As filed with the Securities and Exchange Commission on May 29, 1997
Registration No.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM S-3
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
HEADLANDS MORTGAGE SECURITIES INC.
(Exact name of registrant as specified in its Charter)
Delaware 68-039-7342
(State of Incorporation) (I.R.S. Employer Identification No.)
700 Larkspur Landing Circle
Suite 240
Larkspur, California 94939
(415) 925-5442
(Address, including zip code, and telephone number, including area code, of
principal executive offices)
-----------------
Peter T. Paul
Headlands Mortgage Securities Inc.
700 Larkspur Landing Circle
Suite 240
Larkspur, California 94939
(415) 461-6790
(Name, address, including zip code, and telephone number, including area
code, of agent for service)
----------------
With a copy to:
Phillip R. Pollock, Esq. Michael P. Braun, Esq.
Tobin & Tobin Brown & Wood LLP
One Montgomery Street One World Trade Center
San Francisco, California 94104 New York, New York 10048
----------------
Approximate date of commencement of proposed sale to the public:
From time to time on or after the effective date of the registration
statement, as determined by market conditions.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. / /
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities
Act of 1933, other than securities offered only in connection with dividend
or interest reinvestment plans, please check the following box. /x/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b), under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. / /
<TABLE>
CALCULATION OF REGISTRATION FEE
<CAPTION> Proposed Proposed
Amount Maximum Maximum Amount of
Title of Each Class of to be Offering Price Aggregate Registration
Securities to Be Registered Registered Per Unit(1) Offering Fee
Price(1)
<S> <C> <C> <C> <C>
Asset Backed Securities . . . . . . . $1,000,000 100% $1,000,000 $303.03
</TABLE>
(1) Estimated for the purpose of calculating the registration fee.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation, or sale would be
unlawful prior to registration or qualification under the securities laws of
any such State.
SUBJECT TO COMPLETION, DATED MAY 29, 1997
PROSPECTUS SUPPLEMENT
(To Prospectus dated ______________, 199__)
$___________________
(APPROXIMATE)
HOME EQUITY LOAN ASSET BACKED CERTIFICATES, SERIES 199_-_
HEADLANDS MORTGAGE SECURITIES INC.
SPONSOR
(HEADLANDS MORTGAGE COMPANY)
SELLER AND MASTER SERVICER
Each Home Equity Loan Asset Backed Certificate, Series 199_-_
(collectively, the "Certificates") will represent an undivided interest in
the Home Equity Loan Trust 199_-_ (the "Trust Fund") to be formed pursuant to
a Pooling and Servicing Agreement among (Headlands Mortgage Company
("Headlands")), as Seller and Master Servicer, Headlands Mortgage Securities
Inc., as Sponsor, and ( ), as Trustee. The property of the
Trust Fund will include a pool of (adjustable rate) home equity revolving
credit line loans made or to be made in the future (the "HELOCs") under
certain home equity revolving credit line loan agreements and (fixed-rate)
closed-end home equity loans (the "Closed-End Loans" and together with the
HELOCs, the "Mortgage Loans"). The Mortgage Loans are secured by either
first and second deeds of trust or mortgages on one- to four-family
residential properties. See "Index of Defined Terms" on Page S-58 of this
Prospectus Supplement for the location of the definitions of certain
capitalized terms.
The aggregate undivided interest in the Trust Fund represented by the
Certificates will, as of ____________, 199_ (the "Cut-off Date"), represent
approximately __% of the outstanding principal balances of the Mortgage
Loans. The remaining undivided interest in the Trust Fund not represented by
the Certificates (the "Transferor Interest") will initially be equal to
$_________________, which as of the Cut-off Date is _% of the outstanding
principal balances of the Mortgage Loans. Only the Certificates are offered
hereby.
Distributions of principal and interest on the Certificates will be made
on the __________th day of each month or, if such date is not a Business Day,
then on the succeeding Business Day (each, a "Distribution Date"), commencing
___________, 199_. On each Distribution Date, holders of the Certificates
will be entitled to receive, from and to the limited extent of funds
available in the Collection Account (as defined herein), distributions with
respect to interest and principal calculated as set forth under "Summary--
Interest," "Summary--Principal Payments from Principal Collections" and
"Description of the Certificates--Distributions on the Certificates" herein.
The Certificates are not guaranteed by the Sponsor, or any affiliate thereof.
(However, the Certificates will be unconditionally and irrevocably guaranteed
as to the payment of the Guaranteed Distributions (as defined herein) on each
Distribution Date pursuant to the terms of a financial guaranty insurance
policy (the "Policy") to be issued by
(INSURER)
There is currently no market for the Certificates offered hereby and
there can be no assurance that such a market will develop or if it does
develop that it will continue. See "Risk Factors" herein and in the
Prospectus.
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION SET FORTH UNDER
"RISK FACTORS" ON PAGE S-16 HEREIN AND ON PAGE 12 IN THE
ACCOMPANYING PROSPECTUS.
THE CERTIFICATES REPRESENT INTERESTS IN THE TRUST FUND ONLY AND DO
NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF THE SPONSOR,
THE TRUSTEE OR ANY AFFILIATE THEREOF,
EXCEPT TO THE EXTENT PROVIDED HEREIN. NEITHER
THE 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.
<TABLE>
<CAPTION> Proceeds to
Price to Underwriting the
Public (1) Discount(2) Sponsor(3)
<S> <C> <C> <C>
Per Certificate . . . . . . . . . . . . . . . . . . . . . % % %
Total . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ $
</TABLE>
(1) Plus accrued interest, if any, from _______________, 199_.
(2) The Sponsor has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933.
(3) Before deducting expenses, estimated to be $_______________.
The 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 Certificates will be made in book-entry form only
through the facilities of The Depository Trust Company, Cedel Bank, societe
generale, and the Euroclear System on or about ______________, 199_ (the
"Closing Date"). The Certificates will be offered in Europe and the United
States of America.
(UNDERWRITER)
_____________, 199_
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE
CERTIFICATES. SUCH TRANSACTIONS MAY INCLUDE STABILIZING AND THE PURCHASE OF
THE CERTIFICATES TO COVER SYNDICATE SHORT POSITIONS. FOR A DESCRIPTION OF
THESE ACTIVITIES, SEE "UNDERWRITING" HEREIN.
UNTIL NINETY DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL
DEALERS EFFECTING TRANSACTIONS IN THE 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.
----------------
This Prospectus Supplement does not contain complete information about
the offering of the Certificates. Additional information is contained in the
Prospectus dated __________, ____ and investors are urged to read both this
Prospectus Supplement and the Prospectus in full. Sales of the Certificates
may not be consummated unless the purchaser has received both this Prospectus
Supplement and the Prospectus.
The Trustee on behalf of any Trust Fund will provide without charge to
each person to whom this Prospectus Supplement is delivered, on the written
or oral request of such person, a copy of any or all of the documents
referred to in the Prospectus under "Incorporation of Certain Documents by
Reference" that have been or may be incorporated by reference in the
Prospectus (not including exhibits to the information that is incorporated by
reference unless such exhibits are specifically incorporated by reference
into the information that the Prospectus incorporates). Such requests should
be directed to the Corporate Trust Office of the Trustee at _____________,
telephone:_________, facsimile number:_____________, attention:__________.
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 the accompanying Prospectus. Certain
capitalized terms used in the Summary are defined elsewhere in the Prospectus
Supplement or in the Prospectus. See "Index of Defined Terms" on Page S-56
of this Prospectus Supplement and on Page 99 of the Prospectus for the
location of the definitions of certain capitalized terms.
Trust Fund Home Equity Loan Trust 199_-_ (the "Trust Fund") will be
formed pursuant to a pooling and servicing agreement (the
"Agreement") to be dated as of ______________, 199_ (the
"Cut-off Date") among (Headlands Mortgage Company
("Headlands")), as seller and servicer (together with any
successor in such capacity, the "Seller" and the "Master
Servicer", respectively), Headlands Mortgage Securities
Inc., as sponsor (the "Sponsor"), and ( ),
as trustee (the "Trustee"). The property of the Trust Fund
will include: a pool of (adjustable rate) home equity
revolving credit line loans made or to be made in the future
(the "HELOCs"), under certain home equity revolving credit
line loan agreements (the "Credit Line Agreements") and
certain fixed-rate closed-end home equity loans (the
"Closed-End Loans" and together with the HELOCs, the
"Mortgage Loans") made under certain mortgage notes (the
"Mortgage Notes" and together with the Credit Line
Agreements, the "Loan Agreements"). The Mortgage Loans are
secured by either first or second mortgages on residential
properties that are one- to four-family properties (the
"Mortgaged Properties"); the collections in respect of the
Mortgage Loans received after the Cut-off Date (exclusive of
payments in respect of accrued interest due on or prior to
the Cut-off Date; property that secured a Mortgage Loan
which has been acquired by foreclosure or deed in lieu of
foreclosure; an irrevocable and unconditional limited
financial guaranty insurance policy (the "Policy"); an
assignment of the Sponsor's rights under the Purchase
Agreement (as defined herein); rights under certain hazard
insurance policies covering the Mortgaged Properties; and
certain other property, as described more fully under
"Description of the Certificates--General" herein.
The Trust Fund property will include the unpaid principal
balance of each Mortgage Loan as of the Cut-off Date (the
"Cut-off Date Principal Balance") plus, with respect to a
HELOC, any additions thereto as a result of new advances
made pursuant to the applicable Credit Line Agreement (the
"Additional Balances") during the life of the Trust Fund.
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 aggregate Cut-off Date Principal
Balance of the Mortgage Loans is $____________________ (the
"Cut-off Date Pool Balance"). The "Principal Balance" of a
Mortgage Loan (other than a Liquidated Mortgage Loan) on any
day is equal to its Cut-off Date Principal Balance, 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
Loan Agreement prior to such day. The Principal Balance of
a Liquidated Mortgage Loan (as defined herein) after final
recovery of related Liquidation Proceeds (as defined herein)
shall be zero.
Securities Offered Each of the Home Equity Loan Asset Backed Certificates,
Series 199_-_ offered hereby (the "Certificates")
represents an undivided interest in the Trust Fund.
Each Certificate represents the right to receive
payments of interest at the variable rate described
below (the "Certificate Rate"), payable monthly, and
payments of principal at such time and to the extent
provided herein under "Description of the Certificates--
Distributions on the Certificates". The aggregate
undivided interest in the Trust Fund represented by the
Certificates as of the Closing Date will equal
$__________________ (the "Original Invested Amount"),
which represents __% of the Cut-off Date Pool Balance.
The "Original Certificate Principal Balance" will equal
$__________________. Following the Closing Date, the
"Invested Amount" with respect to any date will be an
amount equal to the Original Invested Amount minus (i)
the amount of Investor Principal Collections (as defined
herein) previously distributed to Certificateholders,
and minus (ii) an amount equal to the product of the
Investor Floating Allocation Percentage and the
Liquidation Loss Amounts (each as defined herein). The
Transferor (as described below) will own the remaining
undivided interest (the "Transferor Interest") in the
Mortgage Loans, which is equal to the Pool Balance minus
the Invested Amount and will initially equal
approximately __% of the Cut-off Date Pool Balance. The
Transferor (the "Transferor") as of any date is the
owner of the Transferor Interest which initially will be
the Sponsor.
The Certificates will be issued pursuant to the Agreement.
The principal amount of the outstanding Certificates (the
"Certificate Principal Balance") on any date is equal to the
Original Certificate Principal Balance minus the aggregate
of amounts actually distributed as principal to the
Certificateholders. See "Description of the Certificates"
herein.
Removal of Certain
Mortgage Loans;
Additional Balances In order to permit the Transferor to remove Mortgage
Loans from the Trust Fund at such times, if any, as the
overcollateralization exceeds the level required to
maintain the ratings on the Certificates, on any
Distribution Date the Transferor may, but shall not be
obligated to, remove from the Trust Fund certain
Mortgage Loans without notice to the Certificateholders.
The Transferor is permitted to designate the Mortgage
Loans to be removed. Mortgage Loans so designated will
only be removed upon satisfaction of the following
conditions (i) No Rapid Amortization Event (as defined
herein) has occurred; (ii) the Transferor Interest as of
the Transfer Date (as defined herein) (after giving
effect to such removal) exceeds the Minimum Transferor
Interest (as defined below); (iii) the transfer of any
Mortgage Loans on any Transfer Date during the Managed
Amortization Period (as defined herein) shall not, in
the reasonable belief of the Transferor, cause a Rapid
Amortization Event to occur or an event which with
notice or lapse of time or both would constitute a Rapid
Amortization Event; (iv) the Transferor shall have
delivered to the Trustee a "Mortgage Loan Schedule"
containing a list of all Mortgage Loans remaining in the
Trust Fund after such removal; (v) the Transferor shall
represent and warrant that no selection procedures which
are adverse to the interests of the Certificateholders
or the Certificate Insurer were used by the Transferor
in selecting such Mortgage Loans; (vi) in connection
with the first such retransfer of Mortgage Loans, the
Rating Agencies (as defined herein) shall have been
notified of the proposed transfer and prior to the
Transfer Date shall not have notified the Transferor in
writing that such transfer would result in a reduction
or withdrawal of the ratings assigned to the
Certificates without regard to the Policy; and (vii) the
Transferor shall have delivered to the Trustee and the
Certificate Insurer an officer's certificate confirming
the conditions set forth in clauses (i) through (vi)
above. See "Description of the Certificates--Optional
Transfers of Mortgage Loans to the Transferor" herein.
The "Minimum Transferor Interest" as of any date is an
amount equal to the lesser of (a) __% of the Pool Balance on
such date and (b) the Transferor Interest as of the Closing
Date.
During the term of the Trust Fund, all Additional Balances
will be transferred to and become property of the Trust
Fund. The Pool Balance at any time will generally fluctuate
from day to day because the amount of Additional Balances
and the amount of principal payments with respect to the
Mortgage Loans will usually differ from day to day. Because
the Transferor Interest is equal to the Pool Balance minus
the Invested Amount, the amount of the Transferor Interest
will fluctuate from day to day as draws are made with
respect to the HELOCs and as Principal Collections are
received.
The Mortgage Loans The Mortgage Loans are secured by first and second
mortgages on Mortgaged Properties located in ___ states.
On the Closing Date, (Headlands) will sell the Mortgage
Loans to the Sponsor, pursuant to a purchase agreement
(the "Purchase Agreement").
The percentage of the Cut-off Date Principal Balance of the
Mortgage Loans secured by Mortgaged Properties located in
the states of __________, ________, __________, _______,
______ and ________ is approximately ____%, ____%, ____%,
____%, ____% and ____%, respectively. The "Combined Loan-
to-Value Ratio" of each HELOC is the ratio of (A) the sum of
(i) the maximum amount the borrower was permitted to draw
down under the related Credit Line Agreement (the "Credit
Limit") and (ii) the amounts of any related senior mortgage
loans (computed as of the date of origination of each such
HELOC) to (B) the lesser of (i) the appraised value of the
Mortgaged Property 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. The "Combined Loan-to-Value Ratio" of each
Closed-End Loan is the ratio of (A) the sum of (i) the
original principal balance of such Closed-End Loan and (ii)
the outstanding principal balance as of the date of
execution of the related Loan Agreement of any mortgage loan
or mortgage loans that are senior or equal in priority to
the Closed-End Loan and that is or are secured by the same
Mortgage Property to (B) the lesser of (i) the appraised
value of the Mortgaged Property 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. As of the Cut-off Date the
Combined Loan-to-Value Ratios ranged from ____% to ______%
and, as of the Cut-off Date, the weighted average Combined
Loan-to-Value Ratio of the Mortgage Loans was approximately
____%.
(Interest on each HELOC is payable monthly and computed on
the related daily outstanding Principal Balance for each day
in the billing cycle at a variable rate per annum (with
respect to the HELOCs, the "Loan Rate") equal at any time
(subject to maximum rates, as described herein under
"Description of the Mortgage Loans--Mortgage Loan Terms,"
and further subject to applicable usury limitations) to the
sum of (i) the highest prime rate published in the "Money
Rates" section of The Wall Street Journal and (ii) a Margin
within the range of ____% to ____%). As of the Cut-off
Date, the weighted average Margin was approximately ____%.
Loan Rates on the HELOCs are adjusted monthly on the first
business day of the calendar month preceding the Due Date.
The HELOCS are simple-interest loans under which the payment
is applied first to interest accrued on the Mortgage Loan
through the date of receipt and then to reduction of the
principal balance. A minimum monthly payment is due on each
of the Mortgage Loans. Interest on each Closed-End Loan is
payable monthly at a fixed rate (with respect to the Closed-
End Loans, the "Loan Rate") on the related outstanding
Principal Balance of such Mortgage Loan. The Closed-End
Loans are actuarial loans under which the payment is
allocated to a pre-determined amount of principal and
interest. As to each Closed-End Loan, the "Due Date" is the
first day of each month and for each HELOC, the "Due Date"
is the twenty-fifth day of each month. The Cut-off Date
Principal Balances ranged from $_________ to $__________ and
averaged approximately $__________. Credit Limits under the
HELOCs as of the Cut-off Date ranged from $__________ to
$__________ and averaged approximately $__________. Each
Mortgage Loan was originated in the period from
_______________, 199_ to ________________, 199_. As of the
Cut-off Date, the maximum Credit Limit Utilization Rate (as
defined herein) was 100% and the weighted average Credit
Limit Utilization Rate was approximately ____%. As of the
Cut-off Date, approximately ____% by Cut-off Date Principal
Balance of the Mortgage Loans represented first liens on the
related Mortgaged Properties, while approximately ____% of
the Mortgage Loans represented second liens. The Mortgage
Loans have final scheduled maturities of fifteen years and
twenty-five years. As of the Cut-off Date, the Mortgage
Loans had remaining terms to scheduled maturity ranging from
___ months to ___ months and had a weighted average of
approximately ___ months. See "Description of the Mortgage
Loans" herein.
Denominations The Certificates will be offered for purchase in
denominations of $1,000 and multiples of $1 in excess
thereof. The interest in the Trust Fund evidenced by a
Certificate (the "Percentage Interest") will be equal to
the percentage derived by dividing the denomination of
such Certificate by the Original Certificate Principal
Balance.
Registration of
Certificates The Certificates will initially be issued in book-entry
form. Persons acquiring beneficial ownership interests
in the Certificates ("Certificate Owners") may elect to
hold their Certificate interests through The Depository
Trust Company ("DTC"), in the United States, or Cedel
Bank, societe generale ("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 Certificates are Book-
Entry Certificates (as defined herein), such
Certificates will be evidenced by one or more
Certificates registered in the name of Cede & Co.
("Cede"), as the nominee of DTC or one of the relevant
depositaries (collectively, the "European
Depositaries"). Cross-market transfers between persons
holding directly or indirectly through DTC, on the one
hand, and counterparties holding directly or indirectly
through CEDEL or Euroclear, on the other, will be
effected in DTC through Citibank N.A. ("Citibank") or
The Chase Manhattan Bank ("Chase"), the relevant
depositaries of CEDEL or Euroclear, respectively, and
each a participating member of DTC. The Certificates
will initially be registered in the name of Cede. The
interests of the Certificateholders will be represented
by book entries on the records of DTC and participating
members thereof. No Certificate Owner will be entitled
to receive a definitive certificate representing such
person's interest, except in the event that Definitive
Certificates (as defined herein) are issued under the
limited circumstances described under "Description of
the Certificates--Book-Entry Certificates" herein. All
references in this Prospectus Supplement to any
Certificates reflect the rights of Certificate Owners
only as such rights may be exercised through DTC and its
participating organizations for so long as such
Certificates are held by DTC. See "Risk Factors--Book-
Entry Certificates", "Description of the Certificates--
Book-Entry Certificates" herein and "Annex I" hereto.
Sponsor Headlands Mortgage Securities Inc., a Delaware corporation
and a subsidiary of Headlands Mortgage Company, a closely-
held California S-corporation. The principal executive
offices of the Sponsor are located at 700 Larkspur Landing
Circle, Suite 240, Larkspur, California 94939 (Telephone:
(415) 925-5442). See "The Sponsor" in the Prospectus.
Master Servicer of the Mortgage
Loans
(Headlands Mortgage Company, a closely held California S-
corporation. The principal executive offices of the Master
Servicer are located at 700 Larkspur Landing Circle, Suite
250, Larkspur, California 94939 (Telephone: (415) 461-
6790).) See "Headlands Mortgage Company" herein.
Collections All collections on the Mortgage Loans will generally be
allocated in accordance with the Loan Agreements between
amounts collected in respect of interest and amounts
collected in respect of principal. As to any Distribution
Date, "Interest Collections" will be equal to the amounts
collected during the related Collection Period, including
the portion of Net Liquidation Proceeds (as defined below)
allocated to interest pursuant to the terms of the Loan
Agreements less Servicing Fees for the related Collection
Period.
As to any Distribution Date, "Principal Collections" will be
equal to the sum of (i) the amounts collected during the
related Collection Period, including the portion of Net
Liquidation Proceeds allocated to principal pursuant to the
terms of the Loan Agreements and (ii) any Transfer Deposit
Amounts (as defined herein).
