mortgage Loan, whether through
trustee's sale, foreclosure sale or
otherwise, reduced by related out-
of-pocket expenses and advances,
but not including the portion, if
any, of such amount that exceeds
the sum of (i) the Principal
Balance of the Mortgage Loan and
(ii) any accrued and unpaid
interest thereon to the end of the
Remittance Period during which such
Mortgage Loan became a Liquidated
Mortgage Loan.
The Master Servicer will deposit
Interest Collections and Principal
Collections in respect of the
Mortgage Loans in an account (the
"Principal and Interest Account")
established for such purpose under
the Pooling and Servicing
Agreement.
Remittance Period.......................... As to any Payment Date, the related
"Remittance Period" is the calendar
month preceding the month of such
Payment Date.
Interest................................... Interest on the Class A
Certificates will be payable
monthly on the twenty-fifth day of
each month or, if such day is not a
Business Day, then the next
succeeding Business Day (each, a
"Payment Date"), commencing on
December 26, 1996, at the Class A
Interest Rate for the related
Interest Accrual Period (as defined
below). The "Class A Interest Rate"
for an Interest Accrual Period will
generally equal the lesser of (i)
the sum of (a) the London Interbank
offered rate for one-month
Eurodollar deposits ("LIBOR")
appearing on the Telerate Screen
Page 3750, as of the second LIBOR
Business Day (as defined herein)
prior to the first day of such
Interest Accrual Period (or as of
two LIBOR Business Days prior to
the Closing Date, in the case of
the first Interest Accrual Period)
and (b) 0.23% (such rate, the
"Class A Formula Rate") and (ii)
the fraction, expressed as an
annual percentage rate, equal to
twelve times the interest due on
the Mortgage Loans during the prior
Remittance Period, minus the amount
of Prepayment Interest Shortfalls
and Relief Act Shortfalls for the
related Remittance Period (net of
the Servicing Fee, the fee payable
to the Trustee (the "Trustee's
Fee") and the Premium Amount)
divided by the Trust Collateral
Value immediately prior to the
related Payment Date, less,
commencing on the thirteenth
Payment Date, 0.50% (the "Net Funds
Cap Rate").
S-11
<PAGE>
In the event that, on any Payment
Date, the Net Funds Cap Rate is
less than the Class A Formula Rate
(i.e., the Class A Interest Rate
equals the Net Funds Cap Rate), the
excess of the amount of interest
due based on the Class A Formula
Rate, over the interest due based
on the Net Funds Cap Rate, together
with interest thereon at the
then-applicable Class A Formula
Rate, will be carried-forward (the
"Net Funds Cap Carry-Forward
Amount") and due on future Payment
Dates. The Certificate Insurer does
not guarantee the payment of, nor
do the ratings assigned to the
Class A Certificates address the
likelihood of payment of, any Net
Funds Cap Carry-Forward Amount.
Interest on the Class A
Certificates in respect of any
Payment Date will accrue from the
preceding Payment Date (or in the
case of the first Payment Date,
from the Closing Date) through the
day preceding such Payment Date
(each such period, an "Interest
Accrual Period") on the basis of
the actual number of days in the
Interest Accrual Period and a
360-day year. For any Payment Date,
the interest then due on the Class
A Certificates (calculated using
the Class A Interest Rate and
exclusive of any Net Funds Cap
Carry- Forward Amount) is the
"Class A Interest Distribution
Amount" for such Payment Date.
Scheduled Principal Payments............... The Amortization Period with
respect to the Class A Certificates
will commence on the Payment Date
on which the Revolving Period ends,
which will be no later than the
November, 1997 Payment Date. On
each Payment Date during the
Amortization Period, the Owners of
the Class A Certificates will be
entitled to receive the Scheduled
Principal Distribution Amount for
such Payment Date.
The Amortization Period is expected
to consist of two periods, the
Managed Amortization Period and the
Rapid Amortization Period. The
"Managed Amortization Period" is
the period commencing on the
Payment Date after which the
Revolving Period ends, and ending
on the earlier to occur of (x) the
November, 1999 Payment Date and (y)
the Payment Date which immediately
precedes the occurrence of a Rapid
Amortization Event. The "Rapid
Amortization Period" is the period
which follows the earlier to occur
of (x) the end of the Managed
Amortization Period and (y) the
occurrence of a Rapid Amortization
Event. If a Rapid Amortization
Event occurs during the Revolving
Period, the Rapid Amortization
Period will commence immediately,
and the Class A Certificates will
never have a Managed Amortization
Period.
On any Payment Date during the
Managed Amortization Period, the
Scheduled Principal Distribution
Amount shall equal the excess (but
in no event less than zero) of (x)
the lesser of (i) the Maximum
Principal Payment and (ii) the
Alternative Principal Payment over
(y) the Step-Down Amount, if any,
with respect to such Payment Date.
With respect to any Payment Date,
the "Maximum Principal Payment"
will equal 98% (the "Fixed
Allocation Percentage") of the
Principal Collections relating to
such Payment Date. With respect to
any Payment Date, the "Alternative
Principal Payment" will equal the
amount, but not less than
S-12
<PAGE>
zero, of Net Principal Collections
relating to such Payment Date. The
aggregate distributions of principal
to Owners will not exceed the
Original Class A Principal Balance.
Beginning with the first Payment
Date in the Rapid Amortization
Period, the Scheduled Principal
Distribution Amount on each Payment
Date will be equal to the excess of
(x) the Maximum Principal Payment
over (y) the Step-Down Amount, if
any, with respect to such Payment
Date. See "Description of the Class
A Certificates--Distributions on
the Class A Certificates."
As of any Payment Date, the
"Step-Down Amount" is the lesser of
(x) the Maximum Step-Down Amount
for such Payment Date and (y) the
Maximum Principal Payment or the
Alternative Principal Payment, as
applicable to such Payment Date. As
of any Payment Date the "Maximum
Step-Down Amount" is the excess of
(i) the aggregate, cumulative
amount of Overcollateralization
Release Amounts for such current,
and all prior, Payment Dates over
(ii) the aggregate, cumulative
amount of all Step-Down Amounts for
all prior Payment Dates; provided,
that for any Payment Date on which
the Specified Overcollateralization
Amount exceeds the
Overcollateralization Amount, the
Step-Down Amount will be reduced
(but not below zero) by the amount
of any such excess.
In addition, to the extent funds
are available therefor (including
funds available under the Policy),
on the Payment Date in December,
2021 (the "Final Scheduled Payment
Date"), the Owners of the Class A
Certificates will be entitled to
receive a payment of principal in
an amount equal to the outstanding
Class A Principal Balance. The
Final Scheduled Payment Date is the
date which is one year after the
date which is the latest possible
maturity date of a Mortgage Loan
which amortizes according to its
terms.
Accelerated Principal Payments............. The Owners of the Class A
Certificates may receive a payment
of Excess Cashflow on any Payment
Date, as a payment of principal
(any such payment, an "Accelerated
Principal Payment"), for the
purpose of increasing the
Overcollateralization Amount to the
Specified Overcollateralization
Amount applicable to such Payment
Date. During the Revolving Period
such Accelerated Principal Payments
will only occur if the amount then
on deposit in the Revolving Account
is in excess of $3,000,000.
Mandatory Prepayment at End
of Pre-Funding Period...................... In addition to the foregoing, on
the Payment Date which immediately
follows the end of the Pre-Funding
Period, if the Pre-Funding Account
amounts exceed $100,000, such
monies will be applied as a
prepayment of the Class A Principal
Balance.
S-13
<PAGE>
The Certificate Insurer and
the Policy................................. On the Closing Date, the
Certificate Insurer will issue the
Policy to the Trustee for the
benefit of the Owners of the Class
A Certificates.
The Policy will irrevocably and
unconditionally guarantee payment
on each Payment Date to the
Trustee, for the benefit of the
Owners of the Class A Certificates,
the full and complete payment of
(i) the Overcollateralization
Deficit, if any, with respect to
such Payment Date and (ii) accrued
and unpaid interest due on the
Class A Certificates calculated at
the Class A Interest Rate, if any
(together, the "Insured Payment"),
with such Insured Payment having
been calculated in accordance with
the original terms of the Class A
Certificates or the Pooling and
Servicing Agreement except for
amendments or modifications to
which the Certificate Insurer has
given its prior written consent.
The Policy will not cover the Net
Funds Cap Carry-Forward Amount,
Prepayment Interest Shortfalls or
Relief Act Shortfalls. The effect
of the Policy is to guarantee the
timely payment of interest on, and
the ultimate payment of the
original principal amount of, the
Class A Certificates.
The "Overcollateralization Deficit"
for any Payment Date shall be the
amount by which (i) the Class A
Principal Balance (after giving
effect to all other amounts
distributable and allocable to
principal on the Class A
Certificates on such Payment Date)
exceeds (ii) the excess of (x) the
Trust Collateral Value as of such
Payment Date over (y) the Non-
Subordinated Originator's Interest
as of such Payment Date. In
addition, the Policy will guarantee
the payment of the outstanding
Class A Principal Balance on the
Payment Date in December, 2021
(after giving effect to all other
amounts distributable and allocable
to principal on such Payment Date).
"Prepayment Interest Shortfalls"
are shortfalls in interest
collections that result from the
timing of prepayments.
"Relief Act Shortfalls" are
interest shortfalls resulting from
the application of the Soldiers'
and Sailors' Civil Relief Act of
1940, as amended. See "Certain
Legal Aspects of Mortgage Loans and
Related Matters -- Soldiers' and
Sailors' Civil Relief Act of 1940"
in the Prospectus.
Denominations.............................. The Class A Certificates will be
offered for purchase in
denominations of $1,000 and
multiples of $1 in excess thereof.
The "Percentage Interest" evidenced
by any particular Class A
Certificate will be equal to the
percentage derived by dividing the
original denomination of such Class
A Certificate by the Original Class
A Principal Balance.
Registration of
Class A Certificates....................... The Class A Certificates will
initially be issued in book-entry
form ("Book-Entry Certificates").
Persons acquiring beneficial
ownership interests in the Class A
Certificates (the "Beneficial
Owners") may elect to hold their
Class A Certificate interests
through The Depository Trust
S-14
<PAGE>
Company ("DTC"), in the United
States, or Centrale de Livraison de
Valeurs Mobilieres S.A. ("CEDEL") or
the Euroclear System ("Euroclear"),
in Europe. Transfers within DTC,
CEDEL or Euroclear, as the case may
be, will be in accordance with the
usual rules and operating procedures
of the relevant system. So long as
the Class A Certificates are
Book-Entry Certificates, such Class
A Certificates will be evidenced by
one or more Class A Certificates
registered in the name of Cede & Co.
("Cede"), as the nominee of DTC or
one of the relevant depositaries
(collectively, the "European
Depositaries"). Cross-market
transfers between persons holding
directly or indirectly through DTC,
on the one hand, and counterparties
holding directly or indirectly
through CEDEL or Euroclear, on the
other, will be effected in DTC
through Citibank N.A. ("Citibank")
or Morgan Guaranty Trust Company of
New York ("Morgan"), the relevant
depositaries of CEDEL or Euroclear,
respectively, and each a
participating member of DTC. The
Class A Certificates will initially
be registered in the name of Cede.
The interests of the Beneficial
Owners will be represented by book
entries on the records of DTC and
participating members thereof. No
Beneficial Owner will be entitled to
receive a definitive certificate
representing such person's interest,
except in the event that Physical
Certificates are issued under the
limited circumstances described
herein. All references in this
Prospectus Supplement to any Class A
Certificates reflect the rights of
Beneficial Owners only as such
rights may be exercised through DTC
and its participating organizations
for so long as such Class A
Certificates are held by DTC. See
"Risk Factors--Book-Entry
Certificates", "Description of the
Class A Certificates--Distributions
on the Class A Certificates" and
"Annex I" hereto.
Record Date................................ With respect to each Payment Date,
the last day of the calendar month
immediately preceding the calendar
month in which such Payment Date
occurs, or, if such day is not a
Business Day, the next preceding
Business Day.
Servicing.................................. The Master Servicer will be
responsible for servicing, managing
and making collections on the
Mortgage Loans. The Master Servicer
will deposit all collections in
respect of the Mortgage Loans into
the Principal and Interest Account
as described herein. On the 18th
day, or, if such day is not a
Business Day, the next succeeding
Business Day, of each month (the
"Remittance Date"), the Master
Servicer will remit the related
Interest Collections (net of the
Servicing Fee) and Principal
Collections to the Trustee. See
"Description of the Class A
Certificates--Distributions on the
Class A Certificates." With respect
to each Remittance Period, the
Master Servicer will receive a
monthly servicing fee (the
"Servicing Fee") in the amount of
approximately 0.50% per annum (the
"Servicing Fee Rate") on the
aggregate Principal Balances of the
Mortgage Loans as of the first day
of such Remittance Period. See
"Description of the Class A
Certificates--Servicing
Compensation and Payment of
Expenses." In certain limited
circumstances, the Master Servicer
may resign or be removed, in which
event either the Trustee or a
third-party servicer acceptable to
the
S-15
<PAGE>
Certificate Insurer will be
appointed as a successor Master
Servicer. See "Description of the
Class A Certificates--Certain
Matters Regarding the Master
Servicer."
Final Payment of
Principal; Termination..................... The Trust will terminate on the
Payment Date following the later of
(A) payment in full of all amounts
owing to the Certificate Insurer
and (B) the earliest of (i) the
Payment Date on which the Class A
Principal Balance has been reduced
to zero, (ii) the final payment or
other liquidation of the last
Mortgage Loan in the Trust, (iii)
the optional transfer to the
Originator of the Class A
Certificates, as described below,
and (iv) the Payment Date in
December, 2021. The Class A
Certificates will be subject to
optional transfer to the Originator
on any Payment Date after the Class
A Principal Balance is reduced to
an amount less than or equal to
$5,000,000 (10% of the Original
Class A Principal Balance) and all
amounts due and owing to the
Certificate Insurer and
unreimbursed draws on the Policy,
together with interest thereon,
have been paid. Such transfer will
only be permitted if the Originator
delivers to the Trustee an amount
equal to the sum of the outstanding
Class A Principal Balance and
accrued and unpaid interest thereon
at the Class A Interest Rate
through the day preceding the final
Payment Date plus all amounts due
to the Certificate Insurer and
unreimbursed draws on the Policy,
together with interest thereon (the
"Reimbursement Amount"). See "The
Pooling and Servicing
Agreement--Termination; Retirement
of Securities" in the Prospectus.
Mandatory Retransfer of
Certain Mortgage Loans..................... The Originator will make certain
representations and warranties in
the Pooling and Servicing Agreement
with respect to the Mortgage Loans.
If the Originator breaches certain
of its representations and
warranties with respect to any
Mortgage Loan and such breach
materially and adversely affects
the interests of the Owners of the
Class A Certificates or the
Certificate Insurer and such breach
is not cured within the specified
period, the Mortgage Loan will be
removed from the Trust upon the
expiration of a specified period
from the date on which the
Originator becomes aware or
receives notice of such breach and
will be reassigned to the
Originator. See "Description of the
Securities--Assignment of Mortgage
Loans" in the Prospectus.
Federal Tax
Considerations............................. Subject to the qualifications set
forth in "Certain Federal Income
Tax Consequences" herein, special
tax counsel to the Sponsor is of
the opinion that, under existing
law, a Class A Certificate will be
treated as a debt instrument for
federal income tax purposes as of
the Closing Date. Under the Pooling
and Servicing Agreement, the
Originator, the Sponsor and the
Owners of the Class A Certificates
will agree to treat the Class A
Certificates as indebtedness for
federal income tax purposes. See
"Certain Federal Income Tax
Consequences" herein and in the
Prospectus for additional
information concerning the
application of federal income tax
laws.
S-16
<PAGE>
ERISA Considerations....................... The Class A Certificates are not
eligible for acquisition by a
pension or other employee benefit
plan subject to the Employee
Retirement Income Security Act of
1974, as amended ("ERISA") or a
plan subject to Section 4975 of the
Internal Revenue Code (each a
"Plan") or a person investing "plan
assets" of a Plan (including,
without limitation, for this
purpose any insurance company
general account). By its acceptance
of a Class A Certificate, each
Owner will be deemed to have
represented and warranted that it
is not subject to the foregoing
limitation. See "ERISA
Considerations" herein and in the
Prospectus.
Legal Investment
Considerations............................. The Class A Certificates will not
constitute "mortgage related
securities" for purposes of the
Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA"),
because not all of the Mortgage
Loans are secured by first
mortgages. Accordingly, many
institutions with legal authority
to invest in comparably rated
securities based solely on first
mortgages may not be legally
authorized to invest in the Class A
Certificates. See "Legal Investment
Considerations" herein and "Legal
Investment Matters" in the
Prospectus.
Certificate Rating......................... It is a condition to the issuance
of the Class A Certificates that
they be rated "AAA" by Standard &
Poor's and "Aaa" by Moody's (each a
"Rating Agency"). In general,
ratings address credit risk and do
not address the likelihood of
prepayments or the likelihood of
the payment of any Net Funds Cap
Carry-Forward Amount. See "Ratings"
herein and "Risk Factors--Security
Rating" in the Prospectus.
S-17
<PAGE>
RISK FACTORS
Originator's Ability to Originate Subsequent Mortgage Loans
It is expected that the Revolving Period will be an "interest-only
period" with respect to the Class A Certificates, with the result that no
principal is expected to be paid to the Owners of the Class A Certificates
during the Revolving Period. If, however, during the Revolving Period, (i) the
Pre-Funding Account monies are not utilized to a certain extent, (ii) a
sufficient amount of Additional Mortgage Loans are not available for assignment
to the Trustee in exchange for Net Principal Collections or (iii) a sufficient
amount of O/C Mortgage Loans are not available for assignment to the Trustee in
exchange for Excess Cashflow, the Owners of the Class A Certificates may
receive payments of principal during the Revolving Period. See "Revolving
Period Feature" in the Summary. The occurrence of any of the three events
described above would result, generally, from a shortage in availability of
qualifying Subsequent Mortgage Loans during the Revolving Period. Therefore,
whether the Revolving Period is an "interest-only period" as expected, depends
in large part on the Originator's ability to originate Subsequent Mortgage
Loans. See "Social, Economic and Other Factors" herein. The Originator does
not, as of the date of this offering, expect that any shortage in availability
will in fact arise during the Revolving Period, and has agreed to originate,
and subsequently deliver to the Trustee, a sufficient amount of Subsequent
Mortgage Loans such that none of the events described above will occur.
However, if the Originator is unable to originate Subsequent Mortgage Loans as
expected, there is a risk that the Class A Certificates may receive payments of
principal during the Revolving Period.
Effect of Mortgage Loan Yield on Class A Interest Rate
The Class A Formula Rate is based upon the value of an index (LIBOR)
which may be different from the value of the index ("Prime") applicable to the
Mortgage Loans (either as a result of the use of a different index, rate
determination date, rate adjustment date or rate cap or floor) and is subject
to the Net Funds Cap Rate. Consequently, the weighted average of the Coupon
Rates which becomes due on such Mortgage Loans (net of the Servicing Fee, the
Trustee's Fee and certain premiums due to the Certificate Insurer) during any
Remittance Period may be less than the amount of interest that would accrue at
the Class A Formula Rate. See "Interest" in the Summary. In addition, LIBOR and
Prime may respond to different economic and market factors, and there is no
necessary correspondence between them. Thus, it is possible, for example, that
LIBOR may rise during a period in which Prime is stable or falling or that,
even if both LIBOR and Prime rise during the same period, LIBOR may rise much
more rapidly than Prime. Such disintermediation may result in the amount of
interest accrued on the Mortgage Loans during any calendar month being less
than the amount of interest payable to the Owners of the Class A Certificates
with respect to the related Interest Accrual Period. The Net Funds Cap Rate
effectively limits the amount of interest accrued on the Class A Certificates
to the fraction, expressed as an annual percentage rate, equal to twelve times
the interest due on the Mortgage Loans during the prior Remittance Period,
minus the amount of Prepayment Interest Shortfalls and Relief Act Shortfalls
for the related Remittance Period (net of the Servicing Fee, the fee payable to
the Trustee (the "Trustee's Fee") and the Premium Amount) divided by the Trust
Collateral Value immediately prior to the related Payment Date, less,
commencing on the thirteenth Payment Date, 0.50%.
Social, Economic and Other Factors
The ability of the Trust to invest in Subsequent Mortgage Loans is
dependent in part upon whether the Mortgagors thereunder perform their payment
and other obligations required by such Subsequent Mortgage Loans in order that
such Subsequent Mortgage Loans meet the specified requirements for transfer on
a Subsequent Cut-Off Date. The performance by such Mortgagors may be affected
as a result of a variety of social and economic factors. Economic factors
include interest rates, unemployment levels, the rate of inflation and
consumers' general perception of economic conditions. However, the Originator
is unable to determine and has no basis to predict whether or to what extent
economic or social factors will affect the performance by such Mortgagors and
the availability of Subsequent Mortgage Loans.
S-18
<PAGE>
Prepayment Considerations
All of the Mortgage Loans may be prepaid in full or in part at any
time. However, Mortgage Loans secured by Mortgaged Properties in certain
jurisdictions may be subject to account termination fees to the extent
permitted by law (the "Termination Fees"). In general, such Termination Fees do
not exceed $500 and do not apply to accounts terminated subsequent to a date
designated in the related Credit Line Agreement which, depending on the
jurisdiction may be during the Draw Period. Any such Termination Fees shall be
retained by the Master Servicer. The prepayment experience with respect to the
Mortgage Loans will affect the weighted average life of the Class A
Certificates. Home equity revolving credit line loans, such as the Mortgage
Loans, have been originated in significant volume only during the past few
years and neither the Sponsor nor the Master Servicer is aware of any publicly
available studies or statistics on the rate of prepayment of such loans.
Generally, home equity revolving credit line loans are not viewed by borrowers
as permanent financing. Accordingly, the Mortgage Loans may experience a higher
rate of prepayment than traditional loans. The Trust's prepayment experience
may be affected by a wide variety of factors, including general economic
conditions, interest rates, the availability of alternative financing and
homeowner mobility. In addition, substantially all of the Mortgage Loans
contain due-on-sale provisions and the Master Servicer intends to enforce such
provisions unless (i) such enforcement is not permitted by applicable law or
(ii) the Master Servicer, in a manner consistent with accepted servicing
practices, permits the purchaser of the related Mortgaged Property to assume
the Mortgage Loan. To the extent permitted by applicable law, such assumption
will not release the original borrower from its obligation under any such
Mortgage Loan. See "Description of the Class A Certificates" and "Maturity and
Prepayment Considerations" herein and "Risk Factors--Yield and Prepayment
Considerations" and "Maturity and Prepayment Considerations" in the Prospectus
for a description of certain provisions of the Credit Line Agreements that may
affect the prepayment experience on the Mortgage Loans.
Book-Entry Certificates
Issuance of the Class A Certificates in book-entry form may reduce the
liquidity of such Certificates in the secondary trading market since investors
may be unwilling to purchase Class A Certificates since they cannot obtain
physical certificates. See "Annex I" herein.
Since transactions in the Class A Certificates can be effected only
through DTC, CEDEL, Euroclear, participating organizations, indirect
participants and certain banks, the ability of a Beneficial Owner to pledge a
Certificate to persons or entities that do not participate in the DTC, CEDEL or
Euroclear system or otherwise to take actions in respect of such Certificates,
may be limited due to lack of a physical certificate representing the Class A
Certificates. See "Annex I" herein and "Description of the Securities--Form of
Securities" in the Prospectus.
Beneficial Owners may experience some delay in their receipt of
distributions of interest and principal on the Class A Certificates since such
distributions will be forwarded by the Trustee to DTC and DTC will credit such
distributions to the accounts of its participants which will thereafter credit
them to the accounts of Owners either directly or indirectly through indirect
participants. See "Description of the Class A Certificates--Distributions on
the Class A Certificates" herein.
Cash Flow Considerations
Generally, minimum monthly payments on the Mortgage Loans will at
least equal or may exceed accrued interest. Even assuming that the Mortgaged
Properties provide adequate security for the Mortgage Loans, substantial delays
could be encountered in connection with the liquidation of Mortgage Loans that
are delinquent and resulting shortfalls in distributions to Owners could occur
if the Certificate Insurer were unable to perform its obligations under the
Policy. Further, liquidation expenses (such as legal fees, real estate taxes,
and maintenance and preservation expenses) will reduce the proceeds payable to
Owners and thereby reduce the security for the Mortgage Loans. In the event any
of the Mortgaged Properties fail to provide adequate security for the related
Mortgage Loans, Owners could experience a loss if the Certificate Insurer were
unable to perform its obligations under the Policy.
S-19
<PAGE>
Certificate Rating
The rating of the Class A Certificates will depend primarily on an
assessment by the Rating Agencies of the claims-paying ability of the
Certificate Insurer. Any reduction in a rating assigned to the claims-paying
ability of the Certificate Insurer below the rating initially given to the
Class A Certificates may result in a reduction in the rating of the Class A
Certificates. The rating by the Rating Agencies of the Class A Certificates is
not a recommendation to purchase, hold or sell the Class A Certificates,
inasmuch as such rating does not comment as to the market price or suitability
for a particular investor. There is no assurance that the ratings will remain
in place for any given period of time or that the ratings will not be lowered
or withdrawn by the Rating Agencies. In general, the ratings address credit
risk and do not address the likelihood of prepayments. The ratings of the Class
A Certificates do not address the possibility of the imposition of United
States withholding tax with respect to non-U.S. persons or the likelihood of
payment of any Net Funds Cap Carry-Forward Amount.
Legal Considerations
If a conservator, receiver or trustee were appointed for the
Originator, or if certain other events relating to the bankruptcy or insolvency
of the Originator were to occur, the Rapid Amortization Period would commence
and the Trustee would attempt to sell the Mortgage Loans (unless the
Certificate Insurer instructs, or, with the consent of the Certificate Insurer,
the Owners holding Class A Certificates evidencing undivided interests
aggregating at least 51% of the Class A Principal Balance instruct otherwise),
thereby causing early payment of the Class A Principal Balance. Any such sale
will be "servicing retained" by the Master Servicer. The net proceeds of such
sale will first be paid to the Certificate Insurer to the extent of
unreimbursed draws under the Policy and other amounts owing to the Certificate
Insurer. The lesser of (i) the amount required to reduce the Class A Principal
Balance, together with all accrued and unpaid interest due thereon, to zero and
(ii) the Floating Allocation Percentage times such remaining amounts will be
distributed to the Owners and the Policy will cover any amounts by which such
remaining net proceeds are insufficient to pay the Class A Principal Balance in
full.
In the event of a bankruptcy or insolvency of the Master Servicer, the
bankruptcy trustee or receiver may have the power to prevent the Trustee or the
Owners from appointing a successor Master Servicer.
Master Servicer's and/or Originator's Ability to Change the Terms of the
Mortgage Loans
The Master Servicer and/or the Originator may agree to changes in the
terms of a Credit Line Agreement, provided that such changes do not adversely
affect the interest of the Owners or the Certificate Insurer, and, in the case
of the Master Servicer only, are consistent with accepted servicing practices.
There can be no assurance that changes in applicable law or the marketplace for
home equity revolving credit line loans or prudent business practice will not
result in changes in the terms of the Mortgage Loans.
Delinquent Mortgage Loans
The Trust will include Mortgage Loans which are 89 or fewer days
delinquent as of the related Cut-Off Date. The aggregate Principal Balance, as
of the Initial Cut-Off Date, of the Initial Mortgage Loans which are between 30
days and 89 days delinquent was $546,699.13.
Mortgage Loans Have an Interest-Only Feature During the Draw Period
In general, the Mortgage Loans may be drawn upon for a period of three
years, which period may be extended at the Originator's sole discretion (the
"Draw Period"). The Originator's decision to extend the Draw Period may include
a review of specific credit criteria. The minimum payment due during the Draw
Period will be the greater of $50.00 or the finance charges accrued on the
outstanding Principal Balance of the Mortgage Loan during the related billing
period. The minimum payment due during the period beginning after the Draw
Period (the "Repayment Period") will be an amount necessary to amortize the
balance due, plus interest and fees.
S-20
<PAGE>
The Mortgage Loans may have an interest-only feature during the Draw
Period. As a result, scheduled principal amortization (but not necessarily
principal from other sources, including prepayments) may be de minimus during
the related Draw Periods such that little, if any, principal payments based on
scheduled principal amortization may be paid to the Owners of the Class A
Certificates during such Draw Periods.
For a discussion of additional risks pertaining to the Class A
Certificates, see "Risk Factors" in the Prospectus.
THE MASTER SERVICER
General
The Master Servicer will service the Mortgage Loans in accordance with
the terms set forth in the Pooling and Servicing Agreement. The Master Servicer
may perform any of its obligations under the Pooling and Servicing Agreement
through one or more subservicers. Notwithstanding any such subservicing
arrangement, the Master Servicer will remain liable for its servicing duties
and obligations under the Pooling and Servicing Agreement as if the Master
Servicer alone were servicing the Mortgage Loans.
The Sponsor and the Master Servicer
The Sponsor, Advanta Mortgage Conduit Services, Inc., is a direct
subsidiary of Advanta Mortgage Corp. USA, the Master Servicer, and is an
indirect subsidiary of Advanta Corp., a Delaware corporation ("Advanta
Parent"), a publicly-traded company based in Springhouse, Pennsylvania with
assets as of September 30, 1996, in excess of $5.6 billion. Advanta Parent,
through its subsidiaries (including the Master Servicer), had managed assets
(including mortgage loans) in excess of $18.3 billion as of September 30, 1996.
See "The Sponsor and the Transferor" and "The Master Servicer" in the
Prospectus.
As of September 30, 1996, the Master Servicer and its subsidiaries
were servicing approximately 40,000 mortgage loans for their own account, or
for the account of the Sponsor's securitization trusts, representing an
aggregate outstanding principal balance of approximately $2.3 billion, and
approximately 42,000 mortgage loans for the account of others representing an
aggregate outstanding principal balance of approximately $2.1 billion. See "The
Master Servicer" in the Prospectus.
As of September 30, 1996, the Sponsor or its affiliates have issued,
and the Master Servicer services, 28 issues of mortgage pass-through securities
with an original balance of approximately $3.7 billion.
The Trustee and the Certificate Insurer may remove the Master
Servicer, and the Master Servicer may resign, only in accordance with the terms
of the Pooling and Servicing Agreement. No removal or resignation shall become
effective until the Trustee or a successor servicer acceptable to the
Certificate Insurer shall have assumed the Master Servicer's responsibilities
and obligations in accordance therewith. See "Description of the Class A
Certificates--Certain Matters Regarding the Master Servicer" herein and "The
Pooling and Servicing Agreement--Removal and Resignation of the Master
Servicer" in the Prospectus.
The Master Servicer may not assign its obligations under the Pooling
and Servicing Agreement, in whole or in part, unless it shall have first
obtained the written consent of the Trustee and the Certificate Insurer, which
consent is required not to be unreasonably withheld; provided, however, that
any assignee must meet the eligibility requirements for a successor servicer
set forth in the Pooling and Servicing Agreement. See "Description of the Class
A Certificates--Certain Matters Regarding the Master Servicer" and "The Pooling
and Servicing Agreement--Removal and Resignation of the Master Servicer" in the
Prospectus.
Upon removal or resignation of the Master Servicer, the Trustee may
solicit bids for a successor servicer and, pending the appointment of a
successor Master Servicer as a result of soliciting such bids, will be required
to
S-21
<PAGE>
serve as Master Servicer. If the Certificate Insurer fails to appoint a
successor Master Servicer and if the Trustee is unable to obtain a qualifying
bid and is prevented by law from acting as servicer, the Trustee will be
required to appoint, or petition a court of competent jurisdiction to appoint,
an eligible successor. Any successor is required to be acceptable to the
Certificate Insurer.
The Class A Certificates will not represent an interest in or
obligation of, nor are the Mortgage Loans guaranteed by, the Originator, the
Sponsor, the Master Servicer, the Trustee or any of their affiliates, nor will
they be insured or guaranteed by the Federal Deposit Insurance Corporation (the
"FDIC") or any other governmental agency or instrumentality.
THE ORIGINATOR
The Originator, an indirect wholly owned subsidiary of Advanta Corp.,
was chartered as a national bank in December 1962. From 1926 to 1962, the
Originator was a Delaware trust company. The Originator was acquired by Advanta
Corp. in 1982. Prior to the enactment of the Competitive Equality Bank Act of
1987 ("CEBA"), the Originator was a "non-bank" bank which did not, and
currently does not, make commercial loans.
The Originator operates under the National Banking Act and is subject
to examination, supervision and regulation by the Office of the Comptroller of
the Currency. The Originator's deposits are insured by the FDIC, and the
Originator is a member of the Federal Reserve Bank of Philadelphia and a member
of the Federal Home Loan Bank of Pittsburgh.
Under certain grandfathering provisions of CEBA, the Originator is not
required to register as a bank holding company, because the Originator was a
"non-bank" bank prior to the enactment of CEBA and complies with certain
restrictions set forth in CEBA. Consequently, Advanta Corp. is not subject to
Federal Reserve Board examination.
The principal executive office of the Originator is located at
Brandywine Corporate Center, 650 Naamans Road, Claymont Delaware 19703
(telephone: (302) 791-4400).
THE ORIGINATOR'S HOME EQUITY REVOLVING LINE OF CREDIT PROGRAM
Underwriting Procedures Relating to Home Equity Revolving Credit Line Loans
The following is a description of the underwriting procedures
customarily employed by the Originator with respect to home equity revolving
credit line loans. The underwriting process is intended to assess the
applicant's credit standing and repayment ability, the value and adequacy of
the real property as collateral and the characteristics of any current existing
mortgages. Such factors include the quality and location of the property, the
length of time the borrower has owned the property, amount of disposable
income, type of employment, length of employment, credit history, current and
pending debt obligations, payment habits and status of past and currently
existing mortgages.
Each applicant for a home equity revolving credit line loan is
required to complete an application which lists the applicant's liabilities,
income, credit and employment history and other demographic and personal
information. If information in the loan application demonstrates that there is
sufficient income and equity in the real property to justify making a home
equity revolving credit line loan, the Originator will conduct a further credit
investigation of the applicant. This investigation includes obtaining and
reviewing an independent credit bureau report on the credit history of the
applicant in order to evaluate the applicant's ability to repay. The credit
report typically contains information relating to such matters as credit
history with local merchants and lenders, installment debt payments and any
record of delinquencies, defaults, bankruptcy, collateral repossessions, suits
or judgments.
S-22
<PAGE>
Full and/or drive-by appraisals are generally performed on all home
equity revolving credit line loans. Such appraisals are determined on the basis
of an Originator-approved independent third-party, fee-based appraisal
completed on forms approved by Federal National Mortgage Association ("FNMA")
or Federal Home Loan Mortgage Corporation ("FHLMC"). To become approved as an
appraiser by the Originator, an appraiser must also submit a copy of their
license and demonstrate proof of an E&O Policy. Any drive-by evaluation is an
exterior examination of the premises by the appraiser to determine that the
property is in good condition. The appraisal is based on various factors,
including the market value of comparable homes and the cost of replacing the
improvement and generally is required to have been made not earlier than 120
days prior to the date of origination of the Mortgage Loan.
After obtaining all applicable employment, credit and property
information, the Originator uses a debt-to-income ratio to assist in
determining whether the prospective borrower has sufficient monthly income
available to support the payments of principal and interest on the home equity
revolving credit line loan in addition to any senior mortgage loan payments
(including any escrows for property taxes and hazard insurance premiums) and
other monthly credit obligations. The debt-to-income ratio is the ratio of the
borrower's total monthly payments (assumed to be based on the applicable fully
indexed interest rate plus a margin) to the borrower's gross monthly income.
Based on the foregoing, for loans with Combined Loan-to-Value Ratios of 85% or
less, the maximum monthly debt-to-income ratio is 50%. Variations in the
monthly debt-to-income ratios limits are permitted based on compensating
factors.
It is generally the Originator's policy to obtain an insured property
report before the Originator makes a home equity revolving credit line loan for
amounts less than or equal to $50,000; for loans in amounts greater than
$50,000, the Originator requires a full title policy. In addition, the
Originator requires proof of hazard and flood insurance, in each of the
jurisdictions where required.
Servicing of the Mortgage Loans
The Master Servicer has established standard policies for the
servicing and collection of the Mortgage Loans, substantially similar to the
procedures used by the Master Servicer to service its closed-end home-equity
product. Servicing includes, but is not limited to, (i) the collection and
aggregation of payments relating to the Mortgage Loans; (ii) the supervision of
delinquent Mortgage Loans, loss mitigation efforts, foreclosure proceedings
and, if applicable, the disposition of Mortgaged Properties; and (iii) the
preparation of tax related information in connection with the Mortgage Loans.
Billing statements are mailed monthly to the Mortgagors. The statement
details all debits and credits and specifies the minimum payment due and the
available credit line. Notice of changes in the applicable loan rate are
provided to the Mortgagor with such statements. Payments are due on varying
days of the month.
With respect to the Mortgage Loans, the general policy of the Master
Servicer is to initiate foreclosure on the underlying property (i) after a loan
has become delinquent and, in the judgement of the Master Servicer,
satisfactory arrangements cannot be made with the Mortgagor; (ii) if a notice
of default on a senior lien is received by the Master Servicer; or (iii) if
circumstances are discovered by the Master Servicer which would indicate that a
potential for loss exists. Foreclosure proceedings may be terminated if the
delinquency is cured. Mortgage Loans to borrowers in bankruptcy proceedings may
be restructured in accordance with law and with a view to maximizing recovery
of such loans, including any deficiencies.
Once foreclosure is initiated by the Master Servicer, a foreclosure
tracking system is used to monitor the progress of the proceedings. The system
includes state specific parameters to monitor whether proceedings are
progressing within the time frame typical for the state in which the property
is located. During the foreclosure proceeding, the Master Servicer determines
the amount of the foreclosure bid and whether to liquidate the loan.
After foreclosure, if the Mortgage Loan is secured by a first mortgage
lien, the Master Servicer may liquidate the Mortgaged Property and charge off
the home equity revolving credit line loan balance which was not
S-23
<PAGE>
recovered through liquidation proceeds. If the Mortgaged Property was subject to
a senior lien, the Master Servicer will either directly manage the foreclosure
sale of the property and satisfy such lien at the time of sale or take other
action as deemed necessary to protect the interest in the Mortgaged Property. If
in the judgment of the Master Servicer, the cost of maintaining or purchasing
the senior lien position exceeds the economic benefit of such action, the Master
Servicer will generally charge off the entire home equity revolving credit line
loan, not pursue any recovery against the related Mortgaged Property, but may
seek a money judgement against the borrower.
Servicing and charge-off policies and collection practices may change
over time in accordance with, among other things, the Master Servicer's
business judgment, changes in the portfolio and applicable laws and
regulations.
DESCRIPTION OF THE MORTGAGE LOANS
General
The Mortgage Loans were originated pursuant to loan agreements and
disclosure statements (the "Credit Line Agreements") and are secured by
mortgages or deeds of trust, which are either first or junior mortgages or
deeds of trust, on Mortgaged Properties. The "Mortgaged Properties" are the
properties securing the Mortgage Loans and consist primarily of residential
properties that are one- to four-family properties.
The aggregate Principal Balances of the Initial Mortgage Loans as of
the Initial Cut-Off Date is $38,501,016.94. As of the Initial Cut- Off Date,
none of the Initial Mortgage Loans were more than 89 days delinquent. The
average Principal Balance was $30,031.99, the minimum Principal Balance was $0,
the maximum Principal Balance was $243,507.16, the minimum Coupon Rate and the
maximum Coupon Rate were 7.25% and 16.25% per annum, respectively, and the
weighted average Coupon Rate was approximately 11.40% per annum. As of the
Initial Cut-Off Date, the weighted average Credit Limit Utilization Rate
(weighted by the Credit Limit total amount) was approximately 94.61%, the
minimum Credit Limit Utilization Rate was zero and the maximum Credit Limit
Utilization Rate was 103.3%. The "Credit Limit Utilization Rate" is determined
by dividing the Principal Balance of a Mortgage Loan by the Credit Limit of the
related Credit Line Agreement. The "Credit Limit" with respect to a Mortgage
Loan is the maximum dollar amount of draws permitted to be made thereunder at
any one time by the Mortgagor. The remaining term to scheduled maturity for the
Initial Mortgage Loans ranged from 259 months to 276 months and the weighted
average remaining term to scheduled maturity was approximately 272 months. The
Combined Loan-to-Value Ratio of the Initial Mortgage Loans ranged from 7.10% to
88.45% and the weighted average Combined Loan-to-Value Ratio was approximately
74.39%. The "Combined Loan-to-Value Ratio" for a Mortgage Loan is the ratio
(expressed as a percentage) of (A) the sum of (i) the Credit Limit of the
Mortgage Loan and (ii) any outstanding principal balances of mortgage loans
senior to such Mortgage Loan (calculated at the date of origination of the
Mortgage Loan) to (B) the lesser of (i) the appraised value of the related
Mortgaged Property as set forth in the loan files at such date of origination
or (ii) in the case of a Mortgaged Property purchased within one year of the
origination of the related Mortgage Loan, the purchase price of such Mortgaged
Property. Credit Limits under the Mortgage Loans ranged from $10,000 to
$246,000 and averaged approximately $31,744. The weighted average second
mortgage ratio (which is the Credit Limit for the related Mortgage Loan,
provided such Mortgage Loan was in the second lien position, divided by the sum
of such Credit Limit and the outstanding principal balance of any mortgage loan
senior to the related Mortgage Loan) for the Initial Mortgage Loans was
approximately 38.43%. 34.82% by Principal Balance of the Initial Mortgage Loans
represented first liens on the related Mortgaged Properties, while 65.18% by
Principal Balance of the Initial Mortgage Loans represented junior liens on the
related Mortgaged Properties. As of the Initial Cut-Off Date, 97.06% of the
Initial Mortgage Loans are secured by Mortgaged Properties which are
single-family residences and 99.71% thereof are owner-occupied. As of the
Initial Cut-Off Date, 14.74%, 12.32%, 11.44%, 8.38%, and 6.51%, by Principal
Balance of the Initial Mortgage Loans are secured by Mortgaged Properties which
are located in New Jersey, Pennsylvania, New York, Illinois and Ohio,
respectively.
S-24
<PAGE>
Mortgage Loan Terms
A borrower may access a Mortgage Loan by writing a check in a minimum
amount of $200. The Mortgage Loans bear interest at the "Index Rate" which is a
variable rate based on the prime rate or base rate published in the Money Rates
table of The Wall Street Journal. The Index Rate with respect to each Mortgage
Loan changes monthly. Each Mortgage Loan is subject to a one percent periodic
cap, a two percent annual cap and a lifetime cap equal to eight percent over
the prime rate plus the spread (the "Margin"). The Mortgage Loans will be
subject to a maximum per annum interest rate (the "Maximum Rate"). The Maximum
Rate for the Initial Mortgage Loans ranged from 17.25% to 24.00% per annum and
are subject to applicable usury limitations. The weighted average Maximum Rate
of the Initial Mortgage Loans was approximately 19.50%. See "Certain Legal
Aspects of Mortgage Loans and Related Matters--Applicability of Usury Laws" in
the Prospectus. The daily periodic rate on the Mortgage Loans (the "Coupon
Rate") is the sum of the Index Rate plus the Margin divided by 360 days. The
Margin for the Initial Mortgage Loans ranged between 1.00% and 8.00% and had a
weighted average as of the Initial Cut-Off Date of 3.21%.
Until April of 1996, the Originator offered an introductory loan rate
or "teaser rate" for the first six months of a loan on all home equity lines of
credit. Currently, no loans are offered with a "teaser rate". The introductory
rate applies to any payments made during the first six months after
origination. After such six month period, the Coupon Rate will adjust to the
Index plus the applicable Margin. Approximately 5.00% of the Initial Mortgage
Loans are currently subject to an introductory rate.
In general, the Mortgage Loans may be drawn upon for a period of three
years, which period may be extended at the Originator's sole discretion (the
"Draw Period"). The Originator's decision to extend the Draw Period may include
a review of specific credit criteria. The minimum payment due during the Draw
Period will be the greater of $50.00 or the finance charges accrued on the
outstanding Principal Balance of the Mortgage Loan during the related billing
period. The minimum payment due during the period beginning after the Draw
Period (the "Repayment Period") will be an amount necessary to amortize the
balance due, plus interest and fees.
Set forth below is a description of certain characteristics of the
Initial Mortgage Loans as of the Initial Cut-Off Date:
PRINCIPAL BALANCES
<TABLE>
<CAPTION>
Number of
Initial
Mortgage Percent of Pool by
Range of Principal Balances Loans Principal Balance Principal Balance
- ---------------------------------------- ------------------ ----------------------- -----------------------
<S> <C> <C> <C>
$ 0.00.......... 2 $ 0.00 0.00%
$ 0.01 to 25,000.00.......... 684 11,664,452.10 30.30
$ 25,000.01 to 50,000.00.......... 450 15,974,474.47 41.49
$ 50,000.01 to 75,000.00.......... 97 5,850,453.89 15.20
$ 75,000.01 to 100,000.00.......... 32 2,720,221.97 7.07
$100,000.01 to 125,000.00.......... 9 984,624.78 2.56
$125,000.01 to 150,000.00.......... 4 575,082.57 1.49
$150,000.01 to 175,000.00.......... 3 488,200.00 1.27
$225,000.01 to 250,000.00.......... 1 243,507.16 0.62
------------------ ----------------------- -----------------------
Total.......................... 1,282 $38,501,016.94 100.00%
================== ======================= =======================
</TABLE>
S-25
<PAGE>
GEOGRAPHIC DISTRIBUTION(1)
<TABLE>
<CAPTION>
Number of Percent of Pool
Initial by Principal
State Mortgage Loans Principal Balance Balance
- ----------------------------------- -------------------- ---------------------- ---------------------
<S> <C> <C> <C>
Arizona........................... 28 $ 715,706.46 1.86%
California........................ 20 784,710.45 2.04
Colorado.......................... 25 594,121.41 1.54
Connecticut....................... 13 425,259.86 1.10
Delaware.......................... 7 207,567.71 0.54
Florida........................... 54 1,523,811.16 3.96
Georgia........................... 35 867,048.06 2.25
Illinois.......................... 110 3,226,313.74 8.38
Indiana........................... 40 1,006,847.35 2.62
Kansas............................ 3 93,692.86 0.24
Kentucky.......................... 19 589,371.68 1.53
Louisiana......................... 1 15,000.00 0.04
Maryland.......................... 76 2,407,703.32 6.25
Michigan.......................... 64 1,662,006.42 4.32
Minnesota......................... 18 538,263.81 1.40
Missouri.......................... 14 436,685.76 1.13
Nevada............................ 24 703,362.86 1.83
New Jersey........................ 168 5,675,193.82 14.74
New York.......................... 124 4,402,645.84 11.44
North Carolina.................... 17 494,316.36 1.28
Ohio.............................. 85 2,507,508.65 6.51
Oregon............................ 29 1,114,770.79 2.90
Pennsylvania...................... 181 4,743,415.32 12.32
Tennessee......................... 5 130,660.40 0.34
Utah.............................. 5 130,199.42 0.34
Virginia.......................... 71 2,121,747.89 5.51
Washington........................ 40 1,212,976.52 3.15
Wisconsin......................... 6 170,109.02 0.44
-------------------- ---------------------- ---------------------
Total......................... 1,282 $38,501,016.94 100.00%
==================== ====================== =====================
</TABLE>
- ----------------------------
(1) Geographic location is determined by the address of the Mortgaged
Property securing the related Mortgage Loan.
S-26
<PAGE>
COMBINED LOAN-TO-VALUE RATIOS(1)
<TABLE>
<CAPTION>
Number of
Initial
Range of Combined Mortgage Percent of Pool by
Loan-to-Value Ratios Loans Principal Balance Principal Balance
- --------------------------------- ------------------ -------------------------- ----------------------
<S> <C> <C> <C>
0.01% to 10.00%................ 2 $ 34,734.90 0.09%
10.01% to 20.00%................ 10 239,764.04 0.62
20.01% to 30.00%................ 25 540,326.46 1.40
30.01% to 40.00%................ 24 752,772.90 1.96
40.01% to 50.00%................ 58 1,912,554.45 4.97
50.01% to 60.00%................ 82 2,611,751.10 6.78
60.01% to 70.00%................ 124 3,706,122.98 9.63
70.01% to 80.00%................ 305 9,296,565.86 24.15
80.01% to 85.00%................ 644 19,194,023.39 49.85
85.01% to 90.00%................ 8 212,400.86 0.55
------------------ -------------------------- ----------------------
Total....................... 1,282 $38,501,016.94 100.00%
================== ========================== ======================
</TABLE>
- ----------------------------
(1) The ratio (expressed as a percentage) of (A) the sum of (i) the Credit
Limit of the Mortgage Loans and (ii) any outstanding principal balances of
mortgage loans senior to the Mortgage Loans (calculated at the date of
origination of the Mortgage Loans) to (B) the lesser of (i) the appraised
value of the related Mortgaged Property as set forth in loan files at such
date of origination or (ii) in the case of a Mortgaged Property purchased
within one year of the origination of the related Mortgage Loan, the
purchase price of such Mortgaged Property.
PROPERTY TYPE
<TABLE>
<CAPTION>
Number of
Initial
Mortgage Percent of Pool by
Property Type Loans Principal Balance Principal Balance
- --------------------------------- ------------------ -------------------------- ----------------------
<S> <C> <C> <C>
Single Family................... 1,242 $37,368,986.81 97.06%
Two- to Four-Family............. 24 708,183.07 1.84
Condominium/PUD................. 13 339,405.87 0.88
Other........................... 3 84,441.19 0.22
------------------ -------------------------- ----------------------
Total....................... 1,282 $38,501,016.94 100.00%
================== ========================== ======================
</TABLE>
LIEN PRIORITY
<TABLE>
<CAPTION>
Number of
Initial
Mortgage Percent of Pool by
Lien Priority Loans Principal Balance Principal Balance
- --------------------------------- ------------------- -------------------------- ----------------------
<S> <C> <C> <C>
First Lien...................... 309 $13,406,658.32 34.82%
Junior Lien..................... 973 25,094,358.62 65.18
------------------- -------------------------- ----------------------
Total....................... 1,282 $38,501,016.94 100.00%
=================== ========================== ======================
</TABLE>
S-27
<PAGE>
LOAN RATES(1)
<TABLE>
<CAPTION>
Number of
Initial
Mortgage Percent of Pool by
Range of Loan Rates Loans Principal Balance Principal Balance
- --------------------------------- ------------------ -------------------------- ----------------------
<S> <C> <C> <C>
7.001% to 7.500%.......... 2 $ 48,023.36 0.11%
8.001% to 8.500%.......... 2 108,203.28 0.28
8.501% to 9.000%.......... 2 69,788.25 0.18
9.001% to 9.500%.......... 36 1,627,264.46 4.23
9.501% to 10.000%.......... 31 1,319,652.17 3.43
10.001% to 10.500%.......... 154 6,161,215.10 16.00
10.501% to 11.000%.......... 178 7,161,468.40 18.60
11.001% to 11.500%.......... 227 6,914,172.77 17.96
11.501% to 12.000%.......... 236 6,817,223.93 17.71
12.001% to 12.500%.......... 174 3,602,001.68 9.36
12.501% to 13.000%.......... 77 1,641,245.95 4.26
13.001% to 13.500%.......... 47 964,758.03 2.51
13.501% to 14.000%.......... 56 1,091,811.72 2.84
14.001% to 14.500%.......... 49 805,882.77 2.09
14.501% to 16.500%.......... 11 168,305.07 0.44
------------------ -------------------------- ----------------------
Total................... 1,282 $38,501,016.94 100.00%
================== ========================== ======================
</TABLE>
- ----------------------------
(1) Approximately 5% of the Initial Mortgage Loans by Principal Balance are
currently subject to an introductory rate or "teaser rate".
CREDIT LIMITS
<TABLE>
<CAPTION>
Number of
Initial
Mortgage Percent of Pool by
Range of Credit Limits Loans Principal Balance Principal Balance
- -------------------------------------- ------------------ ------------------------ -----------------------
<S> <C> <C> <C>
$ 0.01 to $25,000.00 ....... 637 $10,752,191.55 27.93%
$ 25,000.01 to $50,000.00 ....... 494 16,722,879.06 43.43
$ 50,000.01 to $75,000.00 ....... 99 5,865,492.53 15.23
$ 75,000.01 to $100,000.00 ....... 31 2,566,038.79 6.66
$100,000.01 to $125,000.00........ 12 1,267,375.28 3.29
$125,000.01 to $150,000.00........ 4 575,082.57 1.49
$150,000.01 to $175,000.00........ 4 508,450.00 1.33
$225,000.01 to $250,000.00........ 1 243,507.16 0.64
------------------ ------------------------ -----------------------
Total............................ 1,282 $38,501,016.94 100.00%
================== ======================== =======================
</TABLE>
S-28
<PAGE>
MAXIMUM MORTGAGE RATES
<TABLE>
<CAPTION>
Number of
Initial
Range of Maximum Mortgage Percent of Pool by
Mortgage Rates Loans Principal Balance Principal Balance
- --------------------------------- ------------------ -------------------------- ----------------------
<S> <C> <C> <C>
17.001% to 17.500%.............. 33 $1,588,876.25 4.13%
17.501% to 18.000%.............. 12 617,088.60 1.60
18.001% to 18.500%.............. 141 5,377,319.34 13.97
18.501% to 19.000%.............. 187 7,956,077.76 20.66
19.001% to 19.500%.............. 216 6,577,340.83 17.08
19.501% to 20.000%.............. 251 7,440,326.67 19.33
20.001% to 20.500%.............. 189 3,903,321.14 10.14
20.501% to 21.000%.............. 83 1,798,051.65 4.67
21.001% to 21.500%.............. 47 1,030,890.75 2.68
21.501% to 22.000%.............. 51 950,757.62 2.47
22.001% to 22.500%.............. 56 1,037,026.29 2.69
22.501% to 23.000%.............. 13 179,067.71 0.47
23.001% to 23.500%.............. 2 25,113.25 0.07
23.501% to 24.000%.............. 1 19,759.08 0.04
------------------ -------------------------- ----------------------
Total....................... 1,282 $38,501,016.94 100.00%
================== ========================== ======================
</TABLE>
MARGIN
<TABLE>
<CAPTION>
Number of
Initial
Mortgage Percent of Pool by
Range of Margins Loans Principal Balance Principal Balance
- --------------------------------- ------------------ -------------------------- ----------------------
<S> <C> <C> <C>
0.501% to 1.000%................ 11 $ 594,984.30 1.55%
1.001% to 1.500%................ 29 1,370,641.41 3.56
1.501% to 2.000%................ 70 3,001,288.15 7.80
2.001% to 2.500%................ 194 8,503,370.56 22.09
2.501% to 3.000%................ 183 5,681,276.65 14.76
3.001% to 3.500%................ 266 7,350,967.70 19.09
3.501% to 4.000%................ 264 6,536,847.94 16.98
4.001% to 4.500%................ 76 1,773,815.00 4.61
4.501% to 5.000%................ 53 1,096,165.64 2.85
5.001% to 5.500%................ 47 1,082,787.34 2.81
5.501% to 6.000%................ 41 745,482.53 1.94
6.001% to 6.500%................ 37 598,512.07 1.54
6.501% to 8.000%................ 11 164,877.65 0.42
------------------ -------------------------- ----------------------
Total....................... 1,282 $38,501,016.94 100.00%
================== ========================== ======================
</TABLE>
S-29
<PAGE>
CREDIT LIMIT UTILIZATION RATES
<TABLE>
<CAPTION>
Number of
Initial
Range of Credit Mortgage Percent of Pool by
Limit Utilization Rates Loans Principal Balance Principal Balance
- --------------------------------- ------------------ ------------------------- ----------------------
<S> <C> <C> <C>
00.00% ......... 2 $ 0.00 0.00%
10.01% to 20.00% ......... 3 26,768.00 0.06
20.01% to 30.00% ......... 5 25,792.21 0.07
30.01% to 40.00% ......... 12 98,367.44 0.26
40.01% to 50.00% ......... 17 234,701.17 0.61
50.01% to 60.00% ......... 19 274,234.11 0.71
60.01% to 70.00% ......... 28 560,578.01 1.46
70.01% to 80.00% ......... 49 1,030,087.28 2.68
80.01% to 90.00% ......... 64 1,762,892.87 4.58
90.01% to 100.00% ......... 1,047 33,207,619.42 86.25
100.01% to 105.00%.......... 36 1,279,976.43 3.32
----- -------------- -------
Total.................... 1,282 $38,501,016.94 100.00%
===== ============== =======
</TABLE>
MONTHS REMAINING TO SCHEDULED MATURITY
<TABLE>
<CAPTION>
Number of
Initial
Range of Months Remaining Mortgage Percent of Pool by
to Scheduled Maturity Loans Principal Balance Principal Balance
- --------------------------------- ------------------ -------------------------- ----------------------
<S> <C> <C> <C>
259 to 264...................... 54 $ 2,126,838.16 5.53%
265 to 270...................... 185 6,007,508.17 15.60
271 to 276...................... 1,043 30,366,670.61 78.87
------------------ -------------------------- ----------------------
Total....................... 1,282 $38,501,016.94 100.00%
================== ========================== ======================
</TABLE>
ORIGINATION YEAR
<TABLE>
<CAPTION>
Number of
Initial
Mortgage Percent of Pool by
Origination Year Loans Principal Balance Principal Balance
- --------------------------------- ------------------ -------------------------- ----------------------
<S> <C> <C> <C>
1995............................ 82 $ 2,991,790.67 7.77%
1996............................ 1,200 35,509,226.27 92.23
------------------ -------------------------- ----------------------
Total....................... 1,282 $38,501,016.94 100.00%
================== ========================== ======================
</TABLE>
S-30
<PAGE>
OCCUPANCY STATUS
<TABLE>
<CAPTION>
Number of
Initial
Mortgage Percent of Pool by
Occupancy Status Loans Principal Balance Principal Balance
- --------------------------------- ------------------ -------------------------- ----------------------
<S> <C> <C> <C>
Owner occupied.................. 1,277 $38,388,603.77 99.71%
Non-owner occupied.............. 5 112,413.17 0.29
------------------ ----------------------
--------------------------
Total....................... 1,282 $38,501,016.94 100.00%
================== ========================== ======================
</TABLE>
DISTRIBUTION OF SEASONING
<TABLE>
<CAPTION>
Number of
Initial
Months Elapsed Since Mortgage Percent of Pool by
Origination Loans Principal Balance Principal Balance
- --------------------------- ------------------ -------------------------- ----------------------
<S> <C> <C> <C>
1-6..................... 1,033 $30,189,500.87 78.41%
7-12.................... 195 6,184,677.91 16.06
13-18.................... 54 2,126,838.16 5.53
----- -------------- ------
Total................ 1,282 $38,501,016.94 100.00%
===== ============== ======
</TABLE>
DELINQUENCY STATUS
<TABLE>
<CAPTION>
Number of
Initial
Mortgage Percent of Pool by
Number of Days Delinquent Loans Principal Balance Principal Balance
- --------------------------------- ------------------ -------------------------- ----------------------
<S> <C> <C> <C>
Current......................... 1,262 37,954,317.81 98.58%
30 to 59 days................... 18 489,400.85 1.27
60 to 89 days................... 2 57,298.28 0.15
------------------ -------------------------- ----------------------
Total....................... 1,282 $38,501,016.94 100.00%
================== ========================== ======================
</TABLE>
S-31
<PAGE>
MATURITY AND PREPAYMENT CONSIDERATIONS
The Pooling and Servicing Agreement, except as otherwise described
herein, provides that the Owners of the Class A Certificates will be entitled
to receive on each Payment Date payments of principal, in the amounts described
herein, until the Class A Principal Balance is reduced to zero.