"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 expenses, but not including
the portion, if any, of such amount that exceeds the
Principal Balance of the Mortgage Loan plus any accrued and
unpaid interest thereon to the end of the Collection Period
during which such Mortgage Loan became a Liquidated Mortgage
Loan.
With respect to any Distribution Date, the portion of
Interest Collections allocable to the Certificates
("Investor Interest Collections") will equal the product of
(a) Interest Collections for such Distribution Date and (b)
the Investor Floating Allocation Percentage. With respect
to any Distribution Date, the "Investor Floating Allocation
Percentage" is the percentage equivalent of a fraction
determined by dividing the Invested Amount at the close of
business on the preceding Distribution Date (or at the
Closing Date in the case of the first Distribution Date) by
the Pool Balance at the beginning of the related Collection
Period. The remaining amount of Interest Collections will
be allocated to the Transferor Interest as more fully
described under "Description of the Certificates--
Allocations and Collections" herein.
On each Distribution Date, the Investor Interest Collections
will be applied in the following order of priority: (i) as
payment to the Trustee for its fee for services rendered
pursuant to the Agreement; (ii) as payment for the premium
for the Policy; (iii) as payment for the accrued interest
due and any overdue accrued interest (with interest thereon)
on the Certificate Principal Balance of the Certificates;
(iv) to pay any Investor Loss Amount (as defined herein) for
such Distribution Date; (v) as payment for any Investor Loss
Amount for a previous Distribution Date that was not
previously (a) funded by Investor Interest Collections
allocable to the Certificateholders, (b) absorbed by the
Overcollateralization Amount, (c) funded by amounts on
deposit in the Spread Account or (d) funded by draws on the
Policy; (vi) to reimburse prior draws made from the Policy
(with interest thereon); (vii) to pay principal on the
Certificates until the Invested Amount exceeds the
Certificate Principal Balance by the Required
Overcollateralization Amount, each as defined herein (such
amount, if any, paid pursuant to this clause (vii) being
referred to herein as the "Accelerated Principal
Distribution Amount"); (viii) any other amounts required to
be deposited in an account for the benefit of the
Certificate Insurer and Certificateholders pursuant to the
Agreement or amounts owed to the Certificate Insurer
pursuant to the Insurance Agreement; (ix) certain amounts
that may be required to be paid to the Master Servicer
pursuant to the Agreement; and (x) to the Transferor to the
extent permitted as described under "Description of the
Certificates--Distributions on the Certificates" herein.
Investor Interest Collections available after the payment of
interest on the Certificates may be insufficient to cover
any Investor Loss Amount. If such insufficiency results in
the Certificate Principal Balance exceeding the Invested
Amount, a draw in an amount equal to such difference will be
made on the Policy in accordance with the terms of the
Policy.
The "Overcollateralization Amount" on any date of
determination is the amount, if any, by which the Invested
Amount exceeds the Certificate Principal Balance on such
day. Payments to Certificateholders pursuant to clause
(iii) above will be interest payments on the Certificates.
Payments to Certificateholders pursuant to clauses (iv), (v)
and (vii) will be principal payments on the Certificates and
will therefore reduce the Certificate Principal Balance,
however, payments pursuant to clause (vii) will not reduce
the Invested Amount. The Accelerated Principal Distribution
Amount is not guaranteed by the Policy.
"Liquidation Loss Amount" means with respect to any
Liquidated Mortgage Loan, the unrecovered Principal Balance
thereof at the end of the related Collection Period in which
such Mortgage Loan became a Liquidated Mortgage Loan, after
giving effect to the Net Liquidation Proceeds in connection
therewith. The "Investor Loss Amount" shall be the product
of the Investor Floating Allocation Percentage and the
Liquidation Loss Amount for such Distribution Date. See
"Description of the Certificates--Distributions on the
Certificates" herein.
Principal Collections will be allocated between the
Certificateholders and the Transferor ("Investor Principal
Collections" and "Transferor Principal Collections",
respectively) in accordance with their percentage interests
in the Mortgage Loans of __% and __%, respectively, as of
the Cut-off Date (the "Fixed Allocation Percentage"), but a
lesser amount of Principal Collections may be distributed to
Certificateholders during the Managed Amortization Period,
as described below. The "Investor Fixed Allocation
Percentage" shall be __%.
The Master Servicer will deposit Interest Collections and
Principal Collections in respect of the Mortgage Loans in an
account established for such purpose under the Agreement
(the "Collection Account"). See "Description of the
Certificates--Payments on Mortgage Loans; Deposits to
Collection Account" herein.
Collection Period As to any Distribution Date other than the first
Distribution Date, the "Collection Period" is the
calendar month preceding the month of such Distribution
Date. As to the first Distribution Date, the
"Collection Period" is the period beginning after the
Cut-off Date and ending on the last day of
_____________, 199_.
Interest Interest on the Certificates will be distributed monthly
on the fifteenth day of each month or, if such day is
not a Business Day, then the next succeeding Business
Day (each, a "Distribution Date"), commencing on
______________, 199_, at the Certificate Rate for the
related Interest Period (as defined below). The
"Certificate Rate" for an Interest Period will generally
equal 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 Period (or as of two LIBOR Business
Days prior to the Closing Date, in the case of the first
Interest Period) and (b) ____%.) Notwithstanding the
foregoing, in no event will the amount of interest
required to be distributed in respect of the
Certificates on any Distribution Date exceed a rate
equal to the weighted average of the Loan Rates (net of
the Servicing Fee Rate, the fee payable to the Trustee
and the rate at which the premium payable to the
Certificate Insurer is calculated) weighted on the basis
of the daily balance of each Mortgage Loan during the
related billing cycle prior to the Collection Period
relating to such Distribution Date. Interest on the
Certificates in respect of any Distribution Date will
accrue from the preceding Distribution Date (or in the
case of the first Distribution Date, from the date of
the initial issuance of the Certificates (the "Closing
Date") through the day preceding such Distribution Date
(each such period, an "Interest Period") on the basis of
the actual number of days in the Interest Period and a
360-day year.
Interest payments on the Certificates will be funded from
Investor Interest Collections, any funds on deposit in the
Spread Account and from draws on the Policy. See
"Description of the Certificates" herein.
Principal Payments
from Principal
Collections For the period beginning on the first Distribution Date and,
unless a Rapid Amortization Event (as defined herein) shall
have earlier occurred, ending on the Distribution Date in
_____________, 200_ (the "Managed Amortization Period"), the
amount of Principal Collections payable to
Certificateholders as of each Distribution Date during the
Managed Amortization Period will equal, to the extent funds
are available therefor, the Scheduled Principal Collections
Distribution Amount for such Distribution Date. On any
Distribution Date during the Managed Amortization Period,
the "Scheduled Principal Collections Distribution Amount"
shall equal the lesser of (i) the Maximum Principal Payment
(as defined herein) and (ii) the Alternative Principal
Payment (as defined herein). With respect to any
Distribution Date, the "Maximum Principal Payment" will
equal the product of the Investor Fixed Allocation
Percentage and Principal Collections for such Distribution
Date. With respect to any Distribution Date, the
"Alternative Principal Payment" will equal the greater of
(x) ____% of the Certificate Principal Balance immediately
prior to such Distribution Date and (y) the amount, but not
less than zero, of Principal Collections for such
Distribution Date less the aggregate of Additional Balances
created during the related Collection Period.
Beginning with the first Distribution Date following the end
of the Managed Amortization Period, the amount of Principal
Collections payable to Certificateholders on each
Distribution Date will be equal to the Maximum Principal
Payment. See "Description of the Certificates--
Distributions on the Certificates" herein.
In addition, to the extent funds are available therefor
(including funds available under the Policy), on the
Distribution Date in _____________ 20__, Certificateholders
will be entitled to receive as payment of principal an
amount equal to the outstanding Certificate Principal
Balance.
Distributions of Principal Collections based upon the
Investor Fixed Allocation Percentage may result in
distributions of principal to Certificateholders in amounts
that are greater relative to the declining Pool Balance than
would be the case if the Investor Floating Allocation
Percentage were used to determine the percentage of
Principal Collections distributed in respect of the Invested
Amount. The aggregate distributions of principal to
Certificateholders will not exceed the Original Certificate
Principal Balance.
The Certificate
Insurer (Insurer) (the "Certificate Insurer") is a
insurance company engaged exclusively in the business of
writing financial guaranty insurance, principally in respect
of securities offered in domestic and foreign markets. The
Certificate Insurer's claims-paying ability is rated ____ by
_________________________________________ and _____ by
________________________________________. See "The
Certificate Insurer" in this Prospectus Supplement.
Policy On or before the Closing Date, the Policy will be issued by
the Certificate Insurer pursuant to the provisions of the
Insurance and Indemnity Agreement (the "Insurance
Agreement") to be dated as of _____________, 199_, among the
Seller, the Sponsor, the Master Servicer and the Certificate
Insurer.
The Policy will irrevocably and unconditionally guarantee
payment on each Distribution Date to the Trustee for the
benefit of the Certificateholders the full and complete
payment of (i) the Guaranteed Principal Distribution Amount
(as defined herein) with respect to the Certificates for
such Distribution Date and (ii) accrued and unpaid interest
due on the Certificates (together, the "Guaranteed
Distributions"), with such Guaranteed Distributions having
been calculated in accordance with the original terms of the
Certificates or the Agreement except for amendments or
modifications to which the Certificate Insurer has given its
prior written consent. The effect of the Policy is to
guarantee the timely payment of interest on, and the
ultimate payment of the principal amount of, all of the
Certificates.
The "Guaranteed Principal Distribution Amount" for any
Distribution Date shall be the amount by which the
Certificate Principal Balance (after giving effect to all
other amounts distributable and allocable to principal on
the Certificates on such Distribution Date) exceeds the
Invested Amount for such Distribution Date. In addition,
the Policy will guarantee the payment of the outstanding
Certificate Principal Balance on the Distribution Date in
____________, 20__ (after giving effect to all other amounts
distributable and allocable to principal on such
Distribution Date).
In accordance with the Agreement, the Trustee will be
required to establish and maintain an account (the "Spread
Account") for the benefit of the Certificate Insurer and the
Certificateholders. The Trustee shall deposit the amounts
into the Spread Account as required by the Agreement.
In the absence of payments under the Policy,
Certificateholders will directly bear the credit and other
risks associated with their undivided interest in the Trust
Fund. See "Description of the Certificates--The Policy"
herein.
Overcollateralization
Amount The distribution of Accelerated Principal Distribution
Amounts, if any, to Certificateholders may result in the
Invested Amount being greater than the Certificate Principal
Balance, thereby creating the Overcollateralization Amount.
The Overcollateralization Amount, if any, will be available
to absorb any Investor Loss Amount not covered by Investor
Interest Collections. Payments of Accelerated Principal
Distribution Amounts are not covered by the Policy. Any
Investor Loss Amounts not covered by such
overcollateralization, amounts on deposit in the Spread
Account or Investor Interest Collections will be covered by
draws on the Policy to the extent provided therein.
Record Date The last day preceding a Distribution Date or, if the
Certificates are no longer Book-Entry Certificates, the last
day of the month preceding a Distribution Date.
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 Collection
Account as described under "Description of the
Certificates--Payments on Mortgage Loans; Deposits to
Collection Account" herein. On the third Business Day
prior to each Distribution Date (the "Determination
Date"), the Master Servicer will calculate, and instruct
the Trustee regarding the amounts available to be paid,
as described under "Description of the Certificates--
Payments on Mortgage Loans; Deposits to Collection
Account" herein, to the Certificateholders on such
Distribution Date. See "Description of the
Certificates--Distributions on the Certificates" herein.
With respect to each Collection Period, the Master
Servicer will receive from collections in respect of
interest on the Mortgage Loans, on behalf of itself, a
portion of such collections as a monthly servicing fee
(the "Servicing Fee") in the amount of approximately
____% per annum (the "Servicing Fee Rate") on the
aggregate Principal Balances of the Mortgage Loans as of
the first day of each such Collection Period. See
"Description of the Certificates--Servicing Compensation
and Payment of Expenses" herein. In certain limited
circumstances, the Master Servicer may resign or be
removed, in which event either the Trustee or a third-
party servicer will be appointed as a successor Master
Servicer. See "Description of the Certificates--Certain
Matters Regarding the Master Servicer and the
Transferor" herein.
Final Payment
of Principal;
Termination The Trust Fund will terminate on the Distribution Date
following the later of (A) payment in full of all amounts
owing to the Certificate Insurer and (B) the earliest of (i)
the Distribution Date on which the Certificate Principal
Balance has been reduced to zero, (ii) the final payment or
other liquidation of the last Mortgage Loan in the Trust
Fund, (iii) the optional retransfer to the Transferor of the
Certificates, as described below and (iv) the Distribution
Date in ______________, 20__. The Certificates will be
subject to optional retransfer to the Transferor on any
Distribution Date after the Certificate Principal Balance is
reduced to an amount less than or equal to $________________
(__% of the Original Certificate Principal Balance) and all
amounts due and owing to the Certificate Insurer and
unreimbursed draws on the Policy, together with interest
thereon, as provided under the Insurance Agreement, have
been paid. The retransfer price will be equal to the sum of
the outstanding Certificate Principal Balance and accrued
and unpaid interest thereon at the Certificate Rate through
the day preceding the final Distribution Date. See
"Description of The Certificates--Termination; Retirement of
the Certificates" herein and "The Agreements--Termination;
Optional Termination" in the Prospectus.
In addition, the Trust Fund may be liquidated as a result of
certain events of bankruptcy, insolvency or receivership
relating to the Transferor. See "Description of the
Certificates--Rapid Amortization Events" herein.
Trustee ( ), a ____________________________ (the
"Trustee")will actasTrusteeon behalfoftheCertificateholders.
Mandatory Retransfer
of Certain Mortgage
Loans
The Seller will make certain representations and warranties
in the Agreement with respect to the Mortgage Loans. If the
Seller breaches certain of its representations and
warranties with respect to any Mortgage Loan and such breach
materially and adversely affects the interests of the
Certificateholders or the Certificate Insurer and is not
cured within the specified period, the Mortgage Loan will be
removed from the Trust Fund upon the expiration of a
specified period from the date on which the Seller becomes
aware or receives notice of such breach and will be
reassigned to the Seller. See "Description of the
Certificates--Assignment of Mortgage Loans" herein.
Federal Income Tax
Consequences Subject to the qualifications set forth in "Federal
Income Tax Consequences" herein, special tax counsel to
the Sponsor is of the opinion that, under existing law,
a Certificate will be treated as a debt instrument for
federal income tax purposes as of the Closing Date.
Under the Agreement, the Transferor, the Sponsor and the
Certificateholders will agree to treat the Certificates
as indebtedness for federal income tax purposes.
Furthermore, special tax counsel to the Sponsor is of
the opinion that the Trust Fund will not be treated as
either an association or a publicly traded partnership
taxable as a corporation. See "Federal Income Tax
Consequences" herein and in the Prospectus for
additional information concerning the application of
federal income tax laws.
ERISA
Considerations The acquisition of a Certificate by a pension or other
employee benefit plan (a "Plan") subject to the Employee
Retirement Income Security Act of 1974, as amended
("ERISA"), could, in some instances, result in a
"prohibited transaction" or other violation of the
fiduciary responsibility provisions of ERISA and Code
Section 4975. Certain exemptions from the prohibited
transaction rules could be applicable to the acquisition
of the Certificates. Any Plan fiduciary considering
whether to purchase any Certificate on behalf of a Plan
should consult with its counsel regarding the
applicability of the provisions of ERISA and the Code.
See "ERISA Considerations" herein and in the Prospectus.
Legal Investment
Considerations The 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 solely on first mortgages may not be legally
authorized to invest in the Certificates. See "Legal
Investment Considerations" herein and "Legal Investment"
in the Prospectus.
Certificate Rating It is a condition to the issuance of the Certificates
that they be rated "___" by _____ and "___" by _________
(each a "Rating Agency"). In general, ratings address
credit risk and do not address the likelihood of
prepayments. See "Ratings" herein and "Risk Factors--
Rating of the Securities" in the Prospectus.
Risk Factors For a discussion of certain risks associated with an
investment in the Certificates, see "Risk Factors" on
Page S-16 herein and on page 12 in the Prospectus.
RISK FACTORS
Investors should consider the following risks in connection with the
purchase of Certificates.
Risk of Reduced Liquidity Because of Owning Book-Entry Certificates.
Issuance of the Certificates in book-entry form may reduce the liquidity of
such Certificates in the secondary trading market since investors may be
unwilling to purchase Certificates for which they cannot obtain physical
certificates. See "Description of the Certificates--Book-Entry Certificates"
herein and "Risk Factors-Book-Entry Registration" in the Prospectus.
Since transactions in the Certificates can be effected only through DTC,
CEDEL, Euroclear, participating organizations, indirect participants and
certain banks, the ability of a Certificate Owner to pledge a Certificate to
persons or entities that do not participate in the DTC, CEDEL or Euroclear
system may be limited due to lack of a physical certificate representing the
Certificates. See "Description of the Certificates--Book-Entry Certificates"
herein and "Risk Factors-Book-Entry Registration" in the Prospectus.
Certificate Owners may experience some delay in their receipt of
distributions of interest and principal on the Certificates since such
distributions will be forwarded by the Trustee to DTC and DTC will credit
such distributions to the accounts of its Participants (as defined herein)
which will thereafter credit them to the accounts of Certificate Owners
either directly or indirectly through indirect participants. Certificate
Owners will not be recognized as Certificateholders as such term is used in
the Agreement, and Certificate Owners will be permitted to exercise the
rights of Certificateholders only indirectly through DTC and its
Participants. See "Description of the Certificates--Book-Entry Certificates"
herein and "Risk Factors-Book-Entry Registration" in the Prospectus.
Cash Flow Considerations and Risks of Shortfalls. Minimum monthly
payments on the Mortgage Loans will at least equal and 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 Certificateholders could occur if
the Certificate Insurer were unable to perform on 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 Certificateholders 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, Certificateholders could
experience a loss if the Certificate Insurer were unable to perform its
obligations under the Policy.
Prepayment Considerations, Risks and Effect on Yield and Weighted
Average Lives of the Certificates. Substantially all of the Mortgage Loans
may be prepaid in whole or in part at any time without penalty. Home equity
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 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
Fund'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 reasonable commercial practice, 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 Certificates" herein and "Certain Legal Aspects of Loans--Due-on-Sale
Clauses" in the Prospectus for a description of certain provisions of the
Loan Agreements that may affect the prepayment experience on the Mortgage
Loans. The yield to maturity and weighted average life of the Certificates
will be affected primarily by the rate and timing of prepayments on the
Mortgage Loans. Any reinvestment risks resulting from a faster or slower
incidence of prepayment of Mortgage Loans will be borne entirely by the
Certificateholders. See "Maturity and Prepayment Considerations" herein and
"Yield and Prepayment Considerations" in the Prospectus.
Certificate Rating Based Primarily on Claims -- Paying Ability of the
Certificate Insurer. The rating of the Certificates will depend primarily on
an assessment by the Rating Agencies of the Mortgage Loans and upon 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 Certificates may result in a reduction in the
rating of the Certificates. The rating by the Rating Agencies of the
Certificates is not a recommendation to purchase, hold or sell the
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 Certificates do not address the possibility of the
imposition of United States withholding tax with respect to non-U.S. persons.
Legal Considerations -- Lien Priority and Possible Delay in
Distributions or Losses. The Mortgage Loans are secured by mortgages (which
generally are second mortgages). With respect to Mortgage Loans that are
secured by first mortgages, the Master Servicer has the power under certain
circumstances to consent to a new mortgage lien on the Mortgaged Property
having priority over such Mortgage Loan. Mortgage Loans secured by second
mortgages are entitled to proceeds that remain from the sale of the related
Mortgaged Property after any related senior mortgage loan and prior statutory
liens have been satisfied. In the event that such proceeds are insufficient
to satisfy such loans and prior liens in the aggregate and the Certificate
Insurer is unable to perform its obligations under the Policy, the
Certificateholders will bear (i) the risk of delay in distributions while a
deficiency judgment against the borrower is obtained and (ii) the risk of
loss if the deficiency judgment cannot be obtained or is not realized upon.
See "Certain Legal Aspects of the Loans" in the Prospectus.
Bankruptcy and Insolvency Risks. The sale of the Mortgage Loans from
Headlands to the Sponsor pursuant to the Purchase Agreement will be treated
as a sale of the Mortgage Loans. However, in the event of an insolvency of
Headlands, the receiver of Headlands may attempt to recharacterize the sale
of the Mortgage Loans as a borrowing by Headlands, secured by a pledge of the
applicable Mortgage Loans. If the receiver decided to challenge such
transfer, delays in payments of the Certificates and reductions in the
amounts thereof could occur. The Sponsor will warrant in the Agreement that
the transfer of the Mortgage Loans by it to the Trust Fund is either a valid
transfer and assignment of such Mortgage Loans to the Trust Fund or the grant
to the Trust Fund of a security interest in such Mortgage Loans.
If a conservator, receiver or trustee were appointed for the Transferor,
or if certain other events relating to the bankruptcy or insolvency of the
Transferor were to occur, Additional Balances would not be sold to the Trust
Fund. In such an event, the Rapid Amortization Period would commence and the
Trustee would attempt to sell the Mortgage Loans (unless Certificateholders
holding Certificates evidencing undivided interests aggregating at least 51%
of the Certificate Principal Balance instruct otherwise), thereby causing
early payment of the Certificate Principal Balance. 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 pursuant to the Insurance Agreement. The Investor Fixed
Allocation Percentage of remaining amounts will be distributed to the
Certificateholders and the Policy will cover any amount by which such
remaining net proceeds are insufficient to pay the Certificate 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 Certificateholders from appointing a successor Master Servicer.
(Risk of Losses as a Result of Geographic Concentration. As of the Cut-
off Date, approximately _____% (by Cut-off Date Principal Balance) of the
Mortgaged Properties are located in the State of __________. An overall
decline in the __________ residential real estate market could adversely
affect the values of the Mortgaged Properties securing such Mortgage Loans
such that the Principal Balances of the related Mortgage Loans, together with
any primary financing on such Mortgaged Properties, could equal or exceed the
value of such Mortgaged Properties. As the residential real estate market is
influenced by many factors, including the general condition of the economy
and interest rates, no assurances may be given that the __________
residential real estate market will not weaken. If the __________
residential real estate market should experience an overall decline in
property values after the dates of origination of the Mortgage Loans, the
rates of losses on the Mortgage Loans would be expected to increase, and
could increase substantially.)
Master Servicer's Ability to Change the Terms of the Mortgage Loans.
The Master Servicer may agree to changes in the terms of a Loan Agreement,
provided that such changes (i) do not adversely affect the interest of the
Certificateholders or the Certificate Insurer, and (ii) are consistent with
prudent business practice. There can be no assurance that changes in
applicable law or the marketplace for home equity loans or prudent business
practice will not result in changes in the terms of the Mortgage Loans. In
addition, the Agreement permits the Master Servicer, within certain
limitations described therein, to increase the Credit Limit of the related
HELOC or reduce the Margin for such HELOC. Any such increase in the Credit
Line of a HELOC would increase the Loan-to-Value Ratio of such HELOC and,
accordingly, would increase the risk of the Trust Fund's investment in such
HELOC. In addition, any reduction in the Margin of a HELOC would reduce the
excess cash flow available to absorb losses.
Delinquent Mortgage Loans. The Trust Fund will include Mortgage Loans
which are 59 or fewer days delinquent as of the Cut-off Date. The Cut-off
Date Principal Balance of Mortgage Loans which are between 30 days and 59
days delinquent as of the Cut-off Date was $_________________. If there are
not sufficient funds from the Investor Interest Collections to cover the
Investor Loss Amounts for any Distribution Date, the Overcollateralization
Amount and the amount on deposit in the Spread Account have been reduced to
zero, and the Certificate Insurer fails to perform its obligations under the
Policy, the aggregate amount of principal returned to the Certificateholders
may be less than the Certificate Principal Balance on the day the
Certificates are issued.
For a discussion of additional risks pertaining to the Certificates, see
"Risk Factors" in the Prospectus.
THE CERTIFICATE INSURER
The following information set forth in this section has been provided by
the Certificate Insurer. Accordingly, neither the Sponsor nor the Master
Servicer makes any representation as to the accuracy and completeness of such
information.
(Description of Certificate Insurer)
HEADLANDS MORTGAGE COMPANY
GENERAL
Headlands Mortgage Company ("Headlands") is a closely-held California
S-corporation which was organized in 1981. The common stock of Headlands is
owned by the Hart and Paul families. Headlands is engaged in the mortgage
banking business, which consists of the origination, acquisition, sale and
servicing of residential mortgage loans secured primarily by one- to
four-unit family residences, and the purchase and sale of mortgage servicing
rights.
Headlands is headquartered in Northern California, and has production
branches in California, Washington, Oregon, Idaho, Nevada and Arizona. Loans
are originated primarily on a wholesale basis, through a network of
independent mortgage loan brokers approved by Headlands. The Mortgage Loans
were acquired by Headlands in one of the three following manners:
(i) originated by an independent broker and purchased by Headlands,
(ii) originated by a broker and funded by Headlands, or (iii) originated and
funded by Headlands in the ordinary course of business.
Headlands' executive offices are located at 700 Larkspur Landing Circle,
Suite 250, Larkspur, CA 94939.
SERVICING OVERVIEW
Headlands (in its capacity as master servicer) will act as master
servicer for the Mortgage Loans pursuant to the Agreement. All of the
Mortgage Loans are currently serviced by Headlands substantially in
accordance with the procedures described herein and in the accompanying
Prospectus. Headlands has only recently started servicing home equity loans.
As a result, there is limited information as to the losses on HELOCs and
Closed-End Loans serviced by Headlands.
As of March 31, 1997, Headlands' mortgage loan servicing portfolio
consisted of 29,152 one- to four-family residential mortgage loans with an
aggregate principal balance of $3,302 million. Headlands' primary source of
mortgage servicing rights is from mortgage loans originated through mortgage
brokers.
Headlands' Servicing Center was established in January 1994. As of
March 31, 1997, it had a staff of 57 employees. Prior to January 1994,
Headlands' servicing portfolio was subserviced by a third party.
Mortgage loan servicing includes collecting payments from borrowers and
remitting those funds to investors, accounting for mortgage loan principal
and interest, reporting to investors, holding custodial funds for payment of
mortgage related expenses such as taxes and insurance, advancing funds to
cover delinquent payments, inspecting foreclosures and property disposition
in the event of unremedied defaults, and otherwise administering the
mortgages.
The following table summarizes the delinquency experience including
pending foreclosures on residential mortgage loans originated or acquired as
part of Headlands' mortgage banking operations and included in Headlands'
servicing portfolio at the dates indicated. As of December 31, 1995 and 1996
and March 31, 1997, the total principal balance of loans serviced by
Headlands was (in millions) $4,149, $4,387 and $3,302, respectively.
<TABLE>
HEADLANDS MORTGAGE COMPANY
OVERALL MORTGAGE PORTFOLIO
DELINQUENCY AND FORECLOSURE EXPERIENCE
<CAPTION>
December 31, March 31,
---------------------------------------------- --------------------
1995 1996 1997
--------------------- ------------------- ---------------------
Number Percent of Number Percent Number Percent
of Servicing of of of of
Loans Portfolio Loans Servicing Loans Servicing
Portfolio Portfolio
------- ---------- ------ --------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Total Number/**/ 27,261 100% 34,363 100% 29,152 100%
======= ========== ====== ========= ======== ==========
Period of Delinquency:
30-59 days 283 1.0% 466 1.4% 292 1.0%
60-89 days 62 0.2% 43 0.1% 70 0.2%
90 days or more 47 0.2% 14 0.0% 16 0.1%
------- ---------- ------- --------- --------- ---------
Total Delinquencies
(excluding Foreclosure) 392 1.4% 523 1.5% 378 1.3%
======= ========== ======= ========= ========== =========
Foreclosures Pending 146 0.5% 197 0.6% 179 0.6%
</TABLE>
_________
** The total portfolio has been reduced by the number of loans pending
service release or have been foreclosed.
There can be no assurance that the delinquency and foreclosure
experience of the Mortgage Loans will correspond to the delinquency and
foreclosure experience of the servicing portfolio of Headland's set forth in
the foregoing table. The statistics shown above represent the respective
delinquency and foreclosure experience only at the dates presented, whereas
the aggregate delinquency and foreclosure experience on the Mortgage Loans
will depend on the results obtained over the life of the Trust. The
servicing portfolio includes mortgage loans with a variety of payment and
other characteristics (including geographic location) which are not
necessarily representative of the payment and other characteristics of the
Mortgage Loans. The servicing portfolio includes mortgage loan underwritten
pursuant to guidelines not necessarily representative of those applicable to
the Mortgage Loans. It should be noted that if the residential real estate
market should experience an overall decline in property values, the actual
rates of delinquencies and foreclosures could be higher than those previously
experienced by Headlands. In addition, adverse economic conditions may
affect the timely payment by Mortgagors of scheduled payments of principal
and interest on the Mortgage Loans and, accordingly, the actual rates of
delinquencies and foreclosures with respect to the Mortgage Loans.
HEADLANDS' HOME EQUITY LOAN PROGRAM
The Mortgage Loans will have been purchased by Headlands, either
directly or through affiliates, from mortgage loan brokers. The Mortgage
Loans have been originated in accordance with the underwriting criteria
specified below under "Underwriting Standards."
UNDERWRITING STANDARDS
Headlands believes that the Mortgage Loans originated were underwritten
in accordance with standards consistent with those utilized by mortgage
lenders or manufactured home lenders generally during the period of
origination.
Underwriting standards are applied by or on behalf of a lender to
evaluate the borrower's credit standing and repayment ability, and the value
and adequacy of the Mortgaged Property as collateral. In general, a
prospective borrower applying for either a home equity line of credit or a
closed-end second is required to fill out a detailed application designed to
provide to the underwriting officer pertinent credit information. As part of
the description of the borrower's financial condition, the borrower generally
is required to provide a current list of assets and liabilities and a
statement of income and expenses, as well as an authorization to apply for a
credit report which summarizes the borrower's credit history with local
merchants and lenders and any record of bankruptcy or other public records.
In most cases, an employment verification is obtained from an independent
source (typically the borrower's employer) which verification reports the
length of employment with that organization, the current salary, and whether
it is expected that the borrower will continue such employment in the future.
If a prospective borrower is self-employed, the borrower may be required to
submit copies of signed tax returns. The borrower may also be required to
authorize verification of deposits at financial institutions where the
borrower has demand or savings accounts.
In determining the adequacy of the Mortgaged Property as collateral, an
appraisal is made of each property considered for financing. The appraiser
is required to inspect the property and verify that it is in good condition
and that construction, if new, has been completed. With respect to single
family loans, the appraisal is based on the market value of comparable homes,
the estimated rental income (if considered applicable by the appraiser) and
the cost of replacing the home. With respect to a loan on a two-to-four unit
property, the appraisal must specify whether an income analysis, a market
analysis or a cost analysis, was used. An appraisal employing the income
approach to value analyzes a two-to-four unit project's cash flow, expenses,
capitalization and other operational information in determining the
property's value. The market approach to value focuses its analysis on the
prices paid for the purchase of similar properties in the two-to-four unit
project's area, with adjustments made for variations between these other
properties and the multifamily project being appraised. The cost approach
calls for the appraiser to make an estimate of land value and then determine
the current cost of reproducing the building less any accrued depreciation.
In any case, the value of the property being financed, as indicated by the
appraisal, must be such that it currently supports, and is anticipated to
support in the future, the outstanding loan balance. For loan values to
$650,000 appraisers may use either a full appraisal (FNMA 1104/FHLMC 70) or a
drive-by appraisal (FHLMC 704); for values between $650,001 to $1,000,000
with a combined loan-to-value of less than 75%, only a full appraisal is
acceptable; for values between $650,001 to $1,000,000 with a combined
loan-to-value of greater than 75%, only a full appraisal and one field review
ordered by Headlands is acceptable; and for loans with values greater than
$1,000,000 with a combined loan-to-value greater than 65%, two full
appraisals are required. Headlands may order discretionary reviews at any
time to ensure the value of the properties. (discussion of appraisers)
In the case of single family loans, once all applicable employment,
credit and property information is received, a determination generally is
made as to whether the prospective borrower has sufficient monthly income
available (a) to meet the borrower's monthly obligations on the proposed
mortgage loan (determined on the basis of the monthly payments due in the
year of origination) and other expenses related to the mortgaged property
(such as property taxes and hazard insurance) and (b) to meet monthly housing
expenses and other financial obligations and monthly living expenses. The
underwriting standards applied by Headlands may be varied in appropriate
cases where factors such as low loan-to-value ratios or other favorable
credit aspects exist.
Headlands requires title insurance for all mortgage loans. Fire and
extended hazard insurance and flood insurance, when applicable, are also
required.
(ADD: CLTV standards, pmi, if applicable, FICO scoring)
A lender may originate Mortgage Loans under a reduced documentation
program. A reduced documentation program is designed to streamline the loan
approval process and thereby improve the lender's competitive position among
other loan originators. Under a reduced documentation program, relatively
more emphasis is placed on credit score and property under writing than on
certain credit underwriting documentation concerning income and employment
verification is waived.
In the case of a Mortgage Loan secured by a leasehold interest in a real
property, the title to which is held by a third party lessor, the Seller will
represent and warrant, among other things, that the remaining term of the
lease and any sublease is at least five years longer than the remaining term
of the Mortgage Loan.
DESCRIPTION OF THE MORTGAGE LOANS
GENERAL
The Mortgage Loans were originated pursuant to loan agreements and
promissory notes and the appropriate state disclosure statements (with
respect to the HELOCs, the "Credit Line Agreements", and with respect to the
Closed-End Loans, the "Mortgage Notes" and together with the Credit Line
Agreements, the "Loan Agreements") and are secured by mortgages or deeds of
trust, which are either first or second mortgages or deeds of trust, on
Mortgaged Properties located in __ states. The Mortgaged Properties securing
the Mortgage Loans consist primarily of residential properties that are one-
to four-family properties. See "--Mortgage Loan Terms" below.
The Original Pool Balance is $______________, which is equal to the
aggregate Principal Balances of the Mortgage Loans as of the Cut-Off Date.
As of the Cut-Off Date, only __ Mortgage Loans were up to 59 days delinquent
and no Mortgage Loan was more than 59 days delinquent. The average Cut-Off
Date Principal Balance of the Mortgage Loans was approximately $_________,
the minimum Cut-Off Date Principal Balance of the Mortgage Loans was zero,
the maximum Cut-Off Date Principal Balance of the Mortgage Loans was
$__________, the minimum Loan Rate and the maximum Loan Rate as of the
Cut-Off Date were _____% and _____% per annum, respectively, and the weighted
average Loan Rate as of the Cut-Off Date was approximately ____% per annum.
As of the Cut-Off Date, the weighted average Credit Limit Utilization Rate
(weighted by credit line) (as defined below) of the HELOCs was approximately
_____% and the maximum Credit Limit Utilization Rate was 100%. The "Credit
Limit Utilization Rate" of a HELOC is determined by dividing the Cut-Off Date
Principal Balance by the Credit Limit of the related Credit Line Agreement.
The remaining term to scheduled maturity for the Mortgage Loans as of the
Cut-Off Date ranged from ___ months to ___ months and the weighted average
remaining term to scheduled maturity was approximately ______ months. As of
the Cut-Off Date, the weighted average Combined Loan-to-Value Ratio (as
defined below) of the Mortgage Loans was approximately _____%. The "Combined
Loan-to-Value Ratio" of each HELOC is the ratio of (A) the sum of (i) the
maximum amount the borrower was permitted to draw down under the related
Credit Line Agreement (the "Credit Limit") and (ii) the amounts of any
related senior mortgage loans (computed as of the date of origination of each
such HELOC) to (B) the lesser of (i) the appraised value of the Mortgaged
Property 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. The "Combined Loan-to-Value Ratio" of each Closed-
End Loan is the ratio of (A) the sum of (i) the original principal balance of
such Closed-End Loan and (ii) the outstanding principal balance as of the
date of execution of the related Loan Agreement of any mortgage loan or
mortgage loans that are senior or equal in priority to the Closed-End Loan
and that is or are secured by the same Mortgage Property to (B) the lesser of
(i) the appraised value of the Mortgaged Property 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 as of the Cut-Off Date ranged from $______ to
$_______ and averaged approximately $_________. 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) was approximately _____%.
As of the Cut-Off Date, no Mortgage Loans represented first liens on the
related Mortgaged Properties, while approximately ___% of the Mortgage Loans
represented second liens. As of the Cut-Off Date approximately _____% of the
Mortgage Loans are secured by Mortgaged Properties which are single-family
residences and approximately __% of the single family residences were
owner-occupied. As of the Cut-Off Date, approximately _____%, ____% and
____% of the Mortgage Loans by Original Pool Balance are located in the
States of __________, __________ and ______, respectively. No other state
represents more than 2% of the Original Pool Balance of the Mortgage Loans.
MORTGAGE LOAN TERMS
The Mortgage Loans consist of loans originated under three different
loan term options: a 15-year Closed-End Loan, a 15-year HELOC or a 25-year
HELOC.
The Closed-End Loans are fixed-rate, fully amortizing second mortgages.
The monthly payment remains constant throughout the term of the Closed-End
Loan, and is applied to principal and interest based on a pre-determined
actuarial paydown schedule. The borrowers may prepay at any time without
penalty.
The HELOC loan programs have either a 5-year or 15-year draw period,
during which the borrower may make cash withdrawals against the equity line,
and a 10-year repayment period, during which the balance of the HELOC as of
the draw period is repaid.
A borrower may access a HELOC credit line at any time during the draw
period by writing a check. The minimum payment during the draw period of the
HELOC is the greater of accrued finance charges on the average daily balance
of the HELOC at the applicable Loan Rate, $100, or 1% of the outstanding
principal balance. The payment during the repayment period of the HELOC is
calculated as accrued interest plus .8333% of principal outstanding as of the
last day of the draw period. HELOCs bear interest at a variable rate which
changes monthly with changes in the applicable Index Rate (as defined below).
All Mortgage Loans are subject to a maximum per annum interest rate (the
"Maximum Rate") equal to approximately (18)% per annum and subject to
applicable usury limitations. The daily periodic rate on the HELOCs (the
"Loan Rate") is the sum of the Index Rate plus the spread (the "Margin")
which generally ranges between 0% and (6.00)% and had a weighted average, as
of the Cut-Off Date, of approximately ( )%, divided by 365 days.
The "Index Rate" is based on the highest "prime rate" published in the
"Money Rates" table of The Wall Street Journal.
Set forth below is a description of certain characteristics of the
Mortgage Loans as of the Cut-off Date:
<TABLE>
PRINCIPAL BALANCES
<CAPTION> Percent of
Pool
Range of Principal Balances Number by Cut-off
of Cut-off Date Date
Mortgage Principal Principal
Loans Balance Balance
- ------------------------------------------ -------- --------------- -----------
<S> <C> <C> <C>
$_______ to $_________ . . . . . . . . . . $ %
$_______ to $_________ . . . . . . . . . .
$_______ to $_________ . . . . . . . . . .
$_______ to $_________ . . . . . . . . . .
$_______ to $_________ . . . . . . . . . .
$_______ to $_________ . . . . . . . . . .
$_______ to $_________ . . . . . . . . . .
$_______ to $_________ . . . . . . . . . .
$_______ to $_________ . . . . . . . . . .
$_______ to $_________ . . . . . . . . . .
$_______ to $_________ . . . . . . . . . .
$_______ to $_________ . . . . . . . . . .
$_______ to $_________ . . . . . . . . . .
$_______ to $_________ . . . . . . . . . .
$_______ to $_________ . . . . . . . . . .
$_______ to $_________ . . . . . . . . . .
$_______ to $_________ . . . . . . . . . .
$_______ to $_________ . . . . . . . . . .
$_______ to $_________ . . . . . . . . . .
$_______ and over . . . . . . . . . . . . .
-------- --------------- -----------
Total . . . . . . . . . . . . . . . . $ 100.00%
========= =============== ===========
</TABLE>
<TABLE>
GEOGRAPHIC DISTRIBUTION(1)
<CAPTION> Percent of
Pool
State Number by Cut-off
of Cut-off Date Date
Mortgage Principal Principal
Loans Balance Balance
- ------------------------------------------ ----------- ----------- ------------
<S> <C> <C> <C>
$ %
----------- ----------- ------------
Total . . . . . . . . . . . . . . . . $ 100.00%
============ ============ =============
</TABLE>
(1) Geographic location is determined by the address of the Mortgaged
Property securing the related Mortgage Loan.
<TABLE>
COMBINED LOAN-TO-VALUE RATIOS(1)
<CAPTION> Percent of
Range of Combined Pool
Loan-to-Value Ratios Number by Cut-off
of Cut-off Date Date
Mortgage Principal Principal
Loans Balance Balance
- ------------------------------------------ -------- ---------------- -------------
<S> <C> <C> <C>
_____% to ______% . . . . . . . . . . . . . $ %
______% to ______% . . . . . . . . . . . .
______% to ______% . . . . . . . . . . . .
______% to ______% . . . . . . . . . . . .
______% to ______% . . . . . . . . . . . .
______% to ______% . . . . . . . . . . . .
______% to ______% . . . . . . . . . . . .
______% to ______% . . . . . . . . . . . .
______% to ______% . . . . . . . . . . . .
______% to ______% . . . . . . . . . . . .
-------- ---------------- -------------
Total . . . . . . . . . . . . . . . . $ 100.00%
======== ================ ==============
</TABLE>
(1) With respect to HELOCs, the ratio of (A) the sum of (i) the maximum
amount the borrower was permitted to draw down under the related Credit
Line Agreement (the "Credit Limit") and (ii) the amounts of any related
senior mortgage loans (computed as of the date of origination of each
such HELOC) to (B) the lesser of (i) the appraised value of the
Mortgaged Property 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. With respect to Closed-End
Loans, the ratio of (A) the sum of (i) the original principal balance of
such Closed-End Loan and (ii) the outstanding principal balance as of
the date of execution of the related Loan Agreement of any mortgage loan
or mortgage loans that are senior or equal in priority to the Closed-End
Loan and that is or are secured by the same Mortgage Property to (B) the
lesser of (i) the appraised value of the Mortgaged Property 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.