The Amortization Period with respect to the Class A Certificates will
commence on the Payment Date on which the Revolving Period ends, which will be
no later than the November, 1997 Payment Date. On each Payment Date during the
Amortization Period, the Owners of the Class A Certificates will be entitled to
receive the Scheduled Principal Distribution Amount for such Payment Date.
The Amortization Period is expected to consist of two periods, the
Managed Amortization Period and the Rapid Amortization Period. The "Managed
Amortization Period" is the period commencing on the Payment Date after which
the Revolving Period ends, and ending on the earlier to occur of (x) the
November, 1999 Payment Date and (y) the Payment Date which immediately precedes
the occurrence of a Rapid Amortization Event. The "Rapid Amortization Period"
is the period which follows the earlier to occur of (x) the end of the Managed
Amortization Period and (y) the occurrence of a Rapid Amortization Event. If a
Rapid Amortization Event occurs during the Revolving Period, the Rapid
Amortization Period will commence immediately, and the Class A Certificates
will never have a Managed Amortization Period.
On any Payment Date during the Managed Amortization Period, the
Scheduled Principal Distribution Amount shall equal the excess (but in no event
less than zero) of (x) the lesser of (i) the Maximum Principal Payment and (ii)
the Alternative Principal Payment over (y) the Step-Down Amount, if any, with
respect to such Payment Date. With respect to any Payment Date, the "Maximum
Principal Payment" will equal 98% (the "Fixed Allocation Percentage") of the
Principal Collections relating to such Payment Date. With respect to any
Payment Date, the "Alternative Principal Payment" will equal the amount, but
not less than zero, of Net Principal Collections relating to such Payment Date.
The aggregate distributions of principal to Owners will not exceed the Original
Class A Principal Balance.
Beginning with the first Payment Date in the Rapid Amortization
Period, the Scheduled Principal Distribution Amount on each Payment Date will
be equal to the excess of (x) the Maximum Principal Payment over (y) the
Step-Down Amount, if any, with respect to such Payment Date.
Because prior payments of principal to Owners of the Class A
Certificates serve to reduce the percentage of the Trust Collateral Value
represented by the Class A Principal Balance, payments of principal based on
the Fixed Allocation Percentage (which is fixed at 98%) may result in
distributions of principal to the Owners of the Class A Certificates in amounts
that are, in most cases, greater relative to the declining balance of the Trust
Collateral Value. This is especially true during the Rapid Amortization Period.
In addition, the Owners of the Class A Certificates may receive a payment of
Excess Cashflow on any Payment Date, as a payment of principal (any such
payment, an "Accelerated Principal Payment"), for the purpose of increasing the
Overcollateralization Amount to the Specified Overcollateralization Amount
applicable to such Payment Date. During the Revolving Period such Accelerated
Principal Payments will only occur if the amount then on deposit in the
Revolving Account is in excess of $3,000,000. The level of losses may therefore
affect the rate of payment of principal on the Class A Certificates.
To the extent obligors make more draws than principal payments, the
Originator's Interest may grow. Because during the Rapid Amortization Period
the Owners share of Principal Collections is based upon the Fixed Allocation
Percentage (without reduction), an increase in the Originator's Interest due to
additional draws may also result in Owners receiving principal at a greater
rate. The Pooling and Servicing Agreement permits the Originator, at its
option, but subject to the satisfaction of certain conditions specified in the
Pooling and Servicing Agreement, including the conditions described below, to
remove certain Mortgage Loans from the Trust at any time during the life of the
Trust, so long as the Originator's Interest (after giving effect to such
removal) is not less than the Minimum Originator's Interest and the
Overcollateralization Amount (after giving effect to such removal) exceeds
S-32
<PAGE>
the then specified Overcollateralization Amount. Such removals may affect the
rate at which principal is distributed to Owners by reducing the overall Pool
Balance and thus the amount of Principal Collections. See "Description of the
Class A Certificates--Optional Transfers of Mortgage Loans to the Originator"
herein.
All of the Mortgage Loans may be prepaid in full or in part at any
time. However, Mortgage Loans secured by Mortgaged Properties in certain
jurisdictions may be subject to Termination Fees to the extent permitted by
law. In general, such account termination fees do not exceed $500 and do not
apply to accounts terminated subsequent to a date designated in the related
Credit Line Agreement which, depending on the jurisdiction may be during the
Draw Period. Any such termination fees shall be retained by the Master
Servicer. The prepayment experience with respect to the Mortgage Loans will
affect the weighted average life of the Class A Certificates.
The rate of prepayment on the Mortgage Loans cannot be predicted.
Neither the Sponsor nor the Master Servicer is aware of any publicly available
studies or statistics on the rate of prepayment of such Mortgage Loans.
Generally, home equity revolving credit lines are not viewed by borrowers as
permanent financing. Accordingly, the Mortgage Loans may experience a higher
rate of prepayment than traditional first mortgage loans. On the other hand,
because the Mortgage Loans amortize as described herein, rates of principal
payment on the Mortgage Loans will generally be slower than those of
traditional fully-amortizing first mortgages in the absence of prepayments on
such Mortgage Loans. The prepayment experience of the Trust with respect to the
Mortgage Loans may be affected by a wide variety of factors, including general
economic conditions, prevailing interest rate levels, the availability of
alternative financing, homeowner mobility, the frequency and amount of any
future draws on the Credit Line Agreements and changes affecting the
deductibility for federal income tax purposes of interest payments on home
equity revolving credit lines. Substantially all of the Mortgage Loans contain
"due-on-sale" provisions, and, with respect to the Mortgage Loans, the Master
Servicer intends to enforce such provisions, unless such enforcement is not
permitted by applicable law. The enforcement of a "due-on-sale" provision will
have the same effect as a prepayment of the related Mortgage Loan. See "Certain
Legal Aspects Of Mortgage Loans And Related Matters--"Enforceability of Certain
Provisions" in the Prospectus.
The yield to an investor who purchases the Class A Certificates in the
secondary market at a price other than par will vary from the anticipated yield
if the rate of prepayment on the Mortgage Loans is actually different than the
rate anticipated by such investor at the time such Class A Certificates were
purchased.
Collections on the Mortgage Loans may vary because, among other
things, borrowers may make payments during any month as low as the minimum
monthly payment for such month or as high as the entire outstanding principal
balance plus accrued interest and the fees and charges thereon. It is possible
that borrowers may fail to make scheduled payments. Collections on the Mortgage
Loans may vary due to seasonal purchasing and payment habits of borrowers.
No assurance can be given as to the level of prepayments that will be
experienced by the Trust.
POOL FACTOR AND TRADING INFORMATION
The "Pool Factor" is a seven-digit decimal which the Trustee will
compute monthly expressing the Class A Principal Balance as of each Payment
Date (after giving effect to any distribution of principal on such Payment
Date) as a proportion of the Original Class A Principal Balance. On the Closing
Date, the Pool Factor will be 1.0000000. See "Description of the Class A
Certificates--Distributions on the Class A Certificates" herein. Thereafter,
the Pool Factor will decline to reflect reductions in the related Class A
Principal Balance resulting from distributions of principal to the Class A
Certificates.
Pursuant to the Pooling and Servicing Agreement, monthly reports
concerning the Trust and the Class A Certificates will be made available to the
Owners and the Certificate Insurer. In addition, within 60 days after the end
of each calendar year, beginning with the 1997 calendar year, information for
tax reporting purposes will be
S-33
<PAGE>
made available to each person who has been a Owner of record at any time during
the preceding calendar year. See "Description Of The Class A
Certificates--Book-Entry Certificates" and "--Reports to Owners" herein.
DESCRIPTION OF THE CLASS A CERTIFICATES
The Class A Certificates will be issued pursuant to the Pooling and
Servicing Agreement. The following summaries describe certain provisions of the
Pooling and Servicing Agreement. The summaries do not purport to be complete
and are subject to, and are qualified in their entirety by reference to, all of
the provisions of the Pooling and Servicing Agreement. Wherever particular
sections or defined terms of the Pooling and Servicing Agreement are referred
to, such sections or defined terms are hereby incorporated herein by reference.
General
The Class A Certificates will be issued in denominations of $1,000 and
multiples of $1 in excess thereof and will evidence undivided interests issued
by the Trust. Physical Certificates, if issued, will be transferable and
exchangeable at the corporate trust office of the "Registrar," which is the
Trustee, acting in its capacity as Trustee, until the Trustee appoints a
successor thereto acceptable to the Certificate Insurer. See "Description Of
The Securities--Form of Securities" in the Prospectus. No service charge will
be made for any registration of exchange or transfer of Class A Certificates,
but the Trustee may require payment of a sum sufficient to cover any tax or
other governmental charge.
The Originator has the right to sell or pledge the Originator's
Interest at any time, provided (i) the Rating Agencies have notified the
Originator, the Certificate Insurer and the Trustee in writing that such action
will not result in the reduction or withdrawal of the ratings assigned to the
Class A Certificates, or adversely affect the interest of the Certificate
Insurer in any material manner, and (ii) certain other conditions specified in
the Pooling and Servicing Agreement are satisfied.
Amendments to Credit Line Agreements
The Master Servicer and/or the Originator may agree to changes in the
terms of a Credit Line Agreement, provided that such changes (i) do not
adversely affect the interest of the Owners or the Certificate Insurer, and
(ii) are consistent with accepted servicing practices. There can be no
assurance that changes in applicable law or the marketplace for home equity
revolving credit line loans or prudent business practice will not result in
changes in the terms of the Mortgage Loans.
Optional Transfers of Mortgage Loans to the Originator
Subject to certain conditions, on any Payment Date the Originator may,
but shall not be obligated to (except upon a breach of a representation or
warranty), remove from the Trust certain Mortgage Loans without notice to the
Owners of the Class A Certificates. The Originator is permitted to designate
the Mortgage Loans to be removed. Mortgage Loans so designated will only be
removed upon satisfaction of certain conditions specified in the Pooling and
Servicing Agreement, including: (i) the Overcollateralization Amount as of such
Payment Date (after giving effect to such removal) exceeds the then Specified
Overcollateralization Amount; (ii) the Originator's Interest as of such Payment
Date (after giving effect to such removal) exceeds the Minimum Originator's
Interest; (iii) the Originator shall have delivered to the Trustee, the
Certificate Insurer and the Rating Agencies a "Mortgage Loan Schedule"
containing a list of all Mortgage Loans remaining in the Trust after such
removal; (iv) the Originator shall represent and warrant that random selection
procedures were used in selecting the Mortgage Loans and no other selection
procedures which are adverse to the interests of the Owners of the Class A
Certificates or the Certificate Insurer were used by the Originator in
selecting such Mortgage Loans; (v) no Rapid Amortization Event shall have
theretofore occurred or will occur as a result of such removal; and (vi) the
Originator shall have delivered to the Trustee and the Certificate Insurer an
officer's certificate confirming the conditions set forth in clauses (i)
through (v) above.
S-34
<PAGE>
Payments on Mortgage Loans; Deposits to Principal and Interest Account
All collections on the Mortgage Loans will generally be allocated in
accordance with the Credit Line Agreements between amounts collected in respect
of interest and amounts collected in respect of principal. As to any Payment
Date, "Interest Collections" will be equal to the amounts collected during the
related Remittance Period, including such portion of Net Liquidation Proceeds
(as defined below), allocated to interest pursuant to the terms of the Credit
Line Agreements less Servicing Fees for the related Remittance Period.
As to any Payment Date, "Principal Collections" will be equal to the
amounts collected during the related Remittance Period, including such portion
of Net Liquidation Proceeds, allocated to principal pursuant to the terms of
the Credit Line Agreements.
"Net Liquidation Proceeds" with respect to a Mortgage Loan are equal
to the Liquidation Proceeds, reduced by related out-of-pocket expenses and
advances, but not including the portion, if any, of such amount that exceeds
the sum of (i) the Principal Balance of the Mortgage Loan and (ii) any accrued
and unpaid interest thereon to the end of the Remittance Period during which
such Mortgage Loan became a Liquidated Mortgage Loan.
"Liquidation Proceeds" are the proceeds (excluding any amounts drawn
on the Policy) received in connection with the liquidation of any Mortgage
Loan, whether through trustee's sale, foreclosure sale or otherwise.
The Master Servicer will deposit Interest Collections and Principal
Collections in respect of the Mortgage Loans in an account (the "Principal and
Interest Account") established for such purpose under the Pooling and Servicing
Agreement.
The "Net Principal Collections" with respect to a Payment Date is the
excess of (x) Principal Collections with respect to the related Remittance
Period over (y) the aggregate principal amount of all Additional Balances
arising during such related Remittance Period, provided, that in no event will
Net Principal Collections be less than zero with respect to any Payment Date.
The Trustee will deposit any amounts drawn under the Policy into the
Certificate Account.
With respect to any date, the "Pool Balance" will be equal to the
aggregate of the Principal Balances of all Mortgage Loans as of such date. The
"Principal Balance" of a Mortgage Loan (other than a Liquidated Mortgage Loan)
on any date is equal to its Principal Balance as of the related Cut-Off Date
plus (i) any Additional Balances in respect of such Mortgage Loan minus (ii)
all collections credited against the Principal Balance of such Mortgage Loan in
accordance with the related Credit Line Agreement prior to such day. The
"Principal Balance" of a Liquidated Mortgage Loan after final recovery of
related Liquidation Proceeds shall be zero.
Conveyance of the Subsequent Mortgage Loans
Subject to certain conditions, the Originator may, on certain dates
(the "Subsequent Transfer Dates") specified in certain transfer agreements
entered into after the Closing Date (the "Subsequent Transfer Agreements"),
deliver to the Trustee loans eligible to become Subsequent Mortgage Loans on
the next following Payment Date, in exchange, on such Payment Date, for monies
released to the Originator as described below under "Flow of Funds", or for a
corresponding increase in the Originator's Interest.
On Payment Dates during the Revolving Period there may be three
separate and distinct claims of the Trust on the Originator's production of
loans which are eligible to be assigned to the Trust as Subsequent Mortgage
Loans: (i) the requirements of the Pre-Funding Account feature, (ii) the
requirements of the Revolving Period feature and (iii) the requirements of the
overcollateralization feature. In the event that the Originator does not have
available sufficient production to satisfy completely all such claims on any
Payment Date during the Revolving Period (which the Originator expects to be
the case only on the December 26, 1996, January 25, 1997 and February 25, 1997
Payment Dates, due to the requirements of the Pre-Funding Account feature on
such Payment Date) the
S-35
<PAGE>
Pooling and Servicing Agreement requires that the available production of the
Originator be allocated: first, to the requirements of the Pre-Funding Account
feature, second, to the requirements of the Revolving Period feature and third,
to the requirements of the overcollateralization feature. A result of the
foregoing is that no Subsequent Mortgage Loans will be delivered to the Trustee
as O/C Mortgage Loans until all Pre-Funding Account monies have been used.
Upon assignment of any Additional Mortgage Loan to the Trust, the
Trustee shall release to the Originator an amount equal to the Principal
Balance thereof as of the related Subsequent Cut-Off Date, as described in
clause (vii) below under "Flow of Funds".
Upon assignment of any Pre-Funded Mortgage Loan to the Trust, the
Trustee shall release to the Originator an amount equal to the Principal
Balance thereof as of the related Subsequent Cut-Off Date from amounts then on
deposit in the Pre-Funding Account.
Upon assignment of any O/C Mortgage Loan to the Trust, the Trustee
shall release to the Originator an amount equal to the Principal Balance
thereof as of the related Subsequent Cut-Off Date, as described in clause (x)
below under "Flow of Funds".
Distributions on the Class A Certificates
Beginning with the first Payment Date (which will occur on December
26, 1996), distributions on the Class A Certificates will be made by the
Trustee or the Paying Agent on each Payment Date to the persons in whose names
such Certificates are registered at the close of business on the day prior to
each Payment Date or, if the Class A Certificates are no longer Book-Entry
Certificates, at the close of business on the last day of the month preceding
such Payment Date (the "Record Date"). The term "Payment Date" means the
twenty-fifth day of each month or, if such day is not a Business Day, then the
next succeeding Business Day. Distributions will be made by check or money
order mailed (or upon the request of a Owner owning Class A Certificates having
denominations aggregating at least $1,000,000, by wire transfer or otherwise)
to the address of the person entitled thereto (which, in the case of Book-Entry
Certificates, will be DTC or its nominee) as it appears on the register of
owners of Class A Certificates (the "Certificate Register") maintained by the
Registrar on the Record Date in amounts calculated as described below. However,
the final distribution in respect of the Class A Certificates will be made only
upon presentation and surrender thereof at the office or the agency of the
Trustee specified in the notice to Owners of such final distribution. For
purposes hereof, a "Business Day" is any day other than (i) a Saturday or
Sunday or (ii) a day on which banking institutions in the State of New York or
in the city in which the principal corporate trust office of the Trustee is
located, are authorized or obligated by law or executive order to be closed.
Flow of Funds
The Trustee shall deposit to a certain account, which shall be called
the "Certificate Account," without duplication, upon receipt, (i) any Insured
Payments, (ii) the proceeds of any liquidation of the assets of the Trust, the
Principal Collections, Interest Collections (net of the Servicing Fee) and
certain other amounts remitted by the Master Servicer or any Sub-Servicer,
together with certain other specified amounts which may be delivered to the
Trustee in connection with retransfers of Mortgage Loans to the Originator,
(iii) the Pre-Funding Account earnings, (iv) the amounts, if any, to be
transferred from the Capitalized Interest Account, (v) amounts, if any,
transferred from the Pre-Funding Account, pursuant to clause (vi) below and
(vi) amounts, if any, transferred from the Revolving Account pursuant to
clauses (vi), (vii), (viii) and (x) below.
With respect to the Certificate Account, on each Payment Date, the
Trustee shall make the following allocations, disbursements and transfers in
the following order of priority, and each such allocation, transfer and
disbursement shall be treated as having occurred only after all preceding
allocations, transfers and disbursements have occurred:
(i) first, to the Trustee, the Trustee's Fee then due;
S-36
<PAGE>
(ii) second, to the Originator, the Originator's Current
Amount, if any, for such Payment Date;
(iii) third, from amounts then on deposit in the Certificate
Account, the premium payable to the Certificate Insurer
(the "Premium Amount");
(iv) fourth, to the Owners of the Class A Certificates, the
Class A Interest Distribution Amount for such Payment Date;
(v) fifth, to the Owners of the Class A Certificates, as a
distribution of principal, the Overcollateralization
Deficit for such Payment Date;
(vi) sixth, if such Payment Date is the first Payment Date
following the end of the Pre-Funding Period, to the Owners
of the Class A Certificates as a distribution of principal
any amount remaining in the Pre-Funding Account (after
taking into account all transfers of Subsequent Mortgage
Loans on or prior to such Payment Date); provided, that if
such remaining amount is less than $100,000, such amount
shall be deposited in the Revolving Account and shall be
deemed to be on deposit in the Revolving Account on such
Payment Date; provided that, if the amount on deposit in
the Revolving Account exceeds $3,000,000, the amount of
such excess shall be distributed to the Owners of the Class
A Certificates as a distribution of principal;
(vii) seventh, for each Payment Date during the Revolving Period
to the Originator, in exchange for the Originator's
transfer as of such Payment Date of the Additional Mortgage
Loans, an amount equal to the lesser of (A) the sum of (i)
Net Principal Collections for the related Remittance Period
and (ii) the amount on deposit in the Revolving Account at
the opening of business on such Payment Date and (B) the
aggregate Principal Balances as of the related Subsequent
Cut- Off Date of all Additional Mortgage Loans relating to
such Payment Date; provided, that if the amount described
in clause (A) exceeds the amount described in clause (B),
an amount equal to such excess shall be deposited to (or
retained in) the Revolving Account and shall be deemed to
be on deposit in the Revolving Account on such Payment
Date; provided that, if the amount on deposit in the
Revolving Account exceeds $3,000,000, the amount of such
excess shall be distributed to the Owners of the Class A
Certificates as a distribution of principal;
(viii) eighth, for each Payment Date during the Amortization
Period, to the Owners of the Class A Certificates as a
distribution of principal, the Scheduled Principal
Distribution Amount for such Payment Date; plus, if such
Payment Date is the first Payment Date occurring during the
Amortization Period, all amounts then on deposit in the
Revolving Account, after taking into account any deposits
thereto and any withdrawals therefrom on such Payment Date;
(ix) ninth, to the Certificate Insurer, the Reimbursement
Amount, if any, then due to it;
(x) tenth, in satisfaction of the overcollateralization
requirements, the Excess Cashflow shall be:
(A) during the Revolving Period,
(1) released to the Originator, in exchange for the
O/C Mortgage Loans, to the extent available, or
(2) deposited to the Revolving Account, if such O/C
Mortgage Loans are not available, or, if such
deposit would result in the amount on deposit in
such account being in excess of $3,000,000, the
amount of such excess shall be applied as an
Accelerated Principal Payment, and
(B) during the Amortization Period, applied as an
Accelerated Principal Payment;
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(xi) eleventh, to the Master Servicer, reimbursement for
Servicing Advances to the extent not previously reimbursed
and reimbursement for Servicing Advances which have become
nonrecoverable;
(xii) twelfth, to the Owners of the Class A Certificates, the
amount of any Net Funds Cap Carry- Forward Amount then due;
and
(xiii) thirteenth, to the Originator, any amount remaining on
deposit in the Certificate Account.
As used in clause (ii) above, the "Originator's Current Amount" for a
Payment Date is equal to the sum of (I) the product of (x) 100% minus the
Floating Allocation Percentage for such Payment Date; (y) Interest Collections
for such Payment Date and (z) a fraction equal to the Non-Subordinated
Originator's Interest divided by the Originator's Interest plus (II) the
product of (x) the difference between (i) during the Managed Amortization
Period, the Net Principal Collections on the Mortgage Loans received during the
related Remittance Period, and during the Rapid Amortization Period, the
Principal Collections on the Mortgage Loans received during the related
Remittance Period, and (ii) during the Managed Amortization Period, the lesser
of the Alternative Principal Payment and the Maximum Principal Payment for such
Payment Date, and during the Rapid Amortization Period, the Maximum Principal
Payment for such Payment Date and (y) a fraction, equal to the Non-Subordinated
Originator's Interest divided by the Originator's Interest.
Interest on the Class A Certificates will be payable monthly on the
twenty-fifth day of each month or, if such day is not a Business Day, then the
next succeeding Business Day (each, a "Payment Date"), commencing on December
26, 1996, at the Class A Interest Rate for the related Interest Accrual Period
(as defined below). The "Class A Interest Rate" for an Interest Accrual Period
will generally equal the lesser of (i) the sum of (a) the London Interbank
offered rate for one-month Eurodollar deposits ("LIBOR") appearing on the
Telerate Screen Page 3750, as of the second LIBOR Business Day (as defined
herein) prior to the first day of such Interest Accrual Period (or as of two
LIBOR Business Days prior to the Closing Date, in the case of the first
Interest Accrual Period) and (b) 0.23% (such rate, the "Class A Formula Rate")
and (ii) the fraction, expressed as an annual percentage rate, equal to twelve
times the interest due on the Mortgage Loans during the prior Remittance
Period, minus the amount of Prepayment Interest Shortfalls and Relief Act
Shortfalls for the related Remittance Period (net of the Servicing Fee, the fee
payable to the Trustee (the "Trustee's Fee") and the Premium Amount) divided by
the Trust Collateral Value immediately prior to the related Payment Date, less,
commencing on the thirteenth Payment Date, 0.50% (the "Net Funds Cap Rate").
Calculation of the LIBOR Rate. On each Payment Date, LIBOR shall be
established by the Trustee and as to any Interest Accrual Period, LIBOR will
equal the rate for United States dollar deposits for one month which appears on
the Telerate Screen Page 3750 as of 11:00 A.M., London time, on the second
LIBOR Business Day prior to the first day of such Interest Accrual Period.
"Telerate Screen Page 3750" means the display designated as page 3750 on the
Telerate Service (or such other page as may replace page 3750 on that service
for the purpose of displaying London interbank offered rates of major banks).
If such rate does not appear on such page (or such other page as may replace
that page on that service, or if such service is no longer offered, such other
service for displaying LIBOR or comparable rates as may be selected by the
Sponsor after consultation with the Trustee), the rate will be the Reference
Bank Rate. The "Reference Bank Rate" will be determined on the basis of the
rates at which deposits in U.S. Dollars are offered by the reference banks
(which shall be three major banks that are engaged in transactions in the
London interbank market, selected by the Sponsor after consultation with the
Trustee) as of 11:00 A.M., London time, on the day that is two LIBOR Business
Days prior to the immediately preceding Payment Date to prime banks in the
London interbank market for a period of one month in amounts approximately
equal to the principal amount of the Class A Certificates then outstanding. The
Trustee will request the principal London office of each of the reference banks
to provide a quotation of its rate. If at least two such quotations are
provided, the rate will be the arithmetic mean of the quotations. If on such
date fewer than two quotations are provided as requested, the rate will be the
arithmetic mean of the rates quoted by one or more major banks in New York
City, selected by the Sponsor after consultation with the Trustee, as of 11:00
A.M., New York City time, on such date for loans in U.S. Dollars to leading
European banks for a period of one month in amounts
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approximately equal to the principal amount of the Class A Certificates then
outstanding. If no such quotations can be obtained, the rate will be LIBOR for
the prior Payment Date. "LIBOR Business Day" means any day other than (i) a
Saturday or a Sunday or (ii) a day on which banking institutions in the State of
New York or in the city of London, England are required or authorized by law to
be closed.
Distributions of Principal Collections
The Amortization Period with respect to the Class A Certificates will
commence on the Payment Date on which the Revolving Period ends, which will be
no later than the November, 1997 Payment Date. On each Payment Date during the
Amortization Period, the Owners of the Class A Certificates will be entitled to
receive the Scheduled Principal Distribution Amount for such Payment Date.
The Amortization Period is expected to consist of two periods, the
Managed Amortization Period and the Rapid Amortization Period. The "Managed
Amortization Period" is the period commencing on the Payment Date after which
the Revolving Period ends, and ending on the earlier to occur of (x) the
November, 1999 Payment Date and (y) the Payment Date which immediately precedes
the occurrence of a Rapid Amortization Event. The "Rapid Amortization Period"
is the period which follows the earlier to occur of (x) the end of the Managed
Amortization Period and (y) the occurrence of a Rapid Amortization Event. If a
Rapid Amortization Event occurs during the Revolving Period the Rapid
Amortization Period will commence immediately, and the Class A Certificates
will never have a Managed Amortization Period.
On any Payment Date during the Managed Amortization Period, the
Scheduled Principal Distribution Amount shall equal the excess (but in no event
less than zero) of (x) the lesser of (i) the Maximum Principal Payment and (ii)
the Alternative Principal Payment over (y) the Step-Down Amount, if any, with
respect to such Payment Date. With respect to any Payment Date, the "Maximum
Principal Payment" will equal 98% (the "Fixed Allocation Percentage") of the
Principal Collections relating to such Payment Date. With respect to any
Payment Date, the "Alternative Principal Payment" will equal the amount, but
not less than zero, of Net Principal Collections relating to such Payment Date.
The aggregate distributions of principal to Owners will not exceed the Original
Class A Principal Balance.
Beginning with the first Payment Date in the Rapid Amortization
Period, the Scheduled Principal Distribution Amount on each Payment Date will
be equal to the excess of (x) the Maximum Principal Payment over (y) the
Step-Down Amount, if any, with respect to such Payment Date.
As of any Payment Date, the "Step-Down Amount" is the lesser of (x)
the Maximum Step-Down Amount for such Payment Date and (y) the Maximum
Principal Payment or the Alternative Principal Payment, as applicable to such
Payment Date. As of any Payment Date the "Maximum Step-Down Amount" is the
excess of (i) the aggregate, cumulative amount of Overcollateralization Release
Amounts for such current, and all prior, Payment Dates over (ii) the aggregate,
cumulative amount of all Step-Down Amounts for all prior Payment Dates;
provided, that for any Payment Date on which the Specified
Overcollateralization Amount exceeds the Overcollateralization Amount, the
Step-Down Amount will be reduced (but not below zero) by the amount of any such
excess.
In addition, to the extent funds are available therefor (including
funds available under the Policy), on the Payment Date in December, 2021, the
Owners of the Class A Certificates will be entitled to receive a payment of
principal in an amount equal to the outstanding Class A Principal Balance.
Rapid Amortization Events
As described above, the Managed Amortization Period will continue
through the Payment Date in November, 1999, unless a Rapid Amortization Event
occurs prior to such date in which case the Rapid Amortization Period will
commence immediately. "Rapid Amortization Event" refers to any of the following
events:
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(a) failure on the part of the Originator (i) to make a
payment or deposit required under the Pooling and Servicing Agreement
within three Business Days after the date such payment or deposit is
required to be made or (ii) to observe or perform in any material
respect any other covenants or agreements of the Originator set forth
in the Pooling and Servicing Agreement, which failure continues
unremedied for a period of 60 days after written notice;
(b) any representation or warranty made by the Originator in
the Pooling and Servicing Agreement proves to have been incorrect in
any material respect when made and continues to be incorrect in any
material respect for a period of 60 days after written notice and as a
result of which the interests of the Owners or the Certificate Insurer
are materially and adversely affected: provided, however, that a Rapid
Amortization Event shall not be deemed to occur if the Originator has
purchased or made a substitution for the related Mortgage Loan or
Mortgage Loans if applicable during such period (or within an
additional 60 days with the consent of the Trustee and the Certificate
Insurer) in accordance with the provisions of the Pooling and
Servicing Agreement;
(c) the occurrence of certain events of bankruptcy,
insolvency or receivership relating to the Originator;
(d) the Trust becomes subject to regulation by the Securities
and Exchange Commission as an investment company within the meaning of
the Investment Company Act of 1940, as amended;
(e) a claim is made under the Policy; or
(f) the removal of the Master Servicer following the
occurrence of an event permitting such removal. See
"Certain Matters Regarding the Master Servicer" herein.
In the case of any event described in clause (a), (b) or (f), a Rapid
Amortization Event will be deemed to have occurred only if, after the
applicable grace period, if any, described herein or in the Pooling and
Servicing Agreement, either the Trustee with the consent of the Certificate
Insurer or Owners holding Class A Certificates evidencing more than 51% of the
aggregate principal amount of the Class A Certificates with the consent of the
Certificate Insurer or the Certificate Insurer (so long as there is no
continuing default by the Certificate Insurer in the performance of its
obligations under the Policy), by written notice to the Certificate Insurer,
the Sponsor, the Originator and the Master Servicer (and to the Trustee, if
given by the Owners) declare that a Rapid Amortization Event has occurred as of
the date of such notice. In the case of any event described in clause (c), (d)
or (e), a Rapid Amortization Event will be deemed to have occurred without any
notice or other action on the part of the Trustee, Owners or the Certificate
Insurer immediately upon the occurrence of such event.
In addition to the consequences of a Rapid Amortization Event
discussed above, if the Originator voluntarily files a bankruptcy petition or
goes into liquidation or any person is appointed a receiver or bankruptcy
trustee of the Originator, on the day of any such filing or appointment no
further Additional Balances will be transferred to the Trust, and the
Originator will promptly give notice to the Trustee and the Certificate Insurer
of any such filing or appointment. Within 15 days, the Trustee will publish a
notice of the liquidation or the filing or appointment relating to the
Originator. Unless otherwise instructed within a specified period by the
Certificate Insurer, or, with the consent of the Certificate Insurer, which
consent shall not be unreasonably withheld, Owners representing undivided
interests aggregating more than 51% of the aggregate principal amount of the
Class A Certificates, the Trustee, upon notice to the Rating Agencies, will
sell, dispose of or otherwise liquidate the Mortgage Loans in a commercially
reasonable manner and on commercially reasonable terms. Any such sale, disposal
or liquidation and such sale, disposal or liquidation will be "servicing
retained" by the Master Servicer. The net proceeds of such sale will first be
paid to the Certificate Insurer to the extent of unreimbursed draws under the
Policy and other amounts owing to the Certificate Insurer. The lesser of (i)
the amount required to reduce the Class A Principal Balance, together with all
accrued and unpaid interest due thereon, to zero and (ii) the Floating
Allocation Percentage times such remaining amounts will be distributed to the
Owners; the Policy will cover any amount by which such remaining net proceeds
are insufficient to pay the Class A Principal Balance in full.
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The Policy and the Certificate Insurer
The following information has been supplied by the Certificate Insurer
for inclusion in this Prospectus Supplement.
The Certificate Insurer, in consideration of the payment of the
premium and subject to the terms of the Policy thereby unconditionally and
irrevocably guarantees to any Owner (as defined below) that an amount equal to
each full and complete Insured Payment will be received from the Certificate
Insurer by the Trustee, or its successor, as trustee for the Owners on behalf
of the Owners for distribution by the Trustee to each Owner of each Owner's
proportionate share of the Insured Payment. The Certificate Insurer's
obligation under the Policy with respect to a particular Insured Payment shall
be discharged to the extent funds equal to the applicable Insured Payment are
received by the Trustee, whether or not such funds are properly applied by the
Trustee. Insured Payments shall be made only at the time set forth in the
Policy and no accelerated Insured Payments shall be made regardless of any
acceleration of the Class A Certificates, unless such acceleration is at the
sole option of the Certificate Insurer.
Notwithstanding the foregoing paragraph, the Policy does not cover
shortfalls, if any, attributable to the liability of the Trust or the Trustee
for withholding taxes, if any (including interest and penalties in respect of
any such liability).
The Certificate Insurer will pay any Insured Payment that is a
Preference Amount (as described below) on the Business Day following receipt on
a Business Day by the Fiscal Agent (as described below) of (i) a certified copy
of the order requiring the return of a preference payment, (ii) an opinion of
counsel satisfactory to the Certificate Insurer that such order is final and
not subject to appeal, (iii) an assignment in such form as is reasonably
required by the Certificate Insurer, irrevocably assigning to the Certificate
Insurer all rights and claims of the Owner relating to or arising under the
Class A Certificates against the debtor which made such preference payment or
otherwise with respect to such preference payment and (iv) appropriate
instruments to effect the appointment of the Certificate Insurer as agent for
such Owner in any legal proceeding related to such preference payment, such
instruments being in a form satisfactory to the Certificate Insurer, provided
that if such documents are received after 12:00 noon New York City time on such
Business Day, they will be deemed to be received on the following Business Day.
Such payments shall be disbursed to the receiver or trustee in bankruptcy named
in the final order of the court exercising jurisdiction on behalf of the Owner
and not to any Owner directly unless such Owner has returned principal or
interest paid on the Class A Certificates to such receiver or trustee in
bankruptcy, in which case such payment shall be disbursed to such Owner.
The Certificate Insurer will pay any other amount payable under the
Policy no later than 12:00 noon New York City time on the later of the Payment
Date on which the related amounts are due or the second Business Day following
receipt in New York, New York on a Business Day by State Street Bank and Trust
Company, N.A., as Fiscal Agent for the Certificate Insurer or any successor
fiscal agent appointed by the Certificate Insurer (the "Fiscal Agent") of a
Notice (as described below); provided that if such Notice is received after
12:00 noon New York City time on such Business Day, it will be deemed to be
received on the following Business Day. If any such Notice received by the
Fiscal Agent is not in proper form or is otherwise insufficient for the purpose
of making a claim under the Policy it shall be deemed not to have been received
by the Fiscal Agent for purposes of this paragraph, and the Certificate Insurer
or the Fiscal Agent, as the case may be, shall promptly so advise the Trustee
and the Trustee may submit an amended Notice.
Insured Payments due under the Policy unless otherwise stated in the
Policy will be disbursed by the Fiscal Agent to the Trustee on behalf of the
Owners by wire transfer of immediately available funds in the amount of the
Insured Payment less, in respect of Insured Payments related to Preference
Amounts, any amount held by the Trustee for the payment of such Insured Payment
and legally available therefor.
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The Fiscal Agent is the agent of the Certificate Insurer only and the
Fiscal Agent shall in no event be liable to Owners for any acts of the Fiscal
Agent or any failure of the Certificate Insurer to deposit or cause to be
deposited, sufficient funds to make payments due under the Policy.
As used in the Policy, the following terms shall have the following
meanings:
"Agreement" means the Pooling and Servicing Agreement, dated
as of November 1, 1996 among the Originator, the Sponsor, the Master
Servicer and the Trustee, without regard to any amendment or
supplement.
"Business Day" means any day other than (i) a Saturday or
Sunday or (ii) a day on which banking institutions in the State of New
York or in the city in which the principal corporate trust office of
the Trustee is located, are authorized or obligated by law or
executive order to be closed.
"Deficiency Amount" means (a) for any Payment Date, any
shortfalls in amounts available in the Certificate Account to pay the
Class A Interest Distribution Amount (excluding any Net Funds Cap
Carry- Forward Amounts, any Prepayment Interest Shortfalls and any
Relief Act Shortfalls), (b) for any Payment Date, any shortfalls in
amounts available in the Certificate Account to pay the
Overcollateralization Deficit and (c) on the final scheduled payment
date for the Class A Certificates, any shortfall in amounts available
in the Certificate Account to pay the outstanding Class A Certificate
Balance.
"Insured Payment" means (i) as of any Payment Date, the
Deficiency Amount and (ii) any Preference Amount.
"Notice" means the telephonic or telegraphic notice, promptly
confirmed in writing by fax substantially in the form of Exhibit A
attached to the Policy, the original of which is subsequently
delivered by registered or certified mail, from the Trustee specifying
the Insured Payment which shall be due and owing on the applicable
Payment Date.
"Owner" means each Owner (as defined in the Agreement) (other
than the Trustee, the Originator or the Master Servicer) who, on the
applicable Payment Date, is entitled under the terms of the applicable
Class A Certificate to payment thereunder.
"Preference Amount" means any amount previously distributed
to an Owner on the Class A Certificates that is recoverable and sought
to be recovered as a voidable preference by a trustee in bankruptcy
pursuant to the United States Bankruptcy Code (11 U.S.C.), as amended
from time to time, in accordance with a final nonappealable order of a
court having competent jurisdiction.
Capitalized terms used in the Policy and not otherwise defined therein
will have the respective meanings set forth in the Agreement as of the date of
execution of the Policy, without giving effect to any subsequent amendment to
or modification of the Agreement unless such amendment or modification has been
approved in writing by the Certificate Insurer.
Any notice under the Policy or service of process on the Fiscal Agent
of the Certificate Insurer may be made at the address listed below for the
Fiscal Agent of the Certificate Insurer or such other address as the
Certificate Insurer shall specify in writing to the Trustee.
The notice address of the Fiscal Agent of the Certificate Insurer is
15th Floor, 61 Broadway, New York, New York 10006 Attention: Municipal
Registrar and Paying Agency or such other address as the Fiscal Agent shall
specify to the Trustee in writing.
The Policy is being issued under and pursuant to, and shall be
construed under, the laws of the State of New York, without giving effect to
the conflict of laws principles thereof.
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The insurance provided by the Policy is not covered by the
Property/Casualty Insurance Security Fund specified in Article 76 of the New
York Insurance Law.
The Policy is not cancelable for any reason. The premium on the Policy
is not refundable for any reason including payment, or provision being made for
payment, prior to the maturity of the Class A Certificates.
The Certificate Insurer is the principal operating subsidiary of MBIA
Inc., a New York Stock Exchange listed company. MBIA Inc. is not obligated to
pay the debts of or claims against the Certificate Insurer. The Certificate
Insurer is domiciled in the State of New York and licensed to do business in
and is subject to regulation under the laws of all 50 states, the District of
Columbia, the Commonwealth of Puerto Rico, the Commonwealth of the Northern
Mariana Islands, the Virgin Islands of the United States and the Territory of
Guam. The Certificate Insurer has two European branches, one in the Republic of
France and the other in the Kingdom of Spain. New York has laws prescribing
minimum capital requirements, limiting classes and concentrations of
investments and requiring the approval of policy rates and forms. State laws
also regulate the amount of both the aggregate and individual risks that may be
insured, the payment of dividends by the Certificate Insurer, changes in
control and transactions among affiliates. Additionally, the Certificate
Insurer is required to maintain contingency reserves on its liabilities in
certain amounts and for certain periods of time.
The consolidated financial statements of the Certificate Insurer, a
wholly owned subsidiary of MBIA Inc., and its subsidiaries as of December 31,
1995 and December 31, 1994 and for the three years ended December 31, 1995,
prepared in accordance with generally accepted accounting principles, included
in the Annual Report on Form 10-K of MBIA Inc. for the year ended December 31,
1995, and the consolidated financial statements of the Certificate Insurer and
its subsidiaries for the nine months ended September 30, 1996 and for the
periods ending September 30, 1996 and September 30, 1995 included in the
Quarterly Report on Form 10-Q of MBIA Inc. for the period ending September 30,
1996, are hereby incorporated by reference into this Prospectus Supplement and
shall be deemed to be a part hereof. Any statement contained in a document
incorporated by reference herein shall be modified or superseded for purposes
of this Prospectus Supplement to the extent that a statement contained herein,
or in any other subsequently filed document which also is incorporated by
reference herein, modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this Prospectus Supplement.
All financial statements of the Certificate Insurer and its
subsidiaries included in the documents filed by MBIA Inc. pursuant to Section
13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended,
subsequent to the date of this Prospectus Supplement and prior to the
termination of the offering of the Class A Certificates shall be deemed to be
incorporated by reference into this Prospectus Supplement and to be a part
hereof from the respective dates of filing such documents.
The tables below present selected financial information of the
Certificate Insurer determined in accordance with statutory accounting
practices prescribed or permitted by insurance regulatory authorities ("SAP")
and generally accepted accounting principles ("GAAP"):
SAP
December 31, 1995 September 30, 1996
(Audited) (Unaudited)
(In Millions)
Admitted Assets........................ $3,814 $4,348
Liabilities ........................... 2,540 2,911
Capital and Surplus.................... 1,274 1,437
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GAAP
December 31, 1995 September 30, 1996
(Audited) (Unaudited)
(In Millions)
Assets................................. 4,463 $4,861
Liabilities ........................... 1,937 2,161
Shareholder's Equity................... 2,526 2,700
Copies of the financial statements of the Certificate Insurer
incorporated by reference herein and copies of the Certificate Insurer's 1995
year-end audited financial statements prepared in accordance with statutory
accounting practices are available, without charge, from the Certificate
Insurer. The address of the Certificate Insurer is 113 King Street, Armonk, New
York 10504. The telephone number of the Certificate Insurer is (914) 273-4545.
The Certificate Insurer does not accept any responsibility for the
accuracy or completeness of this Prospectus Supplement or any information or
disclosure contained herein, or omitted herefrom, other than with respect to
the accuracy of the information regarding the Policy and Certificate Insurer
set forth under the heading "The Policy and the Certificate Insurer."
Moody's Investors Service ("Moody's") rates the claims paying ability
of the Certificate Insurer "Aaa."
Standard & Poor's Ratings Services, a division of The McGraw-Hill
Companies, Inc. ("Standard & Poor's"), rates the claims paying ability of the
Certificate Insurer "AAA."
Fitch Investors Service, L.P. rates the claims paying ability of the
Certificate Insurer "AAA."
Each rating of the Certificate Insurer should be evaluated
independently. The ratings reflect the respective rating agency's current
assessment of the creditworthiness of the Certificate Insurer and its ability
to pay claims on its policies of insurance. Any further explanation as to the
significance of the above ratings may be obtained only from the applicable
rating agency.
The above ratings are not recommendations to buy, sell or hold the
Class A Certificates, and such ratings may be subject to revision or withdrawal
at any time by the rating agencies. Any downward revision or withdrawal of any
of the above ratings may have an adverse effect on the market price of the
Class A Certificates. The Certificate Insurer does not guaranty the market
price of the Class A Certificates nor does it guaranty that the ratings on the
Class A Certificates will not be revised or withdrawn.
Drawings Under the Policy
On each Determination Date the Trustee shall determine, with respect
to the immediately following Payment Date, the amount (the "Available Funds")
to be on deposit in the Certificate Account on such Payment Date (excluding the
amounts of any Insured Payments, the Trustee's Fee, the Servicing Fee and the
Premium Amount).
If the Insured Payment for any Payment Date exceeds the
Available Funds for such Payment Date (such event being an "Available Funds
Shortfall"), the Trustee shall complete a Notice in the form of Exhibit A to
the Policy and submit such notice to the Certificate Insurer no later than
12:00 noon New York City time on the second Business Day preceding such Payment
Date as a claim for an Insured Payment in an amount equal to such Available
Funds Shortfall.
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Collection and Other Servicing Procedures on Mortgage Loans
The Master Servicer will make reasonable efforts to collect all
payments called for under the Mortgage Loans and will, consistent with the
Pooling and Servicing Agreement, follow such collection procedures as it
follows from time to time with respect to the home equity revolving credit line
loans in its servicing portfolio comparable to the Mortgage Loans. Consistent
with the above, the Master Servicer may in its discretion waive any late
payment charge or any assumption or other fee or charge that may be collected
in the ordinary course of servicing the Mortgage Loans.
With respect to the Mortgage Loans, the Master Servicer may arrange
with a borrower a schedule for the payment of interest due and unpaid for a
period, provided that any such arrangement is consistent with the Master
Servicer's policies with respect to the home equity revolving credit line loans
it owns or services. In accordance with the terms of the Pooling and Servicing
Agreement, the Master Servicer or the Originator may consent under certain
circumstances to the placing of a subsequent senior lien in respect of a
Mortgage Loan.
Hazard Insurance
The Pooling and Servicing Agreement provides that the Master Servicer
maintain certain hazard insurance on the Mortgaged Properties relating to the
Mortgage Loans. The terms of the related Credit Line Agreements generally
require borrowers to maintain certain hazard insurance.
The Pooling and Servicing Agreement requires the Master Servicer to
maintain for any Mortgaged Property relating to a Mortgage Loan acquired upon
foreclosure of a Mortgage Loan, or by deed in lieu of such foreclosure, hazard
insurance with extended coverage in an amount equal to the lesser of (a) the
maximum insurable value of such Mortgaged Property or (b) the outstanding
balance of such Mortgage Loan. The Pooling and Servicing Agreement provides
that the Master Servicer may satisfy its obligation to cause hazard policies to
be maintained by maintaining a blanket policy insuring against losses on such
Mortgaged Properties. If such blanket policy contains a deductible clause, the
Master Servicer will be obligated to deposit in the Principal and Interest
Account the sums which would have been deposited therein but for such clause.
The Master Servicer will initially satisfy these requirements by maintaining a
blanket policy. As set forth above, all amounts collected by the Master
Servicer (net of any reimbursements to the Master Servicer) under any hazard
policy (except for amounts to be applied to the restoration or repair of the
Mortgaged Property) will ultimately be deposited in the Principal and Interest
Account.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements on the property by
fire, lightning, explosion, smoke, windstorm and hail, and the like, strike and
civil commotion, subject to the conditions and exclusions specified in each
policy. Although the policies relating to the Mortgage Loans will be
underwritten by different insurers and therefore will not contain identical
terms and conditions, the basic terms thereof are dictated by state laws and
most of such policies typically do not cover any physical damage resulting from
the following: war, revolution, governmental actions, floods and other
water-related causes, earth movement (including earthquakes, landslides and
mudflows), nuclear reactions, wet or dry rot, vermin, rodents, insects or
domestic animals, theft and, in certain cases vandalism. The foregoing list is
merely indicative of certain kinds of uninsured risks and is not intended to be
all-inclusive or an exact description of the insurance policies relating to the
Mortgaged Properties.
Realization Upon Defaulted Mortgage Loans
The Master Servicer will foreclose upon or otherwise comparably
convert to ownership Mortgaged Properties securing such of the Mortgage Loans
as come into default when, in accordance with applicable servicing procedures
under the Pooling and Servicing Agreement, no satisfactory arrangements can be
made for the collection of delinquent payments. In connection with such
foreclosure or other conversion, the Master Servicer will follow such practices
as it deems necessary or advisable and as are in keeping with its general
subordinate mortgage servicing activities, provided the Master Servicer will
not be required to expend its own funds in connection with
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foreclosure or other conversion, correction of default on a related senior
mortgage loan or restoration of any property unless, in its sole judgment, such
foreclosure, correction or restoration will increase Net Liquidation Proceeds.
The Master Servicer will be reimbursed out of Liquidation Proceeds for advances
of its own funds as liquidation expenses before any Net Liquidation Proceeds are
distributed to Owners or the Originator.
Optional Reassignment of Defaulted Loans
The Master Servicer may, at its option, accept the reassignment from
the Trust any Mortgage Loan which is delinquent in payment by 90 days or more.
Any such purchase shall be at a price equal to 100% of the Principal Balance of
such Mortgage Loan plus accrued interest thereon at the applicable Coupon Rate
from the date through which interest was last paid by the related mortgagor to
the first day of the month in which such amount is to be distributed to Owners.
Servicing Compensation and Payment of Expenses
With respect to each Remittance Period, the Master Servicer will
receive from interest collections in respect of the Mortgage Loans a portion of
such interest collections as a monthly Servicing Fee in the amount equal to
approximately 0.50% per annum ("Servicing Fee Rate") on the aggregate Principal
Balances of the Mortgage Loans as of the first day of the related Remittance
Period (or as of the Initial Cut-Off Date for the first Remittance Period). All
Termination Fees, assumption fees, late payment charges and other fees and
charges, to the extent collected from borrowers, will be retained by the Master
Servicer as additional servicing compensation.
The Master Servicer will pay certain ongoing expenses associated with
the Trust and incurred by it in connection with its responsibilities under the
Pooling and Servicing Agreement. In addition, the Master Servicer will be
entitled to reimbursement for certain expenses incurred by it in connection
with defaulted Mortgage Loans and in connection with the restoration of
Mortgaged Properties; such right of reimbursement (i) shall be prior to the
rights of Owners to receive any related Net Liquidation Proceeds and (ii) shall
not be limited to recoveries from the related Mortgage Loan.
Evidence as to Compliance
The Pooling and Servicing Agreement provides for delivery on or before
April 15 in each year, beginning on April 15, 1997, to the Trustee and the
Certificate Insurer of an annual statement signed by an officer of the Master
Servicer to the effect that the Master Servicer has fulfilled its material
obligations under the Pooling and Servicing Agreement throughout the preceding
fiscal year, except as specified in such statement.
On or before April 15 of each year, beginning April 15, 1997, the
Master Servicer will furnish a report prepared by a firm of nationally
recognized independent public accountants (who may also render other services
to the Master Servicer or the Originator) to the Trustee, the Certificate
Insurer and the Rating Agencies to the effect that such firm has examined
certain documents and the records relating to servicing of the Mortgage Loans
under the Pooling and Servicing Agreement and that, on the basis of such
examination, such firm believes that such servicing was conducted in compliance
with the Pooling and Servicing Agreement except for (a) such exceptions as such
firm believes to be immaterial and (b) such other exceptions as shall be set
forth in such report.
Certain Matters Regarding the Master Servicer
The Pooling and Servicing Agreement provides that the Master Servicer
may not resign from its obligations and duties thereunder, except in connection
with a permitted transfer of servicing, unless such duties and obligations are
no longer permissible under applicable law or are in material conflict by
reason of applicable law with any other activities of a type and nature
presently carried on by it as evidenced by an opinion of counsel delivered to
the Trustee and the Certificate Insurer. No such resignation will become
effective until the Trustee has assumed the Master Servicer's obligations and
duties under the Pooling and Servicing Agreement. The Trustee, the Owners (each
with the consent of the Certificate Insurer) or the Certificate Insurer (so
long as no Certificate Insurer default
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is continuing), have the right, to remove the Master Servicer upon the
occurrence of any of (a) certain events of insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings regarding the
Master Servicer and certain actions by the Master Servicer indicating its
insolvency or inability to pay its obligations; (b) the failure of the Master
Servicer to perform any one or more of its material obligations under the
Pooling and Servicing Agreement as to which the Master Servicer shall continue
in default with respect thereto for a specified period, generally of sixty (60)
days, after notice by the Trustee or the Certificate Insurer (if required by the
Pooling and Servicing Agreement) of said failure; or (c) the failure of the
Master Servicer to cure any breach of any of its representations and warranties
set forth in the Pooling and Servicing Agreement which materially and adversely
affects the interests of the Owners or the Certificate Insurer, for a specified
period, generally of thirty (30) days after the Master Servicer's discovery or
receipt of notice thereof.
The Certificate Insurer may also remove the Master Servicer upon the
occurrence of any of certain events, including:
(i) the failure by the Master Servicer to make any required Servicing
Advance which failure continues for thirty (30) days or more after written
notice from the Certificate Insurer; or
(ii) the failure of the Master Servicer to perform one or more of its
material obligations under the Pooling and Servicing Agreement, which failure
continues for sixty (60) days or more after written notice from the Certificate
Insurer; or
(iii) certain other events described in the Pooling and Servicing
Agreement; or
(iv) failure on the part of the Master Servicer to make a payment or
deposit required under the Pooling and Servicing Agreement within three
Business Days after the date such payment or deposit is required to be made.
provided, however, that prior to any removal of the Master Servicer by the
Certificate Insurer pursuant to clause (i) or (ii) above the Master Servicer
shall not have remedied, or shall not have taken action satisfactory to such
Certificate Insurer to remedy, such event or events within a specified period,
generally within 30 days (60 days in respect of clause (ii)) after the Master
Servicer's receipt of notice thereof.
Amendments
The Trustee, the Sponsor, the Master Servicer and the Originator may
at any time and from time to time, with the prior approval of the Certificate
Insurer, but without the giving of notice or the receipt of the consent of the
Owners, amend the Pooling and Servicing Agreement, and the Trustee will be
required to consent to such amendment, for the purposes of (x)(i) curing any
ambiguity or correcting or supplementing any provision of such Pooling and
Servicing Agreement which may be inconsistent with any provision of the Pooling
and Servicing Agreement, or (ii) complying with the requirements of the Code
and the regulations proposed or promulgated thereunder; provided, however, that
such action shall not, as evidenced by an opinion of counsel delivered to the
Trustee and the Certificate Insurer, materially and adversely affect the
interests of any Owner (without its written consent) or (y) such other purposes
set forth in the Pooling and Servicing Agreement.
The Pooling and Servicing Agreement may also be amended by the
Trustee, the Sponsor, the Originator and the Master Servicer at any time and
from time to time, with the prior written approval of the Certificate Insurer,
and not less than a majority of the Percentage Interests represented by the
Owners of the Class A Certificates then outstanding, for the purpose of adding
any provisions or changing in any matter or eliminating any of the provisions
of such Pooling and Servicing Agreement or of modifying in any manner the
rights of the Owners thereunder; provided, however, that no such amendment
shall (a) change in any manner the amount of, or delay the timing of, payments
which are required to be distributed to any Owners without the consent of the
Owners or (b) change the aforesaid percentages of the Percentage Interests
which are required to consent to any such amendments, without the consent of
the all of the Owners affected.
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The Trustee
Bankers Trust Company of California, N.A., a national banking
association with its principal place of business in California, has been named
Trustee pursuant to the Pooling and Servicing Agreement.
The commercial bank or trust company serving as Trustee may own Class
A Certificates and have normal banking relationships with the Sponsor, the
Master Servicer, the Originator and the Certificate Insurer and/or their
affiliates.
The Trustee may resign at any time, in which event the Sponsor will be
obligated to appoint a successor Trustee, as approved by the Certificate
Insurer. The Sponsor (with the prior written consent of the Certificate
Insurer) may also remove the Trustee if the Trustee ceases to be eligible to
continue as such under the Pooling and Servicing Agreement or if the Trustee
becomes insolvent. Upon becoming aware of such circumstances, the Sponsor will
be obligated to appoint a successor Trustee, as approved by the Certificate
Insurer. 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 acceptable to the Certificate Insurer. If the Sponsor
fails to fulfill its obligations to appoint a successor Trustee, the
Certificate Issuer will have the right to do so.
No holder of a Certificate will have any right under the Pooling and
Servicing Agreement to institute any proceeding with respect to the Pooling and
Servicing Agreement unless the Certificate Insurer has given its prior written
consent, such holder previously has given to the Trustee written notice of
default and unless Owners evidencing an aggregate, undivided interest in the
Trust of at least 51% of the Class A Principal Balance have made written
requests upon the Trustee to institute such proceeding in its own name as
Trustee thereunder and have offered to the Trustee reasonable indemnity and the
Trustee for 60 days has neglected or refused to institute any such proceeding.
The Trustee will be under no obligation to exercise any of the trusts or powers
vested in it by the Pooling and Servicing Agreement or to make any
investigation of matters arising thereunder or to institute, conduct or defend
any litigation thereunder or in relation thereto at the request, order or
direction of any of the Owners, unless such Owners have offered to the Trustee
reasonable security or indemnity against the cost, expenses and liabilities
which may be incurred therein or thereby.
Certain Activities
The Trust will not: (i) borrow money; (ii) make loans; (iii) invest in
securities for the purpose of exercising control; (iv) underwrite securities;
(v) except as provided in the Pooling and Servicing Agreement, engage in the
purchase and sale (or turnover) of investments; (vi) offer securities in
exchange for property (except Class A Certificates for the Mortgage Loans); or
(vii) repurchase or otherwise reacquire its securities. See "--Evidence as to
Compliance" above for information regarding reports as to the compliance by the
Originator with the terms of the Pooling and Servicing Agreement.
Representations and Warranties
The Originator will represent and warrant to the Trustee and the
Certificate Insurer that, among other things, as of the Closing Date, it is
duly organized and in good standing and that it has the authority to consummate
the transactions contemplated by the Pooling and Servicing Agreement. The
Originator will also represent and warrant to the Trustee that, among other
things, immediately prior to the assignment of the Mortgage Loans to the
Trustee, the Originator was the sole owner and holder of the Mortgage Loans
free and clear of any and all liens and security interests.
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USE OF PROCEEDS
The net proceeds from the sale of the Class A Certificates will be
paid over to the Originator in consideration of the transfer of the Mortgage
Loans. Such amount will be determined as a result of the pricing of the Class A
Certificates through the offering described in this Prospectus Supplement. The
net proceeds to be received from the sale of the Mortgage Loans will be added
to the Originators' general funds and will be available for general corporate
purposes, including the repayment of debt and the purchase of new mortgage
loans.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
General
The following discussion, which summarizes certain U.S. federal income
tax aspects of the purchase, ownership and disposition of the Class A
Certificates, is based on the provisions of the Internal Revenue Code of 1986,
as amended (the "Code"), the Treasury Regulations thereunder, and published
rulings and court decisions in effect as of the date hereof, all of which are
subject to change, possibly retroactively. This discussion does not address
every aspect of the U.S. federal income tax laws which may be relevant to
Owners in light of their personal investment circumstances or to certain types
of Owners subject to special treatment under the U.S. federal income tax laws
(for example, banks and life insurance companies). Accordingly, investors
should consult their tax advisors regarding U.S. federal, state, local, foreign
and any other tax consequences to them of investing in the Class A
Certificates.
Characterization of the Class A Certificates as Indebtedness
Based on the application of existing law to the facts as set forth in
the Pooling and Servicing Agreement and other relevant documents and assuming
compliance with the terms of the Pooling and Servicing Agreement as in effect
on the date of issuance of the Class A Certificates, Dewey Ballantine, special
tax counsel to the Sponsor ("Tax Counsel"), is of the opinion that the Class A
Certificates will be treated as debt instruments for federal income tax
purposes as of such date. Accordingly, upon issuance, the Class A Certificates
will be treated as "Debt Securities" as described in the Prospectus. See
"Certain Federal Income Tax Consequences" in the Prospectus.
The Originator and the Owners express in the Pooling and Servicing
Agreement their intent that, for applicable tax purposes, the Class A
Certificates will be indebtedness secured by the Mortgage Loans. The
Originator, the Sponsor and the Owners, by accepting the Class A Certificates,
and each Owner by its acquisition of a beneficial interest in a Certificate,
have agreed to treat the Class A Certificates as indebtedness for U.S. federal
income tax purposes. However, because different criteria are used to determine
the non-tax accounting characterization of the transaction, the Originator
intends to treat this transaction as a sale of an interest in the Principal
Balances of the Mortgage Loans for financial accounting and certain regulatory
purposes.
In general, whether for U.S. federal income tax purposes a transaction
constitutes a sale of property or a loan, the repayment of which is secured by
property, is a question of fact, the resolution of which is based upon the
economic substance of the transaction rather than its form or the manner in
which it is labeled. While the Internal Revenue Service (the "IRS") and the
courts have set forth several factors to be taken into account in determining
whether the substance of a transaction is a sale of property or a secured loan,
the primary factor in making this determination is whether the transferee has
assumed the risk of loss or other economic burdens relating to the property and
has obtained the benefits of ownership thereof. Tax Counsel has analyzed and
relied on several factors in reaching its opinion that the weight of the
benefits and burdens of ownership of the Mortgage Loans has been retained by
the Originator and has not been transferred to the Owners.
In some instances, courts have held that a taxpayer is bound by the
particular form it has chosen for a transaction, even if the substance of the
transaction does not accord with its form. Tax Counsel has advised that the
rationale of those cases will not apply to this transaction, because the form
of the transaction as reflected in the
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operative provisions of the documents either accords with the characterization
of the Class A Certificates as debt or otherwise makes the rationale of those
cases inapplicable to this situation.
Taxation of Interest Income of Owners
Assuming that the Owners are holders of debt obligations for U.S.
federal income tax purposes, the Class A Certificates generally will be taxable
as Debt Securities. See "Certain Federal Income Tax Consequences" in the
Prospectus.
While it is not anticipated that the Class A Certificates will be
issued at a greater than de minimis discount, under Treasury regulations (the
"OID Regulations") it is possible that the Class A Certificates could
nevertheless be deemed to have been issued with original issue discount ("OID")
if the interest were not treated as "unconditionally payable" under the OID
Regulations. If such regulations were to apply, all of the taxable income to be
recognized with respect to the Class A Certificates would be includible in
income of Owners as OID, but would not be includible again when the interest is
actually received. See "Certain Federal Income Tax Consequences--Taxation of
Debt Securities; Interest and Acquisition Discount" in the Prospectus for a
discussion of the application of the OID rules if the Class A Certificates are
in fact issued at a greater than de minimis discount or are treated as having
been issued with OID under the OID Regulations. For purposes of calculating
OID, it is likely that the Class A Certificates will be treated as pay-through
securities.
Possible Classification of the Class A Certificates as a Partnership or
Association Taxable as a Corporation
The opinion of Tax Counsel is not binding on the courts or the IRS. It
is possible that the IRS could assert that, for purposes of the Code, the
transaction contemplated by this Prospectus with respect to the Class A
Certificates constitutes a sale of the Mortgage Loans (or an interest therein)
to the Owners and that the proper classification of the legal relationship
between the Originator and the Owners resulting from this transaction is that
of a partnership (including a publicly traded partnership), a publicly traded
partnership treated as a corporation, or an association taxable as a
corporation. Since Tax Counsel has advised that the Class A Certificates will
be treated as indebtedness in the hands of the Owners for U.S. federal income
tax purposes, the Originator will not attempt to comply with U.S. federal
income tax reporting requirements applicable to partnerships or corporations as
such requirements would apply if the Class A Certificates were treated as
indebtedness.
If it were determined that this transaction created an entity
classified as a corporation (including a publicly traded partnership taxable as
a corporation), the Trust would be subject to U.S. federal income tax at
corporate income tax rates on the income it derives from the Mortgage Loans,
which would reduce the amounts available for distribution to the Owners. Cash
distributions to the Owners generally would be treated as dividends for tax
purposes to the extent of such corporation's earnings and profits.
If the transaction were treated as creating a partnership between the
Owners and the Originator, the partnership itself would not be subject to U.S.
federal income tax (unless it were to be characterized as a publicly traded
partnership taxable as a corporation); rather, the Originator and each Owner
would be taxed individually on their respective distributive shares of the
partnership's income, gain, loss, deductions and credits. The amount and timing
of items of income and deductions of the Owner could differ if the Class A
Certificates were held to constitute partnership interests rather than
indebtedness.
Possible Classification as a Taxable Mortgage Pool
In relevant part, Section 7701(i) of the Code provides that any entity
(or a portion of an entity) that is a "taxable mortgage pool" will be
classified as a taxable corporation and will not be permitted to file a
consolidated U.S. federal income tax return with another corporation. Subject
to a grandfather provision for existing entities, any entity (or a portion of
any entity) will be a taxable mortgage pool if (i) substantially all of its
assets consist of debt instruments, more than 50% of which are real estate
mortgages, (ii) the entity is the obligor under debt
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obligations with two or more maturities, and (iii) under the terms of the
entity's debt obligations (or an underlying arrangement), payments on such debt
obligations bear a relationship to the debt instruments held by the entity.
Assuming that all of the provisions of the Pooling and Servicing
Agreement, as in effect on the date of issuance, are complied with, Tax Counsel
is of the opinion that the arrangement created by the Pooling and Servicing
Agreement will not be a taxable mortgage pool under Section 7701(i) of the Code
because only one class of indebtedness secured by the Mortgage Loans is being
issued.
The opinion of Tax Counsel is not binding on the IRS or the courts. If
the IRS were to contend successfully (or future regulations were to provide)
that the arrangement created by the Pooling and Servicing Agreement is a
taxable mortgage pool, such arrangement would be subject to U.S. federal
corporate income tax on its taxable income generated by ownership of the
Mortgage Loans. Such a tax might reduce amounts available for distributions to
Owners. The amount of such a tax would depend upon whether distributions to
Owners would be deductible as interest expense in computing the taxable income
of such an arrangement as a taxable mortgage pool.
Foreign Investors
In general, subject to certain exceptions, interest (including OID)
paid on a Class A Certificate to a nonresident alien individual, foreign
corporation or other non-United States person is not subject to U.S. federal
income tax, provided that such interest is not effectively connected with a
trade or business of the recipient in the United States and the Owner provides
the required foreign person information certification. See "Certain Federal
Income Tax Consequences--Foreign Investors" in the Prospectus.
If the interests of the Owners were deemed to be partnership
interests, the partnership would be required, on a quarterly basis, to pay
withholding tax equal to the product, for each foreign partner, of such foreign
partner's distributive share of "effectively connected" income of the
partnership multiplied by the highest rate of tax applicable to that foreign
partner. In addition, such foreign partner would be subject to branch profits
tax. Each non-foreign partner would be required to certify to the partnership
that it is not a foreign person. The tax withheld from each foreign partner
would be credited against such foreign partner's U.S. income tax inability.
If the Trust were taxable as a corporation, distributions to foreign
persons, to the extent treated as dividends, would generally be subject to
withholding at the rate of 30%, unless such rate were reduced by an applicable
tax treaty.
Backup Withholding
Certain Owners may be subject to backup withholding at the rate of 31%
with respect to interest paid on the Class A Certificates if the Owners, upon
issuance, fail to supply the Trustee or his broker with his taxpayer
identification number, furnish an incorrect taxpayer identification number,
fail to report interest, dividends, or other "reportable payments" (as defined
in the Code) properly, or, under certain circumstances, fail to provide the
Trustee or his broker with a certified statement, under penalty of perjury,
that he is not subject to backup withholding.
The Trustee will be required to report annually to the IRS, and to
each Owner of record, the amount of interest paid (and OID accrued, if any) on
the Class A Certificates (and the amount of interest withheld for U.S. federal
income taxes, if any) for each calendar year, except as to exempt holders
(generally, holders that are corporations, certain tax-exempt organizations or
nonresident aliens who provide certification as to their status as
nonresidents). As long as the only Owner of record is Cede, as nominee for DTC,
Owners and the IRS will receive tax and other information including the amount
of interest paid on the Class A Certificates owned from Participants and
Indirect Participants rather than from the Trustee. (The Trustee, however, will
respond to requests for necessary information to enable Participants, Indirect
Participants and certain other persons to complete their reports.) Each
non-exempt Owner will be required to provide, under penalty of perjury, a
certificate on IRS Form W-9 containing his or her name, address, correct
federal taxpayer identification number and a statement that he or she is not
subject to backup withholding. Should a nonexempt Owner fail to provide the
required certification, the
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Participants or Indirect Participants (or the Paying Agent) will be required to
withhold 31% of the interest (and principal) otherwise payable to the holder,
and remit the withheld amount to the IRS as a credit against the holder's
federal income tax liability.
STATE TAXES
The Sponsor makes no representations regarding the tax consequences of
purchase, ownership or disposition of the Class A Certificates under the tax
laws of any state. Investors considering an investment in the Class A
Certificates should consult their own tax advisors regarding such tax
consequences.
All investors should consult their own tax advisors regarding the
federal, state, local or foreign income tax consequences of the purchase,
ownership and disposition of the Class A Certificates.
ERISA CONSIDERATIONS
The Class A Certificates may not be acquired by a pension or
other employee benefit plan subject to the Employee Retirement Income Security
Act of 1974, as amended ("ERISA") or a plan subject to Section 4975 of the
Internal Revenue Code (each a "Plan") or a person investing "plan assets" of a
Plan (including without limitation, for this purpose, any insurance company
general account). By its acceptance of a Class A Certificate, each Owner will
be deemed to have represented and warranted that it is not subject to the
foregoing limitation. For additional information regarding treatment of the
Certificates under ERISA, see "ERISA Considerations" in the Prospectus.
LEGAL INVESTMENT CONSIDERATIONS
Although, as a condition to their issuance, the Class A Certificates
will be rated in the highest rating category of the Rating Agencies, the Class A
Certificates will not constitute "mortgage related securities" for purposes of
the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA"), because not all
of the mortgages securing the Mortgage Loans are first mortgages. Accordingly,
many institutions with legal authority to invest in comparably rated securities
based on first mortgage loans may not be legally authorized to invest in the
Class A Certificates, which because they evidence interests in a pool that
includes junior mortgage loans are not "mortgage related securities" under
SMMEA. See "Legal Investment Matters" in the Prospectus.
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting
agreement, dated November __, 1996 (the "Underwriting Agreement"), between the
Sponsor and Lehman Brothers Inc. (the "Underwriter"), the Sponsor has agreed to
sell to the Underwriter, and the Underwriter has agreed to purchase from the
Sponsor all the Class A Certificates.
In the Underwriting Agreement, the Underwriter has agreed, subject to
the terms and conditions set forth therein, to purchase all the Class A
Certificates offered hereby if any of the Class A Certificates are purchased.
The Sponsor has been advised by the Underwriter that it proposes
initially to offer the Class A 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 discount not in excess of 0.20% of the denominations of the
Class A Certificates. The Underwriter may allow and such dealers may reallow a
discount not in excess of 0.10% of the denominations of the Class A
Certificates to certain other dealers. After the initial public offering, the
public offering price, such concessions and such discounts may be changed.
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The Underwriting Agreement provides that the Sponsor will indemnify
the Underwriter against certain civil liabilities, including liabilities under
the 1933 Act.
LEGAL MATTERS
Certain legal matters with respect to the Class A Certificates will be
passed upon for the Sponsor by Dewey Ballantine, New York, New York and for the
Underwriter by Dewey Ballantine, New York, New York.
EXPERTS
The consolidated financial statements of the Certificate Insurer and
its subsidiaries as of December 31, 1995 and 1994 and for the three years in
the period ended December 31, 1995, incorporated by reference in this
Prospectus Supplement, have been incorporated herein in reliance on the report
of Coopers & Lybrand L.L.P., independent accountants, given on the authority of
that firm as experts in accounting and auditing.
RATINGS
It is a condition to issuance that the Class A Certificates be rated
"AAA" by Standard & Poor's and "Aaa" by Moody's.
A securities rating addresses the likelihood of the receipt by Owners
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 Class A Certificates. The ratings on the Class A
Certificates do not, however, constitute statements regarding the likelihood or
frequency of prepayments on the Mortgage Loans or the possibility that Owners
might realize a lower than anticipated yield nor the likelihood of the payment
of any Net Funds Cap Carry-Forward Amount.
The ratings assigned to the Class A 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 Class A Certificates may result in a
reduction of one or more of the ratings assigned to the Class A Certificates.
A securities rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each securities rating should be evaluated
independently of similar ratings on different securities.
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INDEX OF DEFINED TERMS
1933 Act ..................................................2
Accelerated Principal Payment.........................13, 32
Additional Balances........................................3
Additional Mortgage Loans..................................6
Advanta Parent ........................................21
Alternative Principal Payment.....................12, 32, 39
Amortization Period........................................6
Available Funds ........................................44
Available Funds Shortfall.................................44
Beneficial Owners ........................................14
Book-Entry Certificates...................................14
Business Day ........................................36
Capitalized Interest Account...............................6
CEBA .....................................................22
Cede ..................................................2, 15
CEDEL .................................................2, 15
Certificate Account.......................................36
Certificate Insurer....................................4, 14
Certificate Register......................................36
Citibank .................................................15
Class A Certificates.......................................1
Class A Formula Rate..................................11, 38
Class A Interest Distribution Amount......................12
Class A Interest Rate..............................3, 11, 38
Class A Principal Balance..................................3
Closing Date ..............................................2
Code .....................................................49
Combined Loan-to-Value Ratio..............................24
Commission ................................................2
Coupon Rate ..............................................25
Credit Limit .............................................24
Credit Limit Utilization Rate.............................24
Credit Line Agreements.....................................3
Cut-Off Date ..............................................4
Cut-Off Date Pool Balance..................................4
Deficiency Amount ........................................42
Draws .....................................................3
DTC ...................................................2, 15
ERISA ....................................................17
Euroclear .............................................2, 15
European Depositaries.....................................15
Excess Cashflow ...........................................8
FDIC .....................................................22
FHLMC ....................................................23
Final Scheduled Payment Date..............................13
Fiscal Agent .............................................41
Floating Allocation Percentage.............................8
FNMA .....................................................23
Index Rate ...............................................25
Initial Cut-Off Date.......................................4
Initial Mortgage Loans.....................................4
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Insured Payment ........................................14
Interest Accrual Period...................................12
Interest Collections..................................11, 35
Invested Amount ...........................................8
IRS ......................................................49
LIBOR ................................................11, 38
LIBOR Business Day........................................39
Liquidation Proceeds......................................35
Managed Amortization Period.......................12, 32, 39
Margin ...................................................25
Master Servicer ........................................1, 4
Maximum Principal Payment.........................12, 32, 39
Maximum Rate .............................................25
Maximum Step-Down Amount..............................13, 39
Minimum Originator's Interest..............................8
Moody's ..................................................44
Morgan ...................................................15
Mortgage Loan Schedule................................10, 34
Mortgage Loans ............................................1
Mortgaged Properties...................................3, 24
Mortgagor .................................................3
Net Funds Cap Carry-Forward Amount........................12
Net Funds Cap Rate....................................11, 38
Net Liquidation Proceeds..............................11, 35
Net Principal Collections..............................6, 35
Non-Subordinated Originator's Interest.....................8
O/C Mortgage Loans.........................................5
OID ......................................................50
OID Regulations ..........................................50
Original Class A Principal Balance.........................3
Original Pre-Funded Amount..............................1, 5
Originator .............................................1, 4
Originator's Current Amount...............................38
Originator's Interest......................................7
Overcollateralization Amount...............................8
Overcollateralization Deficit.............................14
Overcollateralization Release Amount.......................9
Owner .....................................................3
Owners ....................................................1
Payment Date ..................................1, 11, 36, 38
Percentage Interest.......................................14
Plan .....................................................17
Policy ....................................................1
Pool Balance .............................................35
Pool Factor ..............................................33
Pooling and Servicing Agreement............................3
Pre-Funded Mortgage Loans..................................1
Pre-Funding Account........................................1
Pre-Funding Period......................................1, 5
Premium Amount ...........................................37
Prepayment Interest Shortfalls............................14
Principal and Interest Account........................11, 35
Principal Balance .....................................5, 35
S-55
<PAGE>
Principal Collections.................................11, 35
Rapid Amortization Event..................................39
Rapid Amortization Period......................6, 12, 32, 39
Rating Agency ............................................17
Record Date ..............................................36
Reference Bank Rate.......................................38
Registrar ................................................34
Reimbursement Amount......................................16
Relief Act Shortfalls.....................................14
Remittance Date ..........................................15
Remittance Period ........................................11
Repayment Period .....................................20, 25
Revolving Account .........................................7
Revolving Period .......................................1, 6
SAP ......................................................43
Scheduled Principal Distribution Amount...........12, 13, 32
Servicing Fee ............................................15
Servicing Fee Rate....................................15, 46
SMMEA ................................................17, 52
Specified Overcollateralization Amount.....................8
Sponsor ................................................1, 4
Standard & Poor's ........................................44
Step-Down Amount .........................................39
Subsequent Cut-Off Date....................................4
Subsequent Mortgage Loans..................................5
Subsequent Transfer Agreements............................35
Subsequent Transfer Dates.................................35
Tax Counsel ..............................................49
Telerate Screen Page 3750.................................38
Termination Fees .........................................19
Trust .....................................................1
Trust Collateral Value.....................................7
Trustee ................................................1, 4
Trustee's Fee ....................................11, 18, 38
Underwriter ..............................................52
Underwriting Agreement....................................52
S-56
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the offered Advanta Revolving
Home Equity Loan Trust 1996-A Class A Certificates (the "Class A Certificates")
will be available only in book-entry form. Investors in the Class A
Certificates may hold such Class A Certificates through any of DTC, CEDEL or
Euroclear. The Class A Certificates will be tradeable as home market
instruments in both the European and U.S. domestic markets. Initial settlement
and all secondary trades will settle in same-day funds.
Secondary market trading between investors through CEDEL and Euroclear
will be conducted in the ordinary way in accordance with the normal rules and
operating procedures of CEDEL and Euroclear and in accordance with conventional
eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors through DTC will be
conducted according to DTC's rules and procedures applicable to U.S. corporate
debt obligations.
Secondary cross-market trading between CEDEL or Euroclear and DTC
Participants holding Certificates will be effected on a
delivery-against-payment basis through the respective Depositaries of CEDEL and
Euroclear (in such capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Class A Certificates 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 Class A Certificates will be held in book-entry form by DTC in the
name of Cede & Co. as nominee of DTC. Investors' interests in the Class A
Certificates will be represented through financial institutions acting on their
behalf as direct and indirect Participants in DTC. As a result, CEDEL and
Euroclear will hold positions on behalf of their Participants through their
relevant depository which in turn will hold such positions in their accounts as
DTC Participants.
Investors electing to hold their Class A Certificates through DTC will
follow DTC settlement practices. 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 Class A Certificates through CEDEL 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. Class A Certificates 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 home
equity revolving credit line loan asset-backed certificates issues in same-day
funds.
AI-1
<PAGE>
Trading between CEDEL and/or Euroclear Participants. Secondary market
trading between CEDEL Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
Trading between DTC, Originator and CEDEL or Euroclear Participants.
When Class A Certificates are to be transferred from the account of a DTC
Participant to the account of a CEDEL Participant or a Euroclear Participant,
the purchaser will send instructions to CEDEL or Euroclear through a CEDEL
Participant or Euroclear Participant at least one business day prior to
settlement. CEDEL or Euroclear will instruct the Relevant Depository, as the
case may be, to receive the Class A Certificates against payment. Payment will
include interest accrued on the Class A Certificates 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 Relevant Depository to the DTC Participant's
account against delivery of the Class A Certificates. After settlement has been
completed, the Class A Certificates will be credited to the respective clearing
system and by the clearing system, in accordance with its usual procedures, to
the CEDEL 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 Class A Certificates 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 CEDEL or Euroclear cash debt will be valued instead as of the
actual settlement date.
CEDEL 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 CEDEL or Euroclear. Under this
approach, they may take on credit exposure to CEDEL or Euroclear until the
Class A Certificates are credited to their account one day later.
As an alternative, if CEDEL or Euroclear has extended a line of credit
to them, CEDEL Participants or Euroclear Participants can elect not to
preposition funds and allow that credit line to be drawn upon to finance
settlement. Under this procedure, CEDEL Participants or Euroclear Participants
purchasing Class A Certificates would incur overdraft charges for one day,
assuming they cleared the overdraft when the Class A Certificates were credited
to their accounts. However, interest on the Class A Certificates would accrue
from the value date. Therefore, in many cases the investment income on the Class
A Certificates earned during that one-day period may substantially reduce or
offset the amount of such overdraft charges, although the result will depend on
each CEDEL 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 crediting Class A
Certificates to the respective European Depository for the benefit of CEDEL
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 CEDEL or Euroclear Originator and DTC Purchaser. Due
to time zone differences in their favor, CEDEL Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Class A Certificates are to be transferred by the respective clearing system,
through the respective Depository, to a DTC Participant. The seller will send
instructions to CEDEL or Euroclear through a CEDEL Participant or Euroclear
Participant at least one business day prior to settlement. In these cases CEDEL
or Euroclear will instruct the respective Depository, as appropriate, to credit
the Class A Certificates to the DTC Participant's account against payment.
Payment will include interest accrued on the Class A Certificates 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 CEDEL
Participant or Euroclear Participant the following day, and receipt
AI-2
<PAGE>
of the cash proceeds in the CEDEL 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). In the event that the CEDEL
Participant or Euroclear Participant has a line of credit with its respective
clearing system and elects 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
CEDEL Participant's or Euroclear Participant's account would instead be valued
as of the actual settlement date.
Finally, day traders that use CEDEL or Euroclear and that purchase
Class A Certificates from DTC Participants for delivery to CEDEL Participants
or Euroclear Participants should note that these trades would automatically
fail on the sale side unless affirmative action is taken. At least three
techniques should be readily available to eliminate this potential problem:
(a) borrowing through CEDEL or Euroclear for one day (until the
purchase side of the trade is reflected in their CEDEL or Euroclear accounts)
in accordance with the clearing system's customary procedures;
(b) borrowing the Class A Certificates in the U.S. from a DTC
Participant no later than one day prior to settlement, which would give the
Class A Certificates sufficient time to be reflected in their CEDEL 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 CEDEL Participant or
Euroclear Participant.
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner of Class A Certificates holding securities through
CEDEL 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 (as defined below), 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 Class
A Certificates that are Non-U.S. Persons (as defined below) 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 (as defined below), 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 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 Certificate Owners or their 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).
AI-3
<PAGE>
U.S. Federal Income Tax Reporting Procedure. The Owner of a Class A
Certificate or, in the case of a Form 1001 or a Form 4224 filer, his agent,
files by submitting the appropriate form to the person through whom it holds
(the clearing agency, in the case of persons holding directly on the books of
the clearing agency). Form W-8 and Form 1001 are effective for three calendar
years and Form 4224 is effective for one calendar year.
On April 22, 1996, the IRS proposed regulations relating to
withholding, backup withholding and information reporting that, if adopted in
their current form would, among other things, unify current certification
procedures and forms and clarify certain reliance standards. The regulations
are proposed to be effective for payments made after December 31, 1997 but
provide that certificates issued on or before the date that is 60 days after
the proposed regulations are made final will continue to be valid until they
expire. Proposed regulations, however, are subject to change prior to their
adoption in final form.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation, partnership or other entity organized in or under
the laws of the United States or any political subdivision thereof or (iii) an
estate or trust that is subject to U.S. federal income tax regardless of the
source of its income. The term "Non-U.S. Person" means any person who is not 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 Class A
Certificates. Investors are advised to consult their own tax advisors for
specific tax advice concerning their holding and disposing of the Class A
Certificates.
AI-4
<PAGE>
PROSPECTUS
MORTGAGE LOAN ASSET-BACKED SECURITIES, ISSUABLE IN SERIES
ADVANTA
ADVANTA MORTGAGE CONDUIT SERVICES, INC.
Sponsor of the Trusts
ADVANTA
ADVANTA MORTGAGE CORP. USA
Master Servicer
This Prospectus describes certain Mortgage Loan Asset-Backed Securities
(the 'Securities') that may be issued from time to time in series and certain
classes of which may be offered hereby from time to time as described in the
related Prospectus Supplement. Each series of Securities will be issued by a
separate trust (each, a 'Trust'). The primary assets of each Trust will consist
of a segregated pool (a 'Mortgage Pool') of conventional one- to four-family
residential mortgage loans, multi-family residential mortgage loans, mixed use
mortgage loans, revolving home equity loans or certain balances thereof secured
by mortgages primarily on one-to-four-family residential properties, or
certificates of interest or participation therein (collectively, the 'Mortgage
Loans'), to be acquired by such Trust from Advanta Mortgage Conduit Services,
Inc. (the 'Sponsor'). The Sponsor will acquire the Mortgage Loans from one or
more affiliated or unaffiliated institutions (the 'Originators'). In connection
with the establishment of certain Trusts the Sponsor may first transfer the
related Trust Estate to Advanta Mortgage Receivables Inc. (the 'Transferor') and
the Transferor will then transfer such Trust Estate to the related Trust. The
use of the Transferor will not affect the obligations of the Sponsor with
respect to the related Trust or the related Securities. If the Transferor is to
be involved in a particular offering the related Prospectus Supplement will
describe its role in such offering; for purposes of this Prospectus the role of
the Transferor is subsumed in the role of the Sponsor. See 'The Mortgage Pools.'
The Mortgage Loans in each Mortgage Pool and certain other assets described
herein and in the related Prospectus Supplement (collectively with respect to
each Trust, the 'Trust Estate') and in the related Prospectus Supplement will be
held by the related Trust for the benefit of the holders of the related series
of Securities (the 'Securityholders') pursuant to a Pooling and Servicing
Agreement to the extent and as more fully described herein and in the related
Prospectus Supplement. Unless otherwise specified in the related Prospectus
Supplement, each Mortgage Pool will consist of one or more of the various types
of Mortgage Loans described under 'The Mortgage Pools.'
(Cover continued on next page)
------------------------
THE ASSETS OF THE RELATED TRUST ARE THE SOLE SOURCE OF PAYMENTS ON THE RELATED
SECURITIES. THE SECURITIES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF THE
SPONSOR, THE MASTER SERVICER, ANY ORIGINATOR OR ANY OF THEIR AFFILIATES, EXCEPT
AS SET FORTH HEREIN AND IN THE RELATED PROSPECTUS SUPPLEMENT. NEITHER THE
SECURITIES NOR THE UNDERLYING MORTGAGE LOANS WILL BE GUARANTEED OR INSURED BY
ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY THE SPONSOR, THE MASTER
SERVICER, ANY ORIGINATOR OR ANY OF THEIR AFFILIATES, EXCEPT AS SET FORTH IN THE
RELATED PROSPECTUS SUPPLEMENT. SEE ALSO 'RISK FACTORS' PAGE 13.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------------
Offers of the Securities may be made through one or more different methods,
including offerings through underwriters, as more fully described under 'Methods
of Distribution' and in the related Prospectus Supplement. There will be no
secondary market for any series of Securities prior to the offering thereof.
There can be no assurance that a secondary market for any of the Securities will
develop or, if it does develop, that it will offer sufficient liquidity of
investment or will continue.
Retain this Prospectus for future reference. This Prospectus may not be
used to consummate sales of securities offered hereby unless accompanied by a
Prospectus Supplement.
------------------------
The date of this Prospectus is September 6, 1996.
<PAGE>
(Cover continued from previous page)
Each series of Securities will include one or more classes. The Securities
of any particular class may represent beneficial ownership interests in the
related Mortgage Loans held by the related Trust, or may represent debt secured
by such Mortgage Loans, as described herein and in the related Prospectus
Supplement. A series may include one or more classes of Securities entitled to
principal distributions, with disproportionate, nominal or no interest
distributions, or to interest distributions, with disproportionate, nominal or
no principal distributions. The rights of one or more classes of Securities of
any series may be senior or subordinate to the rights of one or more of the
other classes of Securities. A series may include two or more classes of
Securities which differ as to the timing, sequential order, priority of payment,
interest rate or amount of distributions of principal or interest or both.
Information regarding each class of Securities of a series, and certain
characteristics of the Mortgage Loans to be evidenced by such Securities, will
be set forth in the related Prospectus Supplement.
THE SPONSOR'S AND THE RELATED ORIGINATORS' ONLY OBLIGATIONS WITH RESPECT TO
A SERIES OF SECURITIES WILL BE PURSUANT TO THE SERVICING REQUIREMENTS RELATING
THERETO, AND PURSUANT TO CERTAIN REPRESENTATIONS AND WARRANTIES MADE BY THE
SPONSOR OR BY SUCH ORIGINATORS, EXCEPT AS OTHERWISE DESCRIBED IN THE RELATED
PROSPECTUS SUPPLEMENT. THE PROSPECTUS SUPPLEMENT FOR EACH SERIES OF SECURITIES
WILL NAME ADVANTA MORTGAGE CORP. USA AS MASTER SERVICER (THE 'MASTER SERVICER')
WHICH WILL ACT, DIRECTLY OR THROUGH ONE OR MORE SUBSERVICERS (THE
'SUBSERVICER(S)'). THE PRINCIPAL OBLIGATIONS OF THE MASTER SERVICER WILL BE
PURSUANT TO ITS CONTRACTUAL SERVICING OBLIGATIONS (WHICH MAY INCLUDE A LIMITED
OBLIGATION TO MAKE CERTAIN ADVANCES IN THE EVENT OF DELINQUENCIES IN PAYMENTS ON
THE MORTGAGE LOANS AND INTEREST SHORTFALLS DUE TO PREPAYMENT OF MORTGAGE LOANS).
SEE 'DESCRIPTION OF THE SECURITIES.'
If so specified in the related Prospectus Supplement, the Trust Estate for
a series of Securities may include any combination of a mortgage pool insurance
policy, letter of credit, financial guaranty insurance policy, bankruptcy bond,
special hazard insurance policy, reserve fund or other form of Credit
Enhancement. In addition to or in lieu of the foregoing, Credit Enhancement with
respect to certain classes of Securities of any series may be provided by means
of subordination, cross-support among Mortgage Assets, as defined herein, or
over-collateralization. See 'Description of Credit Enhancement.'
The rate of payment of principal of each class of Securities entitled to
principal payments will depend on the priority of payment of such class and the
rate of payment (including prepayments, defaults, liquidations and repurchases
of Mortgage Loans) of the related Mortgage Loans. A rate of principal payment
lower or higher than that anticipated may affect the yield on each class of
Securities in the manner described herein and in the related Prospectus
Supplement. The various types of Securities, the different classes of such
Securities and certain types of Mortgage Loans in a given Mortgage Pool may have
different prepayment risks and credit risks. The Prospectus Supplement for a
series of Securities or the related Current Report on Form 8-K will contain
information as to (i) types, maturities and certain statistical information
relating to credit risks of the Mortgage Loans in the related Mortgage Pool,
(ii) the effect of certain rates of prepayment, based upon certain specified
assumptions for a series of Securities and (iii) priority of payment and
maturity dates of the Securities. AN INVESTOR SHOULD CAREFULLY REVIEW THE
INFORMATION IN THE RELATED PROSPECTUS SUPPLEMENT CONCERNING THE DIFFERENT
CONSEQUENCES OF THE RISKS ASSOCIATED WITH THE DIFFERENT TYPES AND CLASSES OF
SECURITIES. See 'Yield Considerations.' A Trust may be subject to early
termination under the circumstances described herein and in the related
Prospectus Supplement.
One or more separate elections may be made to treat a Trust, or one or more
segregated pools of assets held by such Trust, as a real estate mortgage
investment conduit ('REMIC') for federal income tax purposes. If applicable, the
Prospectus Supplement for a series of Securities will specify which class or
classes of the related series of Securities will be considered to be regular
interests in a REMIC and which classes of Securities or other interests will be
designated as the residual interest in a REMIC. Alternatively, a Trust may be
treated as a grantor trust or as a partnership for federal income tax purposes,
or may be treated for federal income tax purposes as a mere security device
which constitutes a collateral arrangement for the issuance of secured debt. See
'Certain Federal Income Tax Consequences' herein.
2
<PAGE>
No dealer, salesman, or any other person has been authorized to give any
information, or to make any representations, other than those contained in this
Prospectus or the related Prospectus Supplement, and, if given or made, such
information must not be relied upon as having been authorized by the Company or
any dealer, salesman, or any other person. Neither the delivery of this
Prospectus or the related Prospectus Supplement nor any sale made hereunder or
thereunder shall under any circumstances create an implication that there has
been no change in the information herein or therein since the date hereof. This
Prospectus and the related Prospectus Supplement are not an offer to sell or a
solicitation of an offer to buy any security in any jurisdiction in which it is
unlawful to make such offer or solicitation.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
CAPTION PAGE
- ------- ----
<S> <C>
Summary of Prospectus................................................. 4
Risk Factors.......................................................... 13
Risks of the Mortgage Loans....................................... 14
The Trusts............................................................ 18
The Mortgage Pools.................................................... 25
General........................................................... 25
The Mortgage Pools................................................ 25
Mortgage Loan Program................................................. 27
Underwriting Guidelines........................................... 28
Qualifications of Originators..................................... 31
Sub-Servicers..................................................... 32
Representations by Originators.................................... 32
Sub-Servicing by Originators...................................... 33
Description of the Securities......................................... 35
General........................................................... 35
Form of Securities................................................ 37
Assignment of Mortgage Loans...................................... 38
Forward Commitments; Pre-Funding.................................. 39
Payments on Mortgage Loans; Deposits to Distribution Account...... 40
Withdrawals from the Principal and Interest Account............... 43
Distributions..................................................... 43
Principal and Interest on the Securities.......................... 44
Advances.......................................................... 45
Reports to Securityholders........................................ 46
Collection and Other Servicing Procedures......................... 47
Realization Upon Defaulted Mortgage Loans......................... 48
Subordination......................................................... 49
Description of Credit Enhancement..................................... 50
Hazard Insurance; Claims Thereunder................................... 55
Hazard Insurance Policies......................................... 55
The Sponsor and the Transferor........................................ 55
The Master Servicer................................................... 56
The Pooling and Servicing Agreement................................... 56
Servicing and Other Compensation and Payment of Expenses;
Originator's Retained Yield..................................... 56
Evidence as to Compliance......................................... 57
Removal and Resignation of the Master Servicer.................... 57
Amendments........................................................ 58
<CAPTION>
CAPTION PAGE
- ------- ----
<S> <C>
Termination; Retirement of Securities............................. 59
The Trustee....................................................... 59
Yield Considerations.................................................. 62
Maturity and Prepayment Considerations................................ 63
Certain Legal Aspects of Mortgage Loans and Related Matters........... 65
General........................................................... 65
Cooperative Loans................................................. 66
Foreclosure....................................................... 67
Foreclosure on Shares of Cooperatives............................. 67
Rights of Redemption.............................................. 68
Anti-Deficiency Legislation and Other Limitations on Lenders...... 68
Environmental Legislation......................................... 69
Enforceability of Certain Provisions.............................. 70
Certain Provisions of California Deeds of Trust................... 70
Applicability of Usury Laws....................................... 71
Alternative Mortgage Instruments.................................. 71
Soldiers' and Sailors' Civil Relief Act of 1940................... 72
Certain Federal Income Tax Consequences............................... 72
General........................................................... 72
Grantor Trust Securities.......................................... 72
REMIC Securities.................................................. 74
Debt Securities................................................... 80
Discount and Premium.............................................. 81
Backup Withholding................................................ 83
Foreign Investors................................................. 84
ERISA Considerations.................................................. 84
Plan Asset Regulations............................................ 85
Prohibited Transaction Class Exemption............................ 85
Tax Exempt Investors.............................................. 87
Consultation With Counsel......................................... 87
Legal Investment Matters.............................................. 87
Use of Proceeds....................................................... 88
Methods of Distribution............................................... 88
Legal Matters......................................................... 89
Financial Information................................................. 89
Additional Information................................................ 89
Index of Principal Definitions........................................ 90
</TABLE>
UNTIL 90 DAYS AFTER THE DATE OF EACH PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE RELATED SECURITIES, WHETHER OR NOT PARTICIPATING
IN THE DISTRIBUTION THEREOF, MAY BE REQUIRED TO DELIVER THIS PROSPECTUS AND THE
RELATED PROSPECTUS SUPPLEMENT. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
3
<PAGE>
SUMMARY OF PROSPECTUS
The following summary of certain pertinent information is qualified in its
entirety by reference to the detailed information appearing elsewhere in this
Prospectus and by reference to the information with respect to each series of
Securities contained in the Prospectus Supplement to be prepared and delivered
in connection with the offering of such series. Capitalized terms used in this
summary that are not otherwise defined shall have the meanings ascribed thereto
in this Prospectus. An index indicating where certain terms used herein are
defined appears at the end of this Prospectus.
<TABLE>
<S> <C>
Securities
Offered........... Mortgage Loan Asset-Backed Securities.
Sponsor............. Advanta Mortgage Conduit Services, Inc. See 'The
Sponsor and The Transferor.'
Originators......... The Sponsor will acquire the Mortgage Loans from
one or more institutions affiliated with the
Sponsor ('Affiliated Originators') or
institutions unaffiliated with the Sponsor
('Unaffiliated Originators') (the Affiliated
Originators and the Unaffiliated Originators are
collectively referred to as the 'Originators').
The Sponsor will transfer the related Trust
Estate to the related Trust. In connection with
the establishment of certain Trusts the Sponsor
may first transfer the related Trust Estate to
the Transferor and the Transferor will then
transfer such Trust Estate to the related Trust.
The use of the Transferor will not affect the
obligations of the Sponsor with respect to the
related Trust or the related Securities. If the
Transferor is to be involved in a particular
offering the related Prospectus Supplement will
describe its role in such offering; for purposes
of this Prospectus the role of the Transferor is
subsumed in the role of the Sponsor.
Master Servicer..... Advanta Mortgage Corp. USA. See 'The Master
Servicer' and 'The Pooling and Servicing
Agreement--Removal and Resignation of the Master
Servicer.'
Sub-Servicers....... Originators may act as Sub-Servicers for Mortgage
Loans acquired by the Sponsor from such
Originators unless all servicing duties relating
to such Mortgage Loans have been transferred to
the Master Servicer or to a third-party,
unaffiliated contract servicer approved by the
Master Servicer. See 'Mortgage Loan Pro-
gram--Sub-Servicers.'
Trustee............. The trustee (the 'Trustee') for each series of
Securities will be specified in the related
Prospectus Supplement.
The Securities...... Issuance of Securities.
Each series of Securities will be issued at the
direction of the Sponsor by a separate Trust
(each, a 'Trust'). The primary assets of each
Trust will consist of a segregated pool (each, a
'Mortgage Pool') of conventional, one- to
four-family residential mortgage loans or
multi-family residential mortgage loans (the
'Mortgage Loans') or certificates of interest or
participation therein, acquired by such Trust
from the Sponsor. The Sponsor will acquire the
Mortgage Loans from one or more of the
Originators. The Securities issued by any Trust
may represent beneficial ownership interests in
the related Mortgage Loans held by the related
Trust, or may represent debt secured by such
Mortgage Loans, as described herein and in the
related Prospectus Supplement. Securities which
represent beneficial ownership interests in the
related
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Trust will be referred to as 'Certificates' in
the related Prospectus Supplement; Securities
which represent debt issued by the related Trust
will be referred to as 'Notes' in the related
Prospectus Supplement.
Each Trust will be established pursuant to an
agreement (each, a 'Trust Agreement') by and
between the Sponsor and the Trustee named
therein. Each Trust Agreement will describe the
related pool of assets to be held in trust (each
such asset pool, the 'Trust Estate'), which will
include the related Mortgage Loans and, if so
specified in the related Prospectus Supplement,
may include any combination of a mortgage pool
insurance policy, letter of credit, financial
guaranty insurance policy, special hazard
policy, reserve fund or other form of Credit
Enhancement.
The Mortgage Loans held by each Trust will be
master serviced by the Master Servicer pursuant
to a servicing agreement (each, a 'Servicing
Agreement') by and between the Master Servicer
and the related Trustee.
With respect to Securities that represent debt
issued by the related Trust, the related Trust
will enter into an indenture (each, an
'Indenture') by and between such Trust and the
trustee named on such Indenture (the 'Indenture
Trustee'), as set forth in the related
Prospectus Supplement. Securities that represent
beneficial ownership interests in the related
Trust will be issued pursuant to the related
Trust Agreement.
In the case of any individual Trust, the
contractual arrangements relating to the
establishment of the Trust, the servicing of the
related Mortgage Loans and the issuance of the
related Securities may be contained in a single
agreement, or in several agreements which
combine certain aspects of the Trust Agreement,
the Servicing Agreement and the Indenture
described above (for example, a pooling and
servicing agreement, or a servicing and
collateral management agreement). For purposes
of this Prospectus, the term 'Pooling and
Servicing Agreement' as used with respect to a
Trust means, collectively, and except as
otherwise specified, any and all agreements
relating to the establishment of the related
Trust, the servicing of the related Mortgage
Loans and the issuance of the related
Securities.
Securities Will Be Recourse to the Assets of the
Related Trust Only.
The sole source of payment for any series of
Securities will be the assets of the related
Trust (i.e., the related Trust Estate). The
Securities will not be obligations, either
recourse or non-recourse (except for certain
non-recourse debt described under 'Certain
Federal Income Tax Consequences'), of the
Sponsor, the Master Servicer, any Sub-Servicer,
any Originator or any Person other than the
related Trust. In the case of Securities that
represent beneficial ownership interest in the
related Trust Estate, such Securities will
represent the ownership of such Trust Estate;
with respect to Securities that represent debt
issued by the related Trust, such Securities
will be secured by the related Trust Estate.
Notwithstanding the foregoing, and as to be
described in the related Prospectus Supplement,
certain types of Credit Enhancement, such as a
financial guaranty insurance policy or a letter
of
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credit, may constitute a full recourse
obligation of the issuer of such Credit
Enhancement.
General Nature of the Securities as Investments.
The Securities will consist of two basic types:
(i) Securities of the fixed-income type
('Fixed-Income Securities') and (ii) Securities
of the equity participation type ('Equity
Securities'). No Class of Equity Securities will
be offered pursuant to this Prospectus or any
Prospectus Supplement related hereto.
Fixed-Income Securities will generally be styled
as debt instruments, having a principal balance
and a specified interest rate ('Interest Rate').
Fixed-Income Securities may be either benefi-
cial ownership interests in the related Mortgage
Loans held by the related Trust, or may
represent debt secured by such Mortgage Loans.
Each series or class of Fixed-Income Securities
may have a different Interest Rate, which may be
a fixed or adjustable Interest Rate. The related
Prospectus Supplement will specify the Interest
Rate for each series or class of Fixed-Income
Securities, or the initial Interest Rate and the
method for determining subsequent changes to the
Interest Rate.
A series may include one or more classes of
Fixed-Income Securities ('Strip Securities')
entitled (i) to principal distributions, with
disproportionate, nominal or no interest
distributions, or (ii) to interest
distributions, with disproportionate, nominal or
no principal distributions. In addition, a
series may include two or more classes of
Fixed-Income Securities that differ as to
timing, sequential order, priority of payment,
Interest Rate or amount of distributions of
principal or interest or both, or as to which
distributions of principal or interest or both
on any class may be made upon the occurrence of
specified events, in accordance with a schedule
or formula, or on the basis of collections from
designated portions of the related Mortgage
Pool, which series may include one or more
classes of Fixed-Income Securities ('Accrual
Securities'), as to which certain accrued
interest will not be distributed but rather will
be added to the principal balance (or nominal
principal balance, in the case of Accrual
Securities which are also Strip Securities)
thereof on each Payment Date, as hereinafter
defined and in the manner described in the
related Prospectus Supplement.
If so provided in the related Prospectus
Supplement, a series of Securities may include
one or more other classes of Fixed-Income
Securities (collectively, the 'Senior
Securities') that are senior to one or more
other classes of Fixed-Income Securities
(collectively, the 'Subordinate Securities') in
respect of certain distributions of principal
and interest and allocations of losses on
Mortgage Loans.
In addition, certain classes of Senior (or
Subordinate) Securities may be senior to other
classes of Senior (or Subordinate) Securities in
respect of such distributions or losses.
Equity Securities will represent the right to
receive the proceeds of the related Trust Estate
after all required payments have been made to
the Securityholders of the related Fixed-Income
Securities (both Senior Securities and
Subordinate Securities), and following any
required deposits to any reserve account which
may
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be established for the benefit of the
Fixed-Income Securities. Equity Securities may
constitute what are commonly referred to as the
'residual interest,' 'seller's interest' or the
'general partnership interest,' depending upon
the treatment of the related Trust for federal
income tax purposes. As distinguished from the
Fixed-Income Securities, the Equity Securities
will not be styled as having principal and
interest components. Any losses suffered by the
related Trust will first be absorbed by the
related class of Equity Securities, as described
herein and in the related Prospectus Supplement.
No Class of Equity Securities will be offered
pursuant to this Prospectus or any Prospectus
Supplement related hereto. Equity Securities may
be offered on a private placement basis or
pursuant to a separate Registration Statement to
be filed by the Sponsor. In addition, the
Sponsor and its affiliates may initially or
permanently hold any Equity Securities issued by
any Trust.
General Payment Terms of Securities.
As provided in the related Pooling and Servicing
Agreement and as described in the related
Prospectus Supplement, Securityholders will be
entitled to receive payments on their Securities
on specified dates (each, a 'Payment Date').
Payment Dates with respect to Fixed-Income
Securities will occur monthly, quarterly or
semi-annually, as described in the related
Prospectus Supplement; Payment Dates with
respect to Equity Securities will occur as
described in the related Prospectus Supplement.
The related Prospectus Supplement will describe a
date (the 'Record Date') preceding such Payment
Date, as of which the Trustee or its paying
agent will fix the identity of the Securi-
tyholders for the purpose of receiving payments
on the next succeeding Payment Date. Unless
otherwise described in the related Prospectus
Supplement, the Payment Date will be the
twenty-fifth day of each month (or, in the case
of quarterly-pay Securities, the twenty-fifth
day of every third month; and in the case of
semi-annual pay Securities, the twenty-fifth day
of every sixth month) and the Record Date will
be the close of business as of the last day of
the calendar month that precedes the calendar
month in which such Payment Date occurs.
Each Pooling and Servicing Agreement will describe
a period (each, a 'Remittance Period')
antecedent to each Payment Date (for example, in
the case of monthly-pay Securities, the calendar
month preceding the month in which a Payment
Date occurs or such other specified period).
Unless otherwise provided in the related
Prospectus Supplement, collections received on
or with respect to the related Mortgage Loans
during a Remittance Period will be required to
be remitted by the Master Servicer to the
related Trustee prior to the related Payment
Date and will be used to fund payments to
Securityholders on such Payment Date. As may be
described in the related Prospectus Supplement,
the related Pooling and Servicing Agreement may
provide that all or a portion of the principal
collected on or with respect to the related
Mortgage Loans may be applied by the related
Trustee to the acquisition of additional
Mortgage Loans during a specified period (rather
than be used to fund payments of principal to
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Securityholders during such period) with the
result that the related securities will possess
an interest-only period, also commonly referred
to as a revolving period, which will be followed
by an amortization period. Any such
interest-only or revolving period may, upon the
occurrence of certain events to be described in
the related Prospectus Supplement, terminate
prior to the end of the specified period and
result in the earlier than expected amortiza-
tion of the related Securities.
In addition, and as may be described in the
related Prospectus Supplement, the related
Pooling and Servicing Agreement may provide that
all or a portion of such collected principal may
be retained by the Trustee (and held in certain
temporary investments, including Mortgage Loans)
for a specified period prior to being used to
fund payments of principal to Securityholders.
The result of such retention and temporary
investment by the Trustee of such principal
would be to slow the amortization rate of the
related Securities relative to the amortization
rate of the related Mortgage Loans, or to
attempt to match the amortization rate of the
related Securities to an amortization schedule
established at the time such Securities are
issued. Any such feature applicable to any
Securities may terminate upon the occurrence of
events to be described in the related Prospectus
Supplement, resulting in the current
distribution of principal payments to the
specified Securityholders and an acceleration of
the amortization of such Securities.
Unless otherwise specified in the related
Prospectus Supplement, neither the Securities
nor the underlying Mortgage Loans will be
guaranteed or insured by any governmental agency
or instrumentality or the Sponsor, the Master
Servicer, any Sub-Servicer, any Originator or
any of their affiliates.
No Investment
Companies......... Neither the Sponsor nor any Trust will register as
an 'investment company' under the Investment
Company Act of 1940, as amended (the 'Investment
Company Act').
Cross-
Collateralization... Unless otherwise provided in the related Pooling
and Servicing Agreement and described in the
related Prospectus Supplement, the source of
payment for Securities of each series will be
the assets of the related Trust Estate only.
However, as may be described in the related
Prospectus Supplement, a Trust Estate may
include the right to receive moneys from a
common pool of Credit Enhancement which may be
available for more than one series of
Securities, such as a master reserve account or
a master insurance policy. Notwithstanding the
foregoing, unless specifically described
otherwise in the related Prospectus Supplement,
no collections on any Mortgage Loans held by any
Trust may be applied to the payment of
Securities issued by any other Trust (except to
the limited extent that certain collections in
excess of amounts needed to pay the related
Securities may be deposited in a common, master
reserve account that provides Credit Enhance-
ment for more than one series of Securities).
The Mortgage
Pools............. Unless otherwise specified in the related
Prospectus Supplement, each Trust Estate will
consist primarily of Mortgage Loans secured by
liens on one- to four-family residential or
multi-family properties ('Mortgages'), located
in any one of the fifty states,
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the District of Columbia, Puerto Rico or any
other Territories of the United States. All
Mortgage Loans will have been acquired by the
related Trust from the Sponsor. All Mortgage
Loans will have been originated either by (x)
one or more institutions affiliated with the
Sponsor (such affiliated institutions, the
'Affiliated Originators') or (y) one or more
institutions not affiliated with the Sponsor
(such unaffiliated institutions, the
'Unaffiliated Originators'). The Mortgage Loans
originated by the Affiliated Originators
generally will have been originated pursuant to
the standard underwriting guidelines (the
'Sponsor's Guidelines') set forth in the
Sponsor's guide for originators (the 'Sponsor's
Originator Guide'), as modified from time to
time. The Mortgage Loans originated by the
Unaffiliated Originators may be originated
either (i) generally pursuant to the Sponsor's
Guidelines; (ii) generally pursuant to such
Unaffiliated Originators' underwriting
guidelines as approved by the Sponsor ('Approved
Guidelines'); or (iii) generally pursuant to
such Originators' underwriting guidelines and
purchased by the Sponsor in a bulk acquisition
('Bulk Acquisition'). See 'Mortgage Loan Pro-
gram.' For a description of the types of
Mortgage Loans that may be included in the
Mortgage Pools, see 'The Mortgage Pools--The
Mortgage Loans.'
A Current Report on Form 8-K will be available to
purchasers or underwriters of the related series
of Securities and will generally be filed,
together with the related Pooling and Servicing
Agreement, with the Securities and Exchange
Commission within fifteen days after the initial
issuance of such series.
Forward Commitments;
Pre-Funding....... A Trust may enter into an agreement (each, a
'Forward Purchase Agreement') with the Sponsor
whereby the Sponsor will agree to transfer
additional Mortgage Loans (the 'Subsequent
Mortgage Loans') to such Trust following the
date on which such Trust is established and the
related Securities are issued. Any Forward
Purchase Agreement will require that any
Mortgage Loans so transferred to a Trust conform
to the requirements specified in such Forward
Purchase Agreement. In addition, the Forward
Purchase Agreement states that the Depositor
shall only transfer the Subsequent Mortgage
Loans upon the satisfaction of certain
conditions including that the Depositor shall
have delivered to the Certificate Insurer, the
Rating Agencies and the Trustee opinions of
counsel (including bankruptcy, corporate and tax
opinions) with respect to the transfer of the
Subsequent Mortgage Loans. If a Forward Purchase
Agreement is to be utilized, and unless other-
wise specified in the related Prospectus
Supplement, the related Trustee will be required
to deposit in a segregated account (each, a
'Pre-Funding Account') all or a portion of the
proceeds received by the Trustee in connection
with the sale of one or more classes of
Securities of the related series; subsequently,
the additional Mortgage Loans will be
transferred to the related Trust in exchange for
money released to the Sponsor from the related
Pre-Funding Account in one or more transfers.
Each Forward Purchase Agreement will set a
specified period during which any such transfers
must occur. The Forward Purchase Agreement or
the related Pooling and Servicing Agreement will
require that, if
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all moneys originally deposited to such
Pre-Funding Account are not so used by the end
of such specified period, then any remaining
moneys will be applied as a mandatory prepayment
of the related class or classes of Securities as
specified in the related Prospectus Supplement.
Credit
Enhancement....... If so specified in the Prospectus Supplement, the
Trust Estate with respect to any series of
Securities may include any one or any
combination of a letter of credit, mortgage pool
insurance policy, special hazard insurance
policy, bankruptcy bond, financial guaranty
insurance policy, reserve fund or other type of
Credit Enhancement to provide full or partial
coverage for certain defaults and losses
relating to the Mortgage Loans. Credit support
also may be provided in the form of the related
class of Equity Securities, and/or by
subordination of one or more classes of
Fixed-Income Securities in a series under which
losses in excess of those absorbed by any
related class of Equity Securities are first
allocated to any Subordinate Securities up to a
specified limit, cross-support among groups of
Mortgage Assets or overcollateralization. Unless
otherwise specified in the related Prospectus
Supplement, any mortgage pool insurance policy
will have certain exclusions from coverage
thereunder, which will be described in the
related Prospectus Supplement, which may be
accompanied by one or more separate Credit
Enhancements that may be obtained to cover
certain of such exclusions. To the extent not
set forth herein, the amount and types of
coverage, the identification of any entity
providing the coverage, the terms of any
subordination and related information will be
set forth in the Prospectus Supplement relating
to a series of Securities. See 'Description of
Credit Enhancement' and 'Subordination.'
Advances............ As to be described in the related Prospectus
Supplement, the Master Servicer may be obligated
to make certain advances with respect to
payments of delinquent scheduled interest and/or
principal on the Mortgage Loans, but only to the
extent that the Master Servicer believes that
such amounts will be recoverable by it. Any such
advance made by the Master Servicer with respect
to a Mortgage Loan is recoverable by it as
provided herein under 'Description of the
Securities--Advances' either from recoveries on
the specific Mortgage Loan or, with respect to
any such advance subsequently determined to be
nonrecoverable, out of funds otherwise
distributable to the holders of the related
series of Securities, which may include the
holders of any Senior Securities of such series.
As to be described in the related Prospectus
Supplement, the Master Servicer may be required
to advance Compensating Interest as defined
hereafter under 'Description of the Securities--
Advances.'
In addition, unless otherwise specified in the
related Prospectus Supplement, the Master
Servicer will be required to pay all 'out of
pocket' costs and expenses incurred in the
performance of its servicing obligations, but
only to the extent that the Master Servicer
reasonably believes that such amounts will
increase Net Liquidation Proceeds on the related
Mortgage Loan. See 'Description of the
Securities--Advances.'