<TABLE>
PROPERTY TYPE
<CAPTION> Percent of
Pool
Property Type Number by Cut-off
of Cut-off Date Date
Mortgage Principal Principal
Loans Balance Balance
- ------------------------------------------ --------- -------------- ----------
<S> <C> <C> <C>
Single Family . . . . . . . . . . . . . . . $ %
Two- to Four-Family . . . . . . . . . . . .
Condominium . . . . . . . . . . . . . . . .
PUD . . . . . . . . . . . . . . . . . . . .
--------- -------------- ----------
Total . . . . . . . . . . . . . . . . $ 100.00%
========= ============= ==========
</TABLE>
<TABLE>
LIEN PRIORITY
<CAPTION> Percent of
Pool
Lien Priority Number by Cut-off
of Cut-off Date Date
Mortgage Principal Principal
Loans Balance Balance
- ------------------------------------------ --------- ----------- -----------
<S> <C> <C> <C>
First Lien . . . . . . . . . . . . . . . . $ %
Second Lien . . . . . . . . . . . . . . . .
--------- ----------- -----------
Total . . . . . . . . . . . . . . . . $ 100.00%
========== =========== ===========
</TABLE>
<TABLE>
LOAN RATES(1)
<CAPTION> Percent of
Range of Pool
Loan Rates Number by Cut-off
of Cut-off Date Date
Mortgage Principal Principal
Loans Balance Balance
- ------------------------------------------- -------- --------------- -----------
<S> <C> <C> <C>
_____% to _____% . . . . . . . . . . . . . $ %
_____% to _____% . . . . . . . . . . . . .
_____% to _____% . . . . . . . . . . . . .
_____% to _____% . . . . . . . . . . . . .
_____% to _____% . . . . . . . . . . . . .
_____% to _____% . . . . . . . . . . . . .
_____% to _____% . . . . . . . . . . . . .
_____% to _____% . . . . . . . . . . . . .
_____% to _____% . . . . . . . . . . . . .
_____% to _____% . . . . . . . . . . . . .
_____% to _____% . . . . . . . . . . . . .
_____% to _____% . . . . . . . . . . . . .
_____% to _____% . . . . . . . . . . . . .
_____% to _____% . . . . . . . . . . . . .
_____% to _____% . . . . . . . . . . . . .
_____% to _____% . . . . . . . . . . . . .
_____% to _____% . . . . . . . . . . . . .
_____% to _____% . . . . . . . . . . . . .
_____% to _____% . . . . . . . . . . . . .
_____% to _____% . . . . . . . . . . . . .
_____% to _____% . . . . . . . . . . . . .
-------- --------------- -----------
Total . . . . . . . . . . . . . . . . $ 100.00%
======== =============== ===========
</TABLE>
(1) Approximately % of the Mortgage Loans by Cut-Off Date Principal
Balance are subject to an introductory rate of _____% per annum.
<TABLE>
MARGIN
<CAPTION> Percent of
Range of Pool
Margins Number by Cut-off
of Cut-off Date Date
Mortgage Principal Principal
Loans Balance Balance
- ------------------------------------------- -------- ------------ -----------
<S> <C> <C> <C>
_____% to _____% . . . . . . . . . . . . . $ %
_____% to _____% . . . . . . . . . . . . .
_____% to _____% . . . . . . . . . . . . .
_____% to _____% . . . . . . . . . . . . .
_____% to _____% . . . . . . . . . . . . .
_____% to _____% . . . . . . . . . . . . .
_____% to _____% . . . . . . . . . . . . .
_____% to _____% . . . . . . . . . . . . .
_____% to _____% . . . . . . . . . . . . .
_____% to _____% . . . . . . . . . . . . .
_____% to _____% . . . . . . . . . . . . .
_____% to _____% . . . . . . . . . . . . .
_____% to _____% . . . . . . . . . . . . .
_____% to _____% . . . . . . . . . . . . .
_____% to _____% . . . . . . . . . . . . .
_____% to _____% . . . . . . . . . . . . .
_____% to _____% . . . . . . . . . . . . .
_____% to _____% . . . . . . . . . . . . .
_____% to _____% . . . . . . . . . . . . .
_____% to _____% . . . . . . . . . . . . .
-------- ------------ -----------
Total . . . . . . . . . . . . . . . . $ 100.00%
======== ============= ============
</TABLE>
<TABLE>
CREDIT LIMIT UTILIZATION RATES
<CAPTION> Percent of
Range of Credit Limit Pool
Utilization Rates Number by Cut-off
of Cut-off Date Date
Mortgage Principal Principal
Loans Balance Balance
- ------------------------------------------- ------- --------------- ----------
<S> <C> <C> <C>
_____% to _____% . . . . . . . . . . . . . $ %
_____% to _____% . . . . . . . . . . . . .
_____% to _____% . . . . . . . . . . . . .
_____% to _____% . . . . . . . . . . . . .
_____% to _____% . . . . . . . . . . . . .
_____% to _____% . . . . . . . . . . . . .
_____% to _____% . . . . . . . . . . . . .
_____% to _____% . . . . . . . . . . . . .
_____% to _____% . . . . . . . . . . . . .
_____% to _____% . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . $ 100.00%
------- --------------- ----------
======= ================ ===========
</TABLE>
<TABLE>
CREDIT LIMITS
<CAPTION> Percent of
Pool
Range of Credit Limits Number by Cut-off
of Cut-off Date Date
Mortgage Principal Principal
Loans Balance Balance
- ------------------------------------------- --------- ----------- ---------
<S> <C> <C> <C>
$__________to $_________ . . . . . . . . . $ %
$_________ to $_________ . . . . . . . . .
$_________ to $_________ . . . . . . . . .
$_________ to $_________ . . . . . . . . .
$_________ to $_________ . . . . . . . . .
$_________ to $_________ . . . . . . . . .
$_________ to $_________ . . . . . . . . .
$_________ to $_________ . . . . . . . . .
$_________ to $_________ . . . . . . . . .
$_________ to $_________ . . . . . . . . .
$_________ to $_________ . . . . . . . . .
$_________ to $_________ . . . . . . . . .
$_________ to $_________ . . . . . . . . .
$_________ to $_________ . . . . . . . . .
$_________ to $_________ . . . . . . . . .
$_________ to $_________ . . . . . . . . .
$_________ to $_________ . . . . . . . . .
$_________ to $_________ . . . . . . . . .
$_________ to $_________ . . . . . . . . .
$_________ to $_________ . . . . . . . . .
$_________ and over . . . . . . . . . . . .
--------- ----------- ---------
Total . . . . . . . . . . . . . . . . $ 100.00%
========= ============ =========
</TABLE>
<TABLE>
MAXIMUM RATES
<CAPTION> Percent of
Pool
Maximum Rates Number by Cut-off
of Cut-off Date Date
Mortgage Principal Principal
Loans Balance Balance
- ------------------------------------------ -------- --------------- -----------
<S> <C> <C> <C>
_____% . . . . . . . . . . . . . . . . . . $ %
_____% . . . . . . . . . . . . . . . . . .
_____% . . . . . . . . . . . . . . . . . .
_____% . . . . . . . . . . . . . . . . . .
-------- --------------- -----------
Total . . . . . . . . . . . . . . . . $ 100.00%
========= ================ ===========
</TABLE>
MONTHS REMAINING TO SCHEDULED MATURITY(1)
<TABLE>
<CAPTION> Percent of
Range of Months Pool
Remaining to Scheduled Maturity Number by Cut-off
of Cut-off Date Date
Mortgage Principal Principal
Loans Balance Balance
<S> <C> <C> <C>
___ to ___ . . . . . . . . . . . . . . . . $ %
___ to ___ . . . . . . . . . . . . . . . .
___ to ___ . . . . . . . . . . . . . . . .
___ to ___ . . . . . . . . . . . . . . . .
___ to ___ . . . . . . . . . . . . . . . .
___ to ___ . . . . . . . . . . . . . . . .
___ to ___ . . . . . . . . . . . . . . . .
___ to ___ . . . . . . . . . . . . . . . .
___ to ___ . . . . . . . . . . . . . . . .
___ to ___ . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . $ 100.00%
</TABLE>
ORIGINATION YEAR
<TABLE>
<CAPTION> Percent of
Pool
Origination Year Number by Cut-off
of Cut-off Date Date
Mortgage Principal Principal
Loans Balance Balance
<S> <C> <C> <C>
____ . . . . . . . . . . . . . . . . . . . $ %
____ . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . $ 100.00%
</TABLE>
DELINQUENCY STATUS
<TABLE>
<CAPTION> Percent of
Pool
Number of Days Delinquent Number by Cut-off
of Cut-off Date Date
Mortgage Principal Principal
Loans Balance Balance
<S> <C> <C> <C>
0 to 29 . . . . . . . . . . . . . . . . . . $ %
30 to 59 . . . . . . . . . . . . . . . . .
60 to 89 . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . $ 100.00%
</TABLE>
TYPE OF MORTGAGE LOAN
<TABLE>
<CAPTION> Percent of
Pool
Type Number by Cut-off
of Cut-off Date Date
Mortgage Principal Principal
Loans Balance Balance
<S> <C> <C> <C>
HELOC . . . . . . . . . . . . . . . . . . . $ %
Closed-End . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . $ 100.00%
</TABLE>
MATURITY AND PREPAYMENT CONSIDERATIONS
The Agreement, except as otherwise described herein, provides that the
Certificateholders will be entitled to receive on each Distribution Date
distributions of principal, in the amounts described under "Description of
the Certificates--Distributions on the Certificates" herein, until the
Certificate Principal Balance is reduced to zero. During the Managed
Amortization Period, Certificateholders will receive amounts from Principal
Collections based upon their Fixed Allocation Percentage subject to reduction
as described below. During the Rapid Amortization Period, Certificateholders
will receive amounts from Principal Collections based solely upon their Fixed
Allocation Percentage. Because prior distributions of Principal Collections
to Certificateholders serve to reduce the Investor Floating Allocation
Percentage but do not change their Fixed Allocation Percentage, allocations
of Principal Collections based on the Fixed Allocation Percentage may result
in distributions of principal to the Certificateholders in amounts that are,
in most cases, greater relative to the declining balance of the Mortgage
Loans than would be the case if the Investor Floating Allocation Percentage
were used to determine the percentage of Principal Collections distributed to
Certificateholders. This is especially true during the Rapid Amortization
Period when the Certificateholders are entitled to receive Investor Principal
Collections and not a lesser amount. In addition, Investor Interest
Collections may be distributed as principal to Certificateholders in
connection with the Accelerated Principal Distribution Amount, if any.
Moreover, to the extent of losses allocable to the Certificateholders,
Certificateholders may also receive as payment of principal the amount of
such losses either from Investor Interest Collections or, in some instances,
draws under the Policy. The level of losses may therefore affect the rate of
payment of principal on the Certificates.
To the extent obligors make more draws than principal payments, the
Transferor Interest may grow. Because during the Rapid Amortization Period
the Certificateholders share of Principal Collections is based upon its Fixed
Allocation Percentage (without reduction), an increase in the Transferor
Interest due to additional draws may also result in Certificateholders
receiving principal at a greater rate. The Agreement permits the Transferor,
at its option, but subject to the satisfaction of certain conditions
specified in the Agreement, including the conditions described below, to
remove certain Mortgage Loans from the Trust Fund at any time during the life
of the Trust Fund, so long as the Transferor Interest (after giving effect to
such removal) is not less than the Minimum Transferor Interest. Such
removals may affect the rate at which principal is distributed to
Certificateholders by reducing the overall Pool Balance and thus the amount
of Principal Collections. See "Description of the Certificates--Optional
Retransfers of Mortgage Loans to the Transferor" herein.
All of the Mortgage Loans may be prepaid in full or in part at any time.
The prepayment experience with respect to the Mortgage Loans will affect the
weighted average life of the 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 HELOCs amortize as described under
"Description of the Mortgage Loans--Mortgage Loan Terms" 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 Fund 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,
with respect to the HELOCs, 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 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 The Loans--Due-on-Sale
Clauses" in the Prospectus.
The yield to an investor who purchases the 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 Certificates were purchased.
Collections on the HELOCs 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 Fund and it can be expected that a portion of
borrowers will not prepay their Mortgage Loans to any significant degree.
See "Yield and Prepayment Considerations" in the Prospectus.
POOL FACTOR AND TRADING INFORMATION
The "Pool Factor" is a seven-digit decimal which the Master Servicer
will compute monthly expressing the Certificate Principal Balance of the
Certificates as of each Distribution Date (after giving effect to any
distribution of principal on such Distribution Date) as a proportion of the
Original Certificate Principal Balance. On the Closing Date, the Pool Factor
will be 1.0000000. See "Description of the Certificates--Distributions on
the Certificates" herein. Thereafter, the Pool Factor will decline to
reflect reductions in the related Certificate Principal Balance resulting
from distributions of principal to the Certificates.
Pursuant to the Agreement, monthly reports concerning the Invested
Amount, the Pool Factor and various other items of information will be made
available to the Certificateholders. In addition, within 60 days after the
end of each calendar year, beginning with the 199_ calendar year, information
for tax reporting purposes will be made available to each person who has been
a Certificateholder of record at any time during the preceding calendar year.
See "Description of the Certificates--Book-Entry Certificates" and "--Reports
to Certificateholders" herein.
DESCRIPTION OF THE CERTIFICATES
The Certificates will be issued pursuant to the Agreement. The form of
the Agreement has been filed as an exhibit to the Registration Statement of
which this Prospectus Supplement and the Prospectus is a part. The following
is a description of the material provisions of the Agreement. Wherever
particular sections or defined terms of the Agreement are referred to, such
sections or defined terms are hereby incorporated herein by reference.
GENERAL
The Certificates will be issued in denominations of $1,000 and multiples
of $1 in excess thereof and will evidence specified undivided interests in
the Trust Fund. The property of the Trust Fund will consist of, to the
extent provided in the Agreement: (i) each of the Mortgage Loans that from
time to time are subject to the Agreement; (ii) collections on the Mortgage
Loans received after the Cut-off Date (exclusive of payments in respect of
accrued interest due on or prior to the Cut-off Date (or due in the month of
______)); (iii) Mortgaged Properties relating to the Mortgage Loans that
are acquired by foreclosure or deed in lieu of foreclosure; (iv) the
Collection Account and the Certificate Account for the Certificates
(excluding net earnings thereon); (v) the Policy; (vi) the Spread
Account (for the benefit of the Certificate Insurer and the
Certificateholders); and (vii) an assignment of
the Sponsor's rights under the Purchase Agreement. Definitive Certificates
(as defined below), if issued, will be transferable and exchangeable at the
corporate trust office of the Trustee, which will initially maintain the
Security Register for the Certificates. See "--Book-Entry Certificates"
below. No service charge will be made for any registration of exchange or
transfer of Certificates, but the Trustee may require payment of a sum
sufficient to cover any tax or other governmental charge.
The aggregate undivided interest in the Trust Fund represented by the
Certificates as of the Closing Date will equal $ (the "Original
Invested Amount"), which represents __% of the Cut-off Date Pool Balance.
The "Original Certificate Principal Balance" will equal $ .
Following the Closing Date, the "Invested Amount" with respect to any
Distribution Date will be an amount equal to the Original Invested Amount
minus (i) the amount of Investor Principal Collections previously distributed
to Certificateholders, and minus (ii) an amount equal to the product of the
Investor Floating Allocation Percentage and the Liquidation Loss Amounts
(each as defined herein). The principal amount of the outstanding
Certificates (the "Certificate Principal Balance") on any Distribution Date
is equal to the Original Certificate Principal Balance minus the aggregate of
amounts actually distributed as principal to the Certificateholders. See "--
Distributions on the Certificates" below. Each Certificate represents the
right to receive payments of interest at the Certificate Rate and payments of
principal as described below.
The Transferor will own the remaining undivided interest in the Mortgage
Loans (the "Transferor Interest"), which is equal to the Pool Balance less
the Invested Amount. The Transferor Interest will initially equal $ ,
which represents _% of the Cut-off Date Pool Balance. The Transferor as of
any date is the owner of the Transferor Interest which initially will be the
Seller. In general, the Pool Balance will vary each day as principal is paid
on the Mortgage Loans, liquidation losses are incurred, Additional Balances
are drawn down by borrowers and Mortgage Loans are transferred to the Trust
Fund.
The Transferor has the right to sell or pledge the Transferor Interest
at any time, provided (i) the Rating Agencies (as defined herein) have
notified the Transferor and the Trustee in writing that such action will not
result in the reduction or withdrawal of the ratings assigned to the
Certificates, and (ii) certain other conditions specified in the Agreement
are satisfied.
BOOK-ENTRY CERTIFICATES
The Certificates will be book-entry Certificates (the "Book-Entry
Certificates"). Persons acquiring beneficial ownership interests in the
Certificates ("Certificate Owners") may elect to hold their Certificates
through the Depository Trust Company ("DTC") in the United States, or CEDEL
or Euroclear (in Europe) if they are participants of such systems, or
indirectly through organizations which are participants in such systems. The
Book-Entry Certificates will be issued in one or more certificates which
equal the aggregate principal balance of the Certificates and will initially
be registered in the name of Cede & Co., the nominee of DTC. CEDEL and
Euroclear will hold omnibus positions on behalf of their participants through
customers' securities accounts in CEDEL's and Euroclear's names on the books
of their respective depositaries which in turn will hold such positions in
customers' securities accounts in the depositaries' names on the books of
DTC. Citibank will act as depositary for CEDEL and Chase will act as
depositary for Euroclear (in such capacities, individually the "Relevant
Depositary" and collectively the "European Depositaries"). Investors may
hold such beneficial interests in the Book-Entry Certificates in minimum
denominations representing Certificate Principal Balances of $1,000 and in
multiples of $1 in excess thereof. Except as described below, no person
acquiring a Book-Entry Certificate (each, a "beneficial owner") will be
entitled to receive a physical certificate representing such Certificate (a
"Definitive Certificate"). Unless and until Definitive Certificates are
issued, it is anticipated that the only "Certificateholder" of the
Certificates will be Cede & Co., as nominee of DTC. Certificate Owners will
not be Certificateholders as that term is used in the Agreement. Certificate
Owners are only permitted to exercise their rights indirectly through the
participating organizations that utilize the services of DTC, including
securities brokers and dealers, banks and trust companies and clearing
corporations and certain other organizations ("Participants") and DTC.
The beneficial owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or
other financial intermediary (each, a "Financial Intermediary") that
maintains the beneficial owner's account for such purpose. In turn, the
Financial Intermediary's ownership of such Book-Entry Certificate will be
recorded on the records of DTC (or of a participating firm that acts as agent
for the Financial Intermediary, whose interest will in turn be recorded on
the records of DTC, if the beneficial owner's Financial Intermediary is not a
DTC participant and on the records of CEDEL or Euroclear, as appropriate).
Certificate Owners will receive all distributions of principal of, and
interest on, the Certificates from the Trustee through DTC and DTC
participants. While the Certificates are outstanding (except under the
circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC is required
to make book-entry transfers among Participants on whose behalf it acts with
respect to the Certificates and is required to receive and transmit
distributions of principal of, and interest on, the Certificates.
Participants and organizations which have indirect access to the DTC system,
such as banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a Participant, either directly or
indirectly ("Indirect Participants") with whom Certificate Owners have
accounts with respect to Certificates are similarly required to make book-
entry transfers and receive and transmit such distributions on behalf of
their respective Certificate Owners. Accordingly, although Certificate
Owners will not possess certificates, the Rules provide a mechanism by which
Certificate Owners will receive distributions and will be able to transfer
their interest.
Certificate Owners will not receive or be entitled to receive
certificates representing their respective interests in the Certificates,
except under the limited circumstances described below. Unless and until
Definitive Certificates are issued, Certificate Owners who are not
Participants may transfer ownership of Certificates only through Participants
and Indirect Participants by instructing such Participants and Indirect
Participants to transfer Certificates, by book-entry transfer, through DTC
for the account of the purchasers of such Certificates, which account is
maintained with their respective Participants. Under the Rules and in
accordance with DTC's normal procedures, transfers of ownership of
Certificates will be executed through DTC and the accounts of the respective
Participants at DTC will be debited and credited. Similarly, the
Participants and Indirect Participants will make debits or credits, as the
case may be, on their records on behalf of the selling and purchasing
Certificate Owners.