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Optional
Termination....... The Master Servicer, the Sponsor, or, if specified
in the related Prospectus Supplement, the holders
of the related class of Equity Securities or the
Credit Enhancer may at their respective option
effect early retirement of a series of
Securities through the purchase of the Mortgage
Loans and other assets in the related Trust
Estate under the circumstances and in the manner
set forth herein under 'The Pooling and
Servicing Agreement--Termination; Retirement of
Securities' and in the related Prospectus
Supplement.
Mandatory
Termination....... The Trustee, the Master Servicer or certain other
entities specified in the related Prospectus
Supplement may be required to effect early
retirement of a series of Securities by
soliciting competitive bids for the purchase of
the related Trust Estate or otherwise, under
other circumstances and in the manner specified
in 'The Pooling and Servicing
Agreement--Termination; Retirement of Securi-
ties' and in the related Prospectus Supplement.
Legal Investment.... Not all of the Mortgage Loans in a particular
Mortgage Pool may represent first liens.
Accordingly, as disclosed in the related Pro-
spectus Supplement, certain classes of
Securities offered hereby and by the related
Prospectus Supplement may not constitute
'mortgage related securities' for purposes of
the Secondary Mortgage Market Enhancement Act of
1984 ('SMMEA') and, if so, will not be legal
investments for certain types of institutional
investors under SMMEA.
Institutions whose investment activities are
subject to legal investment laws and regulations
or to review by certain regulatory authorities
may be subject to additional restrictions on
investment in certain classes of Securities. Any
such institution should consult its own legal
advisors in determining whether and to what
extent a class of Securities constitutes legal
investments for such investors. See 'Legal
Investment' herein.
ERISA
Considerations.... A fiduciary of an employee benefit plan and
certain other retirement plans and arrangements,
including individual retirement accounts and
annuities, Keogh plans, and collective
investment funds and separate accounts in which
such plans, accounts, annuities or arrangements
are invested, that is subject to the Employee
Retirement Income Security Act of 1974, as
amended ('ERISA'), or Section 4975 of the Code
(each such entity, a 'Plan') should carefully
review with its legal advisors whether the
purchase or holding of Securities could give
rise to a transaction that is prohibited or is
not otherwise permissible either under ERISA or
Section 4975 of the Code. Investors are advised
to consult their counsel and to review 'ERISA
Considerations' herein.
Certain Federal
Income Tax
Consequences...... Securities of each series offered hereby will, for
federal income tax purposes, constitute either (i)
interests ('Grantor Trust Securities') in a
Trust treated as a grantor trust under
applicable provisions of the Code, (ii) 'regular
interests' ('REMIC Regular Securities') or
'residual interests' ('REMIC Residual Securi-
ties') in a Trust treated as a REMIC (or, in
certain instances, containing one or more
REMIC's) under Sections 860A through 860G of the
Code, (iii) debt issued by a Trust ('Debt
Securities')
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or (iv) interests in a Trust which is treated as
a partnership ('Partnership Interests').
Investors are advised to consult their tax
advisors and to review 'Certain Federal Income
Tax Consequences' herein and in the related
Prospectus Supplement.
Registration of
Securities........ Securities may be represented by global securities
registered in the name of Cede & Co. ('Cede'), as
nominee of The Depository Trust Company ('DTC'),
or another nominee. In such case,
Securityholders will not be entitled to receive
definitive securities representing such Holders'
interests, except in certain circumstances
described in the related Prospectus Supplement.
See 'Description of the Securities--Form of
Securities' herein.
Ratings............. Each class of Fixed-Income Securities offered
pursuant to the related Prospectus Supplement will
be rated in one of the four highest rating
categories by one or more 'national statistical
rating organizations,' as defined in the
Securities Exchange Act of 1934, as amended (the
'Exchange Act'), and commonly referred to as
'Rating Agencies.' Such ratings will address, in
the opinion of such Rating Agencies, the
likelihood that the related Trust will be able
to make timely payment of all amounts due on the
related Fixed-Income Securities in accordance
with the terms thereof. Such ratings will
neither address any prepayment or yield
considerations applicable to any Securities nor
constitute a recommendation to buy, sell or hold
any Securities.
Equity Securities will not be rated.
The ratings expected to be received with respect
to any Securities will be set forth in the
related Prospectus Supplement.
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RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Securities.
Limited Liquidity. There can be no assurance that a secondary market for
the Securities of any series or class will develop or, if it does develop, that
it will provide Securityholders with liquidity of investment or that it will
continue for the life of the Securities of any series. The Prospectus Supplement
for any series of Securities may indicate that an underwriter specified therein
intends to establish a secondary market in such Securities; however, no
underwriter will be obligated to do so. Unless otherwise specified in the
related Prospectus Supplement, the Securities will not be listed on any
securities exchange.
Limited Obligations. The Securities will not represent an interest in or
obligation, either recourse or non-recourse (except for certain non-recourse
debt described under 'Certain Federal Income Tax Consequences'), of the Sponsor,
the Master Servicer, any Originator (as defined herein) or any person other than
the related Trust. The only obligations of the foregoing entities with respect
to the Securities or the Mortgage Loans will be the obligations (if any) of the
Sponsor, the related Originators and the Master Servicer pursuant to certain
limited representations and warranties made with respect to the Mortgage Loans,
the Master Servicer's servicing obligations under the related Pooling and
Servicing Agreement (including its limited obligation, if any, to make certain
advances in the event of delinquencies on the Mortgage Loans, but only to the
extent deemed recoverable) and, if and to the extent expressly described in the
related Prospectus Supplement, certain limited obligations of the Sponsor,
Master Servicer, applicable Sub-Servicer, or another party in connection with a
purchase obligation ('Purchase Obligation') or an agreement to purchase or act
as remarketing agent with respect to a Convertible Mortgage Loan upon conversion
to a fixed rate. Notwithstanding the foregoing, and as to be described in the
related Prospectus Supplement, certain types of Credit Enhancement, such as a
financial guaranty insurance policy or a letter of credit, may constitute a full
recourse obligation of the issuer of such Credit Enhancement. Except as
described in the related Prospectus Supplement, neither the Securities nor the
underlying Mortgage Loans will be guaranteed or insured by any governmental
agency or instrumentality, or by the Sponsor, the Master Servicer, any
Sub-Servicer or any of their affiliates. Proceeds of the assets included in the
related Trust Estate for each series of Securities (including the Mortgage Loans
and any form of Credit Enhancement) will be the sole source of payments on the
Securities, and there will be no recourse to the Sponsor or any other entity in
the event that such proceeds are insufficient or otherwise unavailable to make
all payments provided for under the Securities.
Limitations, Reduction and Substitution of Credit Enhancement. With
respect to each series of Securities, Credit Enhancement will be provided in
limited amounts to cover certain types of losses on the underlying Mortgage
Loans. Credit Enhancement will be provided in one or more of the forms referred
to herein, including, but not limited to: a letter of credit; a Purchase
Obligation; a mortgage pool insurance policy; a special hazard insurance policy;
a bankruptcy bond; a reserve fund; a financial guaranty insurance policy or
other type of Credit Enhancement to provide partial coverage for certain
defaults and losses relating to the Mortgage Loans. Credit Enhancement also may
be provided in the form of the related class of Equity Securities, subordination
of one or more classes of Fixed-Income Securities in a series under which losses
in excess of those absorbed by any related class of Equity Securities are first
allocated to any Subordinate Securities up to a specified limit, cross-support
among Mortgage Assets and/or overcollateralization. See 'Subordination' and
'Description of Credit Enhancement' herein. Regardless of the form of Credit
Enhancement provided, the coverage will be limited in amount and in most cases
will be subject to periodic reduction in accordance with a schedule or formula.
Furthermore, such Credit Enhancements may provide only very limited coverage as
to certain types of losses, and may provide no coverage as to certain other
types of losses. Generally, Credit Enhancements do not directly or indirectly
guarantee to the investors any specified rate of prepayments. The Master
Servicer will generally be permitted to reduce, terminate or substitute all or a
portion of the Credit Enhancement for any series of Securities, if the
applicable Rating Agency indicates that the then-current rating thereof will not
be adversely affected. To the extent not set forth herein, the amount and types
of coverage, the identification of any entity providing the coverage, the terms
of any subordination and related information will be set forth in the Prospectus
Supplement relating to a series of Securities. See 'Description of Credit
Enhancement' and 'Subordination.'
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RISKS OF THE MORTGAGE LOANS
Risk of the Losses Associated with Junior Liens. Certain of the Mortgage
Loans will be secured by junior liens subordinate to the rights of the mortgagee
or beneficiary under each related senior mortgage or deed of trust. As a result,
the proceeds from any liquidation, insurance or condemnation proceedings will be
available to satisfy the principal balance of a mortgage loan only to the extent
that the claims, if any, of each such senior mortgagee or beneficiary are
satisfied in full, including any related foreclosure costs. In addition, a
mortgagee secured by a junior lien may not foreclose on the related mortgaged
property unless it forecloses subject to the related senior mortgage or
mortgages, in which case it must either pay the entire amount of each senior
mortgage to the applicable mortgagee at or prior to the foreclosure sale or
undertake the obligation to make payments on each senior mortgage in the event
of default thereunder. In servicing junior lien loans in its portfolio, it has
been the practice of the Master Servicer to satisfy each such senior mortgage at
or prior to the foreclosure sale only to the extent that it determines any
amounts so paid will be recoverable from future payments and collections on such
junior lien loans or otherwise. The Trusts will not have any source of funds to
satisfy any such senior mortgage or make payments due to any senior mortgagee.
See 'Certain Legal Aspects of Mortgage Loans and Related Matters--Foreclosure.'
Risk of Losses Associated with Declining Real Estate Values. An investment
in securities such as the Securities that generally represent beneficial
ownership interests in the Mortgage Loans or debt secured by such Mortgage Loans
may be affected by, among other things, a decline in real estate values and
changes in the borrowers' financial condition. No assurance can be given that
values of the Mortgaged Properties have remained or will remain at their levels
on the dates of origination of the related Mortgage Loans. If the residential
real estate market should experience an overall decline in property values such
that the outstanding balances of any senior liens, the Mortgage Loans and any
secondary financing on the Mortgaged Properties in a particular Mortgage Pool
become equal to or greater than the value of the Mortgaged Properties, the
actual rates of delinquencies, foreclosures and losses could be higher than
those now generally experienced in the nonconforming credit mortgage lending
industry. Such a decline could extinguish the interest of the related Trust in
the Mortgaged Properties before having any effect on the interest of the related
senior mortgagee. In addition, in the case of Mortgage Loans that are subject to
negative amortization, due to the addition to principal balance of deferred
interest ('Deferred Interest'), the principal balances of such Mortgage Loans
could be increased to an amount equal to or in excess of the value of the
underlying Mortgaged Properties, thereby increasing the likelihood of default.
To the extent that such losses are not covered by the applicable Credit
Enhancement, holders of Securities of the series evidencing interests in the
related Mortgage Pool will bear all risk of loss resulting from default by
Mortgagors and will have to look primarily to the value of the Mortgaged
Properties for recovery of the outstanding principal and unpaid interest on the
defaulted Mortgage Loans.
Risk of Losses Associated with Certain Non-Conforming Credit and
Non-Traditional Loans. The Sponsor's underwriting standards consider, among
other things, a mortgagor's credit history, repayment ability and debt
service-to-income ratio, as well as the value of the property; however, the
Sponsor's Mortgage Loan program generally provides for the origination of
Mortgage Loans relating to non-conforming credits. For purposes hereof,
'non-conforming credit' means a mortgage loan which, based upon standard
underwriting guidelines, is ineligible for purchase by the Federal National
Mortgage Association ('FNMA') or the Federal Home Loan Mortgage Corporation
('FHLMC') due to credit characteristics that do not meet FNMA or FHLMC
guidelines, respectively. Certain of the types of loans that may be included in
the Mortgage Pools may involve additional uncertainties not present in
traditional types of loans. For example, certain of the Mortgage Loans may
provide for escalating or variable payments by the borrower under the Mortgage
Loan (the 'Mortgagor'), as to which the Mortgagor is generally qualified on the
basis of the initial payment amount. In some instances the Mortgagors' income
may not be sufficient to enable them to continue to make their loan payments as
such payments increase and thus the likelihood of default will increase. For a
more detailed discussion, see 'Mortgage Loan Program.'
Risk of Losses Associated with Balloon Loans. Certain of the Mortgage
Loans may constitute 'Balloon Loans.' Balloon Loans are originated with a stated
maturity of less than the period of time of the corresponding amortization
schedule. Consequently, upon the maturity of a Balloon Loan, the Mortgagor will
be required to make a 'balloon' payment that will be significantly larger than
such Mortgagor's previous monthly payments. The ability of such a Mortgagor to
repay a Balloon Loan at maturity frequently will depend on such borrower's
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ability to refinance the Mortgage Loan. The ability of a Mortgagor to refinance
such a Mortgage Loan will be affected by a number of factors, including the
level of available mortgage rates at the time, the value of the related
Mortgaged Property, the Mortgagor's equity in the related Mortgaged Property,
the financial condition of the Mortgagor, the tax laws and general economic
conditions at the time.
Although a low interest rate environment may facilitate the refinancing of
a balloon payment, the receipt and reinvestment by Securityholders of the
proceeds in such an environment may produce a lower return than that previously
received in respect of the related Mortgage Loan. Conversely, a high interest
rate environment may make it more difficult for the Mortgagor to accomplish a
refinancing and may result in delinquencies or defaults. None of the Sponsor,
the Originators, the Master Servicer, any Sub-Servicer or the Trustee will be
obligated to provide funds to refinance any Mortgage Loan, including Balloon
Loans.
Risk of Losses Associated with ARM Loans. ARM Loans may be underwritten on
the basis of an assessment that Mortgagors will have the ability to make
payments in higher amounts after relatively short periods of time. In some
instances, Mortgagors' income may not be sufficient to enable them to continue
to make their loan payments as such payments increase and thus the likelihood of
default will increase.
Risk of Losses Associated with Bankruptcy of Mortgagors. General economic
conditions have an impact on the ability of borrowers to repay Mortgage Loans.
Loss of earnings, illness and other similar factors also may lead to an increase
in delinquencies and bankruptcy filings by borrowers. In the event of personal
bankruptcy of a Mortgagor, it is possible that a Trust could experience a loss
with respect to such Mortgagor's Mortgage Loan. In conjunction with a
Mortgagor's bankruptcy, a bankruptcy court may suspend or reduce the payments of
principal and interest to be paid with respect to such Mortgage Loan or
permanently reduce the principal balance of such Mortgage Loan thereby either
delaying or permanently limiting the amount received by the Trust with respect
to such Mortgage Loan. Moreover, in the event a bankruptcy court prevents the
transfer of the related Mortgaged Property to a Trust, any remaining balance on
such Mortgage Loan may not be recoverable.
Risk of Losses Associated with Mortgaged Properties. Even assuming that
the Mortgaged Properties provide adequate security for the Mortgage Loans,
substantial delays could be encountered in connection with the liquidation of
defaulted Mortgage Loans and corresponding delays in the receipt of related
proceeds by the Securityholders could occur. An action to foreclose on a
Mortgaged Property securing a Mortgage Loan is regulated by state statutes,
rules and judicial decisions and is subject to many of the delays and expenses
of other lawsuits if defenses or counterclaims are interposed, sometimes
requiring several years to complete. Furthermore, in some states an action to
obtain a deficiency judgment is not permitted following a nonjudicial sale of a
Mortgaged Property. In the event of a default by a Mortgagor, these
restrictions, among other things, may impede the ability of the Master Servicer
to foreclose on or sell the Mortgaged Property or to obtain liquidation proceeds
(net of expenses) ('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 ('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. In the event that any Mortgaged
Properties fail to provide adequate security for the related Mortgage Loans and
insufficient funds are available from any applicable Credit Enhancement,
Securityholders could experience a loss on their investment.
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.
Under environmental legislation and judicial decisions applicable in
various states, a secured party that takes a deed in lieu of foreclosure, or
acquires at a foreclosure sale a mortgaged property that, prior to foreclosure,
has been involved in decisions or actions which may lead to contamination of a
property, may be liable for the costs of cleaning up the purportedly
contaminated site. Although such costs could be substantial, it is unclear
whether they would be imposed on a holder of a mortgage note (such as a Trust)
which, under the terms of the Pooling
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and Servicing Agreement, is not required to take an active role in operating the
Mortgaged Properties. See 'Certain Legal Aspects of Mortgage Loans and Related
Matters--Environmental Legislation.'
Certain of the Mortgaged Properties relating to Mortgage Loans may not be
owner occupied. It is possible that the rate of delinquencies, foreclosures and
losses on Mortgage Loans secured by nonowner occupied properties could be higher
than for loans secured by the primary residence of the borrower.
Litigation. Any material litigation relating to the Sponsor or the Master
Servicer will be specified in the related Prospectus Supplement.
Geographic Concentration of Mortgaged Properties. Certain geographic
regions from time to time will experience weaker regional economic conditions
and housing markets than will other regions, and, consequently, will experience
higher rates of loss and delinquency on mortgage loans generally. The Mortgage
Loans underlying certain series of Securities may be concentrated in such
regions, and such concentrations may present risk considerations in addition to
those generally present for similar mortgage loan asset-backed securities
without such concentrations. Information with respect to geographic
concentration of Mortgaged Properties will be specified in the related
Prospectus Supplement or related Current Report on Form 8-K.
Legal Considerations. Applicable state laws generally regulate interest
rates and other charges, require certain disclosures, and require licensing of
the Originators and the Master Servicer and Sub-Servicers. In addition, most
states have other laws, public policy and general principles of equity relating
to the protection of consumers, unfair and deceptive practices and practices
that may apply to the origination, servicing and collection of the Mortgage
Loans. Depending on the provisions of the applicable law and the specific facts
and circumstances involved, violations of these laws, policies and principles
may limit the ability of the Master Servicer to collect all or part of the
principal of or interest on the Mortgage Loans, may entitle the borrower to a
refund of amounts previously paid and, in addition, could subject the Master
Servicer to damages and administrative sanctions. See 'Certain Legal Aspects of
Mortgage Loans and Related Matters.'
The Mortgage Loans may also be subject to federal laws, including: (i) the
Federal Truth-in-Lending Act and Regulation Z promulgated thereunder and the
Real Estate Settlement Procedures Act and Regulation X promulgated thereunder,
which require certain disclosures to the borrowers regarding the terms of the
Mortgage Loans; (ii) the Equal Credit Opportunity Act and Regulation B
promulgated thereunder, which prohibit discrimination on the basis of age, race,
color, sex, religion, marital status, national origin, receipt of public
assistance or the exercise of any right under the Consumer Credit Protection
Act, in the extension of credit; and (iii) 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 laws, policies and general
principles of equity may limit the ability of the Master Servicer to collect all
or part of the principal of or interest on the Mortgage Loans, may entitle the
borrower to rescind the loan or to a refund of amounts previously paid and, in
addition, could subject the Master Servicer to damages and administrative
sanctions. If the Master Servicer is unable to collect all or part of the
principal or interest on the Mortgage Loans because of a violation of the
aforementioned laws, public policies or general principles of equity then the
Trust may be delayed or unable to repay all amounts owed to Investors.
Furthermore, depending upon whether damages and sanctions are assessed against
the Master Servicer or an Originator, such violations may materially impact the
financial ability of the Sponsor to continue to act as Master Servicer or the
ability of an Originator to repurchase or replace Mortgage Loans if such
violation breaches a representation or warranty contained in a Pooling and
Servicing Agreement.
Yield and Prepayment Considerations. The yield to maturity of the
Securities of each series will depend on the rate of payment of principal
(including prepayments, liquidations due to defaults, and repurchases due to
conversion of adjustable-rate mortgage loans ('ARM Loans') to fixed-rate loans
or breaches of representations and warranties) on the Mortgage Loans and the
price paid by Securityholders. Such yield may be adversely affected by a higher
or lower than anticipated rate of prepayments on the related Mortgage Loans. The
yield to maturity on Strip Securities or Securities purchased at premiums or
discounted to par will be extremely sensitive to the rate of prepayments on the
related Mortgage Loans. In addition, the yield to maturity on certain other
types of classes of Securities, including Accrual Securities or certain other
classes in a series including more than one class of Securities, may be
relatively more sensitive to the rate of prepayment on the related Mortgage
Loans than other classes of Securities.
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Unless otherwise specified in the related Prospectus Supplement, the
Mortgage Loans may be prepaid in full or in part at any time; however, a
prepayment penalty or premium may be imposed in connection therewith. Unless so
specified in the related Prospectus Supplement, such penalties will not be
property of the related Trust. The rate of prepayments of the Mortgage Loans
cannot be predicted and is influenced by a wide variety of economic, social, and
other factors, including prevailing mortgage market in terest rates, the
availability of alternative financing, local and regional economic conditions
and homeowner mobility. Therefore, no assurance can be given as to the level of
prepayments that a Trust will experience.
Prepayments may result from mandatory prepayments relating to unused moneys
held in Pre-Funding Accounts, if any, voluntary early payments by borrowers
(including payments in connection with refinancings of the related senior
Mortgage Loan or Loans), sales of Mortgaged Properties subject to 'due-on-sale'
provisions and liquidations due to default, as well as the receipt of proceeds
from physical damage, credit life and disability insurance policies. In
addition, repurchases or purchases from a Trust of Mortgage Loans or
substitution adjustments required to be made under the Pooling and Servicing
Agreement will have the same effect on the Securityholders as a prepayment of
such Mortgage Loans. Unless otherwise specified in the related Prospectus
Supplement, all of the Mortgage Loans contain 'due-on-sale' provisions, and the
Master Servicer will be required to enforce such provisions unless (i) the
'due-on-sale' clause, in the reasonable belief of the Master Servicer, is not
enforceable under applicable law or (ii) the Master Servicer reasonably believes
that to permit an assumption of the Mortgage Loan would not materially and
adversely affect the interests of the Securityholders or of the related Credit
Enhancer, if any. See 'The Pooling and Servicing Agreement' in the related
Prospectus Supplement.
Collections on the Mortgage Loans may vary due to the level of incidence of
delinquent payments and of prepayments. Collections on the Mortgage Loans may
also vary due to seasonal purchasing and payment habits of borrowers.
Book-Entry Registration. Issuance of the Securities in book-entry form may
reduce the liquidity of such Securities in the secondary trading market since
investors may be unwilling to purchase Securities for which they cannot obtain
definitive physical securities representing such Securityholders' interests,
except in certain circumstances described in the related Prospectus Supplement.
Since transactions in Securities will, in most cases, be able to be
effected only through DTC, direct or indirect participants in DTC's book-entry
system ('Direct or Indirect Participants') and certain banks, the ability of a
Securityholder to pledge a Security to persons or entities that do not
participate in the DTC system, or otherwise to take actions in respect of such
Securities, may be limited due to lack of a physical security representing the
Securities.
Securityholders may experience some delay in their receipt of distributions
of interest on and principal of the Securities since distributions may be
required to be forwarded by the Trustee to DTC and, in such a case, DTC will be
required to credit such distributions to the accounts of its Participants which
thereafter will be required to credit them to the accounts of the applicable
class of Securityholders either directly or indirectly through Indirect
Participants. See 'Description of the Securities--Form of Securities.'
The Status of the Mortgage Loans in the Event of Bankruptcy of the Sponsor
or an Originator. In the event of the bankruptcy of the Sponsor or an
Originator at a time when it or any affiliate thereof holds an Equity Security,
a trustee in bankruptcy of the Sponsor, an Originator, or its creditors could
attempt to recharacterize the sale of the Mortgage Loans to the related Trust as
a borrowing by the Sponsor, the Originator or such affiliate with the result, if
such recharacterization is upheld, that the Securityholders would be deemed
creditors of the Sponsor, the Originator or such affiliate, secured by a pledge
of the Mortgage Loans. If such an attempt were successful, it could prevent
timely payments of amounts due to the Trust.
Limitations on Interest Payments and Foreclosures. Generally, under the
terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as amended (the
'Relief Act'), or similar state legislation, a Mortgagor who enters military
service after the origination of the related Mortgage Loan (including a
Mortgagor who is a member of the National Guard or is in reserve status at the
time of the origination of the Mortgage Loan and is later called to active duty)
may not be charged interest (including fees and charges) above an annual rate of
6% during the period of such Mortgagor's active duty status, unless a court
orders otherwise upon application of the
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lender. It is possible that such action could have an effect, for an
indeterminate period of time, on the ability of the Master Servicer to collect
full amounts of interest on certain of the Mortgage Loans. In addition, the
Relief Act imposes limitations that would impair the ability of the Master
Servicer to foreclose on an affected Mortgage Loan during the Mortgagor's period
of active duty status. Thus, in the event that such a Mortgage Loan goes into
default, there may be delays and losses occasioned by the inability to realize
upon the Mortgaged Property in a timely fashion.
Security Rating. The rating of Securities credit enhanced through external
Credit Enhancement such as a letter of credit, financial guaranty insurance
policy or mortgage pool insurance will depend primarily on the creditworthiness
of the issuer of such external Credit Enhancement device (a 'Credit Enhancer').
Any reduction in the rating assigned to the claims-paying ability of the related
Credit Enhancer below the rating initially given to the Securities would likely
result in a reduction in the rating of the Securities. See 'Ratings' in the
Prospectus Supplement.
THE TRUSTS
A Trust for any series of Securities will include the primary mortgage
assets ('Mortgage Assets') consisting of (A) a Mortgage Pool comprised of (i)
Single Family Loans, (ii) Multi-family Loans, (iii) Cooperative Loans, (iv)
Contracts, (v) Home Improvement Loans, or (vi) other loans or (B) certificates
of interest or participation in the items described in clause (A) or in pools of
such items, in each case, as specified in the related Prospectus Supplement,
together with payments in respect of such primary Mortgage Assets and certain
other accounts, obligations or agreements, in each case as specified in the
related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, the
Securities will be entitled to payment only from the assets of the related Trust
(i.e., the related Trust Estate) and will not be entitled to payments in respect
of the assets of any other related Trust Estate established by the Sponsor, the
Originators or any of their affiliates. If specified in the related Prospectus
Supplement, certain Securities will evidence the entire fractional undivided
ownership interest in the related Mortgage Loans held by the related Trust or
may represent debt secured by the related Mortgage Loans.
The following is a brief description of the Mortgage Assets expected to be
included in the related Trusts. If specific information respecting the primary
Mortgage Assets is not known at the time the related series of Securities
initially is offered, information of the nature described below will be provided
in the Prospectus Supplement, and specific information will be set forth in a
report on Form 8-K to be filed with the Commission within fifteen days after the
initial issuance of such Securities (the 'Detailed Description'). A copy of the
Pooling and Servicing Agreement with respect to each Series of Securities will
be attached to the Form 8-K and will be available for inspection at the
corporate trust office of the Trustee specified in the related Prospectus
Supplement. A schedule of the Mortgage Assets relating to such Series (the
'Mortgage Asset Schedule') will be attached to the Pooling and Servicing
Agreement delivered to the Trustee upon delivery of the Securities.
The Mortgage Loans--General. The real properties and Manufactured Homes,
as the case may be, that secure repayment of the Mortgage Loans and Contracts
(the 'Mortgaged Properties') may be located in any one of the fifty states, the
District of Columbia, Puerto Rico or any other Territories of the United States.
Unless otherwise specified in the related Prospectus Supplement, the Mortgage
Loans or Contracts will be 'Conventional Loans' (i.e., loans that are not
insured or guaranteed by any governmental agency). If specified in the related
Prospectus Supplement, Mortgage Loans with certain loan-to-value ratios and/or
certain principal balances may be covered wholly or partially by primary
mortgage insurance policies. Unless otherwise specified in the related
Prospectus Supplement, all of the Mortgage Loans will be covered by standard
hazard insurance policies (which may be in the form of a blanket or forced
placed hazard insurance policy). The existence, extent and duration of any such
coverage will be described in the applicable Prospectus Supplement. Unless
otherwise described in the related Prospectus Supplement, the Mortgage Loans
will not be guaranteed or insured by any government agency or other insurer.
Unless otherwise specified in the related Prospectus Supplement, all of the
Mortgage Loans in a Mortgage Pool will provide for payments to be made monthly
('monthly pay') or bi-weekly. The payment terms of the Mortgage Loans to be
included in a Trust will be described in the related Prospectus Supplement and
may
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include any of the following features or combination thereof or other features
described in the related Prospectus Supplement:
(a) Interest may be payable at a Fixed Rate, or an Adjustable Rate
(i.e., a rate that is adjustable from time to time in relation to an index,
a rate that is fixed for a period of time and under certain circumstances
is followed by an adjustable rate, a rate that otherwise varies from time
to time, or a rate that is convertible from an adjustable rate to a fixed
rate). The specified rate of interest on a Mortgage Loan is its 'Mortgage
Rate.' Changes to an Adjustable Rate may be subject to periodic
limitations, maximum rates, minimum rates or a combination of such
limitations. Accrued interest may be deferred and added to the principal of
a Mortgage Loan for such periods and under such circumstances as may be
specified in the related Prospectus Supplement. If provided for in the
Prospectus Supplement, certain 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, and the amount of any difference may be contributed from
(i) an amount (such amount, exclusive of investment earnings thereon, being
hereinafter referred to as 'Buydown Funds') funded by the originator of the
Mortgage Loan or another source (including the Master Servicer or the
related Originator and the builder of the Mortgaged Property) and placed in
a custodial account (the 'Buydown Account') and (ii) if the Buydown Funds
are contributed on a present value basis, investment earnings on such
Buydown Funds.
(b) Principal may be payable on a level debt service basis to fully
amortize the Mortgage Loan over its term, may be calculated on the basis of
an assumed amortization schedule that is significantly longer than the
original term to maturity or on an interest rate that is different from the
Mortgage Rate, or may not be amortized during all or a portion of the
original term. Payment of all or a substantial portion of the principal may
be due on maturity ('balloon payments'). Principal may include interest
that has been deferred and added to the principal balance of the Mortgage
Loan.
(c) Monthly payments of principal and interest may be fixed for the
life of the Mortgage Loan, may increase over a specified period of time
('graduated payments') or may change from period to period. Mortgage Loans
may include limits on periodic increases or decreases in the amount of
monthly payments and may include maximum or minimum amounts of monthly
payments. Mortgage Loans having graduated payment provisions may provide
for deferred payment of a portion of the interest due monthly during a
specified period, and recoup the deferred interest through negative
amortization during such period whereby the difference between the interest
paid during such period and interest accrued during such period is added
monthly to the outstanding principal balance. Other Mortgage Loans
sometimes referred to as 'growing equity' mortgage loans may provide for
periodic scheduled payment increases for a specified period with the full
amount of such increases being applied to principal.
(d) Prepayments of principal may be subject to a prepayment fee, which
may be fixed for the life of the Mortgage Loan or may decline over time,
and may be prohibited for the life of the Mortgage Loan or for certain
periods ('lockout periods'). Certain Mortgage Loans may permit prepayments
after expiration of the applicable lockout period and may require the
payment of a prepayment fee in connection therewith. Other Mortgage Loans
may permit prepayments without payment of a fee unless the prepayment
occurs during specified time periods. The Mortgage Loans may include
due-on-sale clauses which permit the mortgagee to demand payment of the
entire Mortgage Loan in connection with the sale or certain transfers of
the related Mortgaged Property. Other Mortgage Loans may be assumable by
persons meeting the then applicable underwriting standards of the related
Originator.
(e) As more fully described in the related Prospectus Supplement, the
Mortgage Loans may consist, in whole or in part, of revolving home equity
loans or certain balances thereof ('Revolving Credit Line Loans'). Interest
on each Revolving Credit Line Loan, excluding introductory rates offered
from time to time during promotional periods, may be computed and payable
monthly on the average daily outstanding principal balance of such loan.
From time to time prior to the expiration of the related draw period
specified in a Revolving Credit Line Loan, principal amounts on such
Revolving Credit Line Loan may be drawn down (up to a maximum amount as set
forth in the related Prospectus Supplement) or repaid. If specified in the
related Prospectus Supplement, new draws by borrowers under the Revolving
Credit Line Loans will
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automatically become part of the Trust Estate described in such Prospectus
Supplement. As a result, the aggregate balance of the Revolving Credit Line
Loans will fluctuate from day to day as new draws by borrowers are added to
the Trust Estate and principal payments are applied to such balances and
such amounts will usually differ each day, as more specifically described
in the related Prospectus Supplement. Under certain circumstances, under a
Revolving Credit Line Loan, a borrower may, during the related draw period,
choose an interest only payment option, during which the borrower is
obligated to pay only the amount of interest which accrues on the loan
during the billing cycle, and may also elect to pay all or a portion of the
principal. An interest only payment option may terminate at the end of the
related draw period, after which the borrower must begin paying at least a
minimum monthly portion of the average outstanding principal balance of the
loan.
Except as otherwise described in the related Prospectus Supplement or in
the related Current Report on Form 8-K, interest will be calculated on each
Mortgage Loan pursuant to one of three methods:
Date of Payment Loans. Date of Payment Loans provide that interest is
charged to the Mortgagor at the applicable Mortgage Rate on the outstanding
principal balance of such Note and calculated based on the number of days
elapsed between receipt of the Mortgagor's last payment through receipt of
the Mortgagor's most current payment. Such interest is deducted from the
Mortgagor's payment amount and the remainder, if any, of the payment is
applied as a reduction to the outstanding principal balance of such Note.
Although the Mortgagor is required to remit equal monthly payments on a
specified monthly payment date that would reduce the outstanding principal
balance of such Note to zero at such Note's maturity date, payments that
are made by the Mortgagor after the due date therefor would cause the
outstanding principal balance of such Note not to be reduced to zero. In
such a case, the Mortgagor would be required to make an additional
principal payment at the maturity date for such Note. On the other hand, if
a Mortgagor makes a payment (other than a prepayment) before the due date
therefor, the reduction in the outstanding principal balance of such Note
would occur over a shorter period of time than it would have occurred had
it been based on the original amortization schedule of such Note.
Actuarial Loans. Actuarial Loans provide that interest is charged to
the Mortgagor thereunder, and payments are due from such Mortgagor, as of a
scheduled day of each month which is fixed at the time of origination.
Scheduled monthly payments made by the Mortgagors on the Actuarial Loans
either earlier or later than the scheduled due dates thereof will not
affect the amortization schedule or the relative application of such
payments to principal and interest.
Rule of 78's Loans. A Rule of 78's Loan provides for the payment by
the related Mortgagor of a specified total amount of payments, payable in
equal monthly installments on each due date, which total represents the
principal amount financed and add-on interest in an amount calculated on
the basis of the stated Mortgage Rate for the term of the Loan. The rate at
which such amount of add-on interest is earned and, correspondingly, the
amount of each fixed monthly payment allocated to reduction of the
outstanding principal are calculated in accordance with the 'Rule of 78's.'
Under a Rule of 78's Loan, the amount of a payment allocable to interest is
determined by multiplying the total amount of add-on interest payable over
the term of the loan by a fraction derived as described below.
The fraction used in the calculation of add-on interest earned each month
under a Rule of 78's Loan has as its denominator a number equal to the sum of a
series of numbers. The series of numbers begins with one and ends with the
number of monthly payments due under the loan. For example, with a loan
providing for 12 payments, the denominator of each month's fraction will be 78,
the sum of the series of numbers from 1 to 12. The numerator of the fraction for
a given month is the number of original payments to stated maturity less the
number of payments made up to but not including the current month. Accordingly,
in the example of a twelve-month loan, the fraction for the first payment is,
for the second payment, for the third party, and so on through the final
payment, for which the fraction is. The applicable fraction is then multiplied
by the total add-on interest payable over the entire term of the loan, and the
resulting amount is the amount of add-on interest 'earned' that month. The
difference between the amount of the monthly payment by the obligor and the
amount of earned add-on interest calculated for the month is applied to
principal reduction. Rule of 78's Loans are non-level yield instruments. The
yield in the initial months of a Rule of 78's Loans is somewhat higher than the
stated Mortgage
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Rate (computed on an actuarial basis) and the yield in the later months of the
loan is somewhat less than such stated Mortgage Rate.
The Prospectus Supplement for each series of Securities or the Current
Report on Form 8-K will contain certain information with respect to the Mortgage
Loans (or a sample thereof) contained in the related Mortgage Pool; such
information, insofar as it may relate to statistical information relating to
such Mortgage Loans will be presented as of a date certain (the 'Statistic
Calculation Date') which may also be the related cut-off date (the 'Cut-Off
Date'). Such information will include to the extent applicable to the particular
Mortgage Pool (in all cases as of the Statistic Calculation Date) (i) the
aggregate outstanding principal balance and the average outstanding principal
balance of the Mortgage Loans, (ii) the largest principal balance and the
smallest principal balance of any of the Mortgage Loans, (iii) the types of
Mortgaged Property securing the Mortgage Loans (e.g., one- to four-family
houses, vacation and second homes, Manufactured Homes, multifamily apartments or
other real property), (iv) the original terms to stated maturity of the Mortgage
Loans, (v) the weighted average remaining term to maturity of the Mortgage Loans
and the range of the remaining terms to maturity; (vi) the earliest origination
date and latest maturity date of any of the Mortgage Loans, (vii) the weighted
average CLTV and the range of CLTV's of the Mortgage Loans at origination,
(viii) the weighted average Mortgage Rate or annual percentage rate (as
determined under Regulation Z) (the 'APR') and ranges of Mortgage Rates or APRs
borne by the Mortgage Loans, (ix) in the case of Mortgage Loans having
adjustable rates, the weighted average of the adjustable rates and indices, if
any; (x) the aggregate outstanding principal balance, if any, of Buy-Down Loans
and Mortgage Loans having graduated payment provisions; (xi) the amount of any
mortgage pool insurance policy, special hazard insurance policy or bankruptcy
bond to be maintained with respect to such Mortgage Pool; (xii) a description of
any standard hazard insurance required to be maintained with respect to each
Mortgage Loan; (xiii) a description of any Credit Enhancement to be provided
with respect to all or any Mortgage Loans or the Mortgage Pool; and (xiv) the
geographical distribution of the Mortgage Loans on a state-by-state basis. In
addition, preliminary or more general information of the nature described above
may be provided in the Prospectus Supplement, and specific or final information
may be set forth in a Current Report on Form 8-K, together with the related
Pooling and Servicing Agreement, which will be filed with the Securities and
Exchange Commission and will be made available to holders of the related series
of Securities within fifteen days after the initial issuance of such Securities.
The loan-to-value ratio (the 'LTV') of a Mortgage Loan is equal to the
ratio (expressed as a percentage) of the original principal balance of such
Mortgage Loan to appraised value of the related Mortgaged Property (unless
otherwise disclosed in the related Prospectus Supplement or in the related
Current Report on Form 8-K, less the amount, if any, of the premium for any
credit life insurance) at the time of origination of the Mortgage Loan or, in
the case where the Mortgage represents a purchase money instrument, the lesser
of (a) the appraised value or (b) the purchase price. The combined loan-to-value
ratio (the 'CLTV') of a Mortgage Loan at any given time is the ratio, expressed
as a percentage, determined by dividing (x) the sum of the original principal
balance of such Mortgage Loan (unless otherwise disclosed in the related
Prospectus Supplement or in the related Current Report on Form 8-K, less the
amount, if any, of the premium for any credit life insurance) plus the then-
current principal balance of all mortgage loans (each, a 'Senior Lien') secured
by liens on the related Mortgaged Property having priorities senior to that of
the lien which secures such Mortgage Loan, by (y) the value of the related
Mortgaged Property, based upon the appraisal or valuation (which may in certain
instances include estimated increases in value as a result of certain home
improvements to be financed with the proceeds of such Mortgage Loan) made at the
time of origination of the Mortgage Loan. If the related Mortgagor will use the
proceeds of the Mortgage Loan to refinance an existing Mortgage Loan which is
being serviced directly or indirectly by the Master Servicer, the requirement of
an appraisal or other valuation at the time the new Mortgage Loan is made may be
waived. Unless otherwise specified in the related Prospectus Supplement, for
purposes of calculating the CLTV of a Contract relating to a new Manufactured
Home, the value of such Manufactured Home will be 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. Unless otherwise specified herein or in the related Prospectus
Supplement, the value of a used Manufactured Home will be either (x) the
appraised value, and National Automobile Dealer's Association book value plus
prepaid taxes and hazard insurance premiums or
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(y) the sum of (i) the appraised value of the land to which the Manufactured
Home is attached and (ii) the appraised value of the Manufactured Home. The
appraised value of a Manufactured Home will be 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.
No assurance can be given that values of the Mortgaged Properties have
remained or will remain at their levels on the dates of origination of the
related Mortgage Loans. If the residential real estate market should experience
an overall decline in property values such that the outstanding principal
balances of the Mortgage Loans (plus any additional financing by other lenders
on the same Mortgaged Properties) in a particular Pool become equal to or
greater than the value of such Mortgaged Properties, the actual rates of
delinquencies, foreclosures and losses could be higher than those now generally
experienced in the non-conforming credit mortgage lending industry. An overall
decline in the market value of residential real estate, the general condition of
a Mortgaged Property, or other factors, could adversely affect the values of the
Mortgaged Properties such that the outstanding balances of the Mortgage Loans,
together with any additional liens on the Mortgaged Properties, equal or exceed
the value of the Mortgaged Properties. Under such circumstances, the actual
rates of delinquencies, foreclosures and losses could be higher than those now
generally experienced in the non-conforming credit mortgage lending industry.
Certain Mortgage Loans may be secured by junior liens ('Junior Lien Loans')
subordinate to the rights of the mortgagee under any related senior mortgage(s).
The proceeds from any liquidation, insurance or condemnation of Mortgaged
Properties relating to Junior Lien Loans in a Mortgage Pool will be available to
satisfy the principal balance of such Junior Lien Loans only to the extent that
the claims, if any, of all related senior mortgagees, including any related
foreclosure costs, are satisfied in full. In addition, the Master Servicer may
not foreclose on a Mortgaged Property relating to a Junior Lien Loan unless it
forecloses subject to the related senior mortgage or mortgages, in which case it
must either pay the entire amount of each senior mortgage to the applicable
mortgagee at or prior to the foreclosure sale or undertake the obligation to
make payments on each senior mortgage in the event of default thereunder.
Generally, in servicing Junior Lien Loans in its loan portfolios, it has been
the Master Servicer's practice to satisfy each senior mortgage at or prior to a
foreclosure sale only to the extent that it determines any amounts so paid will
be recoverable from future payments and collections on the Mortgage Loans or
otherwise. The Trusts will not have any source of funds to satisfy any such
senior mortgage or make payments due to any senior mortgagee. See 'Certain Legal
Aspects of Mortgage Loans and Related Matters--Foreclosure.'
Other factors affecting mortgagors' ability to repay Mortgage Loans include
excessive building resulting in an oversupply of housing stock or a decrease in
employment reducing the demand for units in an area; federal, state or local
regulations and controls affecting rents; prices of goods and energy;
environmental restrictions; increasing labor and material costs; and the
relative attractiveness of the Mortgaged Properties. To the extent that losses
on the Mortgage Loans are not covered by Credit Enhancements, such losses will
be borne, at least in part, by the Securityholders of the related series.
The Sponsor will cause the Mortgage Loans comprising each Mortgage Pool to
be assigned to the Trustee named in the related Prospectus Supplement for the
benefit of the holders of the Securities of the related series. The Master
Servicer will service the Mortgage Loans, either directly or through
Sub-Servicers, pursuant to the Pooling and Servicing Agreement and will receive
a fee for such services. See 'Mortgage Loan Program' and 'The Pooling and
Servicing Agreement.' With respect to Mortgage Loans serviced through a
Sub-Servicer, the Master Servicer will remain liable for its servicing
obligations under the related Pooling and Servicing Agreement as if the Master
Servicer alone were servicing such Mortgage Loans.
Unless otherwise specified in the related Prospectus Supplement, the only
obligations of the Sponsor and the Originators with respect to a series of
Securities will be to provide (or, where the Sponsor or an Originator acquired a
Mortgage Loan from another originator, obtain from such originator) certain
representations and warranties concerning the Mortgage Loans and to assign to
the Trustee for such series of Securities the Sponsor's or Originator's rights
with respect to such representations and warranties. See 'The Pooling and
Servicing Agreement.' The obligations of the Master Servicer with respect to the
Mortgage Loans will consist principally of its contractual servicing obligations
under the related Pooling and Servicing Agreement (including its obligation to
enforce the obligations of the Sub-Servicers or Originators as more fully
described herein under 'Mortgage Loan Program--Qualifications of Originators'
and 'The Pooling and Servicing Agreement') and
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its obligation, as described in the related Prospectus Supplement, to make
certain cash advances in the event of delinquencies in payments on, or
prepayments received with respect to, the Mortgage Loans in the amounts
described herein under 'Description of the Securities--Advances.' The
obligations of a Master Servicer to make advances may be subject to limitations,
to the extent provided herein and in the related Prospectus Supplement.
Single Family and Cooperative Loans. Unless otherwise specified in the
Prospectus Supplement, single family loans will consist of mortgage loans, deeds
of trust or participation or other beneficial interests therein, secured by
first or junior liens on one- to four-family residential properties ('Single
Family Loans'). The Mortgaged Properties relating to Single Family Loans will
consist of detached or semi-detached one-family dwelling units, two- to
four-family dwelling units, townhouses, rowhouses, individual condominium units
in condominium developments, individual units in planned unit developments, and
certain mixed use and other dwelling units. Such Mortgaged Properties may
include owner-occupied (which includes vacation and second homes) and non-owner
occupied investment properties.
If so specified, the Single Family Loans may include loans or
participations therein secured by mortgages or deeds of trust on condominium
units in low- or high-rise condominium developments together with such
condominium units' appurtenant interests in the common elements of such
condominium developments. Unless otherwise specified, the Cooperative Loans will
be secured by security interests in or similar liens on stock, shares or
membership certificates issued by cooperatives and in the related proprietary
leases or occupancy agreements granting exclusive rights to occupy specific
dwelling units in such cooperatives' buildings.
Multi-family Loans. Multi-family loans will consist of mortgage loans,
deeds of trust or participation or other beneficial interests therein, secured
by first or junior liens on rental apartment buildings or projects containing
five or more residential units ('Multi-family Loans').
Mortgaged Properties that secure Multi-family Loans may include high-rise,
mid-rise and garden apartments. Certain of the Multi-family Loans may be
secured by apartment buildings owned by Cooperatives. In such cases, the
Cooperative owns all the apartment units in the building and all common areas.
The Cooperative is owned by tenant-stockholders who, through ownership of stock,
shares or membership certificates in the corporation, receive proprietary leases
or occupancy agreements that confer exclusive rights to occupy specific
apartments or units. Generally, a tenant-stockholder of a Cooperative must make
a monthly payment to the Cooperative representing such tenant-stockholder's pro
rata share of the Cooperative's payments for its mortgage loan, real property
taxes, maintenance expenses and other capital or ordinary expenses. Those
payments are in addition to any payments of principal and interest the
tenant-stockholder must make on any loans to the tenant-stockholder secured by
its shares in the Cooperative. The Cooperative will be directly responsible for
building management and, in most cases, payment of real estate taxes and hazard
and liability insurance. A Cooperative's ability to meet debt service
obligations on a Multi-family Loan, as well as all other operating expenses,
will be dependent in large part on the receipt of maintenance payments from the
tenant-stockholders, as well as any rental income from units or commercial areas
the Cooperative might control. Unanticipated expenditures may in some cases have
to be paid by special assessments on the tenant-stockholders.
Home Improvement Loans. Unless otherwise specified in the Prospectus
Supplement, loans to make home improvements may be secured by first or junior
liens on conventional one- to four-family residential properties and
multi-family residential properties ('Home Improvement Loans'). Home Improvement
Loans may be conventional, or may be partially insured by the Federal Housing
Administration ('FHA') or another federal or state agency, as specified in the
related Prospectus Supplement. The loan proceeds from such Home Improvement
Loans are typically disbursed to an escrow agent which, according to guidelines
established by the Originators, releases such proceeds to the contractor upon
completion of the improvements or in draws as the work on the improvements
progresses. Costs incurred by the Mortgagor for loan origination including
origination points and appraisal, legal and title fees, are often included in
the amount financed. In addition, Home Improvement Loans generally provide
additional security to a first or junior mortgage loan because home improvements
typically retain or increase the value of a property.
Contracts. Contracts will consist of manufactured housing conditional
sales contracts and installment sales or loan agreements each secured by a
Manufactured Home ('Contracts'). Contracts may be conventional, insured
partially by the FHA or partially guaranteed by the Veterans Administration, as
specified in the related
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Prospectus Supplement. Unless otherwise specified in the related Prospectus
Supplement, each Contract will be fully amortizing and will bear interest at its
APR.
Unless otherwise specified in the related Prospectus Supplement, 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.'
The related Prospectus Supplement will specify for the Contracts contained
in the related Trust, among other things, the date of origination of the
Contracts; the Mortgage Rates or the APRs on the Contracts; the Contract
Loan-to-Value Ratios; the minimum and maximum outstanding principal balances as
of the Statistic Calculation Date and the average outstanding principal balance;
the outstanding principal balances of the Contracts included in the related
Trust; and the original maturities of the Contracts and the last maturity date
of any Contract.
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THE MORTGAGE POOLS
GENERAL
Unless otherwise specified in the related Prospectus Supplement, each
Mortgage Pool will consist primarily of (i) conventional Mortgage Loans, minus
any stripped portion of the interest payments due under the related Mortgage
Note that may have been retained by any Originator or broker ('Originator's
Retained Yield'), or any other interest retained by the Sponsor or any affiliate
of the Sponsor, evidenced by promissory notes (the 'Mortgage Notes') secured by
mortgages or deeds of trust or other similar security instruments creating a
lien on single-family (i.e., one- to four-family) residential, multi-family
properties or mixed use properties, or (ii) certificates of interest or
participations in such Mortgage Notes. The Mortgaged Properties will consist
primarily of attached or detached one-family dwelling units, two- to four-family
dwelling units, condominiums, townhouses, row houses, individual units in
planned-unit developments and certain other dwelling units, mixed use properties
and the fee, leasehold or other interests in the underlying real property. The
Mortgaged Properties may be owner-occupied (which includes second and vacation
homes) and non-owner occupied investment properties. If specified in the related
Prospectus Supplement relating to a series of Securities, a Mortgage Pool may
contain cooperative apartment loans ('Cooperative Loans') evidenced by
promissory notes ('Cooperative Notes') secured by security interests in shares
issued by cooperatives and in the related proprietary leases or occupancy
agreements granting exclusive rights to occupy specific dwelling units in the
related buildings. As used herein, unless the context indicates otherwise,
'Mortgage Loans' include Cooperative Loans, 'Mortgaged Properties' include
shares in the related cooperative and the related proprietary leases or
occupancy agreements securing Cooperative Notes, 'Mortgage Notes' include
Cooperative Notes and 'Mortgages' include security agreements with respect to
Cooperative Notes.
Each Mortgage Loan will be selected by the Sponsor for inclusion in a
Mortgage Pool from among mortgage loans originated by one or more institutions
affiliated with the Sponsor (such affiliated institutions, the 'Affiliated
Originators'), or from banks, savings and loan associations, mortgage bankers,
mortgage brokers, investment banking firms, the RTC, the FDIC and other mortgage
loan originators or purchasers not affiliated with the Sponsor (such
unaffiliated institutions, the 'Unaffiliated Originators' and, collectively with
the Affiliated Originators, the 'Originators'), all as described below under
'Mortgage Loan Program.' The characteristics of the Mortgage Loans will be
described in the related Prospectus Supplement. Other mortgage loans available
for acquisition by a Trust may have characteristics that would make them
eligible for inclusion in a Mortgage Pool but may not be selected by the Sponsor
for inclusion in such Mortgage Pool.
Each Security will evidence an interest in only the related Mortgage Pool
and corresponding Trust Estate, and not in any other Mortgage Pool or any other
Trust Estate (except in those limited situations whereby certain collections on
any Mortgage Loans in a related Mortgage Pool in excess of amounts needed to pay
the related securities may be deposited in a common, master reserve account that
provides Credit Enhancement for more than one series of Securities).
THE MORTGAGE POOLS
Unless otherwise specified below or in the related Prospectus Supplement,
all of the Mortgage Loans in a Mortgage Pool will (i) have payments that are due
monthly or bi-weekly, (ii) be secured by Mortgaged Properties located in any of
the fifty states, the District of Columbia, Puerto Rico or any other Territories
of the United States and (iii) consist of one or more of the following types of
mortgage loans:
(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 generally not more than 30
years;
(2) ARM Loans having original or modified terms to maturity of
generally not more than 30 years with a related Mortgage Rate that adjusts
periodically, at the intervals described in the related Prospectus
Supplement (which may have adjustments in the amount of monthly payments at
periodic intervals) over the term of the mortgage loan to equal the sum of
a fixed percentage set forth in the related Mortgage Note (the
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'Note Margin') and an index (the 'Index') to be specified in the related
Prospectus Supplement, such as, by way of example: (i) U.S. Treasury
securities of a specified constant maturity, (ii) weekly auction average
investment yield of U.S. Treasury bills of specified maturities, (iii) the
daily Bank Prime Loan rate made available by the Federal Reserve Board or
as quoted by one or more specified lending institutions, (iv) the cost of
funds of member institutions for the Federal Home Loan Bank of San
Francisco, or (v) the interbank offered rates for U.S. dollar deposits in
the London Markets, each calculated as of a date prior to each scheduled
interest rate adjustment date that will be specified in the related
Prospectus Supplement. The related Prospectus Supplement will set forth the
relevant Index, and the related Prospectus Supplement or the related
Current Report on Form 8-K will indicate the highest, lowest and
weighted-average Note Margin with respect to the ARM Loans in the related
Mortgage Pool. 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 subsequent to the initial payment date;
(3) Fixed-rate, graduated payment mortgage loans having original or
modified terms to maturity of generally not more than 30 years with monthly
payments during the first year calculated on the basis of an assumed
interest rate that will be lower than the Mortgage Rate applicable to such
mortgage loan in subsequent years. Deferred Interest, if any, will be added
to the principal balance of such mortgage loans;
(4) Balloon mortgage loans ('Balloon Loans'), which are mortgage loans
having original or modified terms to maturity of generally 5 to 15 years as
described in the related Prospectus Supplement, which may have level
monthly payments of principal and interest based generally on a 10- to
30-year amortization schedule. The amount of the monthly payment may remain
constant until the maturity date, upon which date the full outstanding
principal balance on such Balloon Loan will be due and payable (such
amount, the 'Balloon Amount');
(5) Modified mortgage loans ('Modified Loans'), which are fixed or
adjustable-rate mortgage loans providing for terms at the time of
modification of generally not more than 30 years. Modified 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;
(6) Another type of mortgage loan described in the related Prospectus
Supplement; or
(7) As more fully described in the related Prospectus Supplement, the
Mortgage Loans may consist, in whole or in part, of Revolving Credit Line
Loans. Interest on each Revolving Credit Line Loan, excluding introductory
rates offered from time to time during promotional periods, may be computed
and payable monthly on the average daily outstanding principal balance of
such loan. From time to time prior to the expiration of the related draw
period specified in a Revolving Credit Line Loan, principal amounts on such
Revolving Credit Line Loan may be drawn down (up to a maximum amount as set
forth in the related Prospectus Supplement) or repaid. If specified in the
related Prospectus Supplement, new draws by borrowers under the Revolving
Credit Line Loans will automatically become part of the Trust Estate
described in such Prospectus Supplement. As a result, the aggregate balance
of the Revolving Credit Line Loans will fluctuate from day to day as new
draws by borrowers are added to the Trust Estate and principal payments are
applied to such balances and such amounts will usually differ each day, as
more specifically described in the related Prospectus Supplement. Under
certain circumstances, under a Revolving Credit Line Loan, a borrower may,
during the related draw period, choose an interest only payment option,
during which the borrower is obligated to pay only the amount of interest
which accrues on the loan during the billing cycle, and may also elect to
pay all or a portion of the principal. An interest only payment option may
terminate at the end of the related draw period, after which the borrower
must begin paying at least a minimum monthly portion of the average
outstanding principal balance of the loan.
If provided for in the related Prospectus Supplement, a Mortgage Pool may
contain either or both of the following types of mortgage loans (i) 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 and
(ii) fixed rate mortgage loans which allow the Mortgagors to convert the fixed
rates on such Mortgage Loans to an adjustable
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rate at some point during the life of such Mortgage Loans (each such Mortgage
Loan described in (i) and (ii) above, a 'Convertible Mortgage Loan').
If provided for in the related Prospectus Supplement, certain of the
Mortgage Loans may be Buydown Mortgage Loans pursuant to which the monthly
payments made by the Mortgagor during the Buydown Period will be less than the
scheduled monthly payments on the Mortgage Loan, the resulting difference to be
made up from (i) Buydown Funds funded by the Originator of the Mortgaged
Property or another source (including the Master Servicer or the related
Originator) and placed in the Buydown Account and (ii) if the Buydown Funds are
contributed on a present value basis, investment earnings on such Buydown Funds.
See 'Description of the Securities--Payments on Mortgage Loans; Deposits to
Distribution Account.' The terms of the Buydown Mortgage Loans, if such loans
are included in a Trust, will be as set forth in the related Prospectus
Supplement.
The Sponsor will cause the Mortgage Loans constituting each Mortgage Pool
to be assigned to the Trustee named in the related Prospectus Supplement, for
the benefit of the holders of all of the Securities of a series. The Master
Servicer named in the related Prospectus Supplement will service the Mortgage
Loans, either directly or through other mortgage servicing institutions
(Sub-Servicers), pursuant to a Pooling and Servicing Agreement and will receive
a fee for such services. See 'Mortgage Loan Program' and 'Description of the
Securities.' With respect to those Mortgage Loans serviced by the Master
Servicer through a Sub-Servicer, the Master Servicer will remain liable for its
servicing obligations under the related Pooling and Servicing Agreement as if
the Master Servicer alone were servicing such Mortgage Loans, unless otherwise
described in the related Prospectus Supplement.