Because of time zone differences, credits of securities received in
CEDEL, or Euroclear as a result of a transaction with a Participant will be
made during, subsequent securities settlement processing and dated the
business day following, the DTC settlement date. Such credits or any
transactions in such securities, settled during such processing will be
reported to the relevant Euroclear or, CEDEL Participants on such business
day. Cash received in CEDEL or Euroclear as, a result of sales of securities
by or through a CEDEL Participant (as defined, below) or Euroclear
Participant (as defined below) to a DTC Participant will be, received with
value on the DTC settlement date but will be available in the, relevant CEDEL
or Euroclear cash account only as of the business day following, settlement
in DTC. For information with respect to tax documentation procedures,
relating to the Certificates, see "Federal Income Tax Consequences--Foreign
Investors" and "--Backup Withholding" herein and "Global, Clearance,
Settlement And Tax Documentation Procedures--Certain U.S. Federal Income Tax
Documentation Requirements" in Annex I hereto.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC
in accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in
accordance with its rules and procedures and within its established deadlines
(European time). The relevant European international clearing system will,
if the transaction meets its settlement requirements, deliver instructions to
the Relevant Depositary to take action to effect final settlement on its
behalf by delivering or receiving securities in DTC, and making or receiving
payment in accordance with normal procedures for same day funds settlement
applicable to DTC. CEDEL Participants and Euroclear Participants may not
deliver instructions directly to the European Depositaries.
DTC which is a New York-chartered limited purpose trust company,
performs services for its participants, some of which (and/or their
representatives) own DTC. In accordance with its normal procedures, DTC is
expected to record the positions held by each DTC participant in the Book-
Entry Certificates, whether held for its own account or as a nominee for
another person. In general, beneficial ownership of Book-Entry Certificates
will be subject to the rules, regulations and procedures governing DTC and
DTC participants as in effect from time to time.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations
("CEDEL Participants") and facilitates the clearance and settlement of
securities transactions between CEDEL Participants through electronic book-
entry changes in accounts of CEDEL Participants, thereby eliminating the need
for physical movement of certificates. Transactions may be settled in CEDEL
in any of 28 currencies, including United States dollars. CEDEL provides to
its CEDEL Participants, among other things, services for safekeeping,
administration, clearance and settlement of internationally traded securities
and securities lending and borrowing. CEDEL interfaces with domestic markets
in several countries. As a professional depository, CEDEL is subject to
regulation by the Luxembourg Monetary Institute. CEDEL participants are
recognized financial institutions around the world, including underwriters,
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organizations. Indirect access to CEDEL is also available
to others, such as banks, brokers, dealers and trust companies that clear
through or maintain a custodial relationship with a CEDEL Participant, either
directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement
of certificates and any risk from lack of simultaneous transfers of
securities and cash. Transactions may now be settled in any of 32
currencies, including United States dollars. Euroclear includes various
other services, including securities lending and borrowing and interfaces
with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC described above. Euroclear
is operated by the Brussels, Belgium office of Morgan Guaranty Trust Company
of New York (the "Euroclear Operator"), under contract with Euroclear
Clearance Systems S.C., a Belgian cooperative corporation (the
"Cooperative"). All operations are conducted by the Euroclear Operator, and
all Euroclear securities clearance accounts and Euroclear cash accounts are
accounts with the Euroclear Operator, not the Cooperative. The Cooperative
establishes policy for Euroclear on behalf of Euroclear Participants.
Euroclear Participants include banks (including central banks), securities
brokers and dealers and other professional financial intermediaries. Indirect
access to Euroclear is also available to other firms that clear through or
maintain a custodial relationship with a Euroclear Participant, either
directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such,
it is regulated and examined by the Board of Governors of the Federal Reserve
System and the New York State Banking Department, as well as the Belgian
Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear
and the related Operating Procedures of the Euroclear System and applicable
Belgian law (collectively, the "Terms and Conditions"). The Terms and
Conditions govern transfers of securities and cash within Euroclear,
withdrawals of securities and cash from Euroclear, and receipts of payments
with respect to securities in Euroclear. All securities in Euroclear are
held on a fungible basis without attribution of specific certificates to
specific securities clearance accounts. The Euroclear Operator acts under
the Terms and Conditions only on behalf of Euroclear Participants, and has no
record of or relationship with persons holding through Euroclear
Participants.
Distributions on the Book-Entry Certificates will be made on each
Distribution Date by the Trustee to DTC. DTC will be responsible for
crediting the amount of such payments to the accounts of the applicable DTC
participants in accordance with DTC's normal procedures. Each DTC
participant will be responsible for disbursing such payments to the
beneficial owners of the Book-Entry Certificates that it represents and to
each Financial Intermediary for which it acts as agent. Each such Financial
Intermediary will be responsible for disbursing funds to the beneficial
owners of the Book-Entry Certificates that it represents.
Under a book-entry format, beneficial owners of the Book-Entry
Certificates may experience some delay in their receipt of payments, since
such payments will be forwarded by the Trustee to Cede. Distributions with
respect to Certificates held through CEDEL or Euroclear will be credited to
the cash accounts of CEDEL Participants or Euroclear Participants in
accordance with the relevant system's rules and procedures, to the extent
received by the Relevant Depositary. Such distributions will be subject to
tax reporting in accordance with relevant United States tax laws and
regulations. See "Federal Income Tax Consequences--Foreign Investors" and "-
- -Backup Withholding" herein. Because DTC can only act on behalf of Financial
Intermediaries, the ability of a beneficial owner to pledge Book-Entry
Certificates to persons or entities that do not participate in the Depository
system, or otherwise take actions in respect of such Book-Entry Certificates,
may be limited due to the lack of physical certificates for such Book-Entry
Certificates. In addition, issuance of the Book-Entry Certificates in book-
entry form may reduce the liquidity of such Certificates in the secondary
market since certain potential investors may be unwilling to purchase
Certificates for which they cannot obtain physical certificates.
Monthly and annual reports on the Trust Fund provided by the Master
Servicer to CEDE, as nominee of DTC, may be made available to beneficial
owners upon request, in accordance with the rules, regulations and procedures
creating and affecting the Depository, and to the Financial Intermediaries to
whose DTC accounts the Book-Entry Certificates of such beneficial owners are
credited.
DTC has advised the Transferor and the Trustee that, unless and until
Definitive Certificates are issued, DTC will take any action permitted to be
taken by the holders of the Book-Entry Certificates under the Agreement only
at the direction of one or more Financial Intermediaries to whose DTC
accounts the Book-Entry Certificates are credited, to the extent that such
actions are taken on behalf of Financial Intermediaries whose holdings
include such Book-Entry Certificates. CEDEL or the Euroclear Operator, as
the case may be, will take any other action permitted to be taken by a
Certificateholder under the Agreement on behalf of a CEDEL Participant or
Euroclear Participant only in accordance with its relevant rules and
procedures and subject to the ability of the Relevant Depositary to effect
such actions on its behalf through DTC. DTC may take actions, at the
direction of the related Participants, with respect to some Certificates
which conflict with actions taken with respect to other Certificates.
Definitive Certificates will be issued to beneficial owners of the Book-
Entry Certificates, or their nominees, rather than to DTC, only if (a) DTC or
the Transferor advises the Trustee in writing that DTC is no longer willing,
qualified or able to discharge properly its responsibilities as nominee and
depository with respect to the Book-Entry Certificates and the Transferor or
the Trustee is unable to locate a qualified successor, (b) the Transferor, at
its sole option, elects to terminate a book-entry system through DTC or (c)
after the occurrence of an Event of Servicing Termination (as defined
herein), beneficial owners having Percentage Interests aggregating not less
than 51% of the Certificate Principal Balance of the Book-Entry Certificates
advise the Trustee and DTC through the Financial Intermediaries and the DTC
participants in writing that the continuation of a book-entry system through
DTC (or a successor thereto) is no longer in the best interests of beneficial
owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all beneficial
owners of the occurrence of such event and the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Certificates and instructions for
re-registration, the Trustee will issue Definitive Certificates, and
thereafter the Trustee will recognize the holders of such Definitive
Certificates as Certificateholders under the Agreement.
Although DTC, CEDEL and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Certificates among
participants of DTC, CEDEL and Euroclear, they are under no obligation to
perform or continue to perform such procedures and such procedures may be
discontinued at any time.
ASSIGNMENT OF MORTGAGE LOANS
At the time of issuance of the Certificates, the Sponsor will transfer
to the Trust Fund all of its right, title and interest in and to each
Mortgage Loan (including any Additional Balances arising in the future),
related Loan Agreements, mortgages and other related documents (collectively,
the "Related Documents"), including all collections received on or with
respect to each such Mortgage Loan after the Cut-off Date (exclusive of
payments in respect of accrued interest due on or prior to the Cut-off Date).
The Trustee, concurrently with such transfer, will deliver the Certificates
to the Sponsor and the Transferor Certificate (as defined in the Agreement)
to the Transferor. Each Mortgage Loan transferred to the Trust Fund will be
identified on a schedule (the "Mortgage Loan Schedule") delivered to the
Trustee pursuant to the Agreement. Such schedule will include information as
to the Cut-off Date Principal Balance of each Mortgage Loan, as well as
information with respect to the Loan Rate.
Within 90 days of the Closing Date, the Trustee will review the Mortgage
Loans and the Related Documents and if any Mortgage Loan or Related Document
is found to be defective in any material respect and such defect is not cured
within 90 days following notification thereof to the Seller and the Sponsor
by the Trustee, the Seller will be obligated to accept the transfer of such
Mortgage Loan from the Trust Fund. Upon such transfer, the Principal Balance
of such Mortgage Loan will be deducted from the Pool Balance, thus reducing
the amount of the Transferor Interest. If the deduction would cause the
Transferor Interest to become less than the Minimum Transferor Interest at
such time (a "Transfer Deficiency"), the Seller will be obligated to either
substitute an Eligible Substitute Mortgage Loan or make a deposit into the
Collection Account in the amount (the "Transfer Deposit Amount") equal to the
amount by which the Transferor Interest would be reduced to less than the
Minimum Transferor Interest at such time. Any such deduction, substitution
or deposit, will be considered a payment in full of such Mortgage Loan. Any
Transfer Deposit Amount will be treated as a Principal Collection.
Notwithstanding the foregoing, however, prior to all required deposits to the
Collection Account being made no such transfer shall be considered to have
occurred unless such deposit is actually made. The obligation of the Seller
to accept a transfer of a Defective Mortgage Loan is the sole remedy
regarding any defects in the Mortgage Loans and Related Documents available
to the Trustee or the Certificateholders.
An "Eligible Substitute Mortgage Loan" is a mortgage loan substituted by
the Sponsor for a Defective Mortgage Loan which must, on the date of such
substitution, (i) have an outstanding Principal Balance (or in the case of a
substitution of more than one Mortgage Loan for a Defective Mortgage Loan, an
aggregate Principal Balance), not __% more or less than the Transfer
Deficiency relating to such Defective Mortgage Loan; (ii) have a Loan Rate
not less than the Loan Rate of the Defective Mortgage Loan and not more than
_% in excess of the Loan Rate of such Defective Mortgage Loan; (iii) have a
Loan Rate based on the same Index with adjustments to such Loan Rate made on
the same Interest Rate Adjustment Date as that of the Defective Mortgage
Loan; (iv) have a Margin that is not less than the Margin of the Defective
Mortgage Loan and not more than ___ basis points higher than the Margin for
the Defective Mortgage Loan; (v) have a mortgage of the same or higher level
of priority as the mortgage relating to the Defective Mortgage Loan; (vi)
have a remaining term to maturity not more than ___ months earlier and not
more than __ months later than the remaining term to maturity of the
Defective Mortgage Loan; (vii) comply with each representation and warranty
as to the Mortgage Loans set forth in the Agreement (deemed to be made as of
the date of substitution); (viii) in general, have an original Combined Loan-
to-Value Ratio not greater than that of the Defective Mortgage Loan; and (ix)
satisfy certain other conditions specified in the Agreement. To the extent
the Principal Balance of an Eligible Substitute Mortgage Loan is less than
the Principal Balance of the related Defective Mortgage Loan and to the
extent that the Transferor Interest would be reduced below the Minimum
Transferor Interest, the Seller will be required to make a deposit to the
Collection Account equal to such difference.
The Seller will make certain representations and warranties as to the
accuracy in all material respects of certain information furnished to the
Trustee with respect to each Mortgage Loan (e.g., Cut-off Date Principal
Balance and the Loan Rate). In addition, the Seller will represent and
warrant on the Closing Date that at the time of transfer to the Sponsor, the
Seller has transferred or assigned all of its rights, title and interest in
each Mortgage Loan and the Related Documents, free of any lien (subject to
certain exceptions). Upon discovery of a breach of any such representation
and warranty which materially and adversely affects the interests of the
Certificateholders or the Certificate Insurer in the related Mortgage Loan
and Related Documents, the Seller will have a period of 90 days after
discovery or notice of the breach to effect a cure. If the breach cannot be
cured within the 90-day period, the Seller will be obligated to accept a
transfer of the Defective Mortgage Loan from the Trust Fund. The same
procedure and limitations that are set forth in the second preceding
paragraph for the transfer of Defective Mortgage Loans will apply to the
transfer of a Mortgage Loan that is required to be transferred because of
such breach of a representation or warranty in the Agreement that materially
and adversely affects the interests of the Certificateholders.
Mortgage Loans required to be transferred to the Seller as described in
the preceding paragraphs are referred to as "Defective Mortgage Loans."
Pursuant to the Agreement, the Master Servicer will service and
administer the Mortgage Loans as more fully set forth above.
AMENDMENTS TO CREDIT LINE AGREEMENTS
Subject to applicable law, the Master Servicer may change the terms of
the Credit Line Agreements at any time provided that such changes (i) do not
adversely affect the interest of the Certificateholders or the Certificate
Insurer, and (ii) are consistent with prudent business practice. In addition,
the Agreement permits the Master Servicer, within certain limitations
described therein, to increase the Credit Limit of the related Mortgage Loan
or reduce the Margin for such Mortgage Loan.
OPTIONAL TRANSFERS OF MORTGAGE LOANS TO THE TRANSFEROR
Subject to the conditions specified in the Agreement, on any
Distribution Date the Transferor may, but shall not be obligated to, remove
on such Distribution Date (the "Transfer Date") from the Trust Fund, certain
Mortgage Loans without notice to the Certificateholders. The Transferor is
permitted to designate the Mortgage Loans to be removed. Mortgage Loans so
designated will only be removed upon satisfaction of the following
conditions: (i) No Rapid Amortization Event (as defined herein) has
occurred; (ii) the Transferor Interest as of such Transfer Date (after giving
effect to such removal) exceeds the Minimum Transferor Interest; (iii) the
transfer of any Mortgage Loans on any Transfer Date during the Managed
Amortization Period (as defined herein) shall not, in the reasonable belief
of the Transferor, cause a Rapid Amortization Event to occur or an event
which with notice or lapse of time or both would constitute a Rapid
Amortization Event; (iv) the Transferor shall have delivered to the Trustee a
"Mortgage Loan Schedule" containing a list of all Mortgage Loans remaining in
the Trust Fund after such removal; (v) the Transferor shall represent and
warrant that no selection procedures which the Transferor reasonably believes
are adverse to the interests of the Certificateholders or the Certificate
Insurer were used by the Transferor in selecting such Mortgage Loans; (vi) in
connection with the first such retransfer of Mortgage Loans, the Rating
Agencies shall have been notified of the proposed transfer and prior to the
Transfer Date shall not have notified the Transferor in writing that such
transfer would result in a reduction or withdrawal of the ratings assigned to
the Certificates without regard to the Policy; and (vii) the Transferor shall
have delivered to the Trustee and the Certificate Insurer an officer's
certificate confirming the conditions set forth in clauses (i) through (vi)
above.
As of any date of determination, the "Minimum Transferor Interest" is an
amount equal to the lesser of (a) _% of the Pool Balance on such date and (b)
the Transferor Interest as of the Closing Date.
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO COLLECTION ACCOUNT
The Trustee shall establish and maintain an account (the "Collection
Account") for the benefit of the Certificateholders and the Transferor, as
their interests may appear. The Collection Account will be an Eligible
Account (as defined herein). Subject to the investment provision described
in the following paragraphs, within two Business Days of receipt by the
Master Servicer of amounts in respect of the Mortgage Loans (excluding
amounts representing administrative charges, annual fees, taxes, assessments,
credit insurance charges, insurance proceeds to be applied to the restoration
or repair of a Mortgaged Property or similar items), the Master Servicer will
deposit such amounts in the Collection Account. Amounts so deposited may be
invested in Eligible Investments (as described in the Agreement) maturing no
later than one Business Day prior to the next Distribution Date or on such
Distribution Date if approved by the Rating Agencies and the Certificate
Insurer. Not later than the third Business Day prior to each Distribution
Date (the "Determination Date"), the Master Servicer will notify the Trustee
of the amount of such deposit to be included in funds available for the
related Distribution Date.
An "Eligible Account" is (i) an account that is maintained with a
depository institution whose debt obligations at the time of any deposit
therein have the highest short-term debt rating by the Rating Agencies, (ii)
one or more accounts with a depository institution having a minimum long-term
unsecured debt rating of "____" by _______ and "____" by ___, which accounts
are fully insured by either the Savings Association Insurance Fund ("SAIF")
or the Bank Insurance Fund ("BIF") of the Federal Deposit Insurance
Corporation established by such fund, (iii) a segregated trust account
maintained with the Trustee in its fiduciary capacity or (iv) otherwise
acceptable to each Rating Agency and the Certificate Insurer as evidenced by
a letter from each Rating Agency and the Certificate Insurer to the Trustee,
without reduction or withdrawal of their then current ratings of the
Certificates.
Eligible Investments are specified in the Agreement and may also include
investments which meet the criteria of the Rating Agencies from time to time
as being consistent with their then current ratings of the Certificates.
ALLOCATIONS AND COLLECTIONS
All collections on the Mortgage Loans will generally be allocated in
accordance with the Loan Agreements between amounts collected in respect of
interest and amounts collected in respect of principal. As to any
Distribution Date, "Interest Collections" will be equal to the amounts
collected during the related Collection Period, including such portion of Net
Liquidation Proceeds allocated to interest pursuant to the terms of the Loan
Agreements less Servicing Fees for the related Collection Period.
As to any Distribution Date, "Principal Collections" will be equal to
the sum of (i) the amounts collected during the related Collection Period,
including such portion of Net Liquidation Proceeds allocated to principal
pursuant to the terms of the Loan Agreements and (ii) any Transfer Deposit
Amounts. "Net Liquidation Proceeds" with respect to a Mortgage Loan are
equal to the Liquidation Proceeds, reduced by related expenses, but not
including the portion, if any, of such amount that exceeds the Principal
Balance of the Mortgage Loan plus accrued and unpaid interest thereon to the
end of the Collection 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.
With respect to any Distribution Date, the portion of Interest
Collections allocable to the Certificates ("Investor Interest Collections")
will equal the product of (a) Interest Collections for such Distribution Date
and (b) the Investor Floating Allocation Percentage. With respect to any
Distribution Date, the "Investor Floating Allocation Percentage" is the
percentage equivalent of a fraction determined by dividing the Invested
Amount at the close of business on the preceding Distribution Date (or the
Closing Date in the case of the first Distribution Date) by the Pool Balance
at the beginning of the related Collection Period. The remaining amount of
Interest Collections will be allocated to the Transferor Interest.
Principal Collections will be allocated between the Certificateholders
and the Transferor ("Investor Principal Collections" and "Transferor
Principal Collections", respectively) as described herein.
The Trustee will deposit any amounts drawn under the Policy into the
Collection 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 day is equal to the Cut-off Date Principal Balance thereof, 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 Loan Agreement prior to such day. The Principal
Balance of a Liquidated Mortgage Loan after final recovery of related
Liquidation Proceeds shall be zero.
DISTRIBUTIONS ON THE CERTIFICATES
Beginning with the first Distribution Date, distributions on the
Certificates will be made by the Trustee or the Paying Agent on each
Distribution Date to the persons in whose names such Certificates are
registered at the close of business on the day prior to each Distribution
Date or, if the Certificates are no longer Book-Entry Certificates, at the
close of business on the last day of the month preceding such Distribution
Date (the "Record Date"). The term "Distribution Date" means the _________
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 Certificateholder owning Certificates having
denominations aggregating at least $_________, 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
Certificate Register in amounts calculated as described herein on the
Determination Date. However, the final distribution in respect of the
Certificates will be made only upon presentation and surrender thereof at the
office or the agency of the Trustee specified in the notice to
Certificateholders of such final distribution. For purposes of the
Agreement, a "Business Day" is any day other than (i) a Saturday or Sunday or
(ii) a day on which banking institutions in New York State are required or
authorized by law to be closed.
Application of Interest Collections. On each Distribution Date, the
Trustee or the Paying Agent will apply the Investor Interest Collections in
the following manner and order of priority:
(i) as payment to the Trustee for its fee for services rendered
pursuant to the Agreement;
(ii) as payment for the premium for the Policy;
(iii) as payment for the accrued interest due and any overdue
accrued interest (with interest thereon to the extent permitted by law)
on the Certificate Principal Balance of the Certificates;
(iv) to pay Certificateholders the Investor Loss Amount for such
Distribution Date;
(v) as payment for any Investor Loss Amount for a previous
Distribution Date that was not previously (a) funded by Investor
Interest Collections, (b) absorbed by the Overcollateralization Amount,
(c) funded by amounts on deposit in the Spread Account or (d) funded by
draws on the Policy;
(vi) to reimburse prior draws made from the Policy (with interest
thereon);
(vii) to pay principal on the Certificates until the Invested
Amount exceeds the Certificate Principal Balance by the Required
Overcollateralization Amount (such amount so paid, the "Accelerated
Principal Distribution Amount");
(viii) any other amounts required to be deposited in an account for
the benefit of the Certificate Insurer and the Certificateholders or
owed to the Certificate Insurer pursuant to the Insurance Agreement;
(ix) certain amounts that may be required to be paid to the Master
Servicer pursuant to the Agreement; and
(x) to the Transferor to the extent permitted as described herein.
Payments to Certificateholders pursuant to clause (iii) will be interest
payments on the Certificates. Payments to Certificateholders pursuant to
clauses (iv), (v) and (vii) will be principal payments on the Certificates
and will therefore reduce the Certificate Principal Balance, however,
payments pursuant to clause (vii) will not reduce the Invested Amount. The
Accelerated Principal Distribution Amount is not guaranteed by the Policy.
To the extent that Investor Interest Collections are applied to pay the
interest on the Certificates, Investor Interest Collections may be
insufficient to cover Investor Loss Amounts. If such insufficiency results
in the Certificate Principal Balance exceeding the Invested Amount, a draw
will be made on the Policy in accordance with the terms of the Policy.
The "Required Overcollateralization Amount" shall be an amount set forth
in the Agreement. "Liquidation Loss Amount" means with respect to any
Liquidated Mortgage Loan, the unrecovered Principal Balance thereof during
the Collection Period in which such Mortgage Loan became a Liquidated
Mortgage Loan, after giving effect to the Net Liquidation Proceeds in
connection therewith. The "Investor Loss Amount" shall be the product of the
Investor Floating Allocation Percentage and the Liquidation Loss Amount for
such Distribution Date.
A "Liquidated Mortgage Loan" means, as to any Distribution Date, any
Mortgage Loan in respect of which the Master Servicer has determined, based
on the servicing procedures specified in the Agreement, as of the end of the
preceding Collection Period that all Liquidation Proceeds which it expects to
recover with respect to the disposition of the related Mortgaged Property
have been recovered. The Investor Loss Amount will be allocated to the
Certificateholders.
As to any Distribution Date other than the first Distribution Date, the
"Collection Period" is the calendar month preceding each Distribution Date.
As to the first Distribution Date, the "Collection Period" is the period
beginning after the Cut-off Date and ending on the last day of
_______________ 199_.
Interest will be distributed on each Distribution Date at the
Certificate Rate for the related Interest Period (as defined below). The
"Certificate Rate" for a Distribution Date will generally equal the sum of
((a) LIBOR, calculated as specified below, as of the second LIBOR Business
Day prior to the immediately preceding Distribution Date (or as of two LIBOR
Business Days prior to the Closing Date, in the case of the first
Distribution Date) plus (b) ____% per annum.) Notwithstanding the foregoing,
in no event will the amount of interest required to be distributed in respect
of the Certificates on any Distribution Date exceed a rate equal to the
weighted average of the Loan Rates (net of the Servicing Fee Rate, the fee
payable to the Trustee and the rate at which the premium payable to the
Certificate Insurer is calculated) weighted on the basis of the daily balance
of each Mortgage Loan during the related billing cycle prior to the
Collection Period relating to such Distribution Date.
Interest on the Certificates in respect of any Distribution Date will
accrue on the Certificate Principal Balance from the preceding Distribution
Date (or in the case of the first Distribution Date, from the date of the
initial issuance of the Certificates (the "Closing Date")) through the day
preceding such Distribution Date (each such period, an "Interest Period") on
the basis of the actual number of days in the Interest Period and a 360-day
year. Interest payments on the Certificates will be funded from Investor
Interest Collections and, if necessary, from draws on the Policy.
(Calculation of the LIBOR Rate. On each Distribution Date, LIBOR shall
be established by the Trustee and as to any Interest 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 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 Distribution
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 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 approximately equal to the principal amount of the Certificates then
outstanding. If no such quotations can be obtained, the rate will be LIBOR
for the prior Distribution 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.)
Transferor Collections. Collections allocable to the Transferor
Interest that are not distributed to Certificateholders will be distributed
to the Transferor only to the extent that such distribution will not reduce
the amount of the Transferor Interest as of the related Distribution Date
below the Minimum Transferor Interest. Amounts not distributed to the
Transferor because of such limitations will be retained in the Collection
Account until the Transferor Interest exceeds the Minimum Transferor
Interest, at which time such excess shall be released to the Transferor. If
any such amounts are still retained in the Collection Account upon the
commencement of the Rapid Amortization Period, such amounts will be paid to
the Certificateholders as a reduction of the Certificate Principal Balance.
Overcollateralization. The distribution of the aggregate Accelerated
Principal Distribution Amount, if any, to Certificateholders may result in
the Invested Amount being greater than the Certificate Principal Balance,
thereby creating overcollateralization. The Overcollateralization Amount, if
any, will be available to absorb any Investor Loss Amount that is not covered
by Investor Interest Collections.
Distributions of Principal Collections. For the period beginning on the
first Distribution Date and, unless a Rapid Amortization Event shall have
earlier occurred, ending on the Distribution Date in ______________ 20__ (the
"Managed Amortization Period"), the amount of Principal Collections payable
to Certificateholders as of each Distribution Date during the Managed
Amortization Period will equal, to the extent funds are available therefor,
the Scheduled Principal Collections Distribution Amount for such Distribution
Date. On any Distribution Date during the Managed Amortization Period, the
"Scheduled Principal Collections Distribution Amount" shall equal the lesser
of (i) the Maximum Principal Payment (as defined herein) and (ii) the
Alternative Principal Payment (as defined herein). With respect to any
Distribution Date, the "Maximum Principal Payment" will equal the product of
the Investor Fixed Allocation Percentage and Principal Collections for such
Distribution Date. With respect to any Distribution Date, the "Alternative
Principal Payment" will equal the greater of (x) 0___% of the Certificate
Principal Balance immediately prior to such Distribution Date and (y) the
amount, but not less than zero, of Principal Collections for such
Distribution Date less the aggregate of Additional Balances created during
the related Collection Period.
Beginning with the first Distribution Date following the end of the
Managed Amortization Period, the amount of Principal Collections payable to
Certificateholders on each Distribution Date will be equal to the Maximum
Principal Payment.
The amount of Principal Collections to be distributed to
Certificateholders on the first Distribution Date will reflect Principal
Collections and Additional Balances during the first Collection Period which
is the period beginning after the Cut-off Date through the last day of
__________ 199_.
Distributions of Principal Collections based upon the Investor Fixed
Allocation Percentage may result in distributions of principal to
Certificateholders in amounts that are greater relative to the declining Pool
Balance than would be the case if the Investor Floating Allocation Percentage
were used to determine the percentage of Principal Collections distributed in
respect of the Invested Amount. Principal Collections not allocated to the
Certificateholders will be allocated to the Transferor Interest. The
aggregate distributions of principal to the Certificateholders will not
exceed the Original Certificate Principal Balance.
In addition, to the extent of funds available therefor (including funds
available under the Policy), on the Distribution Date in ____________ 20__,
Certificateholders will be entitled to receive as a payment of principal an
amount equal to the outstanding Certificate Principal Balance.
The Paying Agent. The Paying Agent shall initially be the Trustee,
together with any successor thereto in such capacity (the "Paying Agent").
The Paying Agent shall have the revocable power to withdraw funds from the
Collection Account for the purpose of making distributions to the
Certificateholders.
RAPID AMORTIZATION EVENTS
As described above, the Managed Amortization Period will continue
through the Distribution Date in ________ 20__, unless a Rapid Amortization
Event occurs prior to such date in which case the Rapid Amortization Period
will commence prior to such date. "Rapid Amortization Event" refers to
any of the following events:
(a) failure on the part of the Seller (i) to make a payment or
deposit required under the Agreement within two 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 Seller set forth in the Agreement, which failure continues
unremedied for a period of 60 days after written notice;
(b) any representation or warranty made by the Seller in the
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 Certificateholders are materially and adversely affected;
provided, however, that a Rapid Amortization Event shall not be deemed
to occur if the Seller 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) in
accordance with the provisions of the Agreement;
(c) the occurrence of certain events of bankruptcy, insolvency or
receivership relating to the Transferor; or
(d) the Trust Fund 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.
(other events)
In the case of any event described in clause (a) or (b), a Rapid
Amortization Event will be deemed to have occurred only if, after the
applicable grace period, if any, described in such clauses, either the
Trustee or Certificateholders holding Certificates evidencing more than 51%
of the Percentage Interests or the Certificate Insurer (so long as there is
no default by the Certificate Insurer in the performance of its obligations
under the Policy), by written notice to the Sponsor and the Master Servicer
(and to the Trustee, if given by the Certificateholders) 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) or (d), a Rapid Amortization Event will
be deemed to have occurred without any notice or other action on the part of
the Trustee or the Certificateholders immediately upon the occurrence of such
event.
In addition to the consequences of a Rapid Amortization Event discussed
above, if the Transferor voluntarily files a bankruptcy petition or goes into
liquidation or any person is appointed a receiver or bankruptcy trustee of
the Transferor, on the day of any such filing or appointment no further
Additional Balances will be transferred to the Trust Fund, the Transferor
will immediately cease to transfer Additional Balances to the Trust Fund and
the Transferor will promptly give notice to the Trustee of any such filing or
appointment. Within 15 days, the Trustee will publish a notice of the
liquidation or the filing or appointment stating that the Trustee intends to
sell, dispose of or otherwise liquidate the Mortgage Loans in a commercially
reasonable manner and to the best of its ability. Unless otherwise
instructed within a specified period by Certificateholders representing
undivided interests aggregating more than 51% of the aggregate principal
amount of the Certificates, the Trustee will sell, dispose of or otherwise
liquidate the Mortgage Loans in a commercially reasonable manner and on
commercially reasonable terms. Any proceeds will be treated as collections
allocable to the Certificateholders and the Investor Fixed Allocation
Percentage of such remaining proceeds and will be distributed to the
Certificateholders on the date such proceeds are received (the "Dissolution
Distribution Date"). If the portion of such proceeds allocable to the
Certificateholders are not sufficient to pay in full the remaining amount due
on the Certificates, the Policy will cover such shortfall.
Notwithstanding the foregoing, if a conservator, receiver or trustee-in-
bankruptcy is appointed for the Transferor and no Rapid Amortization Event
exists other than such conservatorship, receivership or insolvency of the
Transferor, the conservator, receiver or trustee-in-bankruptcy may have the
power to prevent the commencement of the Rapid Amortization Period or the
sale of Mortgage Loans described above.
THE POLICY
(On or before the Closing Date, the Policy will be issued by the
Certificate Insurer pursuant to the provisions of the Agreement and the
Insurance and Indemnity Agreement (the "Insurance Agreement") to be dated as
of ____________, 199_, among the Seller, the Sponsor, the Master Servicer and
the Certificate Insurer.
The Policy will irrevocably and unconditionally guarantee payment on
each Distribution Date to the Trustee for the benefit of the
Certificateholders the full and complete payment of (i) the Guaranteed
Principal Distribution Amount (as defined herein) with respect to the
Certificates for such Distribution Date and (ii) accrued and unpaid interest
due on the Certificates (together, the "Guaranteed Distributions"), with such
Guaranteed Distributions having been calculated in accordance with the
original terms of the Certificates or the Agreement except for amendments or
modifications to which the Certificate Insurer has given its prior written
consent. The effect of the Policy is to guarantee the timely payment of
interest on, and the ultimate payment of the principal amount of, all of the
Certificates.
The "Guaranteed Principal Distribution Amount" shall be the amount, if
any, by which the Certificate Principal Balance (after giving effect to all
other amounts distributable and allocable to principal on the Certificates)
exceeds the Invested Amount as of such Distribution Date (after giving effect
to all other amounts distributable and allocable to principal on the
Certificates for such Distribution Date). In addition, the Policy will
guarantee the payment of the outstanding Certificate Principal Balance on the
Distribution Date in ______________ 20__ (after giving effect to all other
amounts distributable and allocable to principal on such Distribution Date).
In accordance with the Agreement, the Trustee will be required to
establish and maintain an account (the "Spread Account") for the benefit of
the Certificate Insurer and the Certificateholders. The Trustee shall
deposit the amounts into the Spread Account as required by the Agreement.
Payment of claims on the Policy will be made by the Certificate Insurer
following Receipt by the Certificate Insurer of the appropriate notice for
payment on the later to occur of (i) 12:00 noon, New York City time, on the
second Business Day following Receipt of such notice for payment and (ii)
12:00 noon, New York City time, on the relevant Distribution Date.
If payment of any amount guaranteed by the Certificate Insurer pursuant
to the Policy is avoided as a preference payment under applicable bankruptcy,
insolvency, receivership or similar law, the Certificate Insurer will pay
such amount out of the funds of the Certificate Insurer on the later of (a)
the date when due to be paid pursuant to the Order referred to below or (b)
the first to occur of (i) the fourth Business Day following Receipt by the
Certificate Insurer from the Trustee of (A) a certified copy of the order
(the "Order") of the court or other governmental body which exercised
jurisdiction to the effect that the Certificateholder is required to return
the amount of any Guaranteed Distributions distributed with respect to the
Certificates during the term of the related Policy because such distributions
were avoidable preference payments under applicable bankruptcy law, (B) a
certificate of the Certificateholder that the Order has been entered and is
not subject to any stay and (C) an assignment duly executed and delivered by
the Certificateholder, in such form as is reasonably required by the
Certificate Insurer and provided to the Certificateholder by the Certificate
Insurer, irrevocably assigning to the Certificate Insurer all rights and
claims of the Certificateholder relating to or arising under the Certificates
against the debtor which made such preference payment or otherwise with
respect to such preference payment, or (ii) the date of Receipt by the
Certificate Insurer from the Trustee of the items referred to in clauses (A),
(B) and (C) above if, at least four Business Days prior to such date of
Receipt, the Certificate Insurer shall have Received written notice from the
Trustee that such items were to be delivered on such date and such date was
specified in such notice. Such payment shall be disbursed to the receiver,
conservator, debtor-in-possession or trustee in bankruptcy named in the Order
and not to the Trustee or any Certificateholder directly (unless a
Certificateholder has previously paid such amount to the receiver,
conservator, debtor-in-possession or trustee in bankruptcy named in the Order
in which case such payment shall be disbursed to the Trustee for distribution
to such Certificateholder upon proof of such payment reasonably satisfactory
to the Certificate Insurer).
The terms "Receipt" and "Received", with respect to the Policy, mean
actual delivery to the Certificate Insurer and to its fiscal agent appointed
by the Certificate Insurer at its option, if any, prior to 12:00 noon, New
York City time, on a Business Day; delivery either on a day that is not a
Business Day or after 12:00 noon, New York City time, shall be deemed to be
Receipt on the next succeeding Business Day. If any notice or certificate
given under the Policy by the Trustee is not in proper form or is not
properly completed, executed or delivered it shall be deemed not to have been
Received, and the Certificate Insurer or the fiscal agent shall promptly so
advise the Trustee and the Trustee may submit an amended notice.
Under the Policy, "Business Day" means any day other than (i) a Saturday
or Sunday or (ii) a day on which banking institutions in The City of New
York, New York are authorized or obligated by law or executive order to be
closed.
The Certificate Insurer's obligations under the Policy in respect of
Guaranteed Distributions shall be discharged to the extent funds are
transferred to the Trustee as provided in the Policy, whether or not such
funds are properly applied by the Trustee.
The Certificate Insurer shall be subrogated to the rights of each
Certificateholder to receive payments of principal and interest, as
applicable, with respect to distributions on the Certificates to the extent
of any payment by the Certificate Insurer under the Policy. To the extent
the Certificate Insurer makes Guaranteed Distributions, either directly or
indirectly (as by paying through the Trustee), to the Certificateholders, the
Certificate Insurer will be subrogated to the rights of the
Certificateholders, as applicable, with respect to such Guaranteed
Distributions, shall be deemed to the extent of the payments so made to be a
registered Certificateholder for purposes of payment and shall receive all
future Guaranteed Distributions until all such Guaranteed Distributions by
the Certificate Insurer have been fully reimbursed, provided that the
Certificateholders have received the full amount of the Guaranteed
Distributions.
The terms of the Policy cannot be modified, altered or affected by any
other agreement or instrument, or by the merger, consolidation or dissolution
of the Seller. The Policy by its terms may not be cancelled or revoked. The
Policy is governed by the laws of the State of ________.
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 covered by the Florida Insurance Guaranty Association created under Part
II of Chapter 631 of the Florida Insurance Code. In the event the
Certificate Insurer were to become insolvent, any claims arising under the
Policy are excluded from coverage by the California Insurance Guaranty
Association, established pursuant to Article 14.2 of Chapter 1 of part 2 of
Division 1 of the California Insurance Code.
Pursuant to the terms of the Agreement, unless a Certificate Insurer
default exists, the Certificate Insurer shall be deemed to be the Holder of
the Certificates for certain purposes (other than with respect to payment on
the Certificates), will be entitled to exercise all rights of the
Certificateholders thereunder, without the consent of such Holders and the
Holders of the Certificates may exercise such rights only with the prior
written consent of the Certificate Insurer. In addition, the Certificate
Insurer will have certain additional rights as third party beneficiary to the
Agreement.
In the absence of payments under the Policy, Certificateholders will
bear directly the credit and other risks associated with their undivided
interest in the Trust Fund.)
REPORTS TO CERTIFICATEHOLDERS
Concurrently with each distribution to the Certificateholders, the
Master Servicer will forward to the Trustee for mailing to such
Certificateholder a statement setting forth among other items:
(i) the Investor Floating Allocation Percentage for the preceding
Collection Period;
(ii) the amount being distributed to Certificateholders;
(iii) the amount of interest included in such distribution and the
related Certificate Rate;
(iv) the amount, if any, of overdue accrued interest included in
such distribution (and the amount of interest thereon);
(v) the amount, if any, of the remaining overdue accrued interest
after giving effect to such distribution;
(vi) the amount, if any, of principal included in such
distribution;
(vii) the amount, if any, of the reimbursement of previous
Liquidation Loss Amounts included in such distribution;
(viii) the amount, if any, of the aggregate unreimbursed
Liquidation Loss Amounts after giving effect to such distribution;
(ix) the Servicing Fee for such Distribution Date;
(x) the Invested Amount and the Certificate Principal Balance, each
after giving effect to such distribution;
(xi) the Pool Balance as of the end of the preceding Collection
Period;
(xii) the number and aggregate Principal Balances of the Mortgage
Loans as to which the minimum monthly payment is delinquent for 30-59
days, 60-89 days and 90 or more days, respectively, as of the end of the
preceding Collection Period;
(xiii) the book value of any real estate which is acquired by the
Trust Fund through foreclosure or grant of deed in lieu of foreclosure;
and
(xiv) the amount of any draws on the Policy.
In the case of information furnished pursuant to clauses (iii), (iv),
(v), (vi), (vii) and (viii) above, the amounts shall be expressed as a dollar
amount per Certificate with a $1,000 denomination.
Within 60 days after the end of each calendar year commencing in 1996,
the Master Servicer will be required to forward to the Trustee a statement
containing the information set forth in clauses (iii) and (vi) above
aggregated for such calendar year.
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 Agreement,
follow such collection procedures as it follows from time to time with
respect to the home equity 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 mortgage loans it owns or
services. In accordance with the terms of the Agreement, the Master Servicer
may consent under certain circumstances to the placing of a subsequent senior
lien in respect of a Mortgage Loan.