The Sponsor and/or certain Originators may make certain representations and
warranties regarding the Mortgage Loans, but its assignment of the Mortgage
Loans to the Trustee will be without recourse. See 'Description of the
Securities--Assignment of 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 and Servicing Agreement
(including its obligation to enforce certain purchase and other obligations of
Sub-Servicers and of Originators, as more fully described herein under 'Mortgage
Loan Program--Representations by Originators,' '--Sub-Servicing by Originators'
and 'Description of the Securities--Assignment of Mortgage Loans,' and its
obligation, if any, to make certain cash advances in the event of delinquencies
in payments on or with respect to the Mortgage Loans and interest shortfalls due
to prepayment of Mortgage Loans, in amounts described herein under 'Description
of the Securities--Advances'). The obligation of the Master Servicer to make
delinquency advances will be limited to amounts which the Master Servicer
believes ultimately would be reimbursable out of the proceeds of liquidation of
the Mortgage Loans. See 'Description of the Securities--Advances.'
MORTGAGE LOAN PROGRAM
As a general matter, the Sponsor's Mortgage Loan program will consist of
the origination and packaging of Mortgage Loans relating to non-conforming
credits. For purposes hereof, 'non-conforming credit' means a mortgage loan
which, based upon standard underwriting guidelines, is ineligible for purchase
by FNMA or FHLMC due to credit characteristics that do not meet FNMA or FHLMC
guidelines, respectively. However, certain of the Mortgage Loans will relate to
FNMA or FHLMC conforming credits.
The Mortgagors generally will have taken out the related Mortgage Loans for
one or more of four reasons: (i) to purchase the related Mortgaged Property,
(ii) to refinance an existing mortgage loan on more favorable terms, (iii) to
consolidate debt, or (iv) to obtain cash proceeds by borrowing against the
Mortgagor's equity in the related Mortgaged Property; the Mortgage Loans
described in (i) are commonly referred to as purchase money loans and the
Mortgage Loans described in (ii), (iii) and (iv) on the whole are commonly
referred to as home equity loans.
It is the Sponsor's practice to solicit existing Mortgagors with respect to
the possible refinancing of their existing Mortgages.
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UNDERWRITING GUIDELINES
As more fully described below under 'Qualifications of Originators' and as
may also be described in greater detail in the related Prospectus Supplement,
there are various types of Originators that may participate in the Sponsor's
Mortgage Loan Program. Under the Sponsor's Mortgage Loan Program, the Sponsor
purchases and originates Mortgage Loans pursuant to three types of underwriting
guidelines: (1) standard underwriting guidelines according to the Sponsor's
Originator Guide, as modified from time to time, used by Affiliated Originators
and Unaffiliated Originators ('Sponsor's Guidelines'), (2) underwriting
guidelines utilized by certain Unaffiliated Originators and approved by the
Sponsor ('Approved Guidelines'), and (3) underwriting guidelines ('Bulk
Guidelines') used by Unaffiliated Originators of portfolios of Mortgage Loans
subsequently purchased in whole or part by the Sponsor as bulk acquisitions
('Bulk Acquisitions'). The respective underwriting guidelines are described
below.
Sponsor's Guidelines. The Sponsor's Guidelines are set forth in the
Sponsor's Originator Guide. The Sponsor's Guidelines are revised continuously
based on opportunities and prevailing conditions in the nonconforming credit
residential mortgage market, as well as the expected market for the resulting
Securities.
Mortgage Loans originated by Affiliated Originators generally will, and
Mortgage Loans originated by Unaffiliated Originators may have been, originated
in accordance with the Sponsor's Guidelines as set forth in the Sponsor's
Originator Guide. However, certain of the Mortgage Loans may be employee or
preferred customer loans with respect to which, in accordance with such
Affiliate's mortgage loan programs, no income or asset verifications were
required. In addition, certain Originators may originate Mortgage Loans in
satisfaction of specified requirements of federal or state law applicable to
certain Originators, such as, by way of illustration, the federal Community
Reinvestment Act of 1977, which is applicable to banks; such Mortgage Loans
generally will not have been originated pursuant to the Sponsor's standard
underwriting guidelines applicable to nonconforming loans but may have been
originated pursuant to alternative guidelines applicable to such loans. The
Sponsor will not review any Affiliated Originator mortgage loans for conformity
with the Sponsor's Guidelines set forth in the Sponsor's Originator Guide. The
Sponsor generally will review or cause to be reviewed only a limited portion of
the Mortgage Loans in any delivery of Mortgage Loans from Unaffiliated
Originators for conformity with the Sponsor's Originator Guide.
The following is a brief description of the Sponsor's Guidelines set forth
in the Sponsor's Originator Guide customarily and currently employed by the
Sponsor. The Sponsor believes that these standards are consistent with those
generally used by lenders in the business of making mortgage loans based on
non-conforming credits. The underwriting process is intended to assess both the
prospective borrower's ability to repay and the adequacy of the real property as
collateral for the loan granted. The general appreciation in value of real
estate experienced in the past has been a factor in limiting the Master
Servicer's loss experience on its portfolio of one- to four-family residential
mortgage loans. However, the past pattern of appreciation in value of the real
property securing such loans has not continued, and a depreciation in value has
occurred and may continue to occur in some market areas, and may occur in
others.
The Sponsor's Guidelines permit the origination and purchase of mortgage
loans with multi-tiered credit characteristics tailored to individual credit
profiles. In general, the Sponsor's Guidelines require an analysis of the equity
in the collateral, the payment history of the borrower, the borrower's ability
to repay debt, the property type, and the characteristics of the underlying
first mortgage, if any. A lower maximum CLTV is required for lower gradations of
credit quality and higher property values.
The Sponsor's Guidelines permit the origination or purchase of fixed or
adjustable rate loans that either fully amortize over a period generally not to
exceed 30 years or, in the case of a balloon mortgage, generally amortize based
on a 30-year or less amortization schedule with a due date and a 'balloon'
payment due prior to the 30 year period.
The homes used for collateral to secure the loans may be either owner
occupied (which includes second and vacation homes) or non-owner occupied
investor properties which, in either case are single-family residences (which
may be detached, part of a two- to four-family dwelling, a condominium unit or a
unit in a planned unit development). The Sponsor's Guidelines require that the
CLTV of a Mortgage Loan generally not exceed 85%, after taking into account the
amount of any primary mortgage insurance applicable to such Mortgage Loan.
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If a senior mortgage exists, the lender may first review the senior
mortgage documentation. If it contains open end advance or negative amortization
provisions, the maximum potential senior mortgage balance may be used, although
for certain of the Sponsor's products the current balance may be used in
calculating the CLTV which determines the maximum loan amount. The Sponsor's
Guidelines do not permit the origination or purchase of loans where the senior
mortgage contains a provision pursuant to which the senior mortgagee may share
in any appreciation of the Mortgaged Property.
In most cases, the value of each property proposed as security for a
mortgage loan is required to be determined by a full appraisal. A limited
appraisal of a property, conducted on a drive-by basis, may be utilized. Two
full appraisals are generally required for properties valued over $500,000.
Appraisals are required to be completed by qualified professional
appraisers. The Sponsor evaluates the performance of appraisers and maintains a
current disapproved appraiser list.
The Sponsor's Guidelines have provided for the origination of loans under
three general loan programs: (i) a full verification program for salaried or
self-employed borrowers, (ii) a 'lite' documentation program for borrowers who
may have income which cannot be verified by traditional methods and (iii) a
non-income verification program for self-employed borrowers only. However, the
Sponsor's Guidelines allow for certain borrowers with existing loans to
refinance such loans with either limited, or no, verification of income. The
Sponsor may also purchase pools of loans which may include some loans originated
under a non-income verification program. For the Sponsor's full verification
process, each mortgage applicant is required to provide, and the Sponsor or its
designee is required to verify, personal financial information. The applicant's
total monthly obligations (including principal and interest on each mortgage,
tax assessments, other loans, charge accounts and all other scheduled
indebtedness) generally (in the absence of countervailing considerations, such
as a lower Combined Loan-to-Value Ratio or a price adjustment) should not exceed
the applicant's ability to pay. Applicants who are salaried employees must
provide current employment information in addition to recent employment history.
The Sponsor or its designee verify this information for salaried borrowers based
on written confirmation from employers or a combination of the most recent pay
stub, the most recent W-2 tax form and telephone confirmation from the employer.
Self-employed applicants are generally required to be self-employed in the same
field for a minimum of two years. The self-employed applicant is generally
required to provide personal and business financial statements and signed copies
of complete federal income tax returns (including schedules) filed for the most
recent two years. For the Sponsor's 'lite' documentation program the borrower
must establish proof of cash flow trends to support the borrower's income. Such
proof can include business bank statements or personal bank statements. For the
Sponsor's non-income verifier program, proof of two year's history of
self-employment plus proof of current self-employed status is required. The
applicant's debt-to-income ratio is calculated based on income as certified by
the borrower on the application and must be reasonable.
A credit report by an independent, nationally recognized credit reporting
agency is required reflecting the applicant's complete credit history. The
credit report should reflect all delinquencies of 30 days or more,
repossessions, judgments, foreclosures, garnishments, bankruptcies and similar
instances of adverse credit that can be discovered by a search of public
records. Verification is required to be obtained of the senior mortgage balance,
if any, the status and whether local taxes, interest, insurance and assessments
are included in the applicant's monthly payment. All taxes and assessments not
included in the payment are required to be verified as current.
In connection with purchase-money loans, the Sponsor's Guidelines require
(x) (i) an acceptable source of downpayment funds, (ii) verification of the
source of the downpayment funds and (iii) adequate cash reserves or (y) adequate
equity in the collateral property.
Certain laws protect loan applicants by offering them a time frame after
loan documents are signed, termed the rescission period, during which the
applicant has the right to cancel the loan. The rescission period must have
expired prior to funding a loan and may not be waived by the applicant except as
permitted by law.
Unless otherwise disclosed in the related Prospectus Supplement, the
Sponsor's Guidelines generally require title insurance coverage issued by an
approved ALTA or CLTA title insurance company on each Mortgage Loan it
purchases. The Sponsor, the related Originator and/or their assignees generally
are named as the insured. Title
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insurance policies indicate the lien position of the mortgage loan and protect
the insured against loss if the title or lien position is not as indicated.
The applicant is required to secure property insurance in an amount
sufficient to cover the new loan and any prior mortgage. If the sum of the
outstanding first mortgage, if any, and the related mortgage loan exceeds
replacement value (the cost of rebuilding the subject property, which generally
does not include land value), insurance equal to replacement value may be
accepted. The Sponsor or its designee is required to ensure that its name and
address is properly added to the 'Mortgagee Clause' of the insurance policy. In
the event the Sponsor or the related Originator's name is added to a 'Loss Payee
Clause' and the policy does not provide for written notice of policy changes or
cancellation, an endorsement adding such provision is required.
Approved Guidelines. The Sponsor may cause a Trust to acquire Mortgage
Loans underwritten pursuant to underwriting guidelines that may differ from the
Sponsor's Guidelines as set forth in the Sponsor's Originator Guide. Certain of
the Mortgage Loans will be acquired in negotiated transactions, and such
negotiated transactions may be governed by agreements ('Master Commitments')
relating to ongoing acquisitions of Mortgage Loans by the Sponsor, from
Originators who will represent that the Mortgage Loans have been originated in
accordance with underwriting guidelines agreed to by the Sponsor. Certain other
Mortgage Loans will be acquired from Originators that will represent that the
Mortgage Loans were originated pursuant to underwriting guidelines determined by
a mortgage insurance company acceptable to the Sponsor. The Sponsor will accept
a certification from such insurance company as to a Mortgage Loan's insurability
in a mortgage pool as of the date of certification as evidence of a Mortgage
Loan conforming to applicable underwriting standards. Such certifications likely
will have been issued before the purchase of the Mortgage Loan by the Sponsor.
The Sponsor only will perform random quality assurance reviews on Mortgage Loans
delivered with such certifications.
The underwriting standards utilized in negotiated transactions and Master
Commitments and the underwriting standards of insurance companies may vary
substantially from the Sponsor's Guidelines. All of the underwriting guidelines
will provide an underwriter with information to evaluate either the security for
the related Mortgage Loan, which security consists primarily of the borrower's
repayment ability or the adequacy of the Mortgaged Property as collateral, or a
combination of both. Due to the variety of underwriting guidelines and review
procedures that may be applicable to the Mortgage Loans included in any Mortgage
Pool, the related Prospectus Supplement will not distinguish among the various
underwriting guidelines applicable to the Mortgage Loans nor describe any review
for compliance with applicable underwriting guidelines performed by the Sponsor.
Moreover, there can be no assurance that every Mortgage Loan was originated in
conformity with the Approved Guidelines in all material respects, or that the
quality or performance of Mortgage Loans underwritten pursuant to varying
guidelines as described above will be equivalent under all circumstances.
Bulk Guidelines. Bulk portfolios of Mortgage Loans may be originated by a
variety of Originators under several different underwriting guidelines. For bulk
portfolios which are seasoned for a period of time, the Sponsor's underwriting
review of bulk portfolios of Mortgage Loans focuses primarily on payment
histories and estimated current values based on estimated property appreciation
or depreciation and loan amortization. Mortgage Loans that conform to the
related Bulk Guidelines may not conform to the requirements of either the
Sponsor's Guidelines or the Approved Guidelines. For example, the Sponsor may
purchase Mortgage Loans in bulk portfolios with Combined Loan-to-Value Ratios in
excess of that required under the Sponsor's Guidelines, without title insurance,
or with nonconforming appraisal methods such as tax assessments. Bulk
Acquisition portfolios may be purchased servicing released or retained. If
servicing is retained, the Originator must meet certain minimum requirements, as
modified from time to time, by the Sponsor. The Sponsor generally will cause the
Mortgage Loans acquired in a Bulk Acquisition to be reunderwritten on a sample
basis. Such reunderwriting may be performed by the Sponsor, the Master Servicer
or by a third party acting at the direction of the Sponsor.
Quality Control. The Master Servicer maintains a quality control
department which generally reviews loans originated by Affiliated Originators.
The quality control department randomly selects a portion of the files for
underwriting review. The Sponsor or its Affiliated Originators also cause
appraisal reviews to be performed on a random sample of loan production.
A periodic report is distributed to senior management and the production
offices describing material exceptions to underwriting and appraisal guidelines,
legal and regulatory requirements and variances based on the
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reverification process. Appraisers demonstrating chronic errors, omissions or
large valuation errors are removed from the approved appraiser list. Training
programs, additional audits and performance evaluations for underwriting
personnel and management are influenced by the results of the quality control
review.
The Sponsor generally will cause Mortgage Loans acquired from Unaffiliated
Originators to be (i) reunderwritten for the purpose of determining whether such
Mortgage Loans were originated in accordance with the applicable underwriting
guidelines, (ii) reviewed to assess the accuracy of the appraised values, and
(iii) audited to determine the accuracy of the loan computer system as compared
to the loan files. Such process may consist of a review of all such Mortgage
Loans or may be performed on a sample basis. Such reunderwriting may be
performed by the Sponsor, the Master Servicer or a third party acting at the
direction of the Sponsor.
QUALIFICATIONS OF ORIGINATORS
Each Originator from which a Mortgage Loan is acquired will have been
accepted by the Sponsor for participation in the Sponsor's mortgage loan
program. Certain Unaffiliated Originators ('Conduit Participants') may be
qualified to enter into agreements to sell mortgage loans to the Sponsor
pursuant to Master Commitments which provide for the periodic purchase and sale
of loans meeting certain specified requirements.
Loans acquired from Unaffiliated Originators other than Conduit
Participants will be acquired on a 'spot' basis, or in connection with a Bulk
Acquisition. Unless otherwise described in the related Prospectus Supplement
with respect to certain specified Unaffiliated Originators (in which case any
remedies for breach will lie only against such Unaffiliated Originator), the
Sponsor will make directly, or will guarantee compliance with, any
representations and warranties made by any Unaffiliated Originator, with respect
to the Mortgage Loans originated by it and acquired by a Trust.
All Conduit Participants must have received a satisfactory review by the
Sponsor of its operating procedures. All Unaffiliated Originators will have
delinquency and foreclosure rates monitored and maintained at levels acceptable
to the Sponsor. All Unaffiliated Originators are required to originate mortgage
loans in accordance with the applicable underwriting standards. However, with
respect to any Originator, some of the generally applicable underwriting
standards described herein and in the Sponsor's Originator Guide may be modified
or waived with respect to certain Mortgage Loans originated by such Originators.
The Resolution Trust Corporation (the 'RTC') or the Federal Deposit
Insurance Corporation (the 'FDIC') (either in their respective corporate
capacities or as receiver or conservator for a depository institution) may also
be an Originator of the Mortgage Loans. The RTC and the FDIC are together
referred to as the 'Federal Corporations'. The RTC was established pursuant to
the Financial Institutions Reform, Recovery, and Enforcement Act of 1989
('FIRREA'), which was enacted in response to the financial crisis of the thrift
industry and the Federal Savings and Loan Insurance Corporation. The purpose of
FIRREA is to restore the public's confidence in the savings and loan industry in
order to ensure a viable system of affordable housing finance as well as to
improve the supervision of savings associations and promote the independence of
the FDIC. The FDIC is an independent executive agency originally established by
the Banking Act of 1933 to insure the deposits of all banks entitled to federal
deposit insurance under the Federal Reserve Act and Federal Deposit Insurance
Act. The FDIC administers the system of nationwide deposit insurance (mutual
guaranty of deposits) for United States Banks and, together with the United
States Comptroller of the Currency, regulates in areas related to the
maintenance of reserves for certain types of deposits, the maintenance of
certain financial ratios, transactions with affiliates and a broad range of
other banking practices.
The Sponsor monitors the Originators and the Sub-Servicers under the
control of a Federal Corporation, as well as those Originators and Sub-Servicers
that are insolvent or in receivership or conservatorship or otherwise
financially distressed. Such Originators may not be able or permitted to
repurchase Mortgage Loans for which there has been a breach of representation
and warranty. Moreover, any such Originator may make no representations and
warranties with respect to Mortgage Loans sold by it. The Federal Corporations
(either in their respective corporate capacities or as receiver for a depository
institution) may also originate Mortgage Loans, in which event neither the
related Federal Corporation nor the depository institution for which such
Federal Corporation is acting as receiver may make representations and
warranties with respect to the Mortgage Loans that such Federal Corporation
sells, or such Federal Corporation may make only limited representations and
warranties (for example, that the related legal documents are enforceable). A
Federal Corporation may have
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no obligation to repurchase any Mortgage Loan for a breach of a representation
and warranty. If as a result of a breach of representation and warranty an
Originator is required to repurchase a Mortgage Loan but is not permitted or
otherwise fails to do so or if representations and warranties are not made by an
Originator, to the extent that neither the Sponsor nor any other entity has
assumed the representations and warranties or made representations and
warranties, neither the Sponsor nor that entity will be required to repurchase
such Mortgage Loan and, consequently such Mortgage Loan will remain in the
related Mortgage Pool and any related losses will be borne by the
Securityholders or by the related Credit Enhancement, if any. In addition, loans
which are purchased either directly or indirectly from a Federal Corporation may
be subject to a contract right of such Federal Corporation to repurchase such
loans under certain limited circumstances.
SUB-SERVICERS
Each Originator of a Mortgage Loan will act as Sub-Servicer for such
Mortgage Loan pursuant to an agreement between the Master Servicer and the
Sub-Servicer (a 'Sub-Servicing Agreement') unless the servicing obligations are
released to the Master Servicer or transferred to a servicer approved by the
Master Servicer. An Affiliated Originator of a Mortgage Loan may act as the
Sub-Servicer for such Mortgage Loan unless the other related servicing
obligations are released or transferred. An Unaffiliated Originator acting as a
Sub-Servicer for the Mortgage Loans will be required to meet certain additional
standards with respect to its mortgage loan servicing portfolio, GAAP tangible
net worth and other specified qualifications.
REPRESENTATIONS BY ORIGINATORS
Unless otherwise specified in the related Prospectus Supplement, each
Originator will have made representations and warranties in respect of the
Mortgage Loans sold by such Originator and evidenced by a series of Securities.
Such representations and warranties generally include, among other things, that
at the time of the sale by the Originator to the Sponsor of each Mortgage Loan:
(i) the information with respect to each Mortgage Loan set forth in the
Schedules of Mortgage Loans is true and correct as of the related Cut-Off Date;
(ii) each Mortgage Loan being transferred to the Trust which is a REMIC is a
qualified mortgage under the REMIC provisions of the Code and is a Mortgage;
(iii) each Mortgaged Property is improved by a single (one- to four-) family
residential dwelling or a multi-family structure, which may include condominiums
and townhouses; (iv) each Mortgage Loan had, at the time of origination, either
an attorney's certification of title or a title search or title policy; (v) as
of the related Cut-Off Date each Mortgage Loan is secured by a valid and
subsisting lien of record on the Mortgaged Property having the priority
indicated on the related Schedule of Mortgage Loans subject in all cases to
exceptions to title set forth in the title insurance policy, if any, with
respect to the related Mortgage Loan; (vi) each Originator held good and
indefeasible title to, and was the sole owner of, each Mortgage Loan conveyed by
such Originator; and (vii) each Mortgage Loan was originated in accordance with
law and is the valid, legal and binding obligation of the related Mortgagor.
Unless otherwise described in the related Prospectus Supplement, all of the
representations and warranties of an Originator in respect of a Mortgage Loan
will be made as of the date on which such Originator sells the Mortgage Loan to
the Sponsor; the date as of which such representations and warranties are made
thus may be a date prior to the date of the issuance of the related series of
Securities. A substantial period of time may elapse between the date as of which
the representations and warranties are made and the later date of issuance of
the related series of Securities.
The Sponsor will assign to the Trustee for the benefit of the holders of
the related series of Securities all of its right, title and interest in each
agreement by which it acquires a Mortgage Loan from an Originator insofar as
such agreement relates to the representations and warranties made by an
Originator in respect of such Mortgage Loan and any remedies provided for breach
of such representations and warranties. If an Originator cannot cure a breach of
any representation or warranty made by it in respect of a Mortgage Loan that
materially and adversely affects the interests of the Securityholders in such
Mortgage Loan within a time period specified in the related Pooling and
Servicing Agreement, such Originator and/or the Sponsor will be obligated to
purchase from the related Trust such Mortgage Loan at a price (the 'Loan
Purchase Price') set forth in the related Pooling and Servicing Agreement which
Loan Purchase Price will be equal to the principal balance thereof as of the
date of purchase plus one month's interest at the Mortgage Rate less the amount,
expressed as a percentage per annum, payable in respect of master servicing
compensation or subservicing compensation, as applicable, and the
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Originator's Retained Yield, if any, together with, without duplication, the
aggregate amount of all delinquent interest, if any.
Unless otherwise specified in the related Prospectus Supplement, as to any
such Mortgage Loan required to be purchased by an Originator and/or the Sponsor,
as provided above, rather than repurchase the Mortgage Loan, the Master Servicer
may, at its sole option, remove such Mortgage Loan (a 'Deleted Mortgage Loan')
from the related Trust and cause the Sponsor to substitute in its place another
Mortgage Loan of like kind (a 'Qualified Replacement Mortgage' as such term is
defined in the related Pooling and Servicing Agreement). With respect to a Trust
for which a REMIC election is to be made, except as otherwise provided in the
Prospectus Supplement relating to a series of Securities, such substitution of a
defective Mortgage Loan must be effected within two years of the date of the
initial issuance of the Securities, and may not be made if such substitution
would cause the Trust to not qualify as a REMIC or result in a prohibited
transaction tax under the Code. Unless otherwise specified in the related
Prospectus Supplement or Pooling and Servicing Agreement, an Unaffiliated
Originator generally 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 and
Servicing Agreement to enforce such purchase or substitution obligations for the
benefit of the Trustee and the Securityholders, following the practices it would
employ in its good faith business judgment if it were the owner of such Mortgage
Loan; provided, however, that this purchase or substitution obligation will in
no event become an obligation of the Master Servicer in the event the Originator
fails to honor such obligation. If the Originator fails to repurchase or
substitute a loan and no breach of the Sponsor's representations has occurred,
the Originator's purchase obligation will in no event become an obligation of
the Sponsor. Unless otherwise specified in the related Prospectus Supplement,
the foregoing will constitute the sole remedy available to Securityholders or
the Trustee for a breach of representation by an Originator in its capacity as a
seller of Mortgage Loans to the Sponsor.
Unless otherwise described in the related Prospectus Supplement with
respect to certain Unaffiliated Originators (in which case any remedies for
breach will lie only against such Unaffiliated Originator), the Sponsor will
make directly, or will guarantee compliance with, any representations and
warranties made by any Unaffiliated Originator with respect to the Mortgage
Loans originated or purchased by it and acquired by a Trust.
Notwithstanding the foregoing with respect to any Originator that requests
the Master Servicer's consent to the transfer of sub-servicing rights relating
to any Mortgage Loans to a successor servicer, the Master Servicer may release
such Originator from liability, under its representations and warranties
described above, upon the assumption by such successor servicer of the
Originator's liability for such representations and warranties as of the date
they were made. In that event, the Master Servicer's rights under the instrument
by which such successor servicer assumes the Originator's liability will be
assigned to the Trustee, and such successor servicer shall be deemed to be the
'Originator' for purposes of the foregoing provisions.
SUB-SERVICING BY ORIGINATORS
Each Originator of a Mortgage Loan will act as the Sub-Servicer for such
Mortgage Loan pursuant to a Sub-Servicing Agreement unless servicing is released
to the Master Servicer or has been transferred to a servicer approved by the
Master Servicer. The Master Servicer may, in turn, assign such sub-servicing to
designated sub-servicers that will be qualified Originators and may include
affiliates of the Sponsor. While such a Sub-Servicing Agreement will be a
contract solely between the Master Servicer and the Sub-Servicer, the Pooling
and Servicing Agreement pursuant to which a series of Securities is issued will
provide that, if for any reason the Master Servicer for such series of
Securities is no longer the master servicer of the related Mortgage Loans, the
Trustee or any successor Master Servicer must recognize the Sub-Servicer's
rights and obligations under such Sub-Servicing Agreement.
Unless otherwise specified in the related Prospectus Supplement, with the
approval of the Master Servicer, a Sub-Servicer may delegate its servicing
obligations to third-party servicers, but such Sub-Servicer will remain
obligated under the related Sub-Servicing Agreement. Each Sub-Servicer will be
required to perform the customary functions of a servicer, including collection
of payments from Mortgagors and remittance of such collections to the Master
Servicer; maintenance of hazard insurance and filing and settlement of claims
thereunder, subject in certain cases to the right of the Master Servicer to
approve in advance any such settlement;
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maintenance of escrow or impound accounts of Mortgagors for payment of taxes,
insurance and other items required to be paid by the Mortgagor pursuant to the
Mortgage Loan; processing of assumptions or substitutions; attempting to cure
delinquencies; supervising foreclosures; inspecting and managing Mortgaged
Properties under certain circumstances; and maintaining accounting records
relating to the Mortgage Loans. A Sub-Servicer also may be obligated to make
advances to the Master Servicer in respect of delinquent installments of
principal and/or interest (net of any sub-servicing or other compensation) on
Mortgage Loans, as described more fully under 'Description of the
Securities--Advances,' and in respect of certain taxes and insurance premiums
not paid on a timely basis by Mortgagors. A Sub-Servicer may also be obligated
to deposit amounts in respect of Compensating Interest to the related Principal
and Interest Account in connection with prepayments of principal received and
applied to reduce the outstanding principal balance of a Mortgage Loan. No
assurance can be given that the Sub-Servicers will carry out their advance or
payment obligations, if any, with respect to the Mortgage Loans. Unless
otherwise specified in the related Prospectus Supplement, a Sub-Servicer may
transfer its servicing obligations to another entity that has been approved for
participation in the Sponsor's loan purchase programs, but only with the prior
written approval of the Master Servicer.
As compensation for its servicing duties, the Sub-Servicer may be entitled
to a Base Servicing Fee. The Sub-Servicer may also be entitled to collect and
retain, as part of its servicing compensation, any late charges or prepayment
penalties provided in the Mortgage Note or related instruments. The Sub-Servicer
will be entitled to reimbursement for certain expenditures that it makes,
generally to the same extent that the Master Servicer would be reimbursed under
the applicable Pooling and Servicing Agreement. See 'The Pooling and Servicing
Agreement--Servicing and Other Compensation and Payment of Expenses;
Originator's Retained Yield.'
Each Sub-Servicer will be required to agree to indemnify the Master
Servicer for any liability or obligation sustained by the Master Servicer in
connection with any act or failure to act by the Sub-Servicer in its servicing
capacity. Each Sub-Servicer is required to maintain a fidelity bond and an
errors and omission policy with respect to its officers, employees and other
persons acting on its behalf or on behalf of the Master Servicer.
Each Sub-Servicer will be required to service each Mortgage Loan pursuant
to the terms of the Sub-Servicing Agreement for the entire term of such Mortgage
Loan, unless the Sub-Servicing Agreement is terminated earlier by the Master
Servicer or unless servicing is released to the Master Servicer. The Master
Servicer generally may terminate a Sub-Servicing Agreement immediately upon the
giving of notice upon certain stated events, including the violation of such
Sub-Servicing Agreement by the Sub-Servicer, or following a specified period
after notice to the Sub-Servicer without cause upon payment of an amount equal
to a specified termination fee calculated as a specified percentage of the
aggregate outstanding principal balance of all mortgage loans, including the
Mortgage Loans serviced by such Sub-Servicer pursuant to a Sub-Servicing
Agreement and certain transfer fees.
The Master Servicer may agree with a Sub-Servicer to amend a Sub-Servicing
Agreement. Upon termination of a Sub-Servicing Agreement, the Master Servicer
may act as servicer of the related Mortgage Loans or enter into one or more new
Sub-Servicing Agreements. If the Master Servicer acts as servicer, it will not
assume liability for the representations and warranties of the Sub-Servicer that
it replaces. If the Master Servicer enters into a new Sub-Servicing Agreement,
each new Sub-Servicer either must be an Originator, meet the standards for
becoming an Originator or have such servicing experience that is otherwise
satisfactory to the Master Servicer. The Master Servicer may make reasonable
efforts to have the new Sub-Servicer assume liability for the representations
and warranties of the terminated Sub-Servicer, but no assurance can be given
that such an assumption will occur and, in any event, if the new Sub-Servicer is
an affiliate of the Master Servicer, the liability for such representations and
warranties will not be assumed by such new Sub-Servicer. In the event of such an
assumption, the Master Servicer may in the exercise of its business judgment
release the terminated Sub-Servicer from liability in respect of such
representations and warranties. Any amendments to a Sub-Servicing Agreement or
to a new Sub-Servicing Agreement may contain provisions different from those
described above that are in effect in the original Sub-Servicing Agreements.
However, the Pooling and Servicing Agreement for each Trust Estate will provide
that any such amendment or new agreement may not be inconsistent with such
Pooling and Servicing Agreement to the extent that it would materially and
adversely affect the interests of the Securityholders.
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DESCRIPTION OF THE SECURITIES
GENERAL
The Securities will be issued in series. Each series of Securities (or, in
certain instances, two or more series of Securities) will be issued pursuant to
a Pooling and Servicing Agreement. The following summaries (together with
additional summaries under 'The Pooling and Servicing Agreement' below) describe
all material terms and provisions relating to the Securities common to each
Pooling and Servicing Agreement. The summaries do not purport to be complete and
are subject to, and are qualified in their entirety by reference to, all of the
provisions of the Pooling and Servicing Agreement for the related Trust and the
related Prospectus Supplement.
The Securities will consist of two basic types: (i) Securities of the
fixed-income type ('Fixed-Income Securities') and (ii) Securities of the equity
participation type ('Equity Securities'). No Class of Equity Securities will be
offered pursuant to this Prospectus or any Prospectus Supplement related hereto.
Fixed-Income Securities generally will be styled as debt instruments, having a
principal balance and a specified interest rate ('Interest Rate'). Fixed-Income
Securities may be either beneficial ownership interests in the related Mortgage
Loans held by the related Trust, or may represent debt secured by such Mortgage
Loans. Each series or class of Fixed-Income Securities may have a different
Interest Rate, which may be a fixed, variable or adjustable Interest Rate. The
related Prospectus Supplement will specify the Interest Rate for each series or
class of Fixed-Income Securities, or the initial Interest Rate and the method
for determining subsequent changes to the Interest Rate.
A series may include one or more classes of Fixed-Income Securities ('Strip
Securities') entitled to (i) principal distributions, with disproportionate,
nominal or no interest distributions, or (ii) interest distributions, with
disproportionate, nominal or no principal distributions. In addition, a series
may include two or more classes of Fixed-Income Securities that differ as to
timing, sequential order, priority of payment, Interest Rate or amount of
distributions of principal or interest or both, or as to which distributions of
principal or interest or both on any class may be made upon the occurrence of
specified events, in accordance with a schedule or formula, or on the basis of
collections from designated portions of the related Mortgage Pool, which series
may include one or more classes of Fixed-Income Securities ('Accrual
Securities'), as to which certain accrued interest will not be distributed but
rather will be added to the principal balance (or nominal principal balance in
the case of Accrual Securities which are also Strip Securities) thereof on each
Payment Date, as hereinafter defined and in the manner described in the related
Prospectus Supplement.
If so provided in the related Prospectus Supplement, a series of Securities
may include one or more classes of Fixed-Income Securities (collectively, the
'Senior Securities') that are senior to one or more classes of Fixed-Income
Securities (collectively, the 'Subordinate Securities') in respect of certain
distributions of principal and interest and allocations of losses on Mortgage
Loans. In addition, certain classes of Senior (or Subordinate) Securities may be
senior to other classes of Senior (or Subordinate) Securities in respect of such
distributions or losses.
Equity Securities will represent the right to receive the proceeds of the
related Trust Estate after all required payments have been made to the
Securityholders of the related Fixed-Income Securities (both Senior Securities
and Subordinate Securities), and following any required deposits to any reserve
account that may be established for the benefit of the Fixed-Income Securities.
Equity Securities may constitute what are commonly referred to as the 'residual
interest,' 'seller's interest' or the 'general partnership interest,' depending
upon the treatment of the related Trust for federal income tax purposes. As
distinguished from the Fixed-Income Securities, the Equity Securities will not
be styled as having principal and interest components. Any losses suffered by
the related Trust first will be absorbed by the related class of Equity
Securities, as described herein and in the related Prospectus Supplement.
No Class of Equity Securities will be offered pursuant to this Prospectus
or any Prospectus Supplement related hereto. Equity Securities may be offered on
a private placement basis or pursuant to a separate Registration Statement to be
filed by the Sponsor. In addition, the Sponsor and its affiliates may initially
or permanently hold any Equity Securities issued by any Trust.
General Payment Terms of Securities. As provided in the related Pooling
and Servicing Agreement and as described in the related Prospectus Supplement,
Securityholders will be entitled to receive payments on their
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Securities on specified dates ('Payment Dates'). Payment Dates with respect to
Fixed-Income Securities will occur monthly, quarterly or semi-annually, as
described in the related Prospectus Supplement; Payment Dates with respect to
Equity Securities will occur as described in the related Prospectus Supplement.
The related Prospectus Supplement will describe a date (the 'Record Date')
preceding such Payment Date, as of which the Trustee or its paying agent will
fix the identity of the Securityholders for the purpose of receiving payments on
the next succeeding Payment Date. Unless otherwise described in the related
Prospectus Supplement, the Payment Date will be the twenty-fifth day of each
month (or, in the case of quarterly-pay Securities, the twenty-fifth day of
every third month; and, in the case of semi-annually-pay Securities, the twenty-
fifth day of every sixth month) and the Record Date will be the close of
business as of the last day of the calendar month which precedes such Payment
Date.
The related Prospectus Supplement and the Pooling and Servicing Agreement
will describe a period (a 'Remittance Period') antecedent to each Payment Date
(for example, in the case of monthly-pay Securities, the calendar month
preceding the month in which a Payment Date occurs or such other specified
period). Unless otherwise provided in the related Prospectus Supplement,
collections received on or with respect to the related Mortgage Loans during a
Remittance Period will be required to be remitted by the Master Servicer to the
related Trustee prior to the related Payment Date and will be used to distribute
payments to Securityholders on such Payment Date. As may be described in the
related Prospectus Supplement, the related Pooling and Servicing Agreement may
provide that all or a portion of the principal collected on or with respect to
the related Mortgage Loans may be applied by the related Trustee to the
acquisition of additional Mortgage Loans during a specified period (rather than
used to distribute payments of principal to Securityholders during such period)
with the result that the related securities possess an interest-only period,
also commonly referred to as a revolving period, which will be followed by an
amortization period. Any such interest-only or revolving period may, upon the
occurrence of certain events to be described in the related Prospectus
Supplement, terminate prior to the end of the specified period and result in the
earlier than expected amortization of the related Securities.
In addition, and as may be described in the related Prospectus Supplement,
the related Pooling and Servicing Agreement may provide that all or a portion of
such collected principal may be retained by the Trustee (and held in certain
temporary investments, including Mortgage Loans) for a specified period prior to
being used to distribute payments of principal to Securityholders.
The result of such retention and temporary investment by the Trustee of
such principal would be to slow the amortization rate of the related Securities
relative to the amortization rate of the related Mortgage Loans, or to attempt
to match the amortization rate of the related Securities to an amortization
schedule established at the time such Securities are issued. Any such feature
applicable to any Securities may terminate upon the occurrence of events to be
described in the related Prospectus Supplement, resulting in the current funding
of principal payments to the related Securityholders and an acceleration of the
amortization of such Securities.
Unless otherwise specified in the related Prospectus Supplement, neither
the Securities nor the underlying Mortgage Loans will be guaranteed or insured
by any governmental agency or instrumentality or the Sponsor, the Master
Servicer, any Sub-Servicer, any Originator or any of their affiliates.
Unless otherwise specified in the Prospectus Supplement with respect to a
series, Securities of each series covered by a particular Pooling and Servicing
Agreement will evidence specified beneficial ownership interest in a separate
Trust Estate created pursuant to such Pooling and Servicing Agreement. A Trust
Estate will consist of, to the extent provided in the Pooling and Servicing
Agreement: (i) a pool of Mortgage Loans (and the related mortgage documents) or
certificates of interest or participations therein underlying a particular
series of Securities as from time to time are subject to the Pooling and
Servicing Agreement, exclusive of, if specified in the related Prospectus
Supplement, any Originator's Retained Yield or other interest retained by the
related Originator, the Sponsor or any of its affiliates with respect to each
such Mortgage Loan; (ii) certain other assets including, without limitation,
payments and collections in respect of the Mortgage Loans due, accrued or
received, as described in the related Prospectus Supplement, on and after the
related Cut-Off Date, as from time to time are identified as deposited in
respect thereof in the Principal and Interest Account and in the related
Distribution Account; (iii) property acquired by foreclosure of the Mortgage
Loans or deed in lieu of foreclosure; (iv) hazard insurance policies and primary
insurance policies, if any, and certain proceeds thereof; and (v) any
combination, as specified in the related Prospectus Supplement, of a letter of
credit, financial guaranty insurance
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policy, purchase obligation, mortgage pool insurance policy, special hazard
insurance policy, bankruptcy bond, reserve fund or other type of Credit
Enhancement as described under 'Description of Credit Enhancement.' To the
extent that any Trust Estate 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.
FORM OF SECURITIES
Unless otherwise specified in the related Prospectus Supplement, the
Securities of each series will be issued as physical certificates ('Physical
Certificates') in fully registered form only in the denominations specified in
the related Prospectus Supplement, and will be transferable and exchangeable at
the corporate trust office of the registrar of the Securities (the 'Security
Registrar') named in the related Prospectus Supplement. No service charge will
be made for any registration of exchange or transfer of Securities, but the
Trustee may require payment of a sum sufficient to cover any tax or other
governmental charge.
If so specified in the related Prospectus Supplement, specified classes of
a series of Securities will be issued in uncertificated book-entry form
('Book-Entry Securities'), and will be registered in the name of Cede, the
nominee of DTC. 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 Uniform Commercial Code ('UCC') 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 facilitate the
clearance and settlement of securities transactions between Participants through
electronic book-entry changes in their accounts, thereby eliminating the need
for physical movement of certificates. Participants include securities brokers
and dealers, banks, trust companies and clearing corporations and may include
certain other organizations. Indirect access to the DTC system also is available
to others such as brokers, dealers, banks and trust companies that clear through
or maintain a custodial relationship with a Participant, either directly or
indirectly ('Indirect Participant').
Under a book-entry format, Securityholders that are not Participants or
Indirect Participants but desire to purchase, sell or otherwise transfer
ownership of Securities registered in the name of Cede, as nominee of DTC, may
do so only through Participants and Indirect Participants. In addition, such
Securityholders will receive all distributions of principal of and interest on
the Securities from the Trustee through DTC and its Participants. Under a
book-entry format, Securityholders will receive payments after the related
Payment Date because, while payments are required to be forwarded to Cede, as
nominee for DTC, on each such date, DTC will forward such payments to its
Participants, which thereafter will be required to forward such payments to
Indirect Participants or Securityholders. Unless and until Physical Securities
are issued, it is anticipated that the only Securityholder will be Cede, as
nominee of DTC, and that the beneficial holders of Securities will not be
recognized by the Trustee as Securityholders under the Pooling and Servicing
Agreement. The beneficial holders of such Securities will only be permitted to
exercise the rights of Securityholders under the Pooling and Servicing Agreement
indirectly through DTC and its Participants who in turn will exercise their
rights through DTC.
Under the rules, regulations and procedures creating and affecting DTC and
its operations, DTC is required to make book-entry transfers among Participants
on whose behalf it acts with respect to the Securities and is required to
receive and transmit payments of principal of and interest on the Securities.
Participants and Indirect Participants with which Securityholders have accounts
with respect to their Securities similarly are required to make book-entry
transfers and receive and transmit such payments on behalf of their respective
Securityholders. Accordingly, although Securityholders will not possess
Securities, the rules provide a mechanism by which Securityholders will receive
distributions and will be able to transfer their interests.
Unless and until Physical Certificates are issued, Securityholders who are
not Participants may transfer ownership of Securities only through Participants
by instructing such Participants to transfer Securities, by book-entry transfer,
through DTC for the account of the purchasers of such Securities, which account
is maintained with their respective Participants. Under the Rules and in
accordance with DTC's normal procedures, transfers of ownership of Securities
will be executed through DTC and the accounts of the respective Participants at
DTC will be debited and credited. Similarly, the respective Participants will
make debits or credits, as the case may be, on their records on behalf of the
selling and purchasing Securityholders.
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Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a
Securityholder to pledge Securities to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of such
Securities may be limited due to the lack of a Physical Certificate for such
Securities.
DTC in general advises that it will take any action permitted to be taken
by a Securityholder under a Pooling and Servicing Agreement only at the
direction of one or more Participants to whose account with DTC the related
Securities are credited. Additionally, DTC in general advises that it will take
such actions with respect to specified percentages of the Securityholders only
at the direction of and on behalf of Participants whose holdings include current
principal amounts of outstanding Securities that satisfy such specified
percentages. DTC may take conflicting actions with respect to other current
principal amounts of outstanding Securities to the extent that such actions are
taken on behalf of Participants whose holdings include such current principal
amounts of outstanding Securities.
Any Securities initially registered in the name of Cede, as nominee of DTC,
will be issued in fully registered, certificated form to Securityholders or
their nominees ('Physical Certificates'), rather than to DTC or its nominee only
under the events specified in the related Pooling and Servicing Agreement and
described in the related Prospectus Supplement. Upon the occurrence of any of
the events specified in the related Pooling and Servicing Agreement and the
Prospectus Supplement, DTC will be required to notify all Participants of the
availability through DTC of Physical Certificates. Upon surrender by DTC of the
securities representing the Securities and instruction for reregistration, the
Trustee will issue the Securities in the form of Physical Certificates, and
thereafter the Trustee will recognize the holders of such Physical Certificates
as Securityholders. Thereafter, payments of principal of and interest on the
Securities will be made by the Trustee directly to Securityholders in accordance
with the procedures set forth herein and in the Pooling and Servicing Agreement.
The final distribution of any Security (whether Physical Certificates or
Securities registered in the name of Cede), however, will be made only upon
presentation and surrender of such Securities on the final Payment Date at such
office or agency as is specified in the notice of final payment to
Securityholders.
ASSIGNMENT OF MORTGAGE LOANS
At the time of issuance of a series of Securities, the Sponsor will cause
the Mortgage Loans being included in the related Trust Estate to be assigned to
the Trustee together with, unless otherwise specified in the related Prospectus
Supplement, all payments and collections in respect of the Mortgage Loans due,
accrued or received, as described in the related Prospectus Supplement on or
after the related Cut-Off Date. If specified in the related Prospectus
Supplement, the Sponsor or any of its affiliates may retain the Originator's
Retained Yield, if any, for itself or transfer the same to others. The Trustee
will, concurrently with such assignment, deliver a series of Securities to the
Sponsor in exchange for the Mortgage Loans. Each Mortgage Loan will be
identified in a schedule appearing as an exhibit to the related Pooling and
Servicing Agreement. Such schedule will include, among other things, information
as to the principal balance of each Mortgage Loan as of the Cut-Off Date, as
well as information regarding the Mortgage Rate, the currently scheduled monthly
payment of principal and interest and the maturity of the Mortgage Note.
In connection with the establishment of certain Trusts the Sponsor may
first transfer the related Trust Estate to the Transferor and the Transferor
will then transfer such Trust Estate to the related Trust. The use of the
Transferor will not affect the obligations of the Sponsor with respect to the
related Trust or the related Securities. If the Transferor is to be involved in
a particular offering the related Prospectus Supplement will describe its role
in such offering; for purposes of this Prospectus the role of the Transferor is
subsumed in the role of the Sponsor.
The related Prospectus Supplement will describe any applicable requirements
relating to the delivery of documents, such as the related Notes, and the
preparation and/or filing of transfer documentation, such as assignments of
Mortgage, in connection with the establishment of the related Trust. To the
extent that the ratings, if any, then assigned to the unsecured debt of the
Sponsor or of the Sponsor's ultimate corporate parent are satisfactory to the
Rating Agencies, all or any portion of such document delivery requirements
and/or transfer document preparation and filing requirements may be waived, all
as to be described in the related Prospectus Supplement.
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A typical provision relating to document delivery requirements would
provide that the Sponsor deliver to the Trustee a file consisting of (i) the
original Notes or certified copies thereof, endorsed by the Originator thereof
in blank or to the order of the holder, (ii) originals of all intervening
assignments, showing a complete chain of title from origination to the
applicable Originators, if any, including warehousing assignments, with evidence
of recording thereon, (iii) originals of all assumption and modification
agreements, if any, and, unless such Mortgage Loan is covered by a counsel's
opinion as described in the next paragraph, (iv) either: (a) the original
Mortgage, with evidence of recording thereon, (b) a true and accurate copy of
the Mortgage where the original has been transmitted for recording, until such
time as the original is returned by the public recording office or (c) a copy of
the Mortgage certified by the public recording office in those instances where
the original recorded Mortgage has been lost. To the extent that such a file
containing all or a portion of such items has been delivered to the Trustee, the
Trustee will generally be required, for the benefit of the Securityholders, to
review each such file within a specified period, generally not exceeding 90
days, to ascertain that all required documents (or certified copies of
documents) have been executed and received.
A typical provision relating to the preparation and filing of transfer
documentation would require the Originators to cause to be prepared and
recorded, within a specified period, generally not exceeding 75 business days of
the execution and delivery of the applicable Pooling and Servicing Agreement
(or, if original recording information is unavailable, within such later period
as is permitted by the Pooling and Servicing Agreement) assignments of the
Mortgages from the Originators to the Trustee, in the appropriate jurisdictions
in which such recordation is necessary to perfect the lien thereof as against
creditors of or purchasers from the Originators, to the Trustee; provided,
however, that if the Originators furnish to the Trustee and to the Certificate
Insurer an opinion of counsel to the effect that no such recording is necessary
to perfect the Trustee's interests in the Mortgages with respect to any of the
jurisdictions in which the related Mortgaged Properties are located, then such
recording will not be required with respect to such jurisdictions or at the
election of the Certificate Insurer, any jurisdiction.
Unless otherwise specified in the related Prospectus Supplement, if any
such document is found to be missing or defective in any material respect, the
Trustee (or such custodian) shall promptly so notify the Sponsor, which shall
notify the related Sub-Servicer or Originator, as the case may be. If the
Sub-Servicer or Originator does not cure the omission or defect within a
specified period, generally not exceeding 60 days after notice is given to the
Sponsor, the Sub-Servicer or Originator, as the case may be, will be obligated
to purchase on the next succeeding Remittance Date the related Mortgage Loan
from the Trustee at its Loan Purchase Price (or, if specified in the related
Prospectus Supplement, will be permitted to substitute for such Mortgage Loan
under the conditions specified in the related Prospectus Supplement). The Master
Servicer will be obligated to enforce this obligation of the Sub-Servicer or
Originator, as the case may be, to the extent described above under 'Mortgage
Loan Program--Representations by Originators.' Unless otherwise specified in the
related Prospectus Supplement, neither the Master Servicer nor the Sponsor will,
however, be obligated to purchase or substitute for such Mortgage Loan if the
Sub-Servicer or Originator, as the case may be, defaults on its obligation to do
so, and there can be no assurance that a Sub-Servicer or Originator, as the case
may be, will carry out any such obligation. Unless otherwise specified in the
related Prospectus Supplement, such purchase obligation constitutes the sole
remedy available to the Securityholders or the Trustee for omission of, or a
material defect in, a constituent document.
The Trustee will be authorized at any time to appoint a custodian pursuant
to a custodial agreement to maintain possession of and, if applicable, to review
the documents relating to the 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 Securities will be set forth in the related Prospectus Supplement.
Pursuant to each Pooling and Servicing Agreement, the Master Servicer,
either directly or through Sub-Servicers, will service and administer the
Mortgage Loans assigned to the Trustee as more fully set forth below.
FORWARD COMMITMENTS; PRE-FUNDING
A Trust may enter into an agreement (each, a 'Forward Purchase Agreement')
with the Sponsor whereby the Sponsor will agree to transfer additional Mortgage
Loans to such Trust following the date on which such Trust is established and
the related Securities are issued. The Trust may enter into Forward Purchase
Agreements to permit the acquisition of additional Mortgage Loans (the
'Subsequent Mortgage Loans') that could not be
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delivered by the Sponsor or have not formally completed the origination process,
in each case prior to the date on which the Securities are delivered to the
Securityholders (the 'Closing Date'). Any Forward Purchase Agreement will
require that any Mortgage Loans so transferred to a Trust conform to the
requirements specified in such Forward Purchase Agreement. In addition, the
Forward Purchase Agreement states that the Depositor shall only transfer the
Subsequent Mortgage Loans upon the satisfaction of certain conditions including
that the Depositor shall have delivered to the Certificate Insurer, the Rating
Agencies and the Trustee opinions of counsel (including bankruptcy, corporate
and tax opinions) with respect to the transfer of the Subsequent Mortgage Loans.
If a Forward Purchase Agreement is to be utilized, and unless otherwise
specified in the related Prospectus Supplement, the related Trustee will be
required to deposit in a segregated account (each, a 'Pre-Funding Account') up
to 100% of the net proceeds received by the Trustee in connection with the sale
of one or more classes of Securities of the related series; the additional
Mortgage Loans will be transferred to the related Trust in exchange for money
released to the Sponsor from the related Pre-Funding Account. Each Forward
Purchase Agreement will set a specified period (the 'Funding Period') during
which any such transfers must occur; for a Trust which elects federal income
treatment as a REMIC or as a grantor trust, the related Funding Period will be
limited to three months from the date such Trust is established; for a Trust
which is treated as a mere security device for federal income tax purposes, the
related Funding Period will be limited to nine months from the date such Trust
is established. The Forward Purchase Agreement or the related Pooling and
Servicing Agreement will require that, if all moneys originally deposited to
such Pre-Funding Account are not so used by the end of the related Funding
Period, then any remaining moneys will be applied as a mandatory prepayment of
the related class or classes of Securities as specified in the related
Prospectus Supplement.
During the Funding Period, the moneys deposited to the Pre-Funding Account
will either (i) be held uninvested or (ii) will be invested in cash-equivalent
investments that are rated in one of the four highest rating categories by at
least one nationally recognized statistical rating organization and that will
either mature prior to the end of the Funding Period, or will be drawable on
demand and in any event, will not constitute the type of investment that would
require registration of the related Trust as an 'investment company' under the
Investment Company Act of 1940, as amended. On payment dates that occur during
the Funding Period, the Trustee will transfer any earnings on the moneys in the
Pre-Funding Account to the Certificate Account for distribution to the
Certificateholders.
The Pre-Funding Account will be maintained by the Trustee, which must be a
bank having combined capital and surplus, generally, of a least $100,000,000,
long-term, unsecured debt rated at least investment grade and a long-term
deposit rating of at least investment grade.
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO DISTRIBUTION ACCOUNT
Each Sub-Servicer servicing a Mortgage Loan pursuant to a Sub-Servicing
Agreement will establish and maintain an account (the 'Sub-Servicing Account')
which generally meets the requirements set forth in the Sponsor's Originator
Guide from time to time, and is otherwise acceptable to the Master Servicer. A
Sub-Servicing Account must be established with a Federal Home Loan Bank or with
a depository institution (including the Sub-Servicer itself) whose accounts are
insured by the National Credit Union Share Insurance Fund or the FDIC, provided
that any such depository institution must meet certain minimum rating criteria
set forth in the Sponsor's Originator Guide. Except as otherwise permitted by
the applicable Rating Agencies, a Sub-Servicing Account must be segregated and
may not be established as a general ledger account.
A Sub-Servicer is required to deposit into its Sub-Servicing Account on a
daily basis all amounts described above under 'Mortgage Loan Program--Sub-
Servicing by Originators' that are received by it in respect of the Mortgage
Loans, less its servicing or other compensation. On or before the date specified
in the Sub-Servicing Agreement (which date may be no later than the business day
prior to the Determination Date referred to below or, if such day is not a
business day, the preceding business day), the Sub-Servicer must remit or cause
to be remitted to the Master Servicer all funds held in the Sub-Servicing
Account with respect to Mortgage Loans that are required to be so remitted. A
Sub-Servicer may also be required to make such Servicing Advances and
Delinquency Advances and to pay Compensating Interest as set forth in the
related Sub-Servicing Agreement.
The Master Servicer will deposit or will cause to be deposited into the
Principal and Interest Account on a daily basis certain payments and collections
due, accrued or received, as described in the related Prospectus
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Supplement on or after to the Cut-Off Date, as specifically set forth in the
related Pooling and Servicing Agreement, such as the following except as
otherwise provided therein:
(i) all payments on account of principal, including principal payments
received in advance of the date on which the related monthly payment is due
(the 'Due Date') ('Principal Prepayments'), on the Mortgage Loans
comprising a Trust Estate;
(ii) all payments on account of interest on the Mortgage Loans
comprising such Trust Estate, net of the portion of each payment thereof
retained by the Sub-Servicer, if any, as its servicing or other
compensation;
(iii) all amounts (net of unreimbursed liquidation expenses and
insured expenses incurred, and unreimbursed advances made, by the related
Sub-Servicer) received and retained, if any, in connection with the
liquidation of any defaulted Mortgage Loan, by foreclosure, deed in lieu of
foreclosure or otherwise ('Liquidation Proceeds'), including all proceeds
of any special hazard insurance policy, bankruptcy bond, mortgage pool
insurance policy, financial guaranty insurance policy and any title, hazard
or other insurance policy covering any Mortgage Loan in such Mortgage Pool
(together with any payments under any letter of credit, 'Insurance
Proceeds') or proceeds from any alternative arrangements established in
lieu of any such insurance and described in the applicable Prospectus
Supplement, other than proceeds to be applied to the restoration of the
related property or released to the Mortgagor in accordance with the Master
Servicer's normal servicing procedures (such amounts, net of related
unreimbursed expenses and advances of the Master Servicer, 'Net Liquidation
Proceeds');
(iv) any Buydown Funds (and, if applicable, investment earnings
thereon) required to be paid to Securityholders, as described below;
(v) all proceeds of any Mortgage Loan in such Trust Estate purchased
(or, in the case of a substitution, certain amounts representing a
principal adjustment) by the Master Servicer, the Sponsor, any Sub-Servicer
or Originator or any other person pursuant to the terms of the Pooling and
Servicing Agreement. See 'Mortgage Loan Program--Representations by
Originators,' '--Assignment of Mortgage Loans' above;
(vi) any amounts required to be deposited by the Master Servicer in
connection with losses realized on investments of funds held in the
Principal and Interest Account, as described below;
(vii) any amounts required to be deposited in connection with the
liquidation of the related Trust; and
(viii) any amounts required to be transferred from the Distribution
Account to the Principal and Interest Account.
In addition to the Principal and Interest Account, the Sponsor shall cause
to be established and the Trustee will maintain, at the corporate trust office
of the Trustee, in the name of the Trust for the benefit of the holders of each
series of Securities, an account for the disbursement of payments on the
Mortgage Loans evidenced by each series of Securities (the 'Distribution
Account'). The Principal and Interest Account and the Distribution Account each
must be maintained with a Designated Depository Institution. A 'Designated
Depository Institution' is an institution whose deposits are insured by the Bank
Insurance Fund or the Savings Association Insurance Fund of the FDIC, the
long-term deposits of which have a rating satisfactory to the Rating Agencies
and the related Credit Enhancer, if any, and which is any of the following: (i)
a federal savings and loan association duly organized, validly existing and in
good standing under the federal banking laws, (ii) an institution duly
organized, validly existing and in good standing under the applicable banking
laws of any state, (iii) a national banking association duly organized, validly
existing and in good standing under the federal banking laws, (iv) a principal
subsidiary of a bank holding company, or (v) approved in writing by the related
Credit Enhancer, if any, each Rating Agency and, in each case acting or
designated by the Master Servicer as the depository institution for the
Principal and Interest Account; provided, however, that any such institution or
association will generally be required to have combined capital, surplus and
undivided profits of at least $100,000,000. Notwithstanding the foregoing, the
Principal and Interest Account may be held by an institution otherwise meeting
the preceding requirements except that the only applicable rating requirement
shall be that the unsecured and uncollateralized debt obligations thereof shall
be rated at a level satisfactory to one or more Rating Agencies if such
institution has trust powers and the Principal and Interest Account is held by
such institution in its trust capacity and not in its commercial capacity. The
Distribution Account, the Principal and Interest Account and other accounts
described in the related Prospectus Supplement are collectively referred to as
'Accounts.' All funds in the Distribution Account shall be invested and
reinvested by the Trustee for the benefit of the
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Securityholders and the related Credit Enhancer, if any, as directed by the
Master Servicer, in certain defined obligations set forth in the related Pooling
and Servicing Agreement ('Eligible Investments'). The Principal and Interest
Account may contain funds relating to more than one series of Securities as well
as payments received on other mortgage loans serviced or master serviced by it
that have been deposited into the Principal and Interest Account. All funds in
the Principal and Interest Account will be required to be held (i) uninvested,
up to limits insured by the FDIC or (ii) invested in Eligible Investments. The
Master Servicer will be entitled to any interest or other income or gain
realized with respect to the funds on deposit in the Principal and Interest
Account.
To the extent that the ratings, if any, then assigned to the unsecured debt
of the Master Servicer or of the Master Servicer's corporate parent and
satisfactory to the Rating Agencies, the Master Servicer may be permitted to
co-mingle Mortgage Loan payments and collections with the Master Servicer's
general funds rather than required to deposit such amounts into a segregated
Principal and Interest Account.
Unless otherwise specified in the related Prospectus Supplement, on the day
seven days preceding each Payment Date (the 'Remittance Date'), the Master
Servicer will withdraw from the Principal and Interest Account and remit to the
Trustee for deposit in the applicable Distribution Account, in immediately
available funds, the amount to be distributed therefrom to Securityholders on
such Payment Date. The Master Servicer will remit to the Trustee for deposit
into the Distribution Account the amount of any advances made by the Master
Servicer as described herein under '--Advances,' any amounts required to be
transferred to the Distribution Account from a Reserve Fund, as described under
'Credit Enhancement' below, any amounts required to be paid by the Master
Servicer out of its own funds due to the operation of a deductible clause in any
blanket policy maintained by the Master Servicer to cover hazard losses on the
Mortgage Loans as described under 'Hazard Insurance; Claims Thereunder--Hazard
Insurance Policies' below and any other amounts as specifically set forth in the
related Pooling and Servicing Agreement. The Trustee will cause all payments
received by it from any Credit Enhancer to be deposited in the Distribution
Account not later than the related Payment Date.
Unless otherwise specified in the related Prospectus Supplement, the
portion of any payment received by the Master Servicer in respect of a Mortgage
Loan that is allocable to the Originator's Retained Yield generally will not be
deposited into the Principal and Interest Account, but will not be paid over to
the parties entitled thereto as provided in the related Pooling and Servicing
Agreement.
Funds on deposit in the Principal and Interest Account attributable to
Mortgage Loans underlying a series of Securities may be invested in Eligible
Investments maturing in general not later than the business day preceding the
next Payment Date. Unless otherwise specified in the related Prospectus
Supplement, all income and gain realized from any such investment will be for
the account of the Master Servicer. Funds on deposit in the related Distribution
Account may be invested in Eligible Investments maturing, in general, no later
than the business day preceding the next Payment Date.
With respect to each Buydown Mortgage Loan, the Sub-Servicer will deposit
the related Buydown Funds provided to it in a Buydown Account that will comply
with the requirements set forth herein with respect to a Sub-Servicing Account.
Unless otherwise specified in the related Prospectus Supplement, 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 set forth in the Sponsor's
Originator Guide from time to time, will support the scheduled level of payments
due under the Buydown Mortgage Loan. Neither the Master Servicer nor the Sponsor
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 related Originator or
the related Sub-Servicer, distributions to Securityholders may be affected. With
respect to each Buydown Mortgage Loan, the Sub-Servicer will withdraw from the
Buydown Account and remit to the Master Servicer on or before the date specified
in the Sub-Servicing Agreement 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.
If the Mortgagor on a Buydown Mortgage Loan prepays such Mortgage Loan in
its entirety during the Buydown Period, the Sub-Servicer will withdraw from the
Buydown Account and remit to the Mortgagor or such
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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 Sub-Servicer will generally be required to withdraw
from the Buydown Account and remit to the Master Servicer the Buydown Funds and
investment earnings thereon, if any, which together with such prepayment will
result in a prepayment in full; provided that Buydown Funds may not be available
to cover a prepayment under certain Mortgage Loan programs. Any Buydown Funds so
remitted to the Master Servicer in connection with a prepayment described in the
preceding sentence will be deemed to reduce the amount that would be required to
be paid by the Mortgagor to repay fully the related Mortgage Loan if the
Mortgage Loan were not subject to the buydown plan. Any investment earnings
remaining in the Buydown Account after prepayment or after termination of the
Buydown Period will be remitted to the related Mortgagor or such other
designated party pursuant to the agreement relating to each Buydown Mortgage
Loan (the 'Buydown Agreement'). If the Mortgagor defaults during the Buydown
Period with respect to a Buydown Mortgage Loan and the property securing such
Buydown Mortgage Loan is sold in liquidation (either by the Master Servicer, the
Primary Insurer, the insurer under the mortgage pool insurance policy (the 'Pool
Insurer') or any other insurer), the Sub-Servicer will be required to withdraw
from the Buydown Account the Buydown Funds and all investment earnings thereon,
if any, and remit the same to the Master Servicer or, if instructed by the
Master Servicer, pay the same to the primary insurer or the Pool Insurer, as the
case may be, if the Mortgaged Property is transferred to such insurer and such
insurer pays all of the loss incurred in respect of such default.
WITHDRAWALS FROM THE PRINCIPAL AND INTEREST ACCOUNT
The Master Servicer may, from time to time, make withdrawals from the
Principal and Interest Account for certain purposes, as specifically set forth
in the related Pooling and Servicing Agreement, which generally will include the
following except as otherwise provided therein:
(i) to effect the timely remittance to the Trustee for deposit to the
Distribution Account in the amounts and in the manner provided in the
Pooling and Servicing Agreement and described in '--Payments on Mortgage
Loans; Deposits to Distribution Account' above;
(ii) to reimburse itself or any Sub-Servicer for Delinquency Advances
and Servicing Advances as to any Mortgaged Property, out of late payments
or collections on the related Mortgage Loan with respect to which such
Delinquency Advances or Servicing Advances were made;
(iii) to withdraw investment earnings on amounts on deposit in the
Principal and Interest Account;
(iv) to pay the Sponsor or its assignee all amounts allocable to the
Originator's Retained Yield out of collections or payments which represent
interest on each Mortgage Loan (including any Mortgage Loan as to which
title to the underlying Mortgaged Property was acquired);
(v) to withdraw amounts that have been deposited in the Principal and
Interest Account in error;
(vi) to clear and terminate the Principal and Interest Account in
connection with the termination of the Trust Estate pursuant to the Pooling
and Servicing Agreement, as described in 'The Pooling and Servicing
Agreement--Termination, Retirement of Securities'; and
(vii) to invest in Eligible Investments.
DISTRIBUTIONS
Beginning on the Payment Date in the month following the month (or, in the
case of quarterly-pay Securities, the third month following such month and each
third month thereafter or, in the case of semi-annually-pay Securities, the
sixth month following such month and each sixth month thereafter) in which the
Cut-Off Date occurs (or such other date as may be set forth in the related
Prospectus Supplement) for a series of Securities, distributions of principal
and interest (or, where applicable, of principal only or interest only) on each
class of Securities entitled thereto will be made either by the Trustee or a
paying agent appointed by the Trustee (the 'Paying Agent'), to the persons who
are registered as Securityholders at the close of business on the Record Date in
proportion to their respective Percentage Interests. Unless otherwise specified
in the related Prospectus Supplement, interest that accrues and is not payable
on a class of Securities will be added to the principal balance of each Security
of such class in proportion to its Percentage Interest. The undivided percentage
interest (the 'Percentage Interest') represented by a Security of a particular
class will be equal to the percentage obtained by
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dividing the initial principal balance or notional amount of such Security by
the aggregate initial amount or notional balance of all the Securities of such
class. Distributions will be made in immediately available funds (by wire
transfer or otherwise) to the account of a Securityholder at a bank or other
entity having appropriate facilities therefor, if such Securityholder has so
notified the Trustee or the Paying Agent, as the case may be, and the applicable
Pooling and Servicing Agreement provides for such form of payment, or by check
mailed to the address of the person entitled thereto as it appears on the
Security Register; provided, however, that the final distribution in retirement
of the Securities (other than any Book-Entry Securities) will be made only upon
presentation and surrender of the Securities at the office or agency of the
Trustee specified in the notice to Securityholders of such final distribution.
PRINCIPAL AND INTEREST ON THE SECURITIES
The method of determining, and the amount of, distributions of principal
and interest (or, where applicable, of principal only or interest only) on a
particular series of Securities will be described in the related Prospectus
Supplement. Each class of Securities (other than certain classes of Strip
Securities) may bear interest at a different interest rate (the 'Pass-Through
Rate'), which may be a fixed or adjustable Pass-Through Rate. The related
Prospectus Supplement will specify the Pass-Through Rate for each class, or in
the case of an adjustable Pass-Through Rate, the initial Pass-Through Rate and
the method for determining the Pass-Through Rate. Unless otherwise specified in
the related Prospectus Supplement, interest on the Securities will be calculated
on the basis of a 360-day year consisting of twelve 30-day months.
On each Payment Date for a series of Securities, the Trustee will
distribute or cause the Paying Agent to distribute, as the case may be, to each
holder of record on the Record Date of a class of Securities, an amount equal to
the Percentage Interest represented by the Security held by such holder
multiplied by such class' Distribution Amount. The Distribution Amount for a
class of Securities for any Payment Date will be the portion, if any, of the
principal distribution amount (as defined in the related Prospectus Supplement)
allocable to such class for such Payment Date, as described in the related
Prospectus Supplement, plus, if such class is entitled to payments of interest
on such Payment Date, the interest accrued at the applicable Pass-Through Rate
on the principal balance or notional amount of such class, as specified in the
applicable Prospectus Supplement, less (unless otherwise specified in the
Prospectus Supplement) the amount of any Deferred Interest added to the
principal balance of the Mortgage Loans and/or the outstanding balance of one or
more classes of Securities on the related Due Date and any other interest
shortfalls allocable to Securityholders which are not covered by advances or the
applicable Credit Enhancement, in each case in such amount that is allocated to
such class on the basis set forth in the Prospectus Supplement.
As may be described in the related Prospectus Supplement, the related
Pooling and Servicing Agreement may provide that all or a portion of the
principal collected on or with respect to the related Mortgage Loans may be
applied by the related Trustee to the acquisition of additional Mortgage Loans
during a specified period (rather than used to fund payments of principal to
Securityholders during such period) with the result that the related securities
will possess an interest-only period, also commonly referred to as a revolving
period, which will be followed by an amortization period. Any such interest-only
or revolving period may, upon the occurrence of certain events to be described
in the related Prospectus Supplement, terminate prior to the end of the
specified period and result in the earlier than expected amortization of the
related Securities.
In addition, and as may be described in the related Prospectus Supplement,
the related Pooling and Servicing Agreement may provide that all or a portion of
such collected principal may be retained by the Trustee (and held in certain
temporary investments, including Mortgage Loans) for a specified period prior to
being used to fund payments of principal to Securityholders.
In the case of a series of Securities that includes two or more classes of
Securities, 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 Securities or Subordinate Securities) of each
such class shall be as provided in the related Prospectus Supplement.
Distributions in respect of principal of any class of Securities will be made on
a pro rata basis among all of the Securities of such class.
Except as otherwise provided in the related Pooling and Servicing
Agreement, on or prior to the third business day next preceding the Payment Date
(or such earlier day as shall be agreed by the related Credit
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Enhancer, if any, and the Trustee) of the month of distribution (the
'Determination Date'), the Trustee will determine the amounts of principal and
interest which will be passed through to Securityholders on the immediately
succeeding Payment Date. If the amount in the Distribution Account is
insufficient to cover the amount to be passed through to Securityholders, the
Trustee will be required to notify the related Credit Enhancer, if any, pursuant
to the related Pooling and Servicing Agreement for the purpose of funding such
deficiency.
ADVANCES
Unless otherwise specified in the related Prospectus Supplement, each
Servicer will be required, not later than each Remittance Date, to deposit into
the Principal and Interest Account an amount equal to the sum of the interest
portions (net of the Servicing Fees and the Originators' Retained Yield) due,
but not collected, with respect to delinquent Mortgage Loans directly serviced
by such Servicer during the prior Remittance Period, but only if, in its good
faith business judgment, such Servicer believes that such amount will ultimately
be recovered from the related Mortgage Loan. As may be described in the related
Prospectus Supplement, such Servicer may also be required so to advance
delinquent payments of principal. Any such amounts so advanced are 'Delinquency
Advances'. The Master Servicer will be permitted to fund its payment of
Delinquency Advances on any Remittance Date from collections on any Mortgage
Loan deposited to the Principal and Interest Account subsequent to the related
Remittance Period, and will be required to deposit into the Principal and
Interest Account with respect thereto (i) collections from the Mortgagor whose
delinquency gave rise to the shortfall which resulted in such Delinquency
Advance and (ii) Net Liquidation Proceeds recovered on account of the related
Mortgage Loan to the extent of the amount of aggregate Delinquency Advances
related thereto. A Sub-Servicer will be permitted to fund its payment of
Delinquency Advances as set forth in the related Sub-Servicing Agreement.
A Mortgage Loan is 'delinquent' if any payment due thereon is not made by
the close of business on the day such payment is scheduled to be due.
Unless otherwise specified in the related Prospectus Supplement, on or
prior to each Remittance Date, each Servicer will be required to deposit in the
Principal and Interest Account with respect to any full prepayment received on a
Mortgage Loan directly serviced by such Servicer during the related Remittance
Period out of its own funds without any right of reimbursement therefor, an
amount equal to the difference between (x) 30 days' interest at the Mortgage
Loan's Mortgage Rate (less the related Base Servicing Fees and the Originators'
Retained Yield, if any) on the principal balance of such Mortgage Loan as of the
first day of the related Remittance Period and (y) to the extent not previously
advanced, the interest (less the Servicing Fee and the Originators' Retained
Yield, if any) paid by the Mortgagor with respect to the Mortgage Loan during
such Remittance Period (any such amount paid by such Servicer, 'Compensating
Interest'). No Servicer shall be required to pay Compensating Interest with
respect to any Remittance Period in an amount in excess of the aggregate related
Base Servicing Fees received by such Servicer with respect to all Mortgage Loans
directly serviced by such Servicer for such Remittance Period.
Each Servicer will be required to pay all 'out of pocket' costs and
expenses incurred in the performance of its servicing obligations, but only to
the extent that such Servicer reasonably believes that such amounts will
increase Net Liquidation Proceeds on the related Mortgage Loan. Each such amount
so paid will constitute a 'Servicing Advance'. Such Servicer may recover
Servicing Advances to the extent permitted by the Mortgage Loans or, if not
theretofore recovered from the Mortgagor on whose behalf such Servicing Advance
was made, from Liquidation Proceeds realized upon the liquidation of the related
Mortgage Loan or, in certain cases, from excess cash flow otherwise payable to
the holders of the related Equity Securities.
Notwithstanding the foregoing, if the Master Servicer exercises its option,
if any, to purchase the assets of a Trust Estate as described under 'The Pooling
and Servicing Agreement--Termination; Retirement of Securities' below, the
Master Servicer will be deemed to have been reimbursed for all related advances
previously made by it and not theretofore reimbursed to it. The Master
Servicer's obligation to make advances may be supported by Credit Enhancement as
described in the related Pooling and Servicing Agreement. In the event that the
provider of such support is downgraded by a Rating Agency rating the related
Securities or if the collateral supporting such obligation is not performing or
is removed pursuant to the terms of any agreement described in the related
Prospectus Supplement, the Securities may also be downgraded.
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REPORTS TO SECURITYHOLDERS
With each distribution to Securityholders of a particular class the Trustee
will forward or cause to be forwarded to each holder of record of such class of
Securities a statement or statements with respect to the related Trust setting
forth the information specifically described in the related Pooling and
Servicing Agreement, which generally will include the following as applicable
except as otherwise provided therein:
(i) the amount of the distribution with respect to each class of
Securities;
(ii) the amount of such distribution allocable to principal,
separately identifying the aggregate amount of any prepayments or other
recoveries of principal included therein;
(iii) the amount of such distribution allocable to interest;
(iv) the aggregate unpaid Principal Balance of the Mortgage Loans
after giving effect to the distribution of principal on such Payment Date;
(v) 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 Payment Date;
(vi) the amount of coverage under any letter of credit, mortgage pool
insurance policy or other form of Credit Enhancement covering default risk
as of the close of business on the applicable Determination Date and a
description of any Credit Enhancement substituted therefor;
(vii) information furnished by the Sponsor pursuant to section
6049(d)(7)(C) of the Code and the regulations promulgated thereunder to
assist Securityholders in computing their market discount;
(viii) the total of any Substitution Amounts and any Loan Purchase
Price amounts included in such distribution; and
(ix) a number with respect to each class (the 'Pool Factor') computed
by dividing the principal balance of all Securities in such class (after
giving effect to any distribution of principal to be made on such Payment
Date) by the original principal balance of the Securities of such class on
the Closing Date.
Items (i) through (iii) above shall, with respect to each class of
Securities, be presented on the basis of a certificate having a $1,000
denomination. In addition, by January 31 of each calendar year during which
Securities are outstanding, the Trustee shall furnish a report to each
Securityholder at any time during each calendar year as to the aggregate amounts
reported pursuant to (i), (ii) and (iii) with respect to the Securities for such
calendar year. If a class of Securities are in book-entry form, DTC will supply
such reports to the Securityholders in accordance with its procedures.
In addition, on each Payment Date the Trustee will forward or cause to be
forwarded additional information, as of the close of business on the last day of
the prior calendar month, as more specifically described in the related Pooling
and Servicing Agreement, which generally will include the following as
applicable except as otherwise provided therein:
(i) the total number of Mortgage Loans and the aggregate principal
balances thereof, together with the number, percentage (based on the
then-outstanding principal balances) and aggregate principal balances of
Mortgage Loans (a) 30-59 days delinquent, (b) 60-89 days delinquent and (c)
90 or more days delinquent;
(ii) the number, percentage (based on the then-outstanding principal
balances), aggregate Mortgage Loan balances and status of all Mortgage
Loans in foreclosure proceedings (and whether any such Mortgage Loans are
also included in any of the statistics described in the foregoing clause
(i));
(iii) the number, percentage (based on the then-outstanding principal
balances) and aggregate Mortgage Loan balances of all Mortgage Loans
relating to Mortgagors in bankruptcy proceedings (and whether any such
Mortgage Loans are also included in any of the statistics described in the
foregoing clause (i));
(iv) the number, percentage (based on the then-outstanding principal
balances) and aggregate Mortgage Loan balances of all Mortgage Loans
relating to the status of any Mortgaged Properties as to which title has
been taken in the name of, or on behalf of the Trustee (and whether any
such Mortgage Loans are also included in any of the statistics described in
the foregoing clause (i)); and
(v) the book value of any real estate acquired through foreclosure or
grant of a deed in lieu of foreclosure.
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COLLECTION AND OTHER SERVICING PROCEDURES
Acting directly or through one or more Sub-Servicers as provided in the
related Pooling and Servicing Agreement, the Master Servicer, is required to
service and administer the Mortgage Loans in accordance with the Pooling and
Servicing Agreement and with reasonable care, and using that degree of skill and
attention that the Master Servicer exercises with respect to comparable mortgage
loans that it services for itself or others.
The duties of the Master Servicer include collecting and posting of all
payments, responding to inquiries of Mortgagors or by federal, state or local
government authorities with respect to the Mortgage Loans, investigating
delinquencies, reporting tax information to Mortgagors in accordance with its
customary practices and accounting for collections and furnishing monthly and
annual statements to the Trustee with respect to distributions and making
Delinquency Advances and Servicing Advances to the extent described in the
related Prospectus Supplement. The Master Servicer is required to follow its
customary standards, policies and procedures in performing its duties as Master
Servicer.
The Master Servicer (i) is authorized and empowered to execute and deliver,
on behalf of itself, the Securityholders and the Trustee or any of them, any and
all instruments of satisfaction or cancellation, or of partial or full release
or discharge and all other comparable instruments, with respect to the Mortgage
Loans and with respect to the related Mortgaged Properties; (ii) may consent to
any modification of the terms of any Note not expressly prohibited by the
Pooling and Servicing Agreement if the ef fect of any such modification (x) will
not materially and adversely affect the security afforded by the related
Mortgaged Property or the timing of receipt of any payments required thereunder
(in each case other than as permitted by the related Pooling and Servicing
Agreement); and (y) will not cause a Trust which is a REMIC to fail to qualify
as a REMIC.
The related Pooling and Servicing Agreement will require the Master
Servicer to follow such collection procedures as it follows from time to time
with respect to mortgage loans in its servicing portfolio that are comparable to
the Mortgage Loans; provided that the Master Servicer is required always at
least to follow collection procedures that are consistent with or better than
standard industry practices. The Master Servicer may in its discretion (i) waive
any assumption fees, late payment charges, charges for checks returned for
insufficient funds, prepayment fees, if any, or the fees which may be collected
in the ordinary course of servicing the Mortgage Loans, (ii) if a Mortgagor is
in default or about to be in default because of a Mortgagor's financial
condition, arrange with the Mortgagor a schedule for the payment of delinquent
payments due on the related Mortgage Loan; provided, however, the Master
Servicer shall generally not be permitted to reschedule the payment of
delinquent payments more than one time in any twelve consecutive months with
respect to any Mortgagor or (iii) modify payments of monthly principal and
interest on any Mortgage Loan becoming subject to the terms of the Relief Act in
accordance with the Master Servicer's general policies of the comparable
mortgage loans subject to such Relief Act.
When a Mortgaged Property (other than Mortgaged Property subject to an ARM
Loan) has been or is about to be conveyed by the Mortgagor, the Master Servicer
will be required, to the extent it has knowledge of such conveyance or
prospective conveyance, to exercise its rights to accelerate the maturity of the
related Mortgage Loan under any 'due-on-sale' clause contained in the related
Mortgage or Note; provided, however, that the Master Servicer will not be
required to exercise any such right if (i) the 'due-on-sale' clause, in the
reasonable belief of the Master Servicer, is not enforceable under applicable
law or (ii) the Master Servicer reasonably believes that to permit an assumption
of the Mortgage Loan would not materially and adversely affect the interests of
Securityholders or the related Credit Enhancer or jeopardize coverage under any
primary insurance policy or applicable Credit Enhancement arrangements. In such
event, the Master Servicer will be required to enter into an assumption and
modification agreement with the person to whom such Mortgaged Property has been
or is about to be conveyed, pursuant to which such person becomes liable under
the Mortgage Note and, unless prohibited by applicable law or the related
documents, the Mortgagor remains liable thereon. If the foregoing is not
permitted under applicable law, the Master Servicer will be authorized to enter
into a substitution of liability agreement with such person, pursuant to which
the original Mortgagor is released from liability and such person is substituted
as Mortgagor and becomes liable under the Mortgage Note. The assumed loan must
conform in all respects to the requirements, representations and warranties of
the Pooling and Servicing Agreement.
An ARM Loan may be assumed if such ARM Loan is by its terms assumable and
if, in the reasonable judgment of the Master Servicer or the Sub-Servicer, the
proposed transferee of the related Mortgaged Property establishes its ability to
repay the loan and the security for such ARM Loan would not be impaired by the
assumption. If a Mortgagor transfers the Mortgaged Property subject to an ARM
Loan without consent, such ARM Loan may be
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declared due and payable. Any fee collected by the Master Servicer or
Sub-Servicer for entering into an assumption or substitution of liability
agreement will be retained by the Master Servicer or Sub-Servicer as additional
servicing compensation unless otherwise set forth in the related Prospectus
Supplement. See 'Certain Legal Aspects of Mortgage Loans and Related
Matters--Enforceability of Certain Provisions' herein.
The Master Servicer will have the right under the Pooling and Servicing
Agreement to approve applications of Mortgagors seeking consent for (i) partial
releases of Mortgages, (ii) alterations and (iii) removal, demolition or
division of Mortgaged Properties. No application for consent may be approved by
the Master Servicer unless: (i) the provisions of the related Mortgage Note and
Mortgage have been complied with; (ii) the credit profile of the related
Mortgage Loan after any release is consistent with the Sponsor's Originator
Guide then applicable to such Mortgage Loan; and (iii) the lien priority of the
related Mortgage is not reduced.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
The Master Servicer shall foreclose upon or otherwise comparably effect the
ownership of Mortgaged Properties relating to defaulted Mortgage Loans as to
which no satisfactory arrangements can be made for collection of delinquent
payments and which the Master Servicer has not purchased pursuant to the related
Pooling and Servicing Agreement (such Mortgage Loans, 'REO Property'). In
connection with such foreclosure or other conversion, the Master Servicer shall
exercise such of the rights and powers vested in it, and use the same degree of
care and skill in their exercise or use, as prudent mortgage lenders would
exercise or use under the circumstances in the conduct of their own affairs,
including, but not limited to, making Servicing Advances for the payment of
taxes, amounts due with respect to Senior Liens, and insurance premiums. Unless
otherwise provided in the related Prospectus Supplement, the Master Servicer
shall sell any REO Property within 23 months of its acquisition by the Trust.
The Pooling and Servicing Agreements generally will permit the Master Servicer
to cease further collection and foreclosure activity if the Master Servicer
reasonably determines that such further activity would not increase collections
or recoveries to be received by the related Trust with respect to the related
Mortgage Loan. In addition, any required advancing may be permitted to cease at
this point.
Notwithstanding the generality of the foregoing provisions, the Master
Servicer will be required to manage, conserve, protect and operate each REO
Property for the Securityholders solely for the purpose of its prompt
disposition and sale as 'foreclosure property' within the meaning of Section
860G(a)(8) of the Code or result in the receipt by the Trust of any 'income from
non-permitted assets' within the meaning of Section 860F(a)(2)(B) of the Code or
any 'net income from foreclosure property' which is subject to taxation under
the REMIC Provisions. Pursuant to its efforts to sell such REO Property, the
Master Servicer shall either itself or through an agent selected by the Master
Servicer protect and conserve such REO Property in the same manner and to such
extent as is customary in the locality where such REO Property is located and
may, incident to its conservation and protection of the interests of the
Securityholders, rent the same, or any part thereof, as the Master Servicer
deems to be in the best interest of the Securityholders for the period prior to
the sale of such REO Property. The Master Servicer shall take into account the
existence of any hazardous substances, hazardous wastes or solid wastes, as such
terms are defined in the Comprehensive Environmental Response Compensation and
Liability Act, the Resource Conservation and Recovery Act of 1976, or other
federal, state or local environmental legislation, on a Mortgaged Property in
determining whether to foreclose upon or otherwise comparably convert the
ownership of such Mortgaged Property.
The Master Servicer shall determine, with respect to each defaulted
Mortgage Loan, when it has recovered, whether through trustee's sale,
foreclosure sale or otherwise, all amounts it expects to recover from or on
account of such defaulted Mortgage Loan, whereupon such Mortgage Loan shall
become a Liquidated Mortgage Loan. A Mortgage Loan which is 'charged-off', i.e.,
as to which the Master Servicer ceases further collection and/or foreclosure
activity as a result of a determination that such further actions will not
increase collections or recoveries to be received by the related Trust is also a
'Liquidated Mortgage Loan.'
If a loss is realized on a defaulted Mortgage Loan or REO Property upon the
final liquidation thereof that is not covered by any applicable form of Credit
Enhancement or other insurance, the Securityholders will bear such loss.
However, if a gain results from the final liquidation of an REO Property that 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 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 'Hazard Insurance; Claims Thereunder;
Hazard Insurance Policies.'
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SUBORDINATION
A Senior/Subordinate Series of Securities will consist of one or more
classes of Senior Securities and one or more classes of Subordinate Securities,
as specified in the related Prospectus Supplement. Unless otherwise specified in
the related Prospectus Supplement, only the Senior Securities will be offered
hereby. Subordination of the Subordinate Securities of any Senior/Subordinate
Series of Securities will be effected by the following method, unless an
alternative method is specified in the related Prospectus Supplement. In
addition, certain classes of Senior (or Subordinate) Securities may be senior to
other classes of Senior (or Subordinate) Securities, as specified in the related
Prospectus Supplement, in which case the following discussion is qualified in
its entirety by reference to the related Prospectus Supplement with respect to
the various priorities and other rights as among the various classes of Senior
Securities or Subordinate Securities, as the case may be.
With respect to any Senior/Subordinate Series of Securities, the total
amount available for distribution on each Payment Date, as well as the method
for allocating such amount among the various classes of Securities included in
such series, will be as set forth in the related Prospectus Supplement.
Generally, the amount available for contribution will be allocated first to
interest on the Senior Securities of such series, and then to principal of the
Senior Securities up to the amounts determined as specified in the related
Prospectus Supplement, prior to allocation to the Subordinate Securities of such
series.
In the event of any Realized Losses (as defined below) on Mortgage Loans
not in excess of the limitations described below, other than Extraordinary
Losses, the rights of the Subordinate Securityholders to receive distributions
with respect to the Mortgage Loans will be subordinate to the rights of the
Senior Securityholders. With respect to any defaulted Mortgage Loan that becomes
a Liquidated Mortgage Loan, through foreclosure sale, disposition of the related
Mortgaged Property if acquired by deed in lieu of foreclosure, 'charged-off' or
otherwise, the amount of loss realized, if any (as more fully described in the
related Pooling and Servicing Agreement, a 'Realized Loss'), will equal the
portion of the stated principal balance remaining, after application of all
amounts recovered (net of amounts reimbursable to the Master Servicer for
related advances and expenses) towards interest and principal owing on the
Mortgage Loan. With respect to a Mortgage Loan the principal balance of which
has been reduced in connection with bankruptcy proceedings, the amount of such
reduction will be treated as a Realized Loss.
Except as noted below, all Realized Losses will be allocated to the
Subordinate Securities of the related series, until the Principal Balance (as
defined in the related Prospectus Supplement) of such Subordinate Securities
thereof has been reduced to zero. Any additional Realized Losses will be
allocated to the Senior Securities (or, if such series includes more than one
class of Senior Securities, either on a pro-rata basis among all of the Senior
Securities in proportion to their respective outstanding Principal Balances or
as otherwise provided in the related Prospectus Supplement).
With respect to certain Realized Losses resulting from physical damage to
Mortgaged Properties that are generally of the same type as are covered under a
special hazard insurance policy, the amount thereof that may be allocated to the
Subordinate Securities of the related series may be limited to an amount (the
'Special Hazard Amount') specified in the related Prospectus Supplement. See
'Description of Credit Enhancement--Special Hazard Insurance Policies.' If so,
any Special Hazard Losses in excess of the Special Hazard Amount will be
allocated among all outstanding classes of Securities of the related series,
either on a pro-rata basis in proportion to their outstanding Security Principal
Balances, regardless of whether any Subordinate Securities remain outstanding,
or as otherwise provided in the related Prospectus Supplement. The respective
amounts of other specified types of losses (including Fraud Losses and
Bankruptcy Losses) that may be borne solely by the Subordinate Securities may be
similarly limited to an amount (with respect to Fraud Losses, the 'Fraud Loss
Amount' and with respect to Bankruptcy Losses, the 'Bankruptcy Loss Amount'),
and the Subordinate Securities may provide no coverage with respect to certain
other specified types of losses, as described in the related Prospectus
Supplement, in which case such losses would be allocated on a pro-rata basis
among all outstanding classes of Securities.
Any allocation of a Realized Loss (including a Special Hazard Loss) to a
Security in a Senior/Subordinate Series will be made by reducing the Security
Principal Balance thereof as of the Payment Date following the calendar month in
which such Realized Loss was incurred.
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In lieu of the foregoing provisions, subordination may be effected in the
following manner, or in any other manner described in the related Prospectus
Supplement. The rights of the holders of Subordinate Securities to receive any
or a specified portion of distributions with respect to the Mortgage Loans may
be subordinated to the extent of the amount set forth in the related Prospectus
Supplement (the 'Subordinate Amount'). As specified in the related Prospectus
Supplement, the Subordinate Amount may be subject to reduction based upon the
amount of losses borne by the holders of the Subordinate Securities as a result
of such subordination, a specified schedule or such other method of reduction as
such Prospectus Supplement may specify. If so specified in the related
Prospectus Supplement, additional credit support for this form of subordination
may be provided by the establishment of a reserve fund for the benefit of the
holders of the Senior Securities (which may, if such Prospectus Supplement so
provides, initially be funded by a cash deposit by the Originator) into which
certain distributions otherwise allocable to the holders of the Subordinate
Securities may be placed; such funds would thereafter be available to cure
shortfalls in distributions to holders of the Senior Securities.
DESCRIPTION OF CREDIT ENHANCEMENT
Unless otherwise expressly provided and described in the applicable
Prospectus Supplement, each series of Securities shall have credit support
(referred to herein as 'Credit Enhancement') comprised of one or more of the
following components. Each component will have a monetary limit and will provide
coverage with respect to 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'). Losses occasioned by war, civil insurrection, certain
governmental actions, nuclear reaction and certain other risks ('Extraordinary
Losses') will not be covered unless otherwise specified. To the extent that the
Credit Enhancement for any series of Securities is exhausted, the
Securityholders will bear all further risks of loss not otherwise insured
against.
As set forth below and in the applicable Prospectus Supplement, Credit
Enhancement may be provided with respect to one or more classes of a series of
Securities or with respect to the Mortgage Assets in the related Trust. Credit
Enhancement may be in the form of (i) the subordination of one or more classes
of Subordinate Securities to provide credit support to one or more classes of
Senior Securities as described under 'Subordination,' (ii) the use of a mortgage
pool insurance policy, special hazard insurance policy, bankruptcy bond, reserve
fund, letter of credit, financial guaranty insurance policy, other third party
guarantees, another method of Credit Enhancement described in the related
Prospectus Supplement, or the use of a cross-support feature or
overcollateralization, or (iii) any combination of the foregoing. Unless
otherwise specified in the Prospectus Supplement, any Credit Enhancement will
not provide protection against all risks of loss and will not guarantee
repayment of the entire principal balance of the Securities and interest
thereon. If losses occur that exceed the amount covered by Credit Enhancement or
are not covered by the Credit Enhancement, holders of one or more classes of
Securities will bear their allocable share of deficiencies. If a form of Credit
Enhancement applies to several classes of Securities, and if principal payments
equal to the aggregate principal balances of certain classes will be distributed
prior to such distributions to the classes, the classes that receive such
distributions at a later time are more likely to bear any losses that exceed the
amount covered by Credit Enhancement.
The amounts and type of Credit Enhancement arrangement as well as the
provider thereof, if applicable, with respect to each series of Securities will
be set forth in the related Prospectus Supplement. To the extent provided in the
applicable Prospectus Supplement and the Pooling and Servicing Agreement, the
Credit Enhancement arrangements may be periodically modified, reduced and
substituted for based on the aggregate outstanding principal balance of the
Mortgage Loans covered thereby. See 'Description of Credit
Enhancement--Reduction or Substitution of Credit Enhancement.' If specified in
the applicable Prospectus Supplement, Credit Enhancement for a series of
Securities may cover one or more other series of Securities.
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The descriptions of any insurance policies or bonds described in this
Prospectus or any Prospectus Supplement and the coverage thereunder do not
purport to be complete and are qualified in their entirety by reference to the
actual forms of such policies, copies of which are available upon request.
Letter of Credit. If any component of Credit Enhancement as to any series
of Securities is to be provided by a letter of credit (the 'Letter of Credit'),
a bank (the 'Letter of Credit Bank') will deliver to the Trustee an irrevocable
Letter of Credit. The Letter of Credit may provide direct coverage with respect
to the related Securities or, if specified in the related Prospectus Supplement,
support the Sponsor's or any other person's obligation pursuant to a Purchase
Obligation to make certain payments to the 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.
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. On or before each Payment Date, either the Letter of Credit Bank or
the Trustee (or other obligor under a Purchase Obligation) will be required to
make the payments specified in the related Prospectus Supplement after
notification from the Trustee, to be deposited in the related Distribution
Account, if and to the extent covered, under the applicable Letter of Credit.
Mortgage Pool Insurance Policies. Any mortgage pool insurance policy
('Mortgage Pool Insurance Policy') obtained by the Sponsor for each related
Trust Estate will be issued by the Pool Insurer named in the related Prospectus
Supplement. Each Mortgage Pool Insurance Policy will, subject to limitations
specified in the related Prospectus Supplement described below, cover Defaulted
Mortgage Losses in an amount equal to a percentage specified in the related
Prospectus Supplement (or in a Current Report on Form 8-K) 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 Trustee and the
Securityholders. The Mortgage Pool Insurance Policies, however, are not blanket
policies against loss (typically, such policies do not cover Special Hazard
Losses, Fraud Losses and Bankruptcy Losses), since claims thereunder may only be
made respecting particular defaulted Mortgage Loans and only upon satisfaction
of certain conditions precedent described below due to a failure to pay
irrespective of the reason therefor.
Special Hazard Insurance Policies. Any insurance policy covering Special
Hazard Losses (a 'Special Hazard Insurance Policy') obtained by the Sponsor for
a Trust Estate will be issued by the insurer named in the related Prospectus
Supplement. Each Special Hazard Insurance Policy will, subject to limitations
described in the related Prospectus Supplement, protect holders of the related
series of Securities 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. See 'Hazard Insurance; Claims Thereunder.' A
Special Hazard Insurance Policy will not cover Extraordinary Losses. Aggregate
claims under a Special Hazard Insurance Policy will be limited to a maximum
amount of coverage, as set forth in the related Prospectus Supplement or in a
Current Report on Form 8-K. A Special Hazard Insurance Policy will provide that
no claim may be paid unless hazard and, if applicable, flood insurance on the
Mortgaged 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, in general 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 or
the Sub-Servicer, the insurer will pay the lesser of (i) the cost of repair or
replacement of such property or (ii) up on 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 or the Sub-Servicer 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.
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As indicated under 'Description of the Securities--Assignment of Mortgage
Loans' above and to the extent set forth in the related Prospectus Supplement,
coverage in respect of Special Hazard Losses for a series of Securities 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 Sponsor.
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 then could 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 or a reduction in
the mortgage interest rate (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 ('Bankruptcy Bond') to provide coverage for Bankruptcy Losses
for proceedings under the federal Bankruptcy Code obtained by the Sponsor for a
Trust Estate will be issued by an insurer named in the related Prospectus
Supplement. The level of coverage under each Bankruptcy Bond will be set forth
in the applicable Prospectus Supplement or in a Current Report on Form 8-K.
Reserve Funds. If so provided in the related Prospectus Supplement, the
Sponsor 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 Eligible Investments in specified amounts, amounts otherwise distributable
to Subordinate Securityholders or the owners of any Originator's Retained Yield,
or any other instrument satisfactory to the Rating Agency or Agencies, which
will be applied and maintained in the manner and under the conditions specified
in such Prospectus Supplement. In the alternate 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 Securities from the Originator's Retained Yield or
otherwise. In addition, with respect to any series of Securities 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 Securityholders, 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. A Trust Estate may contain more than one Reserve Fund, each of which
may apply only to a specified class of Securities or to specified Mortgage
Assets.
Financial Guaranty Insurance Policies. If so specified in the related
Prospectus Supplement, a financial guaranty insurance policy or surety bond
('Financial Guaranty Insurance Policy') may be obtained and maintained for each
class or series of Securities. The issuer of any Financial Guaranty Insurance
Policy (a 'Financial Guaranty Insurer') will be described in the related
Prospectus Supplement. A copy of any such Financial Guaranty Insurance Policy
will be attached as an exhibit to the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, a
Financial Guaranty Insurance Policy will unconditionally and irrevocably
guarantee to Securityholders that an amount equal to each full and complete
insured payment will be received by an agent of the Trustee (an 'Insurance
Paying Agent') on behalf of Securityholders, for distribution by the Trustee to
each Securityholder. The 'insured payment' will be defined in the related
Prospectus Supplement, and will generally equal the full amount of the
distributions of principal and interest to which Securityholders are entitled
under the related Pooling and Servicing Agreement plus any other amounts
specified therein or in the related Prospectus Supplement (the 'Insured
Payment').
Financial Guaranty Insurance Policies may apply only to certain specified
classes, or may apply at the Mortgage Asset level and only to specified Mortgage
Assets.
The specific terms of any Financial Guaranty Insurance Policy will be as
set forth in the related Prospectus Supplement. Financial Guaranty Insurance
Policies may have limitations including (but not limited to) limitations on the
insurer's obligation to guarantee the obligations of the Originators to
repurchase or substitute for any
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Mortgage Loans, Financial Guaranty Insurance Policies will not guarantee any
specified rate of prepayments and/or to provide funds to redeem Securities on
any specified date.
Subject to the terms of the related Pooling and Servicing Agreement, the
Financial Guaranty Insurer may be subrogated to the rights of each
Securityholder to receive payments under the Securities to the extent of any
payment by such Financial Guaranty Insurer under the related Financial Guaranty
Insurance Policy.
Other Insurance, Guarantees and Similar Instruments or Agreements. If
specified in the related Prospectus Supplement, a Trust may include in lieu of
some or all of the foregoing or in addition thereto third party guarantees, and
other arrangements for maintaining timely payments or providing additional
protection against losses on all or any specified portion of the assets included
in such Trust, paying administrative expenses, or accomplishing such other
purpose as may be described in the Prospectus Supplement. The Trust may include
a guaranteed investment contract or reinvestment agreement pursuant to which
funds held in one or more accounts will be invested at a specified rate. If any
class of Securities has a floating interest rate, or if any of the Mortgage
Assets has a floating interest rate, the Trust may include an interest rate swap
contract, an interest rate cap agreement or similar contract providing limited
protection against interest rate risks.
Cross Support. If specified in the Prospectus Supplement, the beneficial
ownership of separate groups of assets included in a Trust may be evidenced by
separate classes of the related series of Securities. In such case, credit
support may be provided by a cross-support feature which requires that
distributions be made with respect to one class of Securities may be made from
excess amounts available from other asset groups within the same Trust which
support other classes of Securities. The Prospectus Supplement for a series that
includes a cross-support feature will describe the manner and conditions for
applying such cross-support feature.
If specified in the Prospectus Supplement, the coverage provided by one or
more forms of credit support may apply concurrently to two or more separate
Trusts. If applicable, the Prospectus Supplement will identify the Trusts to
which such credit support relates and the manner of determining the amount of
the coverage provided thereby and of the application of such coverage to the
identified Trusts.
Overcollateralization. If specified in the Prospectus Supplement,
subordination provisions of a Trust may be used to accelerate to a limited
extent the amortization of one or more classes of Securities relative to the
amortization of the related Mortgage Loans. The accelerated amortization is
achieved by the application of certain excess interest to the payment of
principal of one or more classes of Securities. This acceleration feature
creates, with respect to the Mortgage Loans or groups thereof, over
collateralization which results from the excess of the aggregate principal
balance of the related Mortgage Loans, or a group thereof, over the principal
balance of the related class of Securities. Such acceleration may continue for
the life of the related Security, or may be limited. In the case of limited
acceleration, once the required level of overcollateralization is reached, and
subject to certain provisions specified in the related Prospectus Supplement,
such limited acceleration feature may cease, unless necessary to maintain the
required level of overcollateralization.
Maintenance of Credit Enhancement. To the extent that the applicable
Prospectus Supplement does not expressly provide for Credit Enhancement
arrangements in lieu of some or all of the arrangements mentioned below, the
following paragraphs shall apply.
If a form of Credit Enhancement has been obtained for a series of
Securities, the Sponsor will be obligated to exercise its best reasonable
efforts to keep or cause to be kept such form of credit support in full force
and effect throughout the term of the applicable Pooling and Servicing
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.'
In lieu of the Sponsor's obligation to maintain a particular form of Credit
Enhancement, the Sponsor may obtain a substitute or alternate form of Credit
Enhancement. If the Master Servicer obtains such a substitute form of Credit
Enhancement, it will maintain and keep such form of Credit Enhancement in full
force and effect as provided herein. Prior to its obtaining any substitute or
alternate form of Credit Enhancement, the Sponsor will obtain written
confirmation from the Rating Agency or Agencies that rated the related series of
Securities that the substitution or alternate form of Credit Enhancement for the
existing Credit Enhancement will not adversely affect the then-current ratings
assigned to such Securities by such Rating Agency or Agencies.
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The Master Servicer, on behalf of itself, the Trustee and Securityholders,
will provide the Trustee information required for the Trustee to draw under a
Letter of Credit or Financial Guaranty Insurance Policy, will present claims 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 will
take such reasonable steps as are necessary to permit recovery under such Letter
of Credit, Financial Guaranty Insurance Policy, 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 another party of its Purchase
Obligation. As set forth above, all collections by the Master Servicer under any
Purchase Obligation, any Mortgage Pool Insurance Policy, or any Bankruptcy Bond
and, where the related property has not been restored, any Special Hazard
Insurance Policy, are to be deposited initially in the Principal and Interest
Account and ultimately in the Distribution Account, subject to withdrawal as
described above. All draws under any Letter of Credit or Financial Guaranty
Insurance Policy will be deposited directly in the Distribution 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 applicable form of Credit
Enhancement, 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 Securityholders 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 applicable form of Credit
Enhancement is not available because the Master Servicer has been unable to make
the above determinations, has made such determinations incorrectly or recovery
is not available for any other reason, the Master Servicer is nevertheless
obligated to follow such normal practices and procedures (subject to the
preceding sentence) as it deems necessary or advisable to realize upon the
defaulted Mortgage Loan and in the event such determination has been incorrectly
made, is entitled to reimbursement of its expenses in connection with such
restoration.
Reduction or Substitution of Credit Enhancement. Unless otherwise
specified in the related Prospectus Supplement, the amount of credit support
provided pursuant to any of the Credit Enhancements (including, without
limitation, a Mortgage Pool Insurance Policy, Financial Guaranty Insurance
Policy, Special Hazard Insurance Policy, Bankruptcy Bond, Letter of Credit, or
any alternative form of Credit Enhancement) may be reduced under certain
specified circumstances. In addition, if so described in the related Prospectus
Supplement, any formula used in calculating the amount or degree of Credit
Enhancement may be changed without the consent of the Securityholders upon
written confirmation from each Rating Agency then rating the Securities that
such change will not adversely affect the then-current rating or ratings
assigned to the Securities. In most cases, the amount available pursuant to any
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 and Servicing Agreement as the aggregate outstanding principal
balance of the Mortgage Loans declines. Additionally, in certain cases, such
credit support (and any replacements therefor) may be replaced, reduced or
terminated upon the written assurance from each applicable Rating Agency that
the then-current rating of the related series of Securities 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
of the related Securities may be downgraded to a corresponding level, and,
unless otherwise specified in the related Prospectus Supplement, the Sponsor
thereafter will not be obligated to obtain replacement credit support in order
to restore the rating of the Securities, and also will 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, albeit downgraded, rating of the related series of Securities is
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 Sponsor, the Master
Servicer, one or more Originators or such other person that is entitled thereto.
Any assets so released will not be available to fund distribution obligations in
future periods.
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HAZARD INSURANCE; CLAIMS THEREUNDER
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. The
descriptions of any insurance policies described in this Prospectus or any
Prospectus Supplement and the coverage thereunder do not purport to be complete
and are qualified in their entirety by reference to such forms of policies,
sample copies of which are available from the Trustee upon request.
HAZARD INSURANCE POLICIES
The terms of the Mortgage Loans require each Mortgagor to maintain a hazard
insurance policy for the Mortgage Loan. Additionally, the Pooling and Servicing
Agreement will require the Master Servicer to cause to be maintained with
respect to each Mortgage Loan a hazard insurance policy with a generally
acceptable carrier that provides for fire and extended coverage relating to such
Mortgage Loan in an amount not less than the least of (i) the outstanding
principal balance of the Mortgage Loan, (ii) the minimum amount required to
compensate for damage or loss on a replacement cost basis or (iii) the full
insurable value of the premises.
If a Mortgage Loan at the time of origination relates to a Mortgaged
Property in an area identified in the Federal Register by the Federal Emergency
Management Agency as having special flood hazards, the Master Servicer will be
required to maintain with respect thereto a flood insurance policy in a form
meeting the requirements of the then-current guidelines of the Federal Insurance
Administration with a generally acceptable carrier in an amount representing
coverage, and which provides for recovery by the Master Servicer on behalf of
the Trust of insurance proceeds relating to such Mortgage Loan of not less than
the least of (i) the outstanding principal balance of the Mortgage Loan, (ii)
the minimum amount required to compensate for damage or loss on a replacement
cost basis, (iii) the maximum amount of insurance that is available under the
Flood Disaster Protection Act of 1973. Pursuant to the related Pooling and
Servicing Agreement, the Master Servicer will be required to indemnify the Trust
out of the Master Servicer's own funds for any loss to the Trust resulting from
the Master Servicer's failure to maintain such flood insurance.
In the event that the Master Servicer obtains and maintains a blanket
policy insuring against fire with extended coverage and against flood hazards on
all of the Mortgage Loans, then, to the extent such policy names the Master
Servicer as loss payee and provides coverage in an amount equal to the aggregate
unpaid principal balance on the Mortgage Loans without co-insurance, and
otherwise complies with the requirements of the Pooling and Servicing Agreement,
the Master Servicer shall be deemed conclusively to have satisfied its
obligations with respect to fire and hazard insurance coverage under the Pooling
and Servicing Agreement. Such blanket policy may contain a deductible clause, in
which case the Master Servicer will be required, in the event that there shall
not have been maintained on the related Mortgaged Property a policy complying
with the Pooling and Servicing Agreement, and there shall have been a loss that
would have been covered by such policy, to deposit in the Principal and Interest
Account from the Master Servicer's own funds the difference, if any, between the
amount that would have been payable under a policy complying with the Pooling
and Servicing Agreement and the amount paid under such blanket policy.
THE SPONSOR AND THE TRANSFEROR
The Sponsor, ADVANTA Mortgage Conduit Services, Inc., was incorporated in
the State of Delaware in April, 1993. It is a direct subsidiary of the Master
Servicer, Advanta Mortgage Corp. USA, in addition to ADVANTA Mortgage Corp.
Midatlantic, ADVANTA Mortgage Corp., Midatlantic II, ADVANTA Mortgage Corp.
Midwest, ADVANTA Mortgage Corp. of New Jersey and ADVANTA Mortgage Corp.
Northeast. The Sponsor was organized for the purpose of the purchase and
securitization of first and junior mortgage loans.
The Sponsor maintains its principal office at 16875 West Bernardo Drive,
San Diego, California 92127. Its telephone number is (619) 674-1800.
The Transferor, ADVANTA Mortgage Receivables Inc., was incorporated in the
State of Delaware in February, 1994. It is a direct subsidiary of the Sponsor,
and was formed as a special purpose finance subsidiary to
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facilitate certain issuances of Securities. The use of the Transferor will not
affect the obligations of the Sponsor with respect to the related Trust or the
related Securities. If the Transferor is to be involved in a particular offering
the related Prospectus Supplement will describe its role in such offering; for
purposes of this Prospectus the role of the Transferor is subsumed in the role
of the Sponsor.
The Transferor maintains its principal office at Brandywine Corporate
Center, 650 Naamans Road, Claymont, Delaware 19703. Its telephone number is
(302) 791-4400.
THE MASTER SERVICER
Unless otherwise specified in the related Prospectus Supplement, ADVANTA
Mortgage Corp. USA will act as the Master Servicer for a series of Securities.
ADVANTA Mortgage Corp. USA was acquired by ADVANTA Corp., a Delaware
corporation ('ADVANTA Parent') in September, 1986 and is an indirect subsidiary
of ADVANTA Parent. The Master Servicer is an affiliate of Colonial National Bank
USA ('Colonial'), a national banking association domiciled in Delaware, and the
parent of ADVANTA Mortgage Corp. Midatlantic, ADVANTA Mortgage Corp. Midatlantic
II, ADVANTA Mortgage Corp. Midwest, ADVANTA Mortgage Corp. of New Jersey and
ADVANTA Mortgage Corp. Northeast. ADVANTA Mortgage Corp. USA is a Delaware
corporation incorporated in 1983. It is a nationwide servicer of first and
junior mortgage loans. ADVANTA Mortgage Corp. USA has centralized servicing
functions located in San Diego, California. This provides for economies of scale
and a depth of appraisal, attorney and realtor contacts throughout the country.
THE POOLING AND SERVICING AGREEMENT
As described above under 'Description of the Securities--General,' each
series of Securities will be issued pursuant to a Pooling and Servicing
Agreement as described in that section. The following summaries describe certain
additional provisions common to each Pooling and Servicing Agreement.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES; ORIGINATOR'S RETAINED
YIELD
Each servicer, whether the Master Servicer or any Sub-Servicer (either the
Master Servicer or any Sub-Servicer being a 'Servicer'), will retain a fee in
connection with its servicing activities for each series of Securities equal to
the percentage per annum specified in the related Prospectus Supplement or
Current Report on Form 8-K (the 'Base Servicing Fee'), generally payable monthly
with respect to each Mortgage Loan directly serviced by such Servicer at
one-twelfth the annual rate, of the then-outstanding principal amount of each
such Mortgage Loan as of the first day of each calendar month. The Master
Servicer acting as master servicer with respect to Mortgage Loans being serviced
directly by a Sub-Servicer will retain a fee equal to the percentage per annum
specified in the related Prospectus Supplement or Current Report on Form 8-K
('Master Servicing Fee'), generally payable monthly on one-twelfth the annual
rate, of the then-outstanding principal amount of each such Mortgage Loan as of
the first day of each calendar month. The Base Servicing Fees and the Master
Servicing Fee are collectively referred to as the 'Servicing Fee.'
In addition to the Base Servicing Fee, each Servicer will generally be
entitled under the Pooling and Servicing Agreement to retain additional
servicing compensation in the form of prepayment charges, release fees, bad
check charges, assumption fees, late payment charges, or any other
servicing-related fees, Net Liquidation Proceeds not required to be deposited in
the Principal and Interest Account pursuant to the Pooling and Servicing
Agreement, and similar items.
Unless otherwise specified in the related Prospectus Supplement, the Master
Servicer will pay or cause to be paid certain ongoing expenses associated with
each Trust Estate and incurred by it in connection with its responsibilities
under the Pooling and Servicing Agreement, including, without limitation,
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
or accountant, any custodian appointed by the Trustee, the Security Registrar
and any Paying Agent, and payment of expenses incurred in enforcing the
obligations of Sub-Servicers and Originators. The Master Servicer may be
entitled to reimbursement of expenses incurred in enforcing the
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obligations of Sub-Servicers and Originators under certain limited
circumstances. In addition, as indicated in the preceding section, 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 Securityholders to receive any related Liquidation Proceeds
(including Insurance Proceeds).
The Prospectus Supplement for a series of Securities will specify if there
will be any Originator's Retained Yield retained. Any such Originator's Retained
Yield will be a specified portion of the interest payable on each Mortgage Loan
in a Mortgage Pool. Any such Originator's Retained Yield 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 and
Servicing Agreement. Any Originator's Retained Yield in respect of a Mortgage
Loan will represent a specified portion of the interest payable thereon and will
not be part of the related Trust Estate. Any partial recovery of interest in
respect of a Mortgage Loan will be allocated between the owners of any
Originator's Retained Yield and the holders of classes of Securities entitled to
payments of interest as provided in the Prospectus Supplement and the applicable
Pooling and Servicing Agreement.
EVIDENCE AS TO COMPLIANCE
Each Pooling and Servicing Agreement will require the Master Servicer to
deliver annually to the Trustee and any Credit Enhancer, an officers'
certificate stating, as to each signer thereof, that (i) a review of the
activities of the Master Servicer during such preceding year and of performance
under the related Pooling and Servicing Agreement has been made under such
officers' supervision, and (ii) to the best of such officers' knowledge, based
on such review, the Master Servicer has fulfilled all its obligations under the
related Pooling and Servicing Agreement for such year, or, if there has been a
default in the fulfillment of any such obligations, specifying each such default
known to such officers and the nature and status thereof including the steps
being taken by the Master Servicer to remedy such defaults.
Each Pooling and Servicing Agreement will require the Master Servicer to
cause to be delivered to the Trustee and any Credit Enhancer a letter or letters
of a firm of independent, nationally recognized certified public accountants
reasonably acceptable to the Credit Enhancer, if applicable, stating that such
firm has, with respect to the Master Servicer's overall servicing operations (i)
performed applicable tests in accordance with the compliance testing procedures
as set forth in Appendix 3 of the Audit Guide for Audits of HUD Approved
Nonsupervised Mortgagees or (ii) examined such operations in accordance with the
requirements of the Uniform Single Audit Program for Mortgage Bankers, and in
either case stating such firm's conclusions relating thereto.
Copies of the annual accountants' statement and the annual statement of
officers of the Master Servicer may be obtained by Securityholders without
charge upon written request to the Master Servicer.
REMOVAL AND RESIGNATION OF THE MASTER SERVICER
Unless otherwise specified in the related Prospectus Supplement, each
Pooling and Servicing Agreement will provide that the Master Servicer may not
resign from its obligations and duties thereunder, except in connection with a
permitted transfer of servicing, unless such duties and obligations are no
longer permissible under applicable law or are in material conflict by reason of
applicable law with any other activities of a type and nature presently carried
on by it. No such resignation will become effective until the Trustee has
assumed the Master Servicer's obligations and duties under the Pooling and
Servicing Agreement. The Trustee, the Securityholders or a Credit Enhancer, if
applicable, will have the right, pursuant to the related Pooling and Servicing
Agreement, to remove the Master Servicer upon the occurrence of any of (a)
certain events of insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceedings regarding the Master Servicer and certain
actions by the Master Servicer indicating its insolvency or inability to pay its
obligations; (b) the failure of the Master Servicer to perform any one or more
of its material obligations under the Pooling and Servicing Agreement as to
which the Master Servicer shall continue in default with respect thereto for a
specified period, generally of sixty (60) days, after notice by the Trustee or
any Credit Enhancer (if required by the Pooling and Servicing Agreement) of said
failure; or (c) the failure of the Master Servicer to cure any breach of any of
its representations and warranties set forth in the Pooling and Servicing
Agreement which materially and adversely
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affects the interests of the Securityholders or any Credit Enhancer, for a
specified period, generally of thirty (30) days after the Master Servicer's
discovery or receipt of notice thereof.