HAZARD INSURANCE
The Master Servicer shall cause to be maintained for each Mortgage Loan
hazard insurance naming the Master Servicer or the related subservicer as
loss payee thereunder providing extended coverage in an amount which is at
least equal to the lesser of (i) the maximum insurable value of the
improvements securing such Mortgage Loan from time to time or (ii) the
combined principal balance owing on such Mortgage Loan and any mortgage loan
senior to such Mortgage Loan from time to time. The Master Servicer shall
also maintain on property acquired upon foreclosure, or by deed in lieu of
foreclosure, hazard insurance with extended coverage in an amount which is at
least equal to the lesser of (i) the maximum insurable value from time to
time of the improvements which are a part of such property or (ii) the
combined principal balance owing on such Mortgage Loan and any mortgage loan
senior to such Mortgage Loan at the time of such foreclosure or deed in lieu
of foreclosure. Amounts collected by the Master Servicer under any such
policies shall be deposited in the Collection Account net of certain amounts
as indicated in the Agreement. In cases in which any Mortgaged Property is
located in a federally designated flood area, the hazard insurance to be
maintained for the related Mortgage Loan shall include flood insurance. All
such flood insurance shall be in such amounts as are required under
applicable guidelines of the Federal Flood Emergency Act. The Master
Servicer shall be under no obligation to require that any Mortgagor maintain
earthquake or other additional insurance and shall be under no obligation
itself to maintain any such additional insurance on property acquired in
respect of a Mortgage Loan, other than pursuant to such applicable laws and
regulations as shall at any time be in force and as shall require such
additional insurance. If the Master Servicer shall obtain and maintain a
blanket policy consistent with prudent industry standards insuring against
hazard losses on all of the Mortgage Loans in an aggregate amount prudent
under industry standards, it shall conclusively be deemed to have satisfied
its obligations and if there shall have been a loss which would have been
covered by such policy, deposit in the Collection Account, as the case may
be, the amount not otherwise payable under the blanket policy because of any
deductible clause.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements on the property
by fire, lightning, explosion, smoke, windstorm 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 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 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 Certificateholders or the Transferor.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
With respect to each Collection 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 ____% per annum ("Servicing Fee Rate") on the aggregate
Principal Balances of the Mortgage Loans as of the first day of the related
Collection Period (or at the Cut-off Date for the first Collection Period).
All 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 Fund and incurred by it in connection with its responsibilities
under the 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 being prior to the rights of
Certificateholders to receive any related Net Liquidation Proceeds.
EVIDENCE AS TO COMPLIANCE
The Agreement provides for delivery on or before ___________ in each
year, beginning in ___________, 199_, to the Trustee 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 Agreement
throughout the preceding fiscal year, except as specified in such statement.
On or before _____________ of each year, beginning ___________, 199_,
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 Transferor) 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 Agreement and that, on the basis of such examination, such firm
believes that such servicing was conducted in compliance with the 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 AND THE TRANSFEROR
The 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 (i) 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 or its affiliate or (ii) upon the satisfaction of the
following conditions: (a) the Master Servicer has proposed a successor
servicer to the Trustee in writing and such proposed successor servicer is
reasonably acceptable to the Trustee; (b) the Rating Agencies have confirmed
to the Trustee that the appointment of such proposed successor servicer as
the Master Servicer will not result in the reduction or withdrawal of the
then current rating of the Certificates; and (c) such proposed successor
servicer is reasonably acceptable to the Certificate Insurer. No such
resignation will become effective until the Trustee or a successor servicer
has assumed the Master Servicer's obligations and duties under the Agreement.
The Master Servicer may perform any of its duties and obligations under
the Agreement through one or more subservicers or delegates, which may be
affiliates of the Master Servicer. Notwithstanding any such arrangement, the
Master Servicer will remain liable and obligated to the Trustee and the
Certificateholders for the Master Servicer's duties and obligations under the
Agreement, without any diminution of such duties and obligations and as if
the Master Servicer itself were performing such duties and obligations.
The Agreement provides that the Master Servicer will indemnify the Trust
Fund and the Trustee from and against any loss, liability, expense, damage or
injury suffered or sustained as a result of the Master Servicer's actions or
omissions in connection with the servicing and administration of the Mortgage
Loans which are not in accordance with the provisions of the Agreement. The
Agreement provides that neither the Sponsor, the Transferor nor the Master
Servicer nor their directors, officers, employees or agents will be under any
other liability to the Trust Fund, the Trustee, the Certificateholders or any
other person for any action taken or for refraining from taking any action
pursuant to the Agreement. However, neither the Sponsor, the Transferor nor
the Master Servicer will be protected against any liability which would
otherwise be imposed by reason of willful misconduct, bad faith or gross
negligence of the Sponsor, the Transferor or the Master Servicer in the
performance of its duties under the Agreement or by reason of reckless
disregard of its obligations thereunder. In addition, the Agreement provides
that the Master Servicer will not be under any obligation to appear in,
prosecute or defend any legal action which is not incidental to its servicing
responsibilities under the Agreement and which in its opinion may expose it
to any expense or liability. The Master Servicer may, in its sole
discretion, undertake any such legal action which it may deem necessary or
desirable with respect to the Agreement and the rights and duties of the
parties thereto and the interest of the Certificateholders thereunder.
Any corporation into which the Master Servicer may be merged or
consolidated, or any corporation resulting from any merger, conversion or
consolidation to which the Master Servicer shall be a party, or any
corporation succeeding to the business of the Master Servicer shall be the
successor of the Master Servicer hereunder, without the execution or filing
of any paper or any further act on the part of any of the parties hereto,
anything in the Agreement to the contrary notwithstanding.
EVENTS OF SERVICING TERMINATION
"Events of Servicing Termination" will consist of: (i) any failure by
the Master Servicer to deposit in the Collection Account any deposit required
to be made under the Agreement, which failure continues unremedied for five
business days after the giving of written notice of such failure to the
Master Servicer by the Trustee, or to the Master Servicer and the Trustee by
the Certificate Insurer or Certificateholders evidencing an aggregate,
undivided interest in the Trust Fund of at least 25% of the Certificate
Principal Balance; (ii) any failure by the Master Servicer duly to observe or
perform in any material respect any other of its covenants or agreements in
the Agreement which, in each case, materially and adversely affects the
interests of the Certificateholders or the Certificate Insurer and continues
unremedied for 60 days after the giving of written notice of such failure to
the Master Servicer by the Trustee, or to the Master Servicer and the Trustee
by the Certificate Insurer or Certificateholders evidencing an aggregate,
undivided interest in the Trust Fund of at least 25% of the Certificate
Principal Balance; or (iii) certain events of insolvency, readjustment of
debt, marshalling of assets and liabilities or similar proceedings relating
to the Master Servicer and certain actions by the Master Servicer indicating
insolvency, reorganization or inability to pay its obligations (each, an
"Insolvency Event"). Under certain other circumstances, the Certificate
Insurer (with the consent of holders of Certificates evidencing an aggregate
undivided interest in the Trust Fund of at least 51% of the Certificate
Principal Balance) may deliver written notice to the Master Servicer
terminating all the rights and obligations of the Master Servicer under the
Agreement.
Notwithstanding the foregoing, a delay in or failure of performance
referred to under clause (i) above for a period of ten Business Days or
referred to under clause (ii) above for a period of 60 Business Days, shall
not constitute an Event of Servicing Termination if such delay or failure
could not be prevented by the exercise of reasonable diligence by the Master
Servicer and such delay or failure was caused by an act of God or other
similar occurrence. Upon the occurrence of any such event the Master
Servicer shall not be relieved from using its best efforts to perform its
obligations in a timely manner in accordance with the terms of the Agreement
and the Master Servicer shall provide the Trustee, the Sponsor, the
Transferor, the Certificate Insurer and the Certificateholders prompt notice
of such failure or delay by it, together with a description of its efforts to
so perform its obligations.
RIGHTS UPON AN EVENT OF SERVICING TERMINATION
So long as an Event of Servicing Termination remains unremedied, either
the Trustee, or Certificateholders evidencing an aggregate, undivided
interest in the Trust Fund of at least 51% of the Certificate Principal
Balance or the Certificate Insurer, may terminate all of the rights and
obligations of the Master Servicer under the Agreement and in and to the
Mortgage Loans, whereupon the Trustee will succeed to all the
responsibilities, duties and liabilities of the Master Servicer under the
Agreement and will be entitled to similar compensation arrangements. In the
event that the Trustee would be obligated to succeed the Master Servicer but
is unwilling or unable so to act, it may appoint, or petition a court of
competent jurisdiction for the appointment of, a housing and home finance
institution or other mortgage loan or home equity loan servicer with all
licenses and permits required to perform its obligations under the Agreement
and having a net worth of at least $__________ and acceptable to the
Certificate Insurer to act as successor to the Master Servicer under the
Agreement. Pending such appointment, the Trustee will be obligated to act in
such capacity unless prohibited by law. Such successor will be entitled to
receive the same compensation that the Master Servicer would otherwise have
received (or such lesser compensation as the Trustee and such successor may
agree). A receiver or conservator for the Master Servicer may be empowered
to prevent the termination and replacement of the Master Servicer where the
only Event of Servicing Termination that has occurred is an Insolvency Event.
AMENDMENT
The Agreement may be amended from time to time by the Seller, the Master
Servicer, the Sponsor and the Trustee and with the consent of the Certificate
Insurer, but without the consent of the Certificateholders, to cure any
ambiguity, to correct or supplement any provisions therein which may be
inconsistent with any other provisions of the Agreement, to add to the duties
of the Sponsor, the Seller, the Transferor or the Master Servicer or to add
or amend any provisions of the Agreement as required by the Rating Agencies
in order to maintain or improve any rating of the Certificates (it being
understood that, after obtaining the ratings in effect on the Closing Date,
neither the Transferor, the Trustee nor the Master Servicer is obligated to
obtain, maintain, or improve any such rating) or to add any other provisions
with respect to matters or questions arising under the Agreement which shall
not be inconsistent with the provisions of the Agreement, provided that such
action will not, as evidenced by an opinion of counsel, materially and
adversely affect the interests of any Certificateholder or the Certificate
Insurer; provided, that any such amendment will not be deemed to materially
and adversely affect the Certificateholders and no such opinion will be
required to be delivered if the person requesting such amendment obtains a
letter from the Rating Agencies stating that such amendment would not result
in a downgrading of the then current rating of the Certificates. The
Agreement may also be amended from time to time by the Seller, the Master
Servicer, the Sponsor, and the Trustee, with the consent of
Certificateholders evidencing an aggregate, undivided interest in the Trust
Fund of at least 51% of the Certificate Principal Balance and the Certificate
Insurer for the purpose of adding any provisions to or changing in any manner
or eliminating any of the provisions of the Agreement or of modifying in any
manner the rights of the Certificateholders, provided that no such amendment
will (i) reduce in any manner the amount of, or delay the timing of,
collections of payments on the Certificates or distributions or payments
under the Policy which are required to be made on any Certificate without the
consent of the holder of such Certificate or (ii) reduce the aforesaid
percentage required to consent to any such amendment, without the consent of
the holders of all Certificates then outstanding.
TERMINATION; RETIREMENT OF THE CERTIFICATES
The Trust Fund will terminate on the Distribution Date following the
later of (A) payment in full of all amounts owing to the Certificate Insurer
and (B) the earliest of (i) the Distribution Date on which the Certificate
Principal Balance has been reduced to zero, (ii) the final payment or other
liquidation of the last Mortgage Loan in the Trust Fund, (iii) the optional
transfer to the Transferor of the Certificates, as described below and (iv)
the Distribution Date in ____________ 20__.
The Certificates will be subject to optional transfer to the Transferor
on any Distribution Date after the Certificate Principal Balance is reduced
to an amount less than or equal to __% of the Original Certificate Principal
Balance and all amounts due and owing to the Certificate Insurer and
unreimbursed draws on the Policy, together with interest thereon, as provided
under the Insurance Agreement, have been paid. The transfer price will be
equal to the sum of the outstanding Certificate Principal Balance and accrued
and unpaid interest thereon at the Certificate Rate through the day preceding
the final Distribution Date. In no event, however, will the Trust Fund
created by the Agreement continue for more than 21 years after the death of
certain individuals named in the Agreement. Written notice of termination of
the Agreement will be given to each Certificateholder, and the final
distribution will be made only upon surrender and cancellation of the
Certificates at an office or agency appointed by the Trustee which will be
specified in the notice of termination.
In addition, the Trust Fund may be liquidated as a result of certain
events of bankruptcy, insolvency or receivership relating to the Transferor.
See "--Rapid Amortization Events" herein.
THE TRUSTEE
( ), a ____________________________ with its principal
place of business in ________, has been named Trustee pursuant to the
Agreement.
The commercial bank or trust company serving as Trustee may own
Certificates and have normal banking relationships with the Sponsor, the
Master Servicer, the Seller 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 may also remove the Trustee if the Trustee ceases to be
eligible to continue as such under the 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.
No holder of a Certificate will have any right under the Agreement to
institute any proceeding with respect to the Agreement unless such holder
previously has given to the Trustee written notice of default and unless
Certificateholders evidencing an aggregate, undivided interest in the Trust
Fund of at least 51% of the Certificate 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 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 Certificateholders, unless such Certificateholders
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 Fund 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 Agreement, engage in the purchase
and sale (or turnover) of investments; (vi) offer securities in exchange for
property (except 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 Master Servicer
with the terms of the Agreement.
DESCRIPTION OF THE PURCHASE AGREEMENT
The Mortgage Loans to be transferred to the Trust Fund by the Sponsor
will be purchased by the Sponsor from (Headlands) pursuant to the Purchase
Agreement to be entered into between the Sponsor, as purchaser of the
Mortgage Loans, and (Headlands), as Seller of the Mortgage Loans. Under the
Purchase Agreement, the Seller will agree to transfer the Mortgage Loans and
related Additional Balances to the Sponsor. Pursuant to the Agreement, the
Mortgage Loans will be immediately transferred by the Sponsor to the Trust
Fund, and the Sponsor will assign its rights in, to and under the Purchase
Agreement to the Trust Fund. The following is a description of the material
provisions of the Purchase Agreement.
TRANSFERS OF MORTGAGE LOANS
Pursuant to the Purchase Agreement, the Seller will transfer and assign
to the Sponsor, all of its right, title and interest in and to the Mortgage
Loans and all of the Additional Balances thereafter created. The purchase
price of the Mortgage Loans is a specified percentage of the face amount
thereof as of the time of transfer and is payable by the Sponsor in cash.
The purchase price of each Additional Balance comprising the Principal
Balance of a Mortgage Loan is the amount such Additional Balance.
REPRESENTATIONS AND WARRANTIES
The Seller will represent and warrant to the Sponsor 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
Purchase Agreement. The Seller will also represent and warrant to the
Sponsor that, among other things, immediately prior to the sale of the
Mortgage Loans to the Sponsor, the Seller was the sole owner and holder of
the Mortgage Loans free and clear of any and all liens and security
interests. The Seller will make similar representations and warranties in
the Agreement. The Seller will also represent and warrant to the Sponsor
that, among other things, as of the Closing Date, (a) the Purchase Agreement
constitutes a legal, valid and binding obligation of the Seller and (b) the
Purchase Agreement constitutes a valid sale to the Sponsor of all right,
title and interest of the Seller in and to the Mortgage Loans and the
proceeds thereof.
ASSIGNMENT TO TRUST FUND
The Seller expressly acknowledges and consents to the Sponsor's transfer
of its rights relating to the Mortgage Loans under the Agreement to the Trust
Fund. The Seller also agrees to perform its obligations under the Purchase
Agreement for the benefit of the Trust Fund.
TERMINATION
The Purchase Agreement will terminate upon the termination of the Trust
Fund.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Certificates will
be applied by the Sponsor towards the purchase of the Mortgage Loans.
FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following discussion, which summarizes the material U.S. federal
income tax aspects of the purchase, ownership and disposition of the
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 Certificate Owners in light of their personal investment
circumstances or to certain types of Certificate 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 Certificates.
CHARACTERIZATION OF THE CERTIFICATES AS INDEBTEDNESS
Based on the application of existing law to the facts as set forth in
the Agreement and other relevant documents and assuming compliance with the
terms of the Agreement as in effect on the date of issuance of the
Certificates, Brown & Wood LLP, special tax counsel to the Sponsor ("Tax
Counsel"), is of the opinion that the Certificates will be treated as debt
instruments for federal income tax purposes as of such date. Accordingly,
upon issuance, the Certificates will be treated as "Debt Securities" as
described in the Prospectus. See "Federal Income Tax Consequences" in the
Prospectus.
The Transferor and the Certificateholders express in the Agreement their
intent that, for applicable tax purposes, the Certificates will be
indebtedness secured by the Mortgage Loans. The Transferor, the Sponsor and
the Certificateholders, by accepting the Certificates, and each Certificate
Owner by its acquisition of a beneficial interest in a Certificate, have
agreed to treat the 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 Transferor 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 Transferor and has not been transferred to the
Certificate 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 operative provisions of the documents
either accords with the characterization of the Certificates as debt or
otherwise makes the rationale of those cases inapplicable to this situation.
TAXATION OF INTEREST INCOME OF CERTIFICATE OWNERS
Assuming that the Certificate Owners are holders of debt obligations for
U.S. federal income tax purposes, the Certificates generally will be taxable
as Debt Securities. See "Federal Income Tax Consequences" in the Prospectus.
While it is not anticipated that the Certificates will be issued at a
greater than de minimis discount, under Treasury regulations (the "OID
Regulations") it is possible that the 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 Certificates would be includible in income
of Certificate Owners as OID, but would not be includible again when the
interest is actually received. See "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
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 Certificates will be
treated as Pay-Through Securities.
POSSIBLE CLASSIFICATION OF THE 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 Certificates
constitutes a sale of the Mortgage Loans (or an interest therein) to the
Certificate Owners and that the proper classification of the legal
relationship between the Transferor and the Certificate Owners resulting from
this transaction is that of a partnership, a publicly traded partnership
treated as a corporation, or an association taxable as a corporation. Since
Tax Counsel has advised that the Certificates will be treated as indebtedness
in the hands of the Certificateholders for U.S. federal income tax purposes,
the Transferor will not attempt to comply with U.S. federal income tax
reporting requirements applicable to partnerships or corporations.
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 Fund 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 Certificate
Owners. Cash distributions to the Certificate 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
Certificate Owners and the Transferor, 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 Transferor
and each Certificate 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
Certificate Owner could differ if the Certificates were held to constitute
partnership interests rather than indebtedness. Assuming that all of the
provisions of the Agreement, as in effect on the date of issuance, are
complied with, it is the opinion of Tax Counsel that the Trust Fund will not
be treated as either an association or a partnership taxable as a
corporation.
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 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 Agreement, as in effect on
the date of issuance, are complied with, Tax Counsel is of the opinion that
the arrangement created by the 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 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 Certificate Owners. The
amount of such a tax would depend upon whether distributions to Certificate
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 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 Certificate Owner
provides the required foreign person information certification. See "Federal
Income Tax Consequences--Tax Treatment of Foreign Investors" in the
Prospectus.
If the interests of the Certificate 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 liability.
If the Trust Fund 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 Certificate Owners may be subject to backup withholding at the
rate of 31% with respect to interest paid on the Certificates if the
Certificate 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
Certificateholder of record, the amount of interest paid (and OID accrued, if
any) on the 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 "Certificateholder" of record
is Cede, as nominee for DTC, Certificate Owners and the IRS will receive tax
and other information including the amount of interest paid on the
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
Certificate 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 Certificate Owner fail to
provide the required certification, the Participants or Indirect Participants
(or the Paying Agent) will be required to withhold 31% of the interest (and
principal) otherwise payable to the holder, and remit the withheld amount to
the IRS as a credit against the holder's federal income tax liability.
STATE TAXES
The Sponsor makes no representations regarding the tax consequences of
purchase, ownership or disposition of the Certificates under the tax laws of
any state. Investors considering an investment in the 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 CERTIFICATES.
ERISA CONSIDERATIONS
Any Plan fiduciary which proposes to cause a Plan to acquire any of the
Certificates should consult with its counsel with respect to the potential
consequences under the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and the Code, of the Plans acquisition and ownership of
such Certificates. See "ERISA Considerations" in the Prospectus.
The U.S. Department of Labor has granted to _________________
("Underwriter") Prohibited Transaction Exemption _____ (the "Exemption")
which exempts from the application of the prohibited transaction rules
transactions relating to (1) the acquisition, sale and holding by Plans of
certain certificates representing an undivided interest in certain asset-
backed pass-through trusts, with respect to which Underwriter or any of its
affiliates is the sole underwriter or the manager or co-manager of the
underwriting syndicate; and (2) the servicing, operation and management of
such asset-backed pass-through trusts, provided that the general conditions
and certain other conditions set forth in the Exemption are satisfied. The
Exemption will apply to the acquisition, holding and resale of the
Certificates by a Plan provided that certain conditions are met.
For a general description of the Exemption and the conditions that must
be satisfied for the Exemption to apply, see "ERISA Considerations" in the
Prospectus.
The Underwriter believes that the Exemption will apply to the
acquisition and holding of the Certificates by Plans and that all conditions
of the Exemption other than those within the control of the investors will be
met.
Any Plan fiduciary considering whether to purchase any Certificates on
behalf of a Plan should consult with its counsel regarding the applicability
of the fiduciary responsibility and prohibited transaction provisions of
ERISA and the Code to such investment. Among other things, before purchasing
any Certificates, a fiduciary of a Plan subject to the fiduciary
responsibility provisions of ERISA or an employee benefit plan subject to the
prohibited transaction provisions of the Code should make its own
determination as to the availability of the exemptive relief provided in the
Exemption, and also consider the availability of any other prohibited
transaction exemptions.
LEGAL INVESTMENT CONSIDERATIONS
Although, as a condition to their issuance, the Certificates will be
rated in the highest rating category of the Rating Agencies, the 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 Certificates, which because they evidence interests in a
pool that includes junior mortgage loans are not "mortgage related
securities" under SMMEA. See "Legal Investment" in the Prospectus.