The Pooling and Servicing Agreement may also provide that the related
Credit Enhancer may remove the Master Servicer upon the occurrence of any of
certain events including:
(i) with respect to any Payment Date, if the total available funds
with respect to the Mortgage Loans Group will be less than the related
distribution amount on the class of credit-enhanced securities in respect
of such Payment Date; provided, however, that the Credit Enhancer generally
will have no right to remove the Master Servicer pursuant to the provision
described in this clause (i) if the Master Servicer can demonstrate to the
reasonable satisfaction of the Credit Enhancer that such event was due to
circumstances beyond the control of the Master Servicer;
(ii) the failure by the Master Servicer to make any required Servicing
Advance;
(iii) the failure of the Master Servicer to perform one or more of its
material obligations under the Pooling and Servicing Agreement; or
(iv) the failure by the Master Servicer to make any required
Delinquency Advance or to pay any Compensating Interest;
provided, however, that prior to any removal of the Master Servicer by the
related Credit Enhancer pursuant to clauses (i), (ii) or (iii) above the Master
Servicer shall first have been given by the related Credit Enhancer notice of
the occurrence of one or more of the events set forth in clauses (i) or (ii)
above and the Master Servicer shall not have remedied, or shall not have taken
action satisfactory to such Credit Enhancer to remedy, such event or events
within a specified period, generally 30 days (60 days with respect to clause
(iii)) after the Master Servicer's receipt of such notice; and provided, further
that in the event of the refusal or inability of the Master Servicer to make any
required Delinquency Advance or to pay any Compensating Interest as described in
clause (iv) above, such removal shall be effective (without the requirement of
any action on the part of such Credit Enhancer or of the Trustee) not later than
a shorter specified period, generally not in excess of five business days,
following the day on which the Trustee notifies an authorized officer of the
Master Servicer that a required Delinquency Advance or to pay any Compensating
Interest has not been received by the Trustee.
AMENDMENTS
The Trustee, the Sponsor and the Master Servicer may at any time and from
time to time, with the prior approval of the related Credit Enhancer, if
required, but without the giving of notice to or the receipt of the consent of
the Securityholders, amend a Pooling and Servicing Agreement, and the Trustee
will be required to consent to such amendment, for the purposes of (x) (i)
curing any ambiguity, or correcting or supplementing any provision of such
Pooling and Servicing Agreement which may be inconsistent with any other
provision of the Pooling and Servicing Agreement, (ii) in connection with a
Trust making REMIC elections, if accompanied by an approving opinion of counsel
experienced in federal income tax matters, removing the restriction against the
transfer of a REMIC residual security to a Disqualified Organization (as such
term is defined in the Code) or (iii) complying with the requirements of the
Code and the regulations proposed or promulgated thereunder; provided, however,
that such action shall not, as evidenced by an opinion of counsel delivered to
the Trustee, materially and adversely affect the interests of any Securityholder
(without its written consent) or (y) such other purposes set forth in the
related Pooling and Servicing Agreement.
Unless otherwise specified in the related Prospectus Supplement, each
Pooling and Servicing Agreement may also be amended by the Trustee, the Sponsor
and the Master Servicer at any time and from time to time, with the prior
written approval of the related Credit Enhancer, if required, and not less than
a majority of the Percentage Interest represented by each related class of
Securities then outstanding, for the purpose of adding any provisions or
changing in any manner or eliminating any of the provisions of such Pooling and
Servicing Agreement or of modifying in any manner the rights of the
Securityholders thereunder; provided, however, that no such amendment shall (a)
change in any manner the amount of, or delay the timing of, payments which are
required to be distributed to any Securityholders without the consent of the
holder of such Security or (b) change the aforesaid percentages of Percentage
Interest which are required to consent to any such amendments, without the
consent of the holders of all Securities of the class or classes affected then
outstanding.
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TERMINATION; RETIREMENT OF SECURITIES
Unless otherwise specified in the related Prospectus Supplement, each
Pooling and Servicing Agreement will provide that a Trust will terminate upon
the earlier of (i) the payment to the Securityholders of all Securities issued
by the Trust from amounts other than those available under, if applicable, the
related Credit Enhancement of all amounts required to be paid to such
Securityholders upon the later to occur of (a) the final payment or other
liquidation (or any advance made with respect thereto) of the last Mortgage Loan
in the Trust Estate or (b) the disposition of all property acquired in respect
of any Mortgage Loan remaining in the Trust Estate, (ii) any time when a
Qualified Liquidation (as defined in the Code) of the Trust Estate (if the
related Trust is a REMIC) is effected. In no event, however, will the trust
created by the Pooling and Servicing Agreement continue beyond the expiration of
21 years from the death of the survivor of certain persons named in such Pooling
and Servicing Agreement. Written notice of termination of the Pooling and
Servicing Agreement will be given to each Securityholder, and the final
distribution will be made only upon surrender and cancellation of the Securities
at an office or agency appointed by the Trustee that will be specified in the
notice of termination. If the Securityholders are permitted to terminate the
trust under the applicable Pooling and Servicing Agreement, a penalty may be
imposed upon the Securityholders based upon the fee that would be foregone by
the Master Servicer because of such termination.
Any purchase of Mortgage Loans and property acquired in respect of Mortgage
Loans evidenced by a series of Securities shall be made at the option of the
Master Servicer, the Sponsor or, if applicable, the holder of the REMIC Residual
Securities at the price specified in the related Prospectus Supplement. The
exercise of such right will effect earlier than expected retirement of the
Securities of that series, but the right of the Master Servicer, the Sponsor or,
if applicable, such holder to so purchase is, unless otherwise specified in the
applicable Prospectus Supplement, subject to the aggregate principal balance of
the Mortgage Loans for that series as of any Remittance Date being less than the
percentage specified in the related Prospectus Supplement of the aggregate
principal balance of the Mortgage Loans at the Cut-Off Date for that series. The
Prospectus Supplement for each series of Securities will set forth the amounts
that the holders of such Securities will be entitled to receive upon such
earlier than expected retirement. If a REMIC election has been made, the
termination of the related Trust Estate 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 and Servicing Agreement will be named in the
related Prospectus Supplement. Each Pooling and Servicing Agreement will provide
that the Trustee shall be under no obligation to exercise any of the rights or
powers vested in it by the Pooling and Servicing Agreement at the request or
direction of any of the Securityholders, unless such Securityholders shall have
offered to the Trustee reasonable security or indemnity against the costs,
expenses and liabilities which might be incurred by it in compliance with such
request or direction.
The Trustee may execute any of the trusts or powers granted by each Pooling
and Servicing Agreement or perform any duties thereunder either directly or by
or through agents or attorneys, and the Trustee will not be responsible for any
misconduct or negligence on the part of any agent or attorney appointed and
supervised with due care by it thereunder.
Pursuant to each Pooling and Servicing Agreement, the Trustee will not be
liable for any action it takes or omits to take in good faith which it
reasonably believes to be authorized by an authorized officer of any person or
within its rights or powers under the Pooling and Servicing Agreement.
Unless otherwise described in the related Prospectus Supplement, each
Pooling and Servicing Agreement will permit the removal of the Trustee upon the
occurrence and continuance of one of the following events:
(1) the Trustee shall fail to distribute to the Securityholders
entitled thereto on any Payment Date amounts available for distribution in
accordance with the terms of the Pooling and Servicing Agreement; or
(2) the Trustee shall default in the performance of, or breach, any
covenant or agreement of the Trustee in the Pooling and Servicing
Agreement, or if any representation or warranty of the Trustee made in the
Pooling and Servicing Agreement or in any certificate or other writing
delivered pursuant thereto or in
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connection therewith shall prove to be incorrect in any material respect as
of the time when the same shall have been made, and such default or breach
shall continue or not be cured for the period then specified in the related
Pooling and Servicing Agreement after the Trustee shall have received
notice specifying such default or breach and requiring it to be remedied;
or
(3) a decree or order of a court or agency or supervisory authority
having jurisdiction for the appointment of a conservator or receiver or
liquidator in any insolvency, readjustment of debt, marshalling of assets
and liabilities or similar proceedings, or for the winding-up or
liquidation of its affairs, shall have been entered against the Trustee,
and such decree or order shall have remained in force undischarged or
unstayed for the period then specified in the related Pooling and Servicing
Agreement; or
(4) a conservator or receiver or liquidator or sequestrator or
custodian of the property of the Trustee is appointed in any insolvency,
readjustment of debt, marshalling of assets and liabilities or similar
proceedings of or relating to the Trustee or relating to all or
substantially all of its property; or
(5) the Trustee shall become insolvent (however insolvency is
evidenced), generally fail to pay its debts as they come due, file or
consent to the filing of a petition to take advantage of any applicable
insolvency or reorganization statute, make an assignment for the benefit of
its creditors, voluntarily suspend payment of its obligations, or take
corporate action for the purpose of any of the foregoing.
If an event described above occurs and is continuing, then, and in every
such case (i) the Sponsor, (ii) the Securityholders (on the terms set forth in
the related Pooling and Servicing Agreement), or (iii) if there is a Credit
Enhancer, such Credit Enhancer may, whether or not the Trustee has resigned,
immediately, concurrently with the giving of notice to the Trustee, and without
delay, appoint a successor Trustee pursuant to the terms of the Pooling and
Servicing Agreement.
No Securityholder will have any right to institute any proceeding, judicial
or otherwise, with respect to a Pooling and Servicing Agreement or any Credit
Enhancement, if applicable, or for the appointment of a receiver or trustee, or
for any other remedy under the Pooling and Servicing Agreement, unless:
(1) such Securityholder has previously given written notice to the
Sponsor and the Trustee of such Securityholder's intention to institute
such proceeding;
(2) the Securityholders of not less than 25% of the Percentage
Interests represented by certain specified classes of Securities then
outstanding shall have made written request to the Trustee to institute
such proceeding;
(3) such Securityholder or Securityholders have offered to the Trustee
reasonable indemnity, against the costs, expenses and liabilities to be
incurred in compliance with such request;
(4) the Trustee for the period specified in the related Pooling and
Servicing Agreement, generally not in excess of 60 days after receipt of
such notice, request and offer of indemnity, has failed to institute such
proceeding;
(5) as long as such action affects any credit-enhanced class of
Securities outstanding, the related Credit Enhancer has consented in
writing thereto; and
(6) no direction inconsistent with such written request has been given
to the Trustee during such specified period by the Securityholders of a
majority of the Percentage Interests represented by certain specified
classes of Securities.
No one or more Securityholders will have any right in any manner whatever
by virtue of, or by availing themselves of, any provision of the Pooling and
Servicing Agreement to affect, disturb or prejudice the rights of any other
Securityholder of the same class or to obtain or to seek to obtain priority or
preference over any other Securityholder of the same class or to enforce any
right under the Pooling and Servicing Agreement, except in the manner provided
in the Pooling and Servicing Agreement and for the equal and ratable benefit of
all of the Securityholders of the same class.
In the event the Trustee receives conflicting or inconsistent requests and
indemnity from two or more groups of Securityholders, each representing less
than a majority of the applicable class of Securities, the Trustee in its
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sole discretion may determine what action, if any, shall be taken,
notwithstanding any other provision of the Pooling and Servicing Agreement.
Notwithstanding any other provision in the Pooling and Servicing Agreement,
the Securityholder of any Security has the right, which is absolute and
unconditional, to receive distributions to the extent provided in the Pooling
and Servicing Agreement with respect to such Security or to institute suit for
the enforcement of any such distribution, and such right shall not be impaired
without the consent of such Security.
Either (i) the Securityholders of a majority of the Percentage Interests
represented by certain specified classes of Securities then outstanding or (ii)
if there is a Credit Enhancer, such Credit Enhancer may direct the time, method
and place of conducting any proceeding for any remedy available to the Sponsor
with respect to the Certificates or exercising any trust or power conferred on
the Trustee with respect to such Certificates; provided that:
(1) such direction shall not be in conflict with any rule of law or
with a Pooling and Servicing Agreement;
(2) the Sponsor or the Trustee, as the case may be, shall have been
provided with indemnity satisfactory to them; and
(3) the Sponsor or the Trustee, as the case may be, may take any other
action deemed proper by the Trustee which is not inconsistent with such
direction; provided, however, that the Sponsor or the Trustee, as the case
may be, need not take any action which they determine might involve them in
liability or may be unjustly prejudicial to the Securityholders not so
directing.
The Trustee will be liable under the Pooling and Servicing Agreement only
to the extent of the obligations specifically imposed upon and undertaken by the
Trustee therein. Neither the Trustee nor any of the directors, officers,
employees or agents of the Trustee will be under any liability on any Security
or otherwise to any Account, the Sponsor, the Master Servicer or any
Securityholder for any action taken or for refraining from the taking of any
action in good faith under a Pooling and Servicing Agreement, or for errors in
judgment; provided, however, that such provision shall not protect the Trustee
or any such person against any liability which would otherwise be imposed by
reason of negligent action, negligent failure to act or willful misconduct in
the performance of duties or by reason of reckless disregard of obligations and
duties thereunder.
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YIELD CONSIDERATIONS
The yield to maturity of a Security will depend on the price paid by the
holder for such Security, the Pass-Through Rate on any such Security entitled to
payments of interest (which Pass-Through Rate may vary if so specified in the
related Prospectus Supplement) and the rate of payment of principal on such
Security (or the rate at which the notional amount thereof is reduced if such
Security is not entitled to payments of principal) and other factors.
Each month the interest payable on an actuarial type of Mortgage Loan will
be calculated as one-twelfth of the applicable Mortgage Rate multiplied by the
principal balance of such Mortgage Loan outstanding as of a specified day,
usually the first day of the month prior to the month in which the Payment Date
for the related series of Securities occurs, after giving effect to the payment
of principal due on such day, subject to any Deferred Interest. With respect to
date of payment Mortgage Loans, interest is charged to the Mortgagor at the
Mortgage Rate on the outstanding principal balance of such Note and calculated
based on the number of days elapsed between receipt of the Mortgagor's last
payment through receipt of the Mortgagor's most current payments. The amount of
such payments with respect to each Mortgage Loan distributed (or accrued in the
case of Deferred Interest or Accrual Securities) either monthly, quarterly or
semi-annually to holders of a class of Securities entitled to payments of
interest will be similarly calculated on the basis of such class' specified
percentage of each such payment of interest (or accrual in the case of Accrual
Securities) and will be expressed as a fixed, adjustable or variable
Pass-Through Rate payable on the outstanding principal balance or notional
amount of such Security, calculated as described herein and in the related
Prospectus Supplement. Holders of Strip Securities or a class of Securities
having a fixed 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 Securities, as applicable.
The effective yield to maturity to each holder of fixed-rate Securities
entitled to payments of interest will be below that otherwise produced by the
applicable Pass-Through Rate and purchase price of such Security because, while
interest will accrue on each Mortgage Loan from the first day of each month, the
distribution of such interest will be made on the 25th day (or, if such day is
not a business day, the next succeeding business day) of the month (or, in the
case of quarterly-pay Securities, the twenty-fifth day of every third month, or,
in the case of semi-annual-pay Securities, the twenty-fifth day of every sixth
month) following the month of accrual.
A class of Securities may be entitled to payments of interest at a fixed
Pass-Through Rate specified in the related Prospectus Supplement, a variable
Pass-Through Rate or adjustable Pass-Through Rate calculated based on the
weighted average of the Mortgage Rates (net of Servicing Fees and any
Originator's Retained Yield (each, a 'Net Mortgage Rate')) of the related
Mortgage Loans for the designated periods preceding the Payment Date if so
specified in the related Prospectus Supplement, or at such other variable rate
as may be specified in the related Prospectus Supplement.
As will be described in the related Prospectus Supplement, the aggregate
payments of interest on a class of Securities, and the yield to maturity
thereon, will be effected by the rate of payment of principal on the Securities
(or the rate of reduction in the notional balance of Securities entitled only to
payments of interest) and, in the case of Securities 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 Securities also will be
effected by liquidations of Mortgage Loans following Mortgagor defaults and by
purchases of Mortgage Loans required by the Pooling and Servicing Agreement in
the event of breaches of representations made in respect of such Mortgage Loans
by the Sponsor, the Originators, the Master Servicer and others, or repurchases
due to conversions of ARM Loans to a fixed interest rate. See 'Mortgage Loan
Program--Representations by Originators' and 'Descriptions of the
Securities--Assignment of Mortgage Loans' above. In general, if a class of
Securities 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 Securities
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
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significant in the case of a series of Securities 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 likely will be sold at a substantial premium to its principal balance, if
any, and any faster than anticipated rate of prepayments will adversely affect
the yield to holders thereof. In certain circumstances, 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 Securities,
including Accrual Securities or certain other classes in a series including more
than one class of Securities, may be relatively more sensitive to the rate of
prepayment on the related Mortgage Loans than other classes of Securities.
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 Securities
would not be fully offset by a subsequent like reduction (or increase) in the
rate of principal payments.
The Mortgage Rates on certain ARM Loans subject to negative amortization
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 that will be added to the principal balance thereof and will bear
interest at the applicable Mortgage Rate. The addition of any such Deferred
Interest to the principal balance will lengthen the weighted average life of the
Securities evidencing interests in such Mortgage Loans and may adversely affect
yield to holders thereof depending upon the price at which such Securities 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 such principal balance,
the weighted average life of such Securities will be reduced and may adversely
affect yield to holders thereof depending upon the price at which such
Securities were purchased.
For each Mortgage Pool, if all necessary advances are made and if there is
no unrecoverable loss on any Mortgage Loan and if the related Credit Enhancer is
not in default under its obligations or other Credit Enhancement has not been
exhausted, the net effect of each distribution respecting interest will be to
pass-through to each holder of a class of Securities entitled to payments of
interest an amount which is equal to one month's interest (or, in the case of
quarterly-pay Securities, three month's interest or, in the case of semi-
annually-pay Securities, six months' interest) at the applicable Pass-Through
Rate on such class' principal balance or notional balance, as adjusted downward
to reflect any decrease in interest caused by any principal prepayments and the
addition of any Deferred Interest to the principal balance of any Mortgage Loan.
'Description of the Securities--Principal and Interest on the Securities.'
With respect to certain of the 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 Sponsor's underwriting standards, the
Mortgagor under each Mortgage Loan will be qualified 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.
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 Securities will contain information with respect to
the types and maturities of the Mortgage Loans in the related Mortgage Pool.
Unless otherwise specified in the related Prospectus
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Supplement, all of the Mortgage Loans may be prepaid without penalty in full or
in part at any time. The prepayment experience with respect to the Mortgage
Loans in a Mortgage Pool will affect the maturity, average life and yield of the
related series of Securities.
With respect to Balloon Loans, payment of the Balloon Amount (which, based
on the amortization schedule of such Mortgage Loans, may be a substantial
amount) will generally depend on the Mortgagor's ability to obtain refinancing
of such Mortgage Loan 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. Unless
otherwise specified in the related Prospectus Supplement, neither the Sponsor,
the Master Servicer, nor any of their affiliates will be obligated to refinance
or repurchase any Mortgage Loan or to sell the Mortgaged Property.
A number of factors, including homeowner mobility, economic conditions,
enforceability of due-on-sale clauses, mortgage market interest rates and the
availability of mortgage funds, affect prepayment experience. Unless otherwise
specified in the related Prospectus Supplement, the Mortgage Loans will
generally contain due-on-sale provisions permitting the mortgagee to accelerate
the maturity of the Mortgage Loan upon sale or certain transfers by the
Mortgagor of the underlying Mortgaged Property. Unless the related Prospectus
Supplement indicates otherwise, the Master Servicer will generally enforce any
due-on-sale clause to the extent it has knowledge of the conveyance or proposed
conveyance of the underlying Mortgaged Property and it is entitled to do so
under applicable law; provided, however, that the Master Servicer will not take
any action in relation to the enforcement of any due-on-sale provision which
would adversely affect or jeopardize coverage under any applicable insurance
policy. Certain ARM Loans may be assumable under certain conditions if the
proposed transferee of the related Mortgaged Property establishes its ability to
repay the Mortgage Loan and, in the reasonable judgment of the Master Servicer
or the related Sub-Servicer, the security for the ARM Loan would not be impaired
or might be improved by the assumption. The extent to which ARM Loans are
assumed by purchasers of the Mortgaged Properties rather than prepaid by the
related Mortgagors in connection with the sales of the Mortgaged Properties will
affect the weighted average life of the related series of Securities. See
'Description of the Securities--Collection and Other Servicing Procedures' and
'Certain Legal Aspects of the Mortgage Loans and Related Matters--Enforceability
of Certain Provisions' for a description of certain provisions of the Pooling
and Servicing Agreement and certain legal developments that may affect the
prepayment experience on the Mortgage Loans.
There can be no assurance as to the rate of prepayment of the Mortgage
Loans. The Sponsor is not aware of any reliable, 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 Sponsor that have been compiled with respect to
prepayment experience on mortgage loans indicates that while some mortgage loans
may remain outstanding until their stated maturities, a substantial number will
be paid prior to their respective stated maturities.
Although the Mortgage Rates on ARM Loans will be subject to periodic
adjustments, such adjustments will, unless otherwise specified in the related
Prospectus Supplement, (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 in a Mortgage
Pool 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 Securities.
As may be described in the related Prospectus Supplement, the related
Pooling and Servicing Agreement may provide that all or a portion of the
principal collected on or with respect to the related Mortgage Loans may be
applied by the related Trustee to the acquisition of additional Mortgage Loans
during a specified period (rather
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than used to fund payments of principal to Securityholders during such period)
with the result that the related securities possess an interest-only period,
also commonly referred to as a revolving period, which will be followed by an
amortization period. Any such interest-only or revolving period may, upon the
occurrence of certain events to be described in the related Prospectus
Supplement, terminate prior to the end of the specified period and result in the
earlier than expected amortization of the related Securities.
In addition, and as may be described in the related Prospectus Supplement,
the related Pooling and Servicing Agreement may provide that all or a portion of
such collected principal may be retained by the Trustee (and held in certain
temporary investments, including Mortgage Loans) for a specified period prior to
being used to fund payments of principal to Securityholders.
The result of such retention and temporary investment by the Trustee of
such principal would be to slow the amortization rate of the related Securities
relative to the amortization rate of the related Mortgage Loans, or to attempt
to match the amortization rate of the related Securities to an amortization
schedule established at the time such Securities are issued. Any such feature
applicable to any Securities may terminate upon the occurrence of events to be
described in the related Prospectus Supplement, resulting in the current funding
of principal payments to the related Securityholders and an acceleration of the
amortization of such Securities.
Under certain circumstances, the Master Servicer, the Sponsor or, if
specified in the related Prospectus Supplement, the holders of the REMIC
Residual Securities or the Credit Enhancer may have the option to purchase the
Mortgage Loans in a Trust Estate. See 'The Pooling and Servicing
Agreement--Termination; Retirement of Securities.'
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS AND RELATED MATTERS
The following discussion contains summaries of certain legal aspects of
mortgage loans that are general in nature. Because such legal aspects are
governed in part by applicable state law (which laws may differ substantially),
the summaries do not purport to be complete nor to reflect the laws of any
particular state nor to encompass the laws of all states in which the Mortgaged
Properties may be situated. The summaries are qualified in their entirety by
reference to the applicable federal and state laws governing the Mortgage Loans.
GENERAL
The Mortgage Loans will be secured by either deeds of trust or mortgages,
depending upon the prevailing practice in the state in which the Mortgaged
Property subject to a Mortgage Loan is located. In some states, a mortgage
creates a lien upon the real property encumbered by the mortgage. In other
states, the mortgage conveys legal title to the property to the mortgagee
subject to a condition subsequent (i.e., the payment of the indebtedness secured
thereby). The mortgage is not prior to the lien for real estate taxes and
assessments and other charges imposed under governmental police powers. Priority
between mortgages depends on their terms in some cases or on the terms of
separate subordination or intercreditor agreements, and generally on the order
of recordation of the mortgage in the appropriate recording office. 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 the case of a land
trust, there are three parties because title to the property is held by a land
trustee under a land trust agreement of which the borrower is the beneficiary;
at origination of a mortgage loan, the borrower executes a separate undertaking
to make payments on the mortgage note. Although a deed of trust is similar to a
mortgage, a deed of trust has three parties; the borrower-homeowner called the
trustor (similar to a mortgagor), a lender (similar to a mortgagee) called the
beneficiary, and a third-party grantee called the trustee. Under a deed of
trust, the borrower grants the property, irrevocably until the debt is paid, in
trust, generally with a power of sale, to the trustee to secure payment of the
obligation. The trustee's authority under a deed of trust and the mortgagee's
authority under a mortgage are governed by law, the express provisions of the
deed of trust or mortgage, and, in some cases, the directions of the
beneficiary.
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COOPERATIVE LOANS
If specified in the Prospectus Supplement relating to a series of
Securities, the Mortgage Loans also may consist of Cooperative Loans evidenced
by Cooperative Notes secured by security interests in shares issued by
cooperatives, which are private corporations that are entitled to be treated as
housing cooperatives under federal tax law, and in the related proprietary
leases or occupancy agreements granting exclusive rights to occupy specific
dwelling units in the cooperatives' buildings. The security agreement will
create a lien upon, or grant a title interest in, the property which it covers,
the priority of which will depend on the terms of the particular security
agreement as well as the order of recordation of the agreement in the
appropriate recording office. Such a lien or title interest is not prior to the
lien for real estate taxes and assessments and other charges imposed under
governmental police powers.
Each cooperative owns in fee or has a leasehold interest in all the real
property and owns in fee or leases the building and all separate dwelling units
therein. The cooperative is directly responsible for property management and, in
most cases, payment of real estate taxes, other governmental impositions and
hazard and liability insurance. If there is a blanket mortgage or mortgages on
the cooperative apartment building or underlying land, as is generally the case,
or an underlying lease of the land, as is the case in some instances, the
cooperative, as property mortgagor, or lessee, as the case may be, also is
responsible for meeting these mortgage or rental obligations. A blanket mortgage
is ordinarily incurred by the cooperative in connection with either the
construction or purchase of the cooperative's apartment building or the
obtaining of capital by the cooperative. The interest of the occupant under
proprietary leases or occupancy agreements as to which that cooperative is the
landlord generally is subordinate to the interest of the holder of a blanket
mortgage and to the interest of the holder of a land lease. If the cooperative
is unable to meet the payment obligations (i) arising under a blanket mortgage,
the mortgagee holding a blanket mortgage could foreclose on that mortgage and
terminate all subordinate proprietary leases and occupancy agreements or (ii)
arising under its land lease, the holder of the landlord's interest under the
land lease could terminate it and all subordinate proprietary leases and
occupancy agreements. Also, a blanket mortgage on a cooperative may provide
financing in the form of a mortgage that does not fully amortize, with a
significant portion of principal being due in one final payment at maturity. The
inability of the cooperative to refinance a mortgage and its consequent
inability to make such final payment could lead to foreclosure by the mortgagee.
Similarly, a land lease has an expiration date and the inability of the
cooperative to extend its term or, in the alternative, to purchase the land
could lead to termination of the cooperative's interest in the property and
termination of all proprietary leases and occupancy agreements. In either event,
a foreclosure by the holder of a blanket mortgage or the termination of the
underlying lease could eliminate or significantly diminish the value of any
collateral held by the lender who financed the purchase by an individual
tenant-stockholder of cooperative shares or, in the case of the Mortgage Loans,
the collateral securing the Cooperative Loans.
The cooperative is owned by tenant-stockholders who, through ownership of
stock or shares in the corporation, receive proprietary leases or occupancy
agreements that confer exclusive rights to occupy specific units. Generally, a
tenant-stockholder of a cooperative must make a monthly payment to the
cooperative representing such tenant-stockholder's pro rata share of the
cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a cooperative and accompanying occupancy rights are financed through
a cooperative share loan evidenced by a promissory note and secured by an
assignment of and a security interest in the occupancy agreement or proprietary
lease and a security interest in the related cooperative shares. The lender
generally takes possession of the share certificate and a counterpart of the
proprietary lease or occupancy agreement and a financing statement covering the
proprietary lease or occupancy agreement and the cooperative shares is filed in
the appropriate state and local offices to perfect the lender's interest in its
collateral. Subject to the limitations discussed below, upon default of the
tenant-stockholder, the lender may sue for judgment on the promissory note,
dispose of the collateral at a public or private sale or otherwise proceed
against the collateral or tenant-stockholder as an individual as provided in the
security agreement covering the assignment of the proprietary lease or occupancy
agreement and the pledge of cooperative shares. See 'Foreclosure on Shares of
Cooperatives' below.
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FORECLOSURE
Foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale (private sale) under a specific provision in the deed of trust
and state laws which authorize the trustee to sell the property upon any default
by the borrower under the terms of the note or deed of trust. Beside the
nonjudicial remedy, a deed of trust may be judicially foreclosed. In addition to
any notice requirements contained in a deed of trust, in some states, the
trustee must record a notice of default and within a certain period of time send
a copy to the borrower trustor and to any person who has recorded a request for
a copy of notice of default and notice of sale. In addition, the trustee must
provide notice in some states to any other individual having an interest of
record in the real property, including any junior lienholders. If the deed of
trust is not reinstated within a specified period, a notice of sale must be
posted in a public place and, in most states, published for a specific period of
time in one or more local newspapers. In addition, some state laws require that
a copy of the notice of sale be posted on the property and sent to all parties
having an interest of record in the real property.
Foreclosure of a mortgage is generally accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in completion
of the foreclosure may occasionally result from difficulties in locating
necessary parties. Judicial foreclosure proceedings are often not contested by
any of the applicable parties. If the mortgagee's right to foreclose is
contested, the legal proceedings necessary to resolve the issue can be
time-consuming.
In some states, the borrower-trustor has the right to reinstate the loan at
any time following default until shortly before the trustee's sale. In general,
in such states, the borrower, or any other person having a junior encumbrance on
the real estate, may, during a reinstatement period, cure the default by paying
the entire amount in arrears plus the costs and expenses incurred in enforcing
the obligation.
In the case of foreclosure under either a mortgage or a deed of trust, the
sale by the referee or other designated officer or by the trustee is a public
sale. However, because of the difficulty a potential buyer at the sale would
have in determining the exact status of title and because the physical condition
of the property may have deteriorated during the foreclosure proceedings, it is
uncommon for a third party to purchase the property at a foreclosure sale unless
there is a great deal of economic incentive for the new purchaser to purchase
the subject property at the sale. Rather, it is common for the lender to
purchase the property from the trustee or referee for a credit bid less than or
equal to the unpaid principal amount of the mortgage or deed of trust, accrued
and unpaid interest and the expense of foreclosure. Generally, state law
controls the amount of foreclosure costs and expenses, including attorneys'
fees, which may be recovered by a lender. Thereafter, subject to the right of
the borrower in some states to remain in possession during the redemption
period, the lender will assume the burdens of ownership, including obtaining
hazard insurance and making such repairs at its own expense as are necessary to
render the property suitable for sale. The lender will commonly obtain the
services of a real estate broker and pay the broker's commission in connection
with the sale of the property. Depending upon market conditions, the ultimate
proceeds of the sale of the property may not equal the lender's investment in
the property and, in some states, the lender may be entitled to a deficiency
judgment. Any loss may be reduced by the receipt of any mortgage insurance
proceeds.
FORECLOSURE ON SHARES OF COOPERATIVES
The cooperative shares and proprietary lease or occupancy agreement owned
by the tenant-stockholder and pledged to the lender are, in almost all cases,
subject to restrictions on transfer as set forth in the cooperative's
certificate of incorporation and by-laws, as well as in the proprietary lease or
occupancy agreement. The proprietary lease or occupancy agreement, even while
pledged, may be cancelled by the cooperative for failure by the tenant
stockholder to pay rent or other obligations or charges owed by such
tenant-stockholder, including mechanics' liens against the cooperative apartment
building incurred by such tenant-stockholder. Commonly, rent and other
obligations and charges arising under a proprietary lease or occupancy agreement
that are owed to the cooperative are made liens upon the shares to which the
proprietary lease or occupancy agreement relates. In addition, the proprietary
lease or occupancy agreement generally permits the cooperative to terminate such
lease or agreement in the event the borrower defaults in the performance of
covenants thereunder. Typically, the lender and the cooperative enter into a
recognition agreement that, together with any lender protection provisions
contained in the proprietary lease, establishes the rights and obligations of
both parties in the event of a default by
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the tenant-stockholder on its obligations under the proprietary lease or
occupancy agreement. A default by the tenant-stockholder under the proprietary
lease or occupancy agreement usually will constitute a default under the
security agreement between the lender and the tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the cooperative will take no action to terminate such lease or
agreement until the lender has been provided with notice of and an opportunity
to cure the default. The recognition agreement typically provides that if the
proprietary lease or occupancy agreement is terminated, the cooperative will
recognize the lender's lien against proceeds from a sale of the cooperative
apartment, subject, however, to the cooperative's right to sums due under such
proprietary lease or occupancy agreement or sums that have become liens on the
shares relating to the proprietary lease or occupancy agreement. The total
amount owed to the cooperative by the tenant-stockholder, which the lender
generally cannot restrict and does not monitor, could reduce the amount realized
upon a sale of the collateral below the outstanding principal balance of the
Cooperative Loan and accrued and unpaid interest thereon.
Recognition agreements generally also provide that in the event of a
foreclosure on a Cooperative Loan, the lender must obtain the approval or
consent of the cooperative as required by the proprietary lease before
transferring the cooperative shares or assigning the proprietary lease.
Generally, the lender is not limited in any rights it may have to dispossess the
tenant-stockholder.
In New York, foreclosure on the cooperative shares is accomplished by
public sale in accordance with the provisions of Article 9 of the UCC and the
security agreement relating to those shares. Article 9 of the UCC requires that
a sale be conducted in a 'commercially reasonable' manner. Whether a sale has
been conducted in a 'commercially reasonable' manner will depend on the facts in
each case. In determining commercial reasonableness, a court will look to the
notice given the debtor and the method, manner, time, place and terms of the
sale and the sale price. Generally, a sale conducted according to the usual
practice of banks selling similar collateral will be considered reasonably
conducted.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the cooperative corporation to receive sums due under
the proprietary lease or occupancy agreement. If there are proceeds remaining,
the lender must account to the tenant-stockholder for the surplus. Conversely,
if a portion of the indebtedness remains unpaid, the tenant-stockholder is
generally responsible for the deficiency. See 'Anti-Deficiency Legislation and
Other Limitations on Lenders' below.
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 or other parties are given
a statutory period in which to redeem the property from the foreclosure sale. In
some states, redemption may occur only upon payment of the entire principal
balance of the loan, accrued interest and expenses of foreclosure. In other
states, redemption may be authorized if the former borrower pays only a portion
of the sums due. The effect of a statutory right of redemption is to diminish
the ability of the lender to sell the foreclosed property. The rights of
redemption would defeat the title of any purchaser subsequent to foreclosure or
sale under a deed of trust. 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, there is no
right to redeem property after a trustee's sale under a deed of trust.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have imposed statutory prohibitions that limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, including California, statutes limit the right of the beneficiary or
mortgagee to obtain a deficiency judgment against the borrower following
foreclosure. A deficiency judgment is a personal judgment against the former
borrower equal in most cases to the difference between the amount due to the
lender and the net amount realized upon the public sale of the real property. 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
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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 af forded under a deed of trust or mortgage by foreclosure in an
attempt to satisfy the full debt before bringing a personal action against the
borrower. In certain other states, the lender has the option of bringing a
personal action against the borrower on the debt without first exhausting such
security; however, in some of these states the lender, following judgment on
such personal action, may be deemed to have elected a remedy and may be
precluded from exercising remedies with respect to the security. Consequently,
the practical effect of the election requirement, in those states permitting
such election, is that lenders will usually proceed against the security first
rather than bringing a personal action against the borrower. Finally, in certain
other states, statutory provisions limit any deficiency judgment against the
former borrower following a foreclosure to the excess of the outstanding debt
over the fair value of the property at the time of the public sale. The purpose
of these statutes is generally to prevent a beneficiary or mortgagee from
obtaining a large deficiency judgment against the former borrower as a result of
low or no bids at the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other federal and state statutory provisions, including the federal bankruptcy
laws and state laws affording relief to debtors, may interfere with or affect
the ability of the secured mortgage lender to realize upon collateral or enforce
a deficiency judgment. For example, 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 arrearages within a
reasonable time period and reinstating the original mortgage loan payment
schedule even though the lender accelerated the mortgage loan and final judgment
of foreclosure had been entered in state court (provided no sale of the
residence had yet occurred) prior to the filing of the debtor's petition. Some
courts with federal bankruptcy jurisdiction have approved plans, based on the
particular facts of the reorganization case, that effected the curing of a
mortgage loan default by paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction also have 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.
Certain states have imposed general equitable principles upon judicial
foreclosure. These equitable principles are generally designed to relieve the
borrower from the legal effect of the borrower's default under the related 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, lenders
have been required to reinstate loans or recast payment schedules in order to
accommodate borrowers who are suffering from temporary financial disabilities.
In other cases, such courts have limited the right of the lender to foreclose if
the default under the loan is not monetary, such as the borrower failing to
adequately maintain the property or the borrower executing a second deed of
trust affecting the property.
Certain tax liens arising under the Internal Revenue Code of 1986, as
amended, may in certain circumstances provide priority over the lien of a
mortgage or deed of trust. In addition, substantive requirements are imposed
upon mortgage lenders in connection with the origination and the servicing of
mortgage loans by numerous federal and some state consumer protection laws.
These laws include, by example, 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 and the California Fair Debt
Collection Practices Act. These laws and regulations impose specific statutory
liabilities upon lenders who originate mortgage loans and fail to comply with
the provisions of the law. In some cases, this liability may affect assignees of
the mortgage loans.
ENVIRONMENTAL LEGISLATION
Certain states impose a statutory lien for associated costs on property
that is the subject of a cleanup action by the state on account of hazardous
wastes or hazardous substances released or disposed of on the property. Such a
lien generally will have priority over all subsequent liens on the property and,
in certain of these states, will have priority over prior recorded liens
including the lien of a mortgage. In some states, however, such a lien
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will not have priority over prior recorded liens of a deed of trust. In
addition, under federal environmental legislation and under state law in a
number of states, a secured party which takes a deed in lieu of foreclosure or
acquires a mortgaged property at a foreclosure sale or assumes active control
over the operation or management of a property so as to be deemed an 'owner' or
'operator' of the property may be liable for the costs of cleaning up a
contaminated site. Although such costs could be substantial, it is unclear
whether they would be imposed on a lender (such as a Trust Estate) secured by
residential real property. In the event that title to a Mortgaged Property
securing a Mortgage Loan in a Trust Estate was acquired by the Trust and cleanup
costs were incurred in respect of the Mortgaged Property, the holders of the
related series of Securities might realize a loss if such costs were required to
be paid by the Trust.
ENFORCEABILITY OF CERTAIN PROVISIONS
Unless the Prospectus Supplement indicates otherwise, generally all of the
Mortgage Loans 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 including California, 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 a new
home buyer rather than being paid off, that may have an impact upon the average
life of the Mortgage Loans and the number of Mortgage Loans that may be
outstanding until maturity.
Upon foreclosure, courts have imposed general equitable principles. These
equitable principles generally are designed to relieve the borrower from the
legal effect of his defaults under the loan documents. Examples of judicial
remedies that have been fashioned include judicial requirements that the lender
undertake affirmative and expensive actions to determine the causes for the
borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's judgment and have required that lenders reinstate loans or recast
payment schedules in order to accommodate borrowers who are suffering from
temporary financial disability. In other cases, courts have limited the right of
the lender to foreclose if the default under the mortgage instrument is not
monetary, such as the borrower failing to adequately maintain the property or
the borrower executing 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 minimum. 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
protections to the borrower.
CERTAIN PROVISIONS OF CALIFORNIA DEEDS OF TRUST
Most institutional lenders in California use a form of deed of trust that
confers on the beneficiary the right both to receive all proceeds collected
under any hazard insurance policy and all awards made in connection with any
condemnation proceedings, and to apply such proceeds and awards to any
indebtedness secured by the deed of trust, in such order as the beneficiary may
determine, provided, however, that California law prohibits the beneficiary from
applying insurance and condemnation proceeds to the indebtedness secured by the
deed of trust unless the beneficiary's security has been impaired by the
casualty or condemnation, and, if such security has
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been impaired, permits such proceeds to be so applied only to the extent of such
impairment. 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, and, as a result thereof, the beneficiary's security is impaired,
the beneficiary under the underlying first deed of trust 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 first deed of trust. Proceeds in excess
of the amount of indebtedness secured by a first deed of trust will, in most
cases, be applied to the indebtedness of a junior deed of trust.
Another provision typically found in the forms of deed of trust used by
most institutional lenders in California obligates the trustor to pay before
delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property which appear prior to the 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 beneficiary under the deed of trust. Upon a failure of the
trustor to perform any of these obligations, the beneficiary is given the right
under the deed of trust to perform the obligation itself, at its election, with
the trustor agreeing to reimburse the beneficiary for any sums expended by the
beneficiary on behalf of the trustor. All sums so expended by the beneficiary
become part of the indebtedness secured by the deed of trust.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ('Title V'), provides that state usury
limitations shall not apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 1980. A similar federal statute
was in effect with respect to mortgage loans made during the first three months
of 1980. The Office of Thrift Supervision is authorized to issue rules and
regulations and to publish interpretations governing implementation of Title V.
The statute authorized any state to reimpose interest rate limits by adopting,
before April 1, 1983, a law or constitutional provision which expressly rejects
application of the federal law. In addition, even where Title V is not so
rejected, any state is authorized by the law to adopt a provision limiting
discount points or other charges on mortgage loans covered by Title V. Certain
states have taken action to reimpose interest rate limits or to limit discount
points or other charges.
As indicated above under 'Mortgage Loan Program--Representations by
Originators,' each Originator of a Mortgage Loan will have represented that such
Mortgage Loan was originated in compliance with then applicable state laws,
including usury laws, in all material respects. However, the Mortgage Rates on
the Mortgage Loans will be subject to applicable usury laws as in effect from
time to time.
ALTERNATIVE MORTGAGE INSTRUMENTS
Alternative mortgage instruments, including ARM 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
Office of Thrift Supervision, with respect to origination of alternative
mortgage instruments by federal savings and loan associations. Title VIII
provides that any state may reject applicability of the provisions of Title VIII
by adopting, prior to October 15, 1985, a law or constitutional provision
expressly rejecting the applicability of such provisions. Certain states have
taken such action.
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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
Mortgagors 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 Securities, and would
not be covered by advances, any Letter of Credit or any other form of Credit
Enhancement provided in connection with the related series of Securities. In
addition, the Relief Act imposes limitations that would impair the ability of
the Master Servicer to foreclose on an affected Mortgage Loan 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 apply to any Mortgage Loan
which goes into default, there may be delays in payment and losses on the
related Securities 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
Securityholders of the related series.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a general discussion of the material anticipated federal
income tax consequences to investors of the purchase, ownership and disposition
of the Securities offered hereby. The discussion is based upon laws,
regulations, rulings and decisions now in effect, all of which are subject to
change. The discussion below does not purport to deal with all federal tax
consequences applicable to all categories of investors, some of which may be
subject to special rules. Investors should consult their own tax advisors in
determining the federal, state, local and any other tax consequences to them of
the purchase, ownership and disposition of the Securities.
The following discussion addresses securities of three general types: (i)
securities ('Grantor Trust Securities') representing interests in a Trust Estate
(a 'Grantor Trust Estate') which the Sponsor will covenant not to elect to have
treated as a real estate mortgage investment conduit (REMIC); (ii) securities
('REMIC Securities') representing interests in a Trust Estate, or a portion
thereof, which the Sponsor will covenant to elect to have treated as a REMIC
under sections 860A through 860G of the Internal Revenue Code of 1986, as
amended (the 'Code'); and (iii) securities ('Debt Securities') that are intended
to be treated for federal income tax purposes as indebtedness secured by the
underlying Mortgage Loans. This Prospectus does not address the tax treatment of
partnership interests. Such a discussion will be set forth in the related
Prospectus Supplement for any Trust issuing Securities characterized as
partnership interests. The Prospectus Supplement for each series of Securities
will indicate whether a REMIC election (or elections) will be made for the
related Trust Estate and, if a REMIC election is to be made, will identify all
'regular interests' and 'residual interests' in the REMIC. For purposes of this
discussion, references to a 'Securityholder' or a 'Holder' are to the beneficial
owner of a Security.
GRANTOR TRUST SECURITIES
With respect to each series of Grantor Trust Securities, Dewey Ballantine,
special tax counsel to the Sponsor, will deliver its opinion to the Sponsor that
(unless otherwise limited in the related Prospectus Supplement) the related
Grantor Trust Estate will be classified as a grantor trust and not as a
partnership or an association taxable as a corporation. Accordingly, each Holder
of a Grantor Trust Security will generally be treated as the owner of an
interest in the Mortgage Loans included in the Grant or Trust Estate.
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For purposes of the following discussion, a Grantor Trust Security
representing an undivided equitable ownership interest in the principal of the
Mortgage Loans constituting the related Grantor Trust Estate, together with
interest thereon at a pass-through rate, will be referred to as a 'Grantor Trust
Fractional Interest Security.' A Grantor Trust Security representing ownership
of all or a portion of the difference between interest paid on the Mortgage
Loans constituting the related Grantor Trust Estate and interest paid to the
Holders of Grantor Trust Fractional Interest Securities issued with respect to
such Grantor Trust Estate will be referred to as a 'Grantor Trust Strip
Security.'
Special Tax Attributes
Unless otherwise disclosed in a related Prospectus Supplement, Dewey
Ballantine, special tax counsel to the Sponsor, will deliver its opinion to the
Sponsor that (a) Grantor Trust Fractional Interest Securities will represent
interests in (i) 'qualifying real property loans' within the meaning of section
593(d) of the Code; (ii) 'loans . . . secured by an interest in real property'
within the meaning of section 7701(a)(19)(C)(v) of the Code; and (iii)
'obligations (including any participation or certificate of beneficial ownership
therein) which . . . are principally secured by an interest in real property'
within the meaning of section 860G(a)(3)(A) of the Code; and (b) interest on
Grantor Trust Fractional Interest Securities will 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. In addition,
the Grantor Trust Strip Securities will be 'obligations (including any
participation or certificate of beneficial ownership therein) . . . principally
secured by an interest in real property' within the meaning of section
860G(a)(3)(A) of the Code.
Taxation of Holders of Grantor Trust Securities
Holders of Grantor Trust Fractional Interest Securities generally will be
required to report on their federal income tax returns their respective shares
of the income from the Mortgage Loans (including amounts used to pay reasonable
servicing fees and other expenses but excluding amounts payable to Holders of
any corresponding Grantor Trust Strip Securities) and, subject to the
limitations described below, will be entitled to deduct their shares of any such
reasonable servicing fees and other expenses. If a Holder acquires a Grantor
Trust Fractional Interest Security for an amount that differs from its
outstanding principal amount, the amount includible in income on a Grantor Trust
Fractional Interest Security may differ from the amount of interest
distributable thereon. See 'Discount and Premium,' below. Individuals holding a
Grantor Trust Fractional Interest Security directly or through certain
pass-through entities will be allowed a deduction for such reasonable servicing
fees and expenses only to the extent that the aggregate of such Holder's
miscellaneous itemized deductions exceeds 2% of such Holder's adjusted gross
income. Further, Holders (other than corporations) subject to the alternative
minimum tax may not deduct miscellaneous itemized deductions in determining
alternative minimum taxable income.
Holders of Grantor Trust Strip Securities generally will be required to
treat such Securities as 'stripped coupons' under section 1286 of the Code.
Accordingly, such a Holder will be required to treat the excess of the total
amount of payments on such a Security over the amount paid for such Security as
original issue discount and to include such discount in income as it accrues
over the life of such Security. See '--Discount and Premium,' below.
Grantor Trust Fractional Interest Securities may also be subject to the
coupon stripping rules if a class of Grantor Trust Strip Securities is issued as
part of the same series of Securities. The consequences of the application of
the coupon stripping rules would appear to be that any discount arising upon the
purchase of such a Security (and perhaps all stated interest thereon) would be
classified as original issue discount and includible in the Holder's income as
it accrues (regardless of the Holder's method of accounting), as described below
under '--Discount and Premium.' The coupon stripping rules will not apply,
however, if (i) the pass-through rate is no more than 100 basis points lower
than the gross rate of interest payable on the underlying Mortgage Loans and
(ii) the difference between the outstanding principal balance on the Security
and the amount paid for such Security is less than 0.25% of such principal
balance times the weighted average remaining maturity of the Security.
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Sales of Grantor Trust Securities
Any gain or loss recognized on the sale of a Grantor Trust Security (equal
to the difference between the amount realized on the sale and the adjusted basis
of such Grantor Trust Security) 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 Security will generally 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 of principal.
Grantor Trust Reporting
The Trustee will furnish to each Holder of a Grantor Trust Fractional
Interest Security 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, within a
reasonable time after the end of each calendar year, based on information
provided by the Servicer, the Trustee will furnish to each Holder during such
year such customary factual information as the Servic er deems necessary or
desirable to enable Holders of Grantor Trust Securities to prepare their tax
returns and will furnish comparable information to the Internal Revenue Service
(the 'IRS') as and when required to do so by law.
REMIC SECURITIES
If provided in a related Prospectus Supplement, an election will be made to
treat a Trust Estate as a REMIC under the Code. Qualification as a REMIC
requires ongoing compliance with certain conditions. With respect to each series
of Securities for which such an election is made, Dewey Ballantine, special tax
counsel to the Sponsor, will deliver its opinion to the Sponsor that (unless
otherwise limited in the related Prospectus Supplement), assuming compliance
with the Pooling and Servicing Agreement, the Trust Estate will be treated as a
REMIC for federal income tax purposes. A Trust Estate for which a REMIC election
is made will be referred to herein as a 'REMIC Trust.' The Securities of each
class will be designated as 'regular interests' in the REMIC Trust except that a
separate class will be designated as the 'residual interest' in the REMIC Trust.
The Prospectus Supplement for each series of Securities will state whether
Securities of each class will constitute a regular interest (a REMIC Regular
Security) or a residual interest (a REMIC Residual Security).
A REMIC Trust will not be subject to federal income tax except with respect
to income from prohibited transactions and in certain other instances described
below. See '--Taxes on a REMIC Trust.' Generally, the total income from the
Mortgage Loans in a REMIC Trust will be taxable to the Holders of the Securities
of that series, as described below.
Regulations issued by the Treasury Department on December 23, 1992 (the
'REMIC Regulations') provide some guidance regarding the federal income tax
consequences associated with the purchase, ownership and disposition of REMIC
Securities. While certain material provisions of the REMIC Regulations are
discussed below, investors should consult their own tax advisors regarding the
possible application of the REMIC Regulations in their specific circumstances.
SPECIAL TAX ATTRIBUTES
REMIC Regular Securities and REMIC Residual Securities will be 'regular or
residual interests in a REMIC' within the meaning of section 7701(a)(19)(C)(xi)
of the Code, 'qualifying real property loans' within the meaning of section
593(d) of the Code and 'real estate assets' within the meaning of section
856(c)(5)(A) of the Code. If at any time during a calendar year less than 95% of
the assets of a REMIC Trust consist of 'qualified mortgages' (within the meaning
of section 860G(a)(3) of the Code) then the portion of the REMIC Regular
Securities and REMIC Residual Securities that are qualifying assets under those
sections during such calendar year may be limited to the portion of the assets
of such REMIC Trust that are qualified mortgages. Similarly, income on the REMIC
Regular Securities and REMIC Residual Securities will be treated as 'interest on
obligations secured by mortgages on real property' within the meaning of section
856(c)(3)(B) of the Code, subject to the same limitation as set forth in the
preceding sentence. For purposes of applying this limitation, a REMIC Trust
should be treated as owning the assets represented by the qualified mortgages.
The assets of the
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Trust Estate will include, in addition to the Mortgage Loans, payments on the
Mortgage Loans held pending distribution on the REMIC Regular Securities and
REMIC Residual Securities and any reinvestment income thereon. REMIC Regular
Securities and REMIC Residual Securities held by a financial institution to
which section 585, 586 or 593 of the Code applies will be treated as evidences
of indebtedness for purposes of section 582(c)(1) of the Code. REMIC Regular
Securities will also be qualified mortgages with respect to other REMICs.
Taxation of Holders of REMIC Regular Securities
Except as indicated below in this federal income tax discussion, the REMIC
Regular Securities will be treated for federal income tax purposes as debt
instruments issued by the REMIC Trust on the date such Securities are first sold
to the public (the 'Settlement Date') and not as ownership interests in the
REMIC Trust or its assets. Holders of REMIC Regular Securities that otherwise
report income under a cash method of accounting will be required to report
income with respect to such Securities under an ac crual method. For additional
tax consequences relating to REMIC Regular Securities purchased at a discount or
with premium, see '--Discount and Premium,' below.
Taxation of Holders of REMIC Residual Securities
Daily Portions. Except as indicated below, a Holder of a REMIC Residual
Security for a REMIC Trust generally will be required to report its daily
portion of the taxable income or net loss of the REMIC Trust for each day during
a calendar quarter that the Holder owned such REMIC Residual Security. For this
purpose, the daily portion shall be determined by allocating to each day in the
calendar quarter its ratable portion of the taxable income or net loss of the
REMIC Trust for such quarter and by allocating the amount so allocated among the
Residual Holders (on such day) in accordance with their percentage interests on
such day. Any amount included in the gross income or allowed as a loss of any
Residual Holder by virtue of this paragraph will be treated as ordinary income
or loss.
The requirement that each Holder of a REMIC Residual Security report its
daily portion of the taxable income or net loss of the REMIC Trust will continue
until there are no Securities of any class outstanding, even though the Holder
of the REMIC Residual Security may have received full payment of the stated
interest and principal on its REMIC Residual Security.
The Trustee will provide to Holders of REMIC Residual Securities of each
series of Securities (i) such information as is necessary to enable them to
prepare their federal income tax returns and (ii) any reports regarding the
Securities of such series that may be required under the Code.
Taxable Income or Net Loss of a REMIC Trust. The taxable income or net
loss of a REMIC Trust will be the income from the qualified mortgages it holds
and any reinvestment earnings less deductions allowed to the REMIC Trust. Such
taxable income or net loss for a given calendar quarter will be determined in
the same manner as for an individual having the calendar year as the taxable
year and using the accrual method of accounting, with certain modifications. The
first modification is that a deduction will be allowed for accruals of interest
(including any original issue discount, but without regard to the investment
interest limitation in section 163(d) of the Code) on the REMIC Regular
Securities (but not the REMIC Residual Securities), even though REMIC Regular
Securities are for non-tax purposes evidences of beneficial ownership rather
than indebtedness of a REMIC Trust. Second, market discount or premium equal to
the difference between the total stated principal balances of the qualified
mortgages and the basis to the REMIC Trust therein generally will be included in
income (in the case of discount) or deductible (in the case of premium) by the
REMIC Trust as it accrues under a constant yield method, taking into account the
'Prepayment Assumption' (as defined in the Related Prospectus Supplement, see
'--Discount and Premium--Original Issue Discount,' below). The basis to a REMIC
Trust in the qualified mortgages is the aggregate of the issue prices of all the
REMIC Regular Securities and REMIC Residual Securities in the REMIC Trust on the
Settlement Date. If, however, a substantial amount of a class of REMIC Regular
Securities or REMIC Residual Securities has not been sold to the public, then
the fair market value of all the REMIC Regular Securities or REMIC Residual
Securities in that class as of the date of the Prospectus Supplement should be
substituted for the issue price.
Third, no item of income, gain, loss or deduction allocable to a prohibited
transaction (see '--Taxes on a REMIC Trust--Prohibited Transactions' below) will
be taken into account. Fourth, a REMIC Trust generally
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may not deduct any item that would not be allowed in calculating the taxable
income of a partnership by virtue of section 703(a)(2) of the Code. Finally, the
limitation on miscellaneous itemized deductions imposed on individuals by
section 67 of the Code will not be applied at the REMIC Trust level to any
servicing and guaranty fees. (See, however, '--Pass-Through of Servicing and
Guaranty Fees to Individuals' below.) In addition, under the REMIC Regulations,
any expenses that are incurred in connection with the formation of a REMIC Trust
and the issuance of the REMIC Regular Securities and REMIC Residual Securities
are not treated as expenses of the REMIC Trust for which a deduction is allowed.
If the deductions allowed to a REMIC Trust exceed its gross income for a
calendar quarter, such excess will be a net loss for the REMIC Trust for that
calendar quarter. The REMIC Regulations also provide that any gain or loss to a
REMIC Trust from the disposition of any asset, including a qualified mortgage or
'permitted investment' (as defined in section 860G(a)(5) of the Code) will be
treated as ordinary gain or loss.
A Holder of a REMIC Residual Security may be required to recognize taxable
income without being entitled to receive a corresponding amount of cash. This
could occur, for example, if the qualified mortgages are considered to be
purchased by the REMIC Trust at a discount, some or all of the REMIC Regular
Securities are issued at a discount, and the discount included as a result of a
prepayment on a Mortgage Loan that is used to pay principal on the REMIC Regular
Securities exceeds the REMIC Trust's deduction for unaccrued original issue
discount relating to such REMIC Regular Securities. Taxable income may also be
greater in earlier years because interest expense deductions, expressed as a
percentage of the outstanding principal amount of the REMIC Regular Securities,
may increase over time as the earlier classes of REMIC Regular Securities are
paid, whereas interest income with respect to any given Mortgage Loan expressed
as a percentage of the outstanding principal amount of that Mortgage Loan, will
remain constant over time.
Basis Rules and Distributions. A Holder of a REMIC Residual Security has
an initial basis in its Security equal to the amount paid for such REMIC
Residual Security. Such basis is increased by amounts included in the income of
the Holder and decreased by distributions and by any net loss taken into account
with respect to such REMIC Residual Security. A distribution on a REMIC Residual
Security to a Holder is not included in gross income to the extent it does not
exceed such Holder's basis in the REMIC Residual Security (adjusted as described
above) and, to the extent it exceeds the adjusted basis of the REMIC Residual
Security, shall be treated as gain from the sale of the REMIC Residual Security.
A Holder of a REMIC Residual Security is not allowed to take into account
any net loss for any calendar quarter to the extent such net loss exceeds such
Holder's adjusted basis in its REMIC Residual Security as of the close of such
calendar quarter (determined without regard to such net loss). Any loss
disallowed 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 Security.
Excess Inclusions. Any excess inclusions with respect to a REMIC Residual
Security are subject to certain special tax rules. With respect to a Holder of a
REMIC Residual Security, the excess inclusion for any calendar quarter is
defined as the excess (if any) of the daily portions of taxable income over the
sum of the 'daily accruals' for each day during such quarter that such REMIC
Residual Security was held by such Holder. The daily accruals are 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 Security at the
beginning of the calendar quarter and 120% of the 'federal long-term rate' in
effect on the Settlement Date, based on quarterly compounding, and properly
adjusted for the length of such quarter. For this purpose, the adjusted issue
price of a REMIC Residual Security as of the beginning of any calendar quarter
is equal to the issue price of the REMIC Residual Security, increased by the
amount of daily accruals for all prior quarters and decreased by any
distributions made with respect to such REMIC Residual Security before the
beginning of such quarter. The issue price of a REMIC Residual Security is the
initial offering price to the public (excluding bond houses and brokers) at
which a substantial number of the REMIC Residual Securities was sold. The
federal long-term rate is a blend of current yields on Treasury securities
having a maturity of more than nine years, computed and published monthly by the
IRS.
For Holders of REMIC Residual Securities that are thrift institutions
described in section 593 of the Code, income from a REMIC Residual Security
generally may be offset by losses from other activities. Under the REMIC
Regulations, such an organization is treated as having applied its allowable
deductions for the year first to offset income that is not an excess inclusion
and then to offset that portion of its income that is an excess
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inclusion. For other Holders of REMIC Residual Securities, any excess inclusions
cannot be offset by losses from other activities. For Holders that are subject
to tax only on unrelated business taxable income (as defined in section 511 of
the Code), an excess inclusion of such Holder is treated as unrelated business
taxable income. With respect to variable contracts (within the meaning of
section 817 of the Code), a life insurance company cannot adjust its reserve to
the extent of any excess inclusion, except as provided in regulations. The REMIC
Regulations indicate that if a Holder of a REMIC Residual Security is a member
of an affiliated group filing a consolidated income tax return, the taxable
income of the affiliated group cannot be less than the sum of the excess
inclusions attributable to all residual interests in REMICS held by members of
the affiliated group. For a discussion of the effect of excess inclusions on
certain foreign investors that own REMIC Residual Securities, see '--Foreign
Investors' below.
The REMIC Regulations provide that an organization to which section 593 of
the Code applies and which is the Holder of a REMIC Residual Security may not
use its allowable deductions to offset any excess inclusions with respect to
such Security if such Security does not have 'significant value.' For this
purpose, a REMIC Residual Security has significant value under the REMIC
Regulations if (i) its issue price is at least 2% of the aggregate of the issue
prices of all the REMIC Regular Securities and REMIC Residual Securities in that
REMIC Trust and (ii) its 'anticipated weighted average life' is at least 20% of
the 'anticipated weighted average life' of such REMIC Trust.
In determining whether a REMIC Residual Security has significant value, the
anticipated weighted average life of such Security is based in part on the
Prepayment Assumption, except that all anticipated payments on such Security are
taken into account, regardless of their designation as principal or interest.
The anticipated weighted average life of a REMIC Trust is the weighted average
of the anticipated weighted average lives of the Securities.
The Treasury Department also has the authority to issue regulations that
would treat all taxable income of a REMIC Trust as excess inclusions if the
REMIC Residual Security does not have 'significant value.' Although the Treasury
Department did not exercise this authority in the REMIC Regulations, future
regulations may contain such a rule. If such a rule were adopted, it is unclear
whether the test for significant value that is contained in the REMIC
Regulations and discussed in the two preceding paragraphs would be applicable.
If no such rule is applicable, excess inclusions should be calculated as
discussed above.
In the case of any REMIC Residual Securities that are held by a real estate
investment trust, the aggregate excess inclusions with respect to such REMIC
Residual Securities 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 Security as if held directly by such shareholder.
Similar rules will apply in the case of regulated investment companies, common
trust funds and certain cooperatives that hold a REMIC Residual Security.
Pass-Through of Servicing and Guaranty Fees to Individuals. A Holder of a
REMIC Residual Security who is an individual will be required to include in
income a share of any servicing and guaranty fees. A deduction for such fees
will be allowed to such Holder only to the extent that such fees, along with
certain of such Holder's other miscellaneous itemized deductions exceed 2% of
such Holder's adjusted gross income. In addition, a Holder of a REMIC Residual
Security may not be able to deduct any portion of such fees in computing such
Holder's alternative minimum tax liability. A Holder's share of such fees will
generally be determined by (i) allocating the amount of such expenses for each
calendar quarter on a pro rata basis to each day in the calendar quarter, and
(ii) allocating the daily amount among the Holders in proportion to their
respective holdings on such day.
Taxes on a REMIC Trust
Prohibited Transactions. The Code imposes a tax on a REMIC equal to 100%
of the net income derived from 'prohibited transactions.' In general, a
prohibited transaction means the disposition of a qualified mortgage other than
pursuant to certain specified exceptions, the receipt of investment income from
a source other than a Mortgage Loan or certain other permitted investments, the
receipt of compensation for services, or the disposition of an asset purchased
with the payments on the qualified mortgages for temporary investment pending
distribution on the regular and residual interests.
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Contributions to a REMIC after the Startup Day. The Code imposes a tax on
a REMIC equal to 100% of the value of any property contributed to the REMIC
after the 'startup day' (generally the same as the Settlement Date). Exceptions
are provided for cash contributions to a REMIC (i) during the three month period
beginning on the startup day, (ii) made to a qualified reserve fund by a Holder
of a residual interest, (iii) in the nature of a guarantee, (iv) made to
facilitate a qualified liquidation or clean-up call, and (v) as otherwise
permitted by Treasury regulations.
Net Income from Foreclosure Property. The Code imposes a tax on a REMIC
equal to the highest corporate rate on 'net income from foreclosure property.'
The terms 'foreclosure property' (which includes property acquired by deed in
lieu of foreclosure) and 'net income from foreclosure property' are defined by
reference to the rules applicable to real estate investment trusts. Generally,
foreclosure property would be treated as such for a period of two years, with
possible extensions. Net income from foreclosure property generally means gain
from the sale of 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.
Sales of REMIC Securities
General. Except as provided below, if a Regular or REMIC Residual Security
is sold, the seller will recognize gain or loss equal to the difference between
the amount realized in the sale and its adjusted basis in the Security. The
adjusted basis of a REMIC Regular Security generally will equal the cost of such
Security to the seller, increased by any original issue discount or market
discount included in the seller's gross income with respect to such Security and
reduced by distributions on such Security previously received by the seller of
amounts included in the stated redemption price at maturity and by any premium
that has reduced the seller's interest income with respect to such Security. See
'--Discount and Premium.' The adjusted basis of a REMIC Residual Security is
determined as described above under '--Taxation of Holders of REMIC Residual
Securities--Basis Rules and Distributions.' Except as provided in the following
paragraph or under section 582(c) of the Code, any such gain or loss will be
capital gain or loss, provided such Security 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 Security that might otherwise be
capital gain will be treated as ordinary income to the extent that such gain
does not exceed the excess, if any, of (i) the amount that would have been
includible in the income of the Holder of a REMIC Regular Security had income
accrued at a rate equal to 110% of the 'applicable federal rate' (generally, an
average of current yields on Treasury securities) as of the date of purchase
over (ii) the amount actually includible in such Holder's income. In addition,
gain recognized on such a sale by a Holder of a REMIC Regular Security who
purchased such a Security at a market discount would also be taxable as ordinary
income in an amount not exceeding the portion of such discount that accrued
during the period such Security was held by such Holder, reduced by any market
discount includible in income under the rules described below under '--Discount
and Premium.'
If a Holder of a REMIC Residual Security sells its REMIC Residual Security
at a loss, the loss will not be recognized if, within six months before or after
the sale of the REMIC Residual Security, such Holder purchases another residual
interest in any REMIC or any interest in a taxable mortgage pool (as defined in
section 7701(i) of the Code) comparable to a residual interest in a REMIC. Such
disallowed loss would be allowed upon the sale of the other residual interest
(or comparable interest) if the rule referred to in the preceding sentence does
not apply to that sale. While this rule may be modified by Treasury regulations,
no such regulations have yet been published.
Transfers of REMIC Residual Securities. Section 860E(e) of the Code
imposes a substantial tax, payable by the transferor (or, if a transfer is
through a broker, nominee, or other middleman as the transferee's agent, payable
by that agent) upon any transfer of a REMIC Residual Security to a disqualified
organization and upon a pass-through entity (including regulated investment
companies, real estate investment trusts, common trust funds, partnerships,
trusts, estates, certain cooperatives, and nominees) that owns a REMIC Residual
Security if such pass-through entity has a disqualified organization as a
record-holder. For purposes of the preceding sentence, a transfer includes any
transfer of record or beneficial ownership, whether pursuant to a purchase, a
default under a secured lending agreement or otherwise.
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The term 'disqualified organization' includes the United States, any state
or political subdivision thereof, any foreign government, any international
organization, or any agency or instrumentality of the foregoing (other than
certain taxable instrumentalities), any cooperative organization furnishing
electric energy or providing telephone service to persons in rural areas, or any
organization (other than a farmers' cooperative) that is exempt from federal
income tax, unless such organization is subject to the tax on unrelated business
income. 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 a REMIC Residual Security and certain other
provisions that are intended to meet this requirement are described in the
Pooling and Servicing Agreement, and will be discussed more fully in the related
Prospectus Supplement relating to the offering of any REMIC Residual Security.
In addition, a pass-through entity (including a nominee) that holds a REMIC
Residual Security may be subject to additional taxes if a disqualified
organization is a record-holder therein. A transferor of a REMIC Residual
Security (or an agent of a transferee of a REMIC Residual Security, as the case
may be) will be relieved of such tax liability if (i) the transferee furnishes
to the transferor (or the transferee's agent) an affidavit that the transferee
is not a disqualified organization, and (ii) the transferor (or the transferee's
agent) does not have actual knowledge that the affidavit is false at the time of
the transfer. Similarly, no such tax will be imposed on a pass-through entity
for a period with respect to an interest therein owned by a disqualified
organization if (i) the record-holder of such interest furnishes to the
pass-through entity an affidavit that it is not a disqualified organization, and
(ii) during such period, the pass-through entity has no actual knowledge that
the affidavit is false.
Under the REMIC Regulations, a transfer of a 'noneconomic residual
interest' to a U.S. Person (as defined below in '--Foreign Investors--Grantor
Trust Securities and REMIC Regular Securities') will be disregarded for all
federal tax purposes unless no significant purpose of the transfer is to impede
the assessment or collection of tax. A REMIC Residual Security would be treated
as constituting a noneconomic residual interest unless, at the time of the
transfer, (i) the present value of the expected future distributions on the
REMIC Residual Security is no less than the product of the present value of the
'anticipated excess inclusions' with respect to such Security and the highest
corporate rate of tax for the year in which the transfer occurs, and (ii) the
transferor reasonably expects that the transferee will receive distributions
from the applicable REMIC Trust in an amount sufficient to satisfy the liability
for income tax on any 'excess inclusions' at or after the time when such
liability accrues. Anticipated excess inclusions are the excess inclusions that
are anticipated to be allocated to each calendar quarter (or portion thereof)
following the transfer of a REMIC Residual Security, determined as of the date
such Security is transferred and based on events that have occurred as of that
date and on the Prepayment Assumption. See '--Discount and Premium' and
'--Taxation of Holders of REMIC Residual Securities--Excess Inclusions.'
The REMIC Regulations provide that a significant purpose to impede the
assessment or collection of tax exists if, at the time of the transfer, a
transferor of a REMIC Residual Security has 'improper knowledge' (i.e., either
knew, or should have known, that the transferee would be unwilling or unable to
pay taxes due on its share of the taxable income of the REMIC Trust). A
transferor is presumed not to have improper knowledge if (i) the transferor
conducts, at the time of a transfer, a reasonable investigation of the financial
condition of the transferee and, as a result of the investigation, the
transferor finds that the transferee has historically paid its debts as they
come due and finds no significant evidence to indicate that the transferee will
not continue to pay its debts as they come due in the future; and (ii) the
transferee makes certain representations to the transferor in the affidavit
relating to disqualified organizations discussed above. Transferors of a REMIC
Residual Security should consu lt with their own tax advisors for further
information regarding such transfers.
Reporting and Other Administrative Matters. For purposes of the
administrative provisions of the Code, each REMIC Trust will be treated as a
partnership and the Holders of REMIC Residual Securities will be treated as
partners. The Trustee will prepare, sign and file federal income tax returns for
each REMIC Trust, which returns are subject to audit by the IRS. Moreover,
within a reasonable time after the end of each calendar year, the Trustee will
furnish to each Holder that received a distribution during such year a statement
setting forth the portions of any such distributions that constitute interest
distributions, original issue discount, and such other information as is
required by Treasury regulations and, with respect to Holders of REMIC Residual
Securities in a REMIC Trust, information necessary to compute the daily portions
of the taxable income (or net loss) of such
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REMIC Trust for each day during such year. The Trustee will also act as the tax
matters partner for each REMIC Trust, either in its capacity as a Holder of a
REMIC Residual Security or in a fiduciary capacity. Each Holder of a REMIC
Residual Security, by the acceptance of its REMIC Residual Security, agrees that
the Trustee will act as its fiduciary in the performance of any duties required
of it in the event that it is the tax matters partner.
Each Holder of a REMIC Residual Security is required to treat items on its
return consistently with the treatment on the return of the REMIC Trust, unless
the Holder either files a statement identifying the inconsistency or establishes
that the inconsistency resulted from incorrect information received from the
REMIC Trust. The IRS may assert a deficiency resulting from a failure to comply
with the consistency requirement without instituting an administrative
proceeding at the REMIC Trust level. Unless otherwise specified in the related
Prospectus Supplement, the Trustee does not intend to register any REMIC Trust
as a tax shelter pursuant to section 6111 of the Code.
Termination
In general, no special tax consequences will apply to a Holder of a REMIC
Regular Security upon the termination of a REMIC Trust by virtue of the final
payment or liquidation of the last Mortgage Loan remaining in the Trust Estate.
If a Holder of a REMIC Residual Security's adjusted basis in its REMIC Residual
Security at the time such termination occurs exceeds the amount of cash
distributed to such Holder in liquidation of its interest, although the matter
is not entirely free from doubt, it would appear that the Holder of the REMIC
Residual Security is entitled to a loss equal to the amount of such excess.
DEBT SECURITIES
General
With respect to each series of Debt Securities, Dewey Ballantine, special
tax counsel to the Sponsor, will deliver its opinion to the Sponsor that (unless
otherwise limited in the related Prospectus Supplement) the Securities will be
classified as debt of the Sponsor secured by the related Mortgage Loans.
Consequently, the Debt Securities will not be treated as ownership interests in
the Mortgage Loans or the Trust. Holders will be required to report income
received with respect to the Debt Securities in accordance with their normal
method of accounting. For additional tax consequences relating to Debt
Securities purchased at a discount or with premium, see '--Discount and
Premium,' below.
Special Tax Attributes
As described above, Grantor Trust Securities will possess certain special
tax attributes by virtue of their being ownership interests in the underlying
Mortgage Loans. Similarly, REMIC Securities will possess similar attributes by
virtue of the REMIC provisions of the Code. In general, Debt Securities will not
possess such special tax attributes. Investors to whom such attributes are
important should consult their own tax advisors regarding investment in Debt
Securities.
Sale or Exchange
If a Holder of a Debt Security sells or exchanges such Security, the Holder
will recognize gain or loss equal to the difference, if any, between the amount
received and the Holder's adjusted basis in the Security. The adjusted basis in
the Security generally will equal its initial cost, increased by any original
issue discount or market discount previously included in the seller's gross
income with respect to the Security and reduced by the payments previously
received on the Security, other than payments of qualified stated interest, and
by any amortized premium.
In general (except as described in '--Discount and Premium--Market
Discount,' below), except for certain financial institutions subject to section
582(c) of the Code, any gain or loss on the sale or exchange of a Debt Security
recognized by an investor who holds the Security as a capital asset (within the
meaning of section 1221 of the Code), will be capital gain or loss and will be
long-term or short-term depending on whether the Security has been held for more
than one year.
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DISCOUNT AND PREMIUM
A Security purchased for an amount other than its outstanding principal
amount will be subject to the rules governing original issue discount, market
discount or premium. In addition, all Grantor Trust Strip Securities and certain
Grantor Trust Fractional Interest Securities will be treated as having original
issue discount by virtue of the coupon stripping rules in section 1286 of the
Code. In very general terms, (i) original issue discount is treated as a form of
interest and must be included in a Holder's income as it accrues (regardless of
the Holder's regular method of accounting) using a constant yield method; (ii)
market discount is treated as ordinary income and must be included in a Holder's
income as principal payments are made on the Security (or upon a sale of a
Security); and (iii) if a Holder so elects, premium may be amortized over the
life of the Security and offset against inclusions of interest income. These tax
consequences are discussed in greater detail below.
Original Issue Discount
In general, a Security will be considered to be issued with original issue
discount equal to the excess, if any, of its 'stated redemption price at
maturity' over its 'issue price.' The issue price of a Security is the initial
offering price to the public (excluding bond houses and brokers) at which a
substantial number of the Securities was sold. The issue price also includes any
accrued interest attributable to the period between the beginning of the first
Remittance Period and the Settlement Date. The stated redemption price at
maturity of a Security that has a notional principal amount or receives
principal only or that is or may be an Accrual Security is equal to the sum of
all distributions to be made under such Security. The stated redemption price at
maturity of any other Security is its stated principal amount, plus an amount
equal to the excess (if any) of the interest payable on the first Payment Date
over the interest that accrues for the period from the Settlement Date to the
first Payment Date.
Notwithstanding the general definition, original issue discount will be
treated as zero if such discount is less than 0.25% of the stated redemption
price at maturity multiplied by its weighted average life. The weighted average
life of a Security is apparently computed for this purpose as the sum, for all
distributions included in the stated redemption price at maturity of the amounts
determined by multiplying (i) the number of complete years (rounding down for
partial years) from the Settlement Date until the date on which each such
distribution is expected to be made under the assumption that the Mortgage Loans
prepay at the rate specified in the related Prospectus Supplement (the
'Prepayment Assumption') by (ii) a fraction, the numerator of which is the
amount of such distribution and the denominator of which is the Security's
stated redemption price at maturity. If original issue discount is treated as
zero under this rule, the actual amount of original issue discount must be
allocated to the principal distributions on the Security and, when each such
distribution is received, gain equal to the discount allocated to such
distribution will be recognized.
Section 1272(a)(6) of the Code contains special original issue discount
rules directly applicable to REMIC Securities and Debt Securities and applicable
by analogy to Grantor Trust Securities. Investors in Grantor Trust Securities
should be aware that there can be no assurance that the rules described below
will be applied to such Securities. Under these rules (described in greater
detail below), (i) the amount and rate of accrual of original issue discount on
each series of Securities will be based on (x) the Prepayment Assumption, and
(y) in the case of a Security calling for a variable rate of interest, an
assumption that the value of the index upon which such variable rate is based
remains equal to the value of that rate on the Settlement Date, and (ii)
adjustments will be made in the amount of discount accruing in each taxable year
in which the actual prepayment rate differs from the Prepayment Assumption.
Section 1272(a)(6)(B)(iii) of the Code requires that the prepayment
assumption used to calculate original issue discount be determined in the manner
prescribed in Treasury regulations. To date, no such regulations have been
promulgated. The legislative history of this Code provision indicates that the
assumed prepayment rate must be the rate used by the parties in pricing the
particular transaction. The Sponsor anticipates that the Prepayment Assumption
for each series of Securities will be consistent with this standard. The Sponsor
makes no representation, however, that the Mortgage Loans for a given series
will prepay at the rate reflected in the Prepayment Assumption for that series
or at any other rate. Each investor must make its own decision as to the
appropriate prepayment assumption to be used in deciding whether or not to
purchase any of the Securities.
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Each Securityholder must include in gross income the sum of the 'daily
portions' of original issue discount on its Security for each day during its
taxable year on which it held such Security. For this purpose, in the case of an
original Holder, the daily portions of original issue discount will be
determined as follows. A calculation will first be made of the portion of the
original issue discount that accrued during each 'accrual period.' The Trustee
will supply, at the time and in the manner required by the IRS, to
Securityholders, brokers and middlemen information with respect to the original
issue discount accruing on the Securities. Unless otherwise disclosed in the
related Prospectus Supplement, the Trustee will report original issue discount
based on accrual periods of one month, each beginning on a payment date (or, in
the case of the first such period, the Settlement Date) and ending on the day
before the next payment date.
Under section 1272(a)(6) of the Code, the portion of original issue
discount treated as accruing for any accrual period will equal the excess, if
any, of (i) the sum of (A) the present values of all the distributions remaining
to be made on the Security, if any, as of the end of the accrual period and (B)
the distribution made on such Security during the accrual period of amounts
included in the stated redemption price at maturity, over (ii) the adjusted
issue price of such Security at the beginning of the accrual period. The present
value of the remaining distributions referred to in the preceding sentence will
be calculated based on (i) the yield to maturity of the Security, calculated as
of the Settlement Date, giving effect to the Prepayment Assumption, (ii) events
(including actual prepayments) that have occurred prior to the end of the
accrual period, (iii) the Prepayment Assumption, and (iv) in the case of a
Security calling for a variable rate of interest, an assumption that the value
of the index upon which such variable rate is based remains the same as its
value on the Settlement Date over the entire life of such Security. The adjusted
issue price of a Security at any time will equal the issue price of such
Security, increased by the aggregate amount of previously accrued original issue
discount with respect to such Security, and reduced by the amount of any
distributions made on such Security as of that time of amounts included in the
stated redemption price at maturity. The original issue discount accruing during
any accrual period will then be allocated ratably to each day during the period
to determine the daily portion of original issue discount.
In the case of Grantor Trust Strip Securities and certain REMIC Securities,
the calculation described in the preceding paragraph may produce a negative
amount of original issue discount for one or more accrual periods. No definitive
guidance has been issued regarding the treatment of such negative amounts. The
legislative history to section 1272(a)(6) indicates that such negative amounts
may be used to offset subsequent positive accruals but may not offset prior
accruals and may not be allowed as a deduction item in a taxable year in which
negative accruals exceed positive accruals. Holders of such Securities should
consult their own tax advisors concerning the treatment of such negative
accruals.
A subsequent purchaser of a Security that purchases such Security at a cost
less than its remaining stated redemption price at maturity also will be
required to include in gross income for each day on which it holds such
Security, the daily portion of original issue discount with respect to such
Security (but reduced, if the cost of such Security to such purchaser exceeds
its adjusted issue price, by an amount equal to the product of (i) such daily
portion and (ii) a constant fraction, the numerator of which is such excess and
the denominator of which is the sum of the daily portions of original issue
discount on such Security for all days on or after the day of purchase).
Market Discount
A Holder that purchases a Security at a market discount, that is, at a
purchase price less than the remaining stated redemption price at maturity of
such Security (or, in the case of a Security with original issue discount, its
adjusted issue price), will be required to allocate each principal distribution
first to accrued market discount on the Security, and recognize ordinary income
to the extent such distribution does not exceed the aggregate amount of accrued
market discount on such Security not previously included in income. With respect
to Securities that have unaccrued original issue discount, such market discount
must be included in income in addition to any original issue discount. A Holder
that incurs or continues indebtedness to acquire a Security at a market discount
may also be required to defer the deduction of all or a portion of the interest
on such indebtedness until the corresponding amount of market discount is
included in income. In general terms, market discount on a Security may be
treated as accruing either (i) under a constant yield method or (ii) in
proportion to remaining accruals of original issue discount, if any, or if none,
in proportion to remaining distributions of interest on the Security, in
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any case taking into account the Prepayment Assumption. The Trustee will make
available, as required by the IRS, to Holders of Securities information
necessary to compute the accrual of market discount.
Notwithstanding the above rules, market discount on a Security will be
considered to be zero if such discount is less than 0.25% of the remaining
stated redemption price at maturity of such Security multiplied by its weighted
average remaining life. Weighted average remaining life presumably would be
calculated in a manner similar to weighted average life, taking into account
payments (including prepayments) prior to the date of acquisition of the
Security by the subsequent purchaser. If market discount on a Security is
treated as zero under this rule, the actual amount of market discount must be
allocated to the remaining principal distributions on the Security and, when
each such distribution is received, gain equal to the discount allocated to such
distribution will be recognized.
Securities Purchased at a Premium
A purchaser of a Security that purchases such Security at a cost greater
than its remaining stated redemption price at maturity will be considered to
have purchased such Security (a 'Premium Security') at a premium. Such a
purchaser need not include in income any remaining original issue discount and
may elect, under section 171(c)(2) of the Code, to treat such premium as
'amortizable bond premium.' If a Holder makes such an election, the amount of
any interest payment that must be included in such Holder's income for each
period ending on a Payment Date will be reduced by the portion of the premium
allocable to such period based on the Premium Security's yield to maturity. The
legislative history of the Tax Reform Act of 1986 states that such premium
amortization should be made under principles analogous to those governing the
accrual of market discount (as discussed above under '--Market Discount'). If
such election is made by the Holder, the election will also apply to all bonds
the interest on which is not excludible from gross income ('fully taxable
bonds') held by the Holder at the beginning of the first taxable year to which
the election applies and to all such fully taxable bonds thereafter acquired by
it, and is irrevocable without the consent of the IRS. If such an election is
not made, (i) such a Holder must include the full amount of each interest
payment in income as it accrues, and (ii) the premium must be allocated to the
principal distributions on the Premium Security and, when each such distribution
is received, a loss equal to the premium allocated to such distribution will be
recognized. Any tax benefit from the premium not previously recognized will be
taken into account in computing gain or loss upon the sale or disposition of the
Premium Security.
Some Securities may provide for only nominal distributions of principal in
comparison to the distributions of interest thereon. It is possible that the IRS
or the Treasury Department may issue guidance excluding such Securities from the
rules generally applicable to debt instruments issued at a premium. In
particular, it is possible that such a Security will be treated as having
original issue discount equal to the excess of the total payments to be received
thereon over its issue price. In such event, section 1272(a)(6) of the Code
would govern the accrual of such original issue discount, but a Holder would
recognize substantially the same income in any given period as would be
recognized if an election were made under section 171(c)(2) of the Code. Unless
and until the Treasury Department or the IRS publishes specific guidance
relating to the tax treatment of such Securities, the Trustee intends to furnish
tax information to Holders of such Securities in accordance with the rules
described in the preceding paragraph.
Special Election
For any Security acquired on or after April 4, 1994, a Holder may elect to
include in gross income all 'interest' that accrues on the Security by using a
constant yield method. For purposes of the election, the term 'interest'
includes stated interest, acquisition discount, original issue discount, de
minimis original issue discount, market discount, de minimis market discount and
unstated interest as adjusted by any amortizable bond premium or acquisition
premium. A Holder should consult its own tax advisor regarding the time and
manner of making and the scope of the election and the implementation of the
constant yield method.
BACKUP WITHHOLDING
Distributions of interest and principal, as well as distributions of
proceeds from the sale of Securities, may be subject to the 'backup withholding
tax' under section 3406 of the Code at a rate of 31% if recipients of such
distributions fail to furnish to the payor certain information, including their
taxpayer identification numbers, or
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otherwise fail to establish an exemption from such tax. Any amounts deducted and
withheld from a distribution to a recipient would be allowed as a credit against
such recipient's federal income tax. Furthermore, certain penalties may be
imposed by the IRS on a recipient of distributions that is required to supply
information but that does not do so in the proper manner.
FOREIGN INVESTORS
Grantor Trust Securities and REMIC Regular Securities
Distributions made on a Grantor Trust Security or a REMIC Regular Security
to, or on behalf of, a Holder that is not a U.S. Person generally will be exempt
from U.S. federal income and withholding taxes. The term 'U.S. Person' means a
citizen or resident of the United States, a corporation, partnership or other
entity created or organized in or under the laws of the United States or any
political subdivision thereof, or an estate or trust that is subject to U.S.
federal income tax regardless of the source of its income. This exemption is
applicable provided (a) the Holder is not subject to U.S. tax as a result of a
connection to the United States other than ownership of the Security, (b) the
Holder signs a statement under penalties of perjury that certifies that such
Holder is not a U.S. Person, and provides the name and address of such Holder,
and (c) the last U.S. Person in the chain of payment to the Holder receives such
statement from such Holder or a financial institution holding on its behalf and
does not have actual knowledge that such statement is false. Holders should be
aware that the IRS might take the position that this exemption does not apply to
a Holder that also owns 10% or more of the REMIC Residual Securities of any
REMIC trust, or to a Holder that is a 'controlled foreign corporation' described
in section 881(c)(3)(C) of the Code.
REMIC Residual Securities
Amounts distributed to a Holder of a REMIC Residual Security that is a not
a U.S. Person generally will be treated as interest for purposes of applying the
30% (or lower treaty rate) withholding tax on income that is not effectively
connected with a U.S. trade or business. Temporary Treasury Regulations clarify
that amounts not constituting excess inclusions that are distributed on a REMIC
Residual Security to a Holder that is not a U.S. Person generally will be exempt
from U.S. federal income and withholding tax, subject to the same conditions
applicable to distributions on Grantor Trust Securities and REMIC Regular
Securities, as described above, but only to the extent that the obligations
directly underlying the REMIC Trust that issued the REMIC Residual Security
(e.g., Mortgage Loans or regular interests in another REMIC) were issued after
July 18, 1984. In no case will any portion of REMIC income that constitutes an
excess inclusion be entitled to any exemption from the withholding tax or a
reduced treaty rate for withholding. See '--REMIC Securities--Taxation of
Holders of REMIC Residual Securities--Excess Inclusions.'
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 essentially the same 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').
Certain employee benefit plans, such as governmental plans (as defined in
Section 3(32) of ERISA), are not subject to the ERISA requirements discussed
herein. Accordingly, assets of such plans may be invested in Securities 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 tran saction rules set forth in section
503 of the Code.
Section 404 of ERISA imposes 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.
In addition, Section 406 of ERISA and section 4975 of the Code prohibit a broad
range of transactions involving assets of ERISA Plans and Tax-Favored Plans
(collectively, 'Plans') and persons
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('Parties in Interest' under ERISA or 'Disqualified Persons' under the Code) who
have certain specified relationships to the Plans, unless a statutory or
administrative exemption is available. Certain Parties in Interest (or
Disqualified Persons) that participate in a prohibited transaction may be
subject to a penalty (or an excise tax) imposed pursuant to Section 502(i) of
ERISA or section 4975 of the Code, unless a statutory or administrative
exemption is available.
PLAN ASSET REGULATIONS
A Plan's investment in Securities may cause the Mortgage Loans included in
a Mortgage Pool to be deemed Plan assets. The U.S. Department of Labor (the
'DOL') has promulgated regulations (the 'DOL Regulations') concerning whether or
not a Plan's assets would be deemed to include an interest in the underlying
assets of an entity (such as a Trust Estate), for purposes of applying the
general fiduciary responsibility provisions of ERISA and the prohibited
transaction provisions of ERISA and the Code, when a Plan acquires an 'equity
interest' (such as a Security) in such entity. Because of the factual nature of
certain of the rules set forth in the DOL Regulations, an investing Plan's
assets either may be deemed to include an interest in the assets of a Trust
Estate or may be deemed merely to include its interest in the Securities.
Therefore, Plans should not acquire or hold Securities in reliance upon the
availability of any exception under the DOL Regulations.
The prohibited transaction provisions of Section 406 of ERISA and section
4975 of the Code may apply to a Trust Estate and cause the Sponsor, the Master
Servicer, any Sub-Servicer, the Trustee, the obligor under any Credit
Enhancement mechanism or certain affiliates thereof, to be considered or become
Parties in Interest or Disqualified Persons with respect to an investing Plan.
If so, the acquisition or holding of Securities by or on behalf of the investing
Plan could also give rise to a prohibited trans action under ERISA and the Code,
unless some statutory or administrative exemption is available. Securities
acquired by a Plan would be assets of that Plan. Under the DOL Regulations, the
Trust Estate, including the Mortgage Loans and the other assets held in the
Trust Estate, may also be deemed to be assets of each Plan that acquires
Securities. Special caution should be exercised before the assets of a Plan are
used to acquire a Security in such circumstances, especially if, with respect to
such assets, the Sponsor, the Master Servicer, any Sub-Servicer, the Trustee,
the obligor under any Credit Enhancement mechanism or an affiliate thereof
either (i) has investment discretion with respect to the investment of Plan
assets; or (ii) has authority or responsibility to give (or regularly gives)
investment advice with respect to Plan assets for a fee pursuant to an agreement
or understanding that such advice will serve as a primary basis for investment
decisions with respect to such assets.
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 (in the manner described above), is
a fiduciary of the investing Plan. If the Mortgage Loans were to constitute Plan
assets, then any party exercising management or discretionary control regarding
those assets may be deemed to be a Plan 'fiduciary,' and thus subject to the
fiduciary requirements of ERISA and the prohibited transaction provisions of
ERISA and section 4975 of the Code with respect to the investing Plan. In
addition, if the Mortgage Loans were to constitute Plan assets, then the
acquisition or holding of Securities by a Plan, as well as the operation of the
Trust Estate, may constitute or involve a prohibited transaction under ERISA and
the Code.
PROHIBITED TRANSACTION CLASS EXEMPTION
The DOL has issued an administrative exemption, Prohibited Transaction
Class Exemption 83-1 ('PTCE 83-1'), which generally exempts from the prohibited
transaction provisions of section 406(a) of ERISA, and from the excise taxes
imposed by sections 4975(a) and (b) of the Code by reason of section
4975(c)(1)(A) through (D) of the Code, certain transactions involving
residential mortgage pool investment trusts relating to the purchase, sale and
holding of securities in the initial issuance of Securities and the servicing
and operation of 'mortgage pools' (as defined below). PTCE 83-1 permits, subject
to certain general and specific conditions, transactions which might otherwise
be prohibited between Plans and Parties in Interest (or Disqualified Persons)
with respect to those Plans, related to the origination, maintenance and
termination of mortgage pools and the acquisition and holding of certain
mortgage pool pass-through Securities representing interests in such mortgage
pools by Plans, whether or not the Plan's assets would be deemed to include an
ownership interest in the mortgage loans in the mortgage pool. PTCE 83-1 is not
available for mortgage pools that include Cooperative Loans and does not provide
an exemption for Subordinate Securities.
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PTCE 83-1 defines the term 'mortgage pool' as 'an investment pool the
corpus of which (1) is held in trust; and (2) consists solely of (a) interest
bearing obligations secured by either first or second mortgages or deeds of
trust on one- to four-family residential property; (b) property which had
secured obligations and which has been acquired by foreclosure; and (c)
undistributed cash.' The Sponsor expects that each pool of Mortgage Loans (other
than pools including Junior Lien Loans which are not in the second lien
position, Cooperative Loans or Multi-Family Loans) will be a 'mortgage pool'
within the meaning of PTCE 83-1.
PTCE 83-1 defines the term 'mortgage pool pass-through certificate' as a
'certificate representing a beneficial undivided fractional interest in a
mortgage pool and entitling the holder of such certificate to pass-through
payment of principal and interest from the pooled mortgage loans, less any fees
retained by the pool sponsor.' The Sponsor has been advised that, for purposes
of applying PTCE 83-1, the term 'mortgage pool pass-through certificate' would
include (i) Securities representing interests in a Trust Estate consisting of
Mortgage Loans issued in a series consisting of only a single class of
Securities; and (ii) Senior Securities representing interests in a Trust Estate
consisting of Mortgage Loans issued in a series in which there is only one class
of Senior Securities; provided that the Securities described in clauses (i) and
(ii) evidence the beneficial ownership of a specified portion of both future
interest payments and future principal payments with respect to the Mortgage
Loans.
It is not clear whether all types of Securities that may be offered
hereunder would be 'mortgage pass-through certificates' for purposes of applying
PTCE 83-1, including, but not limited to, (a) a class of Securities that
evidences the beneficial ownership of interest payments only or principal
payments only, disproportionate interest and principal payments, or nominal
principal or interest payments, such as the Strip Securities; or (b) Securities
in a series including classes of Securities which differ as to timing,
sequential order, rate or amount of distributions of principal or interest or
both, or as to which distributions of principal or interest or both on any class
may be made upon the occurrence of specified events, in accordance with a
schedule or formula, or on the basis of collections from designated portions of
the Mortgage Pool; or (c) Securities evidencing an interest in a Trust Estate as
to which two or more REMIC elections have been made; or (d) a series including
other types of multiple classes. Accordingly, until further clarification by the
DOL, Plans should not acquire or hold Securities representing interests
described in this paragraph in reliance upon the availability of PTCE 83-1
without first consulting with their counsel regarding the application of PTCE
83-1 to the proposed acquisition and holding of such Securities.
PTCE 83-1 sets forth three general conditions that must be satisfied for
any transaction involving the purchase, sale and holding of 'mortgage pool
pass-through certificates' and the servicing and operation of the 'mortgage
pool' to be eligible for exemption: (1) the pool trustee must not be an
affiliate of the pool sponsor; (2) a system of insurance or other protection for
the pooled mortgage loans and property securing such loans, and for indemnifying
securityholders against reductions in pass-through payments due to property
damage or defaults in loan payments in an amount not less than the greater of 1%
of the aggregate principal balance of all covered pooled mortgages, or the
principal balance of the largest covered mortgage, must be maintained; and (3)
the amount of the payment retained by the pool sponsor together with other funds
inuring to its benefit must be limited to not more than adequate consideration
for forming the mortgage pools plus reasonable compensation for services
provided by the pool sponsor to the mortgage pool. PTCE 83-1 also imposes
additional specific conditions for certain types of transactions involving an
investing Plan and for situations in which the Parties in Interest or
Disqualified Persons are fiduciaries.
The Prospectus Supplement for a series will set forth whether the Trustee
in respect of that series is affiliated with the Sponsor. If the Credit
Enhancement mechanism for a series of Securities constitutes a system of
insurance or other protection within the meaning of PTCE 83-1 and is maintained
in an amount not less than the greater of 1% of the aggregate principal balance
of the Mortgage Loans or the principal balance of the largest Mortgage Loan,
then the Sponsor has been advised that the second general condition referred to
above will be satisfied. The Sponsor will not receive total compensation for
forming and providing services to the Mortgage Pools which will be more than
adequate consideration. Each Plan fiduciary responsible for making the
investment decision whether to acquire or hold Securities must make its own
determination as to whether (i) the Securities constitute 'mortgage pool pass
through certificates' for purposes of applying PTCE 83-1, (ii) the second and
third general conditions will be satisfied, and (iii) the specific conditions,
not discussed herein, of PTCE 83-1 have been satisfied.
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It should be noted that in promulgating PTCE 83-1 and its predecessor, the
DOL did not have under its consideration interests in pools of the exact nature
described herein. There are other class and individual prohibited transaction
exemptions issued by the DOL that could apply to a Plan's acquisition or holding
of Securities. There can be no assurance that any of those exemptions will apply
with respect to any particular Plan that acquires or holds Securities or, even
if all of the conditions specified therein were satisfied, that the exemption
would apply to all transactions involving the Trust Estate. The related
Prospectus Supplement under 'ERISA Considerations' may contain additional
information regarding the application of PTCE 83-1, or other prohibited
transaction exemptions that may be available, with respect to the series offered
thereby.
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 within the meaning of Section 512 of the Code. All 'excess inclusions' of
a REMIC allocated to a REMIC Residual Security held by a Tax Exempt Investor
will be considered unrelated business taxable income and thus will be subject to
federal income tax. See 'Certain Federal Income Tax Consequences--REMIC
Securities--Taxation of Holders of REMIC Residual Securities--Excess
Inclusions.'
CONSULTATION WITH COUNSEL
Any Plan fiduciary that proposes to cause a Plan to acquire or hold
Securities should consult with its counsel with respect to the potential
applicability of the fiduciary responsibility provisions of ERISA and the
prohibited transaction provisions of ERISA and the Code to the proposed
investment and the availability of PTCE 83-1 or any other prohibited transaction
exemption.
LEGAL INVESTMENT MATTERS
Certain classes of Securities offered hereby and by the related Prospectus
Supplement will constitute 'mortgage related securities' for purposes of the
Secondary Mortgage Market Enhancement Act of 1984 ('SMMEA') so long as they are
rated in at least the second highest rating category by any Rating Agency, and
as such may be legal investments for persons, trusts, corporations,
partnerships, associations, business trusts and business entities (including
depository institutions, life insurance companies and pension funds) created
pursuant to or existing under the laws of the United States or of any State
whose authorized investments are subject to state regulation to the same extent
that, under applicable law, obligations issued by or guaranteed as to principal
and interest by the United States or any agency or instrumentality thereof
constitute legal investments for such entities. Under SMMEA, if a State enacted
legislation on or prior to October 3, 1991 specifically limiting the legal
investment authority of any such entities with respect to 'mortgage related
securities,' such securities will constitute legal investments for entities
subject to such legislation only to the extent provided therein. Certain States
have enacted legislation which overrides the preemption provisions of SMMEA.
SMMEA provides, however, that in no event will the enactment of any such
legislation affect the validity of any contractual commitment to purchase, hold
or invest in 'mortgage related securities,' or require the sale or other
disposition of such securities, so long as such contractual commitment was made
or such securities acquired prior to the enactment of such legislation.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal with 'mortgage
related securities' without limitation as to the percentage of their assets
represented thereby, federal credit unions may invest in such securities, and
national banks may purchase such securities for their own account without regard
to the limitations generally applicable to investment securities set forth in 12
U.S.C. 24 (Seventh), subject in each case to such regulations as the applicable
federal regulatory authority may prescribe.
The Federal Financial Institutions Examination Council has adopted a
supervisory policy statement (the 'Policy Statement'), applicable to all
depository institutions, setting forth guidelines for and significant
restrictions on investments in 'high-risk mortgage securities.' The Policy
Statement has been adopted by the Federal Reserve Board, the Office of the
Comptroller of the Currency, the FDIC and the Office of Thrift Supervision with
an effective date of February 10, 1992. The Policy Statement generally indicates
that a
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mortgage derivative product will be deemed to be high risk if it exhibits
greater price volatility than a standard fixed rate thirty-year mortgage
security. According to the Policy Statement, prior to purchase, a depository
institution will be required to determine whether a mortgage derivative product
that it is considering acquiring is high-risk, and if so, that the proposed
acquisition would reduce the institution's overall interest rate risk. Reliance
on analysis and documentation obtained from a securities dealer or other outside
party without internal analysis by the institution would be unacceptable. There
can be no assurance as to which classes of Securities will be treated as
high-risk under the Policy Statement. In addition, the National Credit Union
Administration has issued regulations governing federal credit union investments
which prohibit investment in certain specified types of securities, which may
include certain classes of Securities. Similar policy statements have been
issued by regulators having jurisdiction over other types of depository
institutions.
There may be other restrictions on the ability of certain investors either
to purchase certain classes of Securities or to purchase any class of Securities
representing more than a specified percentage of the investors' assets. The
Sponsor will make no representations as to the proper characterization of any
class of Securities for legal investment or other purposes, or as to the ability
of particular investors to purchase any class of Securities under applicable
legal investment restrictions. These uncertainties may adversely affect the
liquidity of any class of Securities. 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 Securities of any class constitute legal investments under SMMEA or are
subject to investment, capital or other restrictions, and whether SMMEA has been
overridden in any jurisdiction applicable to such investor.
USE OF PROCEEDS
Unless otherwise specified in the related Prospectus Supplement,
substantially all of the net proceeds to be received from the sale of Securities
will be applied by the Sponsor to finance the purchase of, or to repay short-
term loans incurred to finance the purchase of, the Mortgage Loans underlying
the Securities or will be used by the Sponsor for general corporate purposes.
The Sponsor expects that it will make additional sales of securities similar to
the Securities 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 Sponsor, prevailing interest rates,
availability of funds and general market conditions.
METHODS OF DISTRIBUTION
The Securities 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 public offering or
purchase price of such series and the net proceeds to the Sponsor from such
sale.
The Sponsor intends that Securities 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 a particular series of
Securities 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 Sponsor with institutional investors through
dealers; and
3. By direct placements by the Sponsor with institutional investors.
In addition, if specified in the related Prospectus Supplement, a series of
Securities may be offered in whole or in part in exchange for the Mortgage Loans
(and other assets, if applicable) that would comprise the Mortgage Pool in
respect of such Securities.
If underwriters are used in a sale of any Securities (other than in
connection with an underwriting on a best efforts basis), such Securities 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
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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 Sponsor
whose identities and relationships to the Sponsor will be as set forth in the
related Prospectus Supplement. The managing underwriter or underwriters with
respect to the offer and sale of a particular series of Securities will be set
forth on the cover of the Prospectus Supplement relating to such series and the
members of the underwriting syndicate, if any, will be named in such Prospectus
Supplement.
In connection with the sale of the Securities, underwriters may receive
compensation from the Sponsor or from purchasers of the Securities in the form
of discounts, concessions or commissions. Underwriters and dealers participating
in the distribution of the Securities may be deemed to be underwriters in
connection with such Securities, and any discounts or commissions received by
them from the Sponsor and any profit on the resale of Securities by them may be
deemed to be underwriting discounts and commissions under the Securities Act of
1933, as amended. The Prospectus Supplement will describe any such compensation
paid by the Sponsor.
It is anticipated that the underwriting agreement pertaining to the sale of
any series of Securities 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 Securities if any are purchased (other than in
connection with an underwriting on a best efforts basis) and that, in limited
circumstances, the Sponsor will indemnify the several underwriters and the
underwriters will indemnify the Sponsor against certain civil liabilities,
including liabilities under the Securities Act of 1933, as amended, 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 Sponsor and purchasers of
Securities of such series.
The Sponsor anticipates that the Securities offered hereby will be sold
primarily to institutional investors. Purchasers of Securities, including
dealers, may, depending on the facts and circumstances of such purchases, be
deemed to be 'underwriters' within the meaning of the Securities Act of 1933, as
amended, in connection with reoffers and sales by them of Securities. Holders of
Securities should consult with their legal advisors in this regard prior to any
such reoffer or sale.
LEGAL MATTERS
Certain legal matters will be passed upon for the Sponsor by Dewey
Ballantine, New York, New York and by the office of the general counsel of the
Sponsor.
FINANCIAL INFORMATION
The Sponsor has determined that its financial statements are not material
to the offering made hereby. However, any prospective purchaser who desires to
review financial information concerning the Sponsor will be provided by the
Sponsor upon request with a copy of the most recent financial statements of the
Sponsor.
A Prospectus Supplement may contain the financial statements of the related
Credit Enhancer, if any.
ADDITIONAL INFORMATION
This Prospectus, together with the Prospectus Supplement for each series of
Securities, contains a summary of the material terms of the applicable exhibits
to the Registration Statement and the documents referred to herein and therein.
Copies of such exhibits are on file at the offices of the Securities and
Exchange Commission in Washington, D.C., and may be obtained at rates prescribed
by the Commission upon request to the Commission and may be inspected, without
charge, at the Commission's offices.
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INDEX OF PRINCIPAL DEFINITIONS
<TABLE>
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<S> <C>
Accounts.............................................................. 41
Accrual Securities.................................................... 6
Actuarial Loans....................................................... 20
ADVANTA Parent........................................................ 56
Affiliated Originators................................................ 4
Approved Guidelines................................................... 9
APR................................................................... 21
ARM Loans............................................................. 16
Balloon Amount........................................................ 26
Balloon Loans......................................................... 14
Balloon Payments...................................................... 19
Bankruptcy Bond....................................................... 52
Bankruptcy Loss....................................................... 49
Bankruptcy Loss Amount................................................ 49
Base Servicing Fee.................................................... 56
Book-Entry Securities................................................. 37
Bulk Acquisition...................................................... 9
Bulk Guidelines....................................................... 28
Buydown Account....................................................... 19
Buydown Agreement..................................................... 43
Buydown Funds......................................................... 19
Buydown Mortgage Loans................................................ 19
Buydown Period........................................................ 19
Cede.................................................................. 12
Certificates.......................................................... 5
Closing Date.......................................................... 40
Code.................................................................. 72
Colonial.............................................................. 56
CLTV.................................................................. 21
Compensating Interest................................................. 45
Conduit Participants.................................................. 31
Contracts............................................................. 23
Conventional Loans.................................................... 18
Convertible Mortgage Loan............................................. 26
Cooperative Loans..................................................... 25
Cooperative Notes..................................................... 25
Credit Enhancement.................................................... 50
Credit Enhancer....................................................... 18
Cut-Off Date.......................................................... 21
Date of Payment Loans................................................. 20
Debt Securities....................................................... 11
</TABLE>
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<TABLE>
<CAPTION>
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<S> <C>
Debt Service Reduction................................................ 52
Defaulted Mortgage Loss............................................... 50
Deferred Interest..................................................... 14
Deficient Valuation................................................... 52
Deleted Mortgage Loan................................................. 33
Delinquency Advances.................................................. 45
Designated Depository Institution..................................... 41
Detailed Description.................................................. 18
Determination Date.................................................... 45
Direct or Indirect Participants....................................... 17
Disqualified Persons.................................................. 85
Distribution Account.................................................. 44
DOL................................................................... 85
DOL Regulations....................................................... 85
DTC................................................................... 12
Due Date.............................................................. 41
Eligible Investments.................................................. 42
Equity Securities..................................................... 6
ERISA................................................................. 11
ERISA Plans........................................................... 85
Exchange Act.......................................................... 12
Extraordinary Losses.................................................. 50
FDIC.................................................................. 31
Federal Corporations.................................................. 31
FHA................................................................... 23
FHLMC................................................................. 14
Financial Guaranty Insurance Policy................................... 52
Financial Guaranty Insurer............................................ 52
FIRREA................................................................ 31
Fixed-Income Securities............................................... 6
FNMA.................................................................. 14
Forward Purchase Agreement............................................ 9
Fraud Loss............................................................ 49
Fraud Loss Amount..................................................... 49
Funding Period........................................................ 40
Garn-St. Germain Act.................................................. 70
Graduated Payments.................................................... 19
Grantor Trust Estate.................................................. 72
Grantor Trust Fractional Interest Security............................ 73
Grantor Trust Securities.............................................. 11
Grantor Trust Strip Security.......................................... 73
Holder................................................................ 72
</TABLE>
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<TABLE>
<CAPTION>
PAGE
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<S> <C>
Home Improvement Loans................................................ 23
Indenture............................................................. 5
Indenture Trustee..................................................... 5
Index................................................................. 26
Indirect Participant.................................................. 37
Insurance Paying Agent................................................ 52
Insurance Proceeds.................................................... 41
Insured Payment....................................................... 52
Interest Rate......................................................... 6
Investment Company Act................................................ 8
IRAs.................................................................. 84
IRS................................................................... 74
Junior Lien Loans..................................................... 22
Letter of Credit...................................................... 51
Letter of Credit Bank................................................. 51
Liquidated Mortgage Loan.............................................. 15
Liquidation Proceeds.................................................. 15
Lockout Periods....................................................... 19
Loan Purchase Price................................................... 32
LTV................................................................... 21
Manufactured Homes.................................................... 24
Manufacturer's Invoice Price.......................................... 21
Master Commitments.................................................... 30
Master Servicer....................................................... 2
Master Servicing Fee.................................................. 56
Modified Loans........................................................ 26
Monthly Pay........................................................... 18
Mortgages............................................................. 8
Mortgage Assets....................................................... 18
Mortgage Asset Schedule............................................... 18
Mortgage Loans........................................................ 1
Mortgage Notes........................................................ 25
Mortgage Pool......................................................... 1
Mortgage Pool Insurance Policy........................................ 51
Mortgage Pool Pass-Through Certificate................................ 86
Mortgage Rate......................................................... 19
Mortgaged Properties.................................................. 18
Mortgagor............................................................. 14
Multi-family Loans.................................................... 23
Net Liquidation Proceeds.............................................. 41
Net Mortgage Rate..................................................... 62
Note Margin........................................................... 26
</TABLE>
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<TABLE>
<CAPTION>
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<S> <C>
Notes................................................................. 5
Originators........................................................... 1
Originator's Retained Yield........................................... 25
Participants.......................................................... 37
Parties in Interest................................................... 85
Partnership Interests................................................. 12
Pass-Through Rate..................................................... 44
Paying Agent.......................................................... 43
Payment Date.......................................................... 7
Percentage Interest................................................... 43
Physical Certificates................................................. 37
Plan.................................................................. 11
Plans................................................................. 85
Policy Statement...................................................... 87
Pool Factor........................................................... 46
Pool Insurer.......................................................... 43
Pooling and Servicing Agreement....................................... 5
Pre-Funding Account................................................... 9
Premium Security...................................................... 83
Prepayment Assumption................................................. 81
Principal Prepayments................................................. 41
PTCE 83-1............................................................. 85
Purchase Obligation................................................... 13
Qualified Replacement Mortgage........................................ 33
Qualified Retirement Plans............................................ 84
Rating Agencies....................................................... 12
Realized Loss......................................................... 49
Record Date........................................................... 7
Relief Act............................................................ 17
REMIC................................................................. 2
REMIC Regular Securities.............................................. 11
REMIC Regulations..................................................... 74
REMIC Residual Securities............................................. 11
REMIC Securities...................................................... 72
REMIC Trust........................................................... 74
Remittance Date....................................................... 42
Remittance Period..................................................... 7
REO Property.......................................................... 48
Reserve Fund.......................................................... 52
Revolving Credit Line Loans........................................... 19
RTC................................................................... 31
Rule of 78's.......................................................... 20
</TABLE>
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<TABLE>
<CAPTION>
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<S> <C>
Rule of 78's Loans.................................................... 20
Securities............................................................ 1
Securityholders....................................................... 1
Security Registrar.................................................... 37
Senior Lien........................................................... 21
Senior Securities..................................................... 6
Servicer.............................................................. 56
Servicing Advance..................................................... 45
Servicing Agreement................................................... 5
Servicing Fee......................................................... 56
Settlement Date....................................................... 75
Single Family Loans................................................... 23
SMMEA................................................................. 11
Special Hazard Amount................................................. 49
Special Hazard Insurance Policy....................................... 51
Special Hazard Insurer................................................ 51
Special Hazard Loss................................................... 50
Sponsor............................................................... 1
Sponsor's Guidelines.................................................. 9
Sponsor's Originator Guide............................................ 9
Statistic Calculation Date............................................ 21
Strip Securities...................................................... 6
Sub-Servicers......................................................... 2
Sub-Servicing Account................................................. 40
Sub-Servicing Agreement............................................... 32
Subordinate Amount.................................................... 50
Subordinate Securities................................................ 6
Subsequent Mortgage Loans............................................. 9
Tax Exempt Investor................................................... 87
Tax-Favored Plans..................................................... 84
Title V............................................................... 71
Title VIII............................................................ 71
Trust................................................................. 1
Trust Agreement....................................................... 5
Trust Estate.......................................................... 1
Trustee............................................................... 4
UCC................................................................... 37
Unaffiliated Originators.............................................. 4
U.S. Person........................................................... 84
</TABLE>
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================================================================================
No dealer, salesperson or other person has been authorized to give any
information or to make any representations not contained in this Prospectus
Supplement and the Prospectus and, if given or made, such information or
representations must not be relied upon as having been authorized by the Sponsor
or by the Underwriter. This Prospectus Supplement and the Prospectus do not
constitute an offer to sell, or a solicitation of an offer to buy, the
securities offered hereby to anyone in any jurisdiction in which the person
making such offer or solicitation is not qualified to do so to anyone to whom it
is unlawful to make any such offer or solicitation. Neither the delivery of this
Prospectus Supplement nor any sale made hereunder shall, under any
circumstances, create an implication that information herein or therein is
correct as of any time since the date of this Prospectus Supplement or the
Prospectus.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
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<S> <C>
PROSPECTUS SUPPLEMENT
Available Information................................................. S-2
Reports to the Owners................................................. S-2
Summary............................................................... S-3
Risk Factors.......................................................... S-18
The Master Servicer................................................... S-21
The Originator........................................................ S-22
The Originator's Home Equity Revolving
Line of Credit Program.............................................. S-22
Description of the Mortgage Loans..................................... S-24
Maturity and Prepayment Considerations................................ S-32
Pool Factor and Trading Information................................... S-33
Description of the Class A Certificates............................... S-34
Use of Proceeds....................................................... S-49
Certain Federal Income Tax Consequences............................... S-49
State Taxes........................................................... S-52
ERISA Considerations.................................................. S-52
Legal Investment Considerations....................................... S-52
Underwriting.......................................................... S-52
Legal Matters......................................................... S-53
Experts............................................................... S-53
Ratings............................................................... S-53
Index of Defined Terms................................................ S-54
Global Clearance, Settlement and Tax Documentation Procedures.........Annex I
PROSPECTUS
Summary of Prospectus................................................. 4
Risk Factors.......................................................... 13
The Trusts............................................................ 18
The Mortgage Pools.................................................... 25
Mortgage Loan Program................................................. 27
Description of the Securities......................................... 35
Subordination......................................................... 49
Description of Credit Enhancement..................................... 50
Hazard Insurance: Claims Thereunder................................... 55
The Sponsor and the Transferor........................................ 55
The Master Servicer................................................... 56
The Pooling and Servicing Agreement................................... 56
Yield Considerations.................................................. 62
Maturity and Prepayment Considerations................................ 63
Certain Legal Aspects of Mortgage Loans and Related Matters........... 65
Certain Federal Income Tax Consequences............................... 72
ERISA Considerations.................................................. 84
Legal Investment Matters.............................................. 87
Use of Proceeds....................................................... 88
Methods of Distribution............................................... 88
Legal Matters......................................................... 89
Financial Information................................................. 89
Additional Information................................................ 89
Index of Principal Definitions........................................ 90
</TABLE>
Advanta Revolving Home
Equity Loan Trust
1996-A
$50,000,000 Class A
Certificates
Revolving Home Equity Loan
Asset-Backed Certificates
Series 1996-A
------------------------------------------
PROSPECTUS SUPPLEMENT
------------------------------------------
LEHMAN BROTHERS
November 15, 1996
================================================================================