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting
agreement, dated ___________, 199_ (the "Underwriting Agreement"), among the
Sponsor and (Underwriter) (the "Underwriter"), the Sponsor has agreed to sell
to the Underwriter, and the Underwriter has agreed to purchase from the
Sponsor all the Certificates.
In the Underwriting Agreement, the Underwriter has agreed, subject to
the terms and conditions set forth therein, to purchase all the Certificates
offered hereby if any of the Certificates are purchased.
The Sponsor has been advised by the Underwriter that it proposes
initially to offer the Certificates to the public in Europe and the United
States at the offering price set forth on the cover page hereof and to
certain dealers at such price less a discount not in excess of ____% of the
Certificate denominations. The Underwriter may allow and such dealers may
reallow a discount not in excess of _____% of the Certificate denominations
to certain other dealers. After the initial public offering, the public
offering price, such concessions and such discounts may be changed.
The Sponsor has been advised by the Underwriter that it presently
intends to make a market in the Certificates offered hereby; however, it is
not obligated to do so, any market-making may be discontinued at any time,
and there can be no assurance that an active public market for the
Certificates will develop.
If the Underwriter creates a short position in the Certificates in
connection with the offering, i.e., if they sell more Certificates than are
set forth on the cover page of this Prospectus Supplement, the Underwriter
may reduce that short position by purchasing Certificates in the open market.
In general, the purchase of a security for the purpose of stabilization
or to reduce a short position could cause the price of the security to be
higher than it might be in the absence of such purchase.
Neither the Seller, the Sponsor nor the Underwriter makes any
representation or prediction as to the direction or magnitude of any effect
that the transactions described above may have on the prices of the
Certificates. In addition, neither the Seller, the Sponsor nor the
Underwriter makes any representation that the Underwriter will engage in such
transactions, once commenced, will not be discontinued without notice.
The Underwriting Agreement provides that the Sponsor will indemnify the
Underwriter against certain civil liabilities, including liabilities under
the Act.
LEGAL MATTERS
Certain legal matters with respect to the Certificates will be passed
upon for the Sponsor by Tobin & Tobin, a professional corporation, San
Francisco, California. Certain federal income tax consequences with respect
to the Certificates will be passed upon for the Sponsor by Brown & Wood LLP,
New York, New York. Brown & Wood LLP, New York, New York will act as counsel
for the Underwriters.
EXPERTS
The consolidated balance sheets of (Insurer) and Subsidiaries as of
___________, 199_ and 199_ and the related consolidated statements of income,
changes in shareholder's equity, and cash flows for each of the three years
in the period ended ___________, 199_, incorporated by reference in this
Prospectus Supplement, have been incorporated herein in reliance on the
report of ________________________, independent accountants, given on the
authority of that firm as experts in accounting and auditing.
RATINGS
It is a condition to issuance that the Certificates be rated "___" by
_____ and "___" by _________.
A securities rating addresses the likelihood of the receipt by
Certificateholders of distributions on the Mortgage Loans. The rating takes
into consideration the characteristics of the Mortgage Loans and the
structural, legal and tax aspects associated with the Certificates. The
ratings on the Certificates do not, however, constitute statements regarding
the likelihood or frequency of prepayments on the Mortgage Loans or the
possibility that Certificateholders might realize a lower than anticipated
yield.
The ratings assigned to the 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 Certificates may result in a reduction of
one or more of the ratings assigned to the 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.
The Sponsor has not requested a rating of the Certificates by any rating
agency other than the Rating Agencies; there can be no assurance, however, as
to whether any other rating agency will rate the Certificates or, if it does,
what rating would be assigned by such other rating agency. The rating
assigned by such other rating agency to the Certificates could be lower than
the respective ratings assigned by the Rating Agencies.
INDEX OF DEFINED TERMS
Page
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Accelerated Principal Distribution Amount . . . . . . . . . . . . . S-9, S-38
Additional Balances . . . . . . . . . . . . . . . . . . . . . . . . . . . S-3
Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-3
Alternative Principal Payment . . . . . . . . . . . . . . . . . . S-11, S-40
beneficial owner . . . . . . . . . . . . . . . . . . . . . . . . . . . S-32
BIF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-37
Book-Entry Certificates . . . . . . . . . . . . . . . . . . . . . . . . S-32
Business Day . . . . . . . . . . . . . . . . . . . . . . . . . . S-38, S-42
Cede . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-7
CEDEL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-7
CEDEL Participants . . . . . . . . . . . . . . . . . . . . . . . . . . S-33
Certificate Insurer . . . . . . . . . . . . . . . . . . . . . . . . . . S-12
Certificate Owners . . . . . . . . . . . . . . . . . . . . . . . . S-7, S-32
Certificate Principal Balance . . . . . . . . . . . . . . . . . . . S-4, S-31
Certificate Rate . . . . . . . . . . . . . . . . . . . . . . S-4, S-10, S-39
Certificateholder . . . . . . . . . . . . . . . . . . . . . . . . S-32, S-51
Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1, S-4
Chase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-7
Citibank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-7
Closed-End Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-3
Closing Date . . . . . . . . . . . . . . . . . . . . . . . . S-1, S-11, S-39
Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-49
Collection Account . . . . . . . . . . . . . . . . . . . . . . . S-10, S-36
Collection Period . . . . . . . . . . . . . . . . . . . . . . . . S-10, S-39
Combined Loan-to-Value Ratio . . . . . . . . . . . . . . . . S-5, S-22, S-25
Cooperative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-33
Credit Limit . . . . . . . . . . . . . . . . . . . . . . . . S-5, S-22, S-25
Credit Limit Utilization Rate . . . . . . . . . . . . . . . . . . . . . S-22
Credit Line Agreements . . . . . . . . . . . . . . . . . . . . . . S-3, S-22
Cut-Off Date . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1, S-3
Cut-Off Date Pool Balance . . . . . . . . . . . . . . . . . . . . . . . . S-3
Cut-Off Date Principal Balance . . . . . . . . . . . . . . . . . . . . . S-3
Debt Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-49
Defective Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . S-36
Definitive Certificate . . . . . . . . . . . . . . . . . . . . . . . . S-32
Determination Date . . . . . . . . . . . . . . . . . . . . . . . S-13, S-37
Dissolution Distribution Date . . . . . . . . . . . . . . . . . . . . . S-41
Distribution Date . . . . . . . . . . . . . . . . . . . . . . S-1, S-10, S-38
DTC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-7, S-32
Due Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-6
Eligible Account . . . . . . . . . . . . . . . . . . . . . . . . . . . S-37
Eligible Substitute Mortgage Loan . . . . . . . . . . . . . . . . . . . S-35
ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-15, S-52
Euroclear . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-7
Euroclear Operator . . . . . . . . . . . . . . . . . . . . . . . . . . S-33
Euroclear Participants . . . . . . . . . . . . . . . . . . . . . . . . S-33
European Depositaries . . . . . . . . . . . . . . . . . . . . . . . S-7, S-32
Events of Servicing Termination . . . . . . . . . . . . . . . . . . . . S-46
Exemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-52
Financial Intermediary . . . . . . . . . . . . . . . . . . . . . . . . S-32
Fixed Allocation Percentage . . . . . . . . . . . . . . . . . . . . . . S-10
Guaranteed Distributions . . . . . . . . . . . . . . . . . . . . S-12, S-41
Guaranteed Principal Distribution Amount . . . . . . . . . . . . S-12, S-41
Headlands . . . . . . . . . . . . . . . . . . . . . . . . . . S-1, S-3, S-19
HELOC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-3
Index Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-23
Indirect Participants . . . . . . . . . . . . . . . . . . . . . . . . . S-32
Insolvency Event . . . . . . . . . . . . . . . . . . . . . . . . . . . S-46
Insurance Agreement . . . . . . . . . . . . . . . . . . . . . . . S-12, S-41
Interest Collections . . . . . . . . . . . . . . . . . . . . . . . S-8, S-37
Interest Period . . . . . . . . . . . . . . . . . . . . . . . . . S-11, S-39
Invested Amount . . . . . . . . . . . . . . . . . . . . . . . . . . S-4, S-31
Investor Fixed Allocation Percentage . . . . . . . . . . . . . . . . . S-10
Investor Floating Allocation Percentage . . . . . . . . . . . . . . S-8, S-37
Investor Interest Collections . . . . . . . . . . . . . . . . . . . S-8, S-37
Investor Loss Amount . . . . . . . . . . . . . . . . . . . . . . S-10, S-38
Investor Principal Collections . . . . . . . . . . . . . . . . . S-10, S-37
IRS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-49
LIBOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-10
LIBOR Business Day . . . . . . . . . . . . . . . . . . . . . . . . . . S-39
Liquidated Mortgage Loan . . . . . . . . . . . . . . . . . . . . . . . S-38
Liquidation Loss Amount . . . . . . . . . . . . . . . . . . . . . S-10, S-38
Liquidation Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . S-37
Loan Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . S-3, S-22
Loan Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-6, S-23
Managed Amortization Period . . . . . . . . . . . . . . . . . . . S-11, S-40
Margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-23
Master Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-3
Maximum Principal Payment . . . . . . . . . . . . . . . . . . . . S-11, S-40
Maximum Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-23
Minimum Transferor Interest . . . . . . . . . . . . . . . . . . . . S-5, S-36
Mortgage Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-3
Mortgage Loan Schedule . . . . . . . . . . . . . . . . . . . S-5, S-35, S-36
Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
Mortgage Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-22
Mortgage Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-3
Mortgaged Properties . . . . . . . . . . . . . . . . . . . . . . . . . . S-3
Net Liquidation Proceeds . . . . . . . . . . . . . . . . . . . . . S-8, S-37
OID . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-50
OID Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-50
Order . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-42
Original Certificate Principal Balance . . . . . . . . . . . . . . S-4, S-31
Original Invested Amount . . . . . . . . . . . . . . . . . . . . . S-4, S-31
Overcollateralization Amount . . . . . . . . . . . . . . . . . . . . . . S-9
Paying Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-40
Percentage Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . S-7
Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-15
Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1, S-3
Pool Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . S-3, S-37
Pool Factor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-31
Principal Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-3
Principal Collections . . . . . . . . . . . . . . . . . . . . . . . S-8, S-37
Purchase Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . S-5
Rapid Amortization Event . . . . . . . . . . . . . . . . . . . . . . . S-40
Rating Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-15
Receipt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-42
Received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-42
Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-38
Reference Bank Rate . . . . . . . . . . . . . . . . . . . . . . . . . . S-39
Related Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . S-35
Relevant Depositary . . . . . . . . . . . . . . . . . . . . . . . . . . S-32
Required Overcollateralization Amount . . . . . . . . . . . . . . . . . S-38
Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-32
SAIF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-37
Scheduled Principal Collections Distribution Amount . . . . . . . S-11, S-40
Seller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-3
Servicing Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-13
Servicing Fee Rate . . . . . . . . . . . . . . . . . . . . . . . S-13, S-45
SMMEA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-15, S-52
Sponsor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-3
Spread Account . . . . . . . . . . . . . . . . . . . . . . . . . S-12, S-42
Tax Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-49
Telerate Screen Page 3750 . . . . . . . . . . . . . . . . . . . . . . . S-39
Terms and Conditions . . . . . . . . . . . . . . . . . . . . . . . . . S-34
Transfer Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-36
Transfer Deficiency . . . . . . . . . . . . . . . . . . . . . . . . . . S-35
Transfer Deposit Amount . . . . . . . . . . . . . . . . . . . . . . . . S-35
Transferor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-4
Transferor Interest . . . . . . . . . . . . . . . . . . . . . S-1, S-4, S-32
Transferor Principal Collections . . . . . . . . . . . . . . . . S-10, S-37
Trust Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1, S-3
Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-3, S-14
Underwriter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-52
Underwriting Agreement . . . . . . . . . . . . . . . . . . . . . . . . S-52
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Home
Equity Loan Asset Backed Certificates, Series 199_-_ (the "Global
Securities") will be available only in book-entry form. Investors in the
Global Securities may hold such Global Securities through any of The
Depository Trust Company ("DTC"), CEDEL or Euroclear. The Global Securities
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 holding Global Securities
through CEDEL and Euroclear will be conducted in the ordinary way in
accordance with their normal rules and operating procedures and in accordance
with conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures
applicable to U.S. corporate debt obligations and prior Home Equity Loan
Asset Backed Certificates issues.
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 Global Securities will be
subject to U.S. withholding taxes unless such holders meet certain
requirements and deliver appropriate U.S. tax documents to the securities
clearing organizations or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name
of Cede & Co. as nominee of DTC. Investors' interests in the Global
Securities will be represented through financial institutions acting on their
behalf as direct and indirect Participants in DTC. As a result, CEDEL and
Euroclear will hold positions on behalf of their participants through their
respective Depositaries, which in turn will hold such positions in accounts
as DTC Participants.
Investors electing to hold their Global Securities through DTC will
follow the settlement practices applicable to prior Home Equity Loan Asset
Backed Certificates issues. Investor securities custody accounts will be
credited with their holdings against payment in same-day funds on the
settlement date.
Investors electing to hold their Global Securities through 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. Global Securities will be
credited to the securities custody accounts on the settlement date against
payment in same-day funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired
value date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior Home
Equity Loan Asset Backed Certificates issues in same-day funds.
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 seller and CEDEL or Euroclear purchaser. When
Global Securities 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 respective Depositary, as
the case may be, to receive the Global Securities against payment. Payment
will include interest accrued on the Global Securities from and including the
last coupon payment date to and excluding the settlement date, on the basis
of the actual number of days in such accrual period and a year assumed to
consist of 360 days. For transactions settling on the 31st of the month,
payment will include interest accrued to and excluding the first day of the
following month. Payment will then be made by the respective Depositary of
the DTC Participant's account against delivery of the Global Securities.
After settlement has been completed, the Global Securities will be credited
to the respective clearing system and by the clearing system, in accordance
with its usual procedures, to the 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 Global Securities will accrue from, the value date (which would be the
preceding day when settlement occurred in New York). If settlement is not
completed on the intended value date (i.e., the trade fails), the 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 Global Securities are credited to their accounts 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 the finance
settlement. Under this procedure, CEDEL Participants or Euroclear
Participants purchasing Global Securities would incur overdraft charges for
one day, assuming they cleared the overdraft when the Global Securities were
credited to their accounts. However, interest on the Global Securities would
accrue from the value date. Therefore, in many cases the investment income
on the Global Securities earned during that one-day period may substantially
reduce or offset the amount of such overdraft charges, although this result
will depend on each 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 sending Global Securities
to the respective European Depositary 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 Seller 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
Global Securities are to be transferred by the respective clearing system,
through the respective Depositary, to a DTC Participant. The seller will
send instructions to 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 Depositary, as
appropriate, to deliver the Global Securities to the DTC Participant's
account against payment. Payment will include interest accrued on the Global
Securities from and including the last coupon payment to and excluding the
settlement date on the basis of the actual number of days in such accrual
period and a year assumed to consist of 360 days. For transactions settling
on the 31st of the month, payment will include interest accrued to and
excluding the first day of the following month. The payment will then be
reflected in the account of the CEDEL Participant or Euroclear Participant
the following day, and receipt 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). Should the CEDEL Participant or Euroclear Participant have a line of
credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the back-
valuation will extinguish any overdraft incurred over that one-day period.
If settlement is not completed on the intended value date (i.e., the trade
fails), receipt of the cash proceeds in the 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
Global Securities 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 were 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 day trade is reflected in their CEDEL or Euroclear accounts) in
accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant
no later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their 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 Global Securities 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, unless (i) each clearing system, bank or other
financial institution that holds customers' securities in the ordinary course
of its trade or business in the chain of intermediaries between such
beneficial owner and the U.S. entity required to withhold tax complies with
applicable certification requirements and (ii) such beneficial owner takes
one of the following steps to obtain an exemption or reduced tax rate:
Exemption for non-U.S. Persons (Form W-8). Beneficial owners of Global
Securities that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status).
If the information shown on Form W-8 changes, a new Form W-8 must be filed
within 30 days of such change.
Exemption for non-U.S. Persons with effectively connected income (Form
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a
U.S. branch, for which the interest income is effectively connected with its
conduct of a trade or business in the United States, can obtain an exemption
from the withholding tax by filing Form 4224 (Exemption from Withholding of
Tax on Income Effectively Connected with the Conduct of a Trade or Business
in the United States).
Exemption or reduced rate for non-U.S. Persons resident in treaty
countries (Form 1001). Non-U.S. Persons that are Certificate Owners residing
in a country that has a tax treaty with the United States can obtain an
exemption or reduced tax rate (depending on the treaty terms) by filing Form
1001 (Ownership, Exemption or Reduced Rate Certificate). If the treaty
provides only for a reduced rate, withholding tax will be imposed at that
rate unless the filer alternatively files Form W-8. Form 1001 may be filed by
the Certificate Owners or his agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's
Request for Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Certificate Owner of a
Global Security or, in the case of a Form 1001 or a Form 4224 filer, his
agent, files by submitting the appropriate form to the person through whom it
holds (the clearing agency, in the case of persons holding directly on the
books of the clearing agency). Form W-8 and Form 1001 are effective for
three calendar years and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation or partnership organized in or under the laws of
the United States or any political subdivision thereof or (iii) an estate or
trust the income of which is includible in gross income for United States tax
purposes, regardless of its source. This summary does not deal with all
aspects of U.S. federal income tax withholding that may be relevant to
foreign holders of the Global Securities. Investors are advised to consult
their own tax advisors for specific tax advice concerning their holding and
disposing of the Global Securities.
======================================= ==================================
No dealer, salesman or other
person has been authorized to give
any information or to make any
representation not contained in
this Prospectus Supplement or the
Prospectus and, if given or made,
such information or representation HOME EQUITY LOAN TRUST
must not be relied upon as having 199__-__
been authorized by the Company or
(Underwriter). This Prospectus
Supplement and the Prospectus do
not constitute an offer of any $___________
securities other than those to (Approximate)
which they relate or an offer to
sell, or a solicitation of an offer
to buy, to any person in any
jurisdiction where such an offer or
solicitation would be unlawful. Home Equity Loan
Neither the delivery of this Asset Backed Certificates
Prospectus Supplement and the Series 199_-_
Prospectus nor any sale made
hereunder shall, under any
circumstances, create any
implication that the information
contained herein is correct as of HEADLANDS MORTGAGE
any time subsequent to their SECURITIES, INC.
respective dates. Sponsor
-----------------
(____________________________)
TABLE OF CONTENTS
Seller and Master Servicer
Page
----
PROSPECTUS SUPPLEMENT
Summary . . . . . . . . . . . S-3
Risk Factors . . . . . . . . S-16 ___________________________________
The Certificate Insurer . . . S-18
Headlands Mortgage Company . S-19
Description of the Mortgage
Loans . . . . . . . . . . S-21 PROSPECTUS SUPPLEMENT
Maturity and Prepayment ___________, 199____
Considerations. . . . . .. S-29
Pool Factor and Trading ___________________________________
Information . . . . . . .. S-31
Description of the Certificates S-31
Description of the Purchase
Agreement . . . . . . . . . . S-50
Use of Proceeds . . . . . . . S-51
Federal Income Tax Consequences S-51
State Taxes . . . . . . . . . S-53
ERISA Considerations . . . . S-54
Legal Investment Considerations S-54 (UNDERWRITER)
Underwriting . . . . . . . . S-54
Legal Matters . . . . . . . . S-55
Experts . . . . . . . . . . . S-55
Ratings . . . . . . . . . . . S-55
Index of Defined Terms . . . S-56
Annex I . . . . . . . . . . . S-59
PROSPECTUS
Prospectus Supplement or Current
Report on Form 8K . . . . . . . . 2
Available Information . . . . . . 2
Incorporation of Certain Documents
by Reference . . . . . . . . . 2
Reports to Securityholders . . . 3
Summary of Terms . . . . . . . . 4
Risk Factors . . . . . . . . . 11
The Trust Fund . . . . . . . . 17
Use of Proceeds . . . . . . . . 21
The Depositor . . . . . . . . . 22
Loan Program . . . . . . . . . 22
Description of the Securities . 24
Credit Enhancement . . . . . . 38
Yield and Prepayment
Considerations . . . . . . .. 43
The Agreements . . . . . . . . 45
Certain Legal Aspects of
the Loans . . . . . . . . . 57
Federal Income Tax
Consequences . . . . . . . . 71
State Tax Considerations . . . 90
ERISA Considerations . . . . . 90
Legal Investment . . . . . . . 93
Method of Distribution . . . . 94
Legal Matters . . . . . . . . . 95
Financial Information . . . . . 95
Ratings . . . . . . . . . . . . 95
Index of Defined Terms . . . . 97
======================================== ==================================
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such State.
SUBJECT TO COMPLETION, DATED MAY 29, 1997
PROSPECTUS
HEADLANDS MORTGAGE SECURITIES INC.
Sponsor
Asset Backed Securities
(Issuable in Series)
---------------
This Prospectus relates to the issuance of Asset Backed Certificates
(the "Certificates") and Asset Backed Notes (the "Notes" and, together with
the Certificates, the "Securities"), which may be sold from time to time in
one or more series (each, a "Series") by a Trust Fund (as defined below) on
terms determined at the time of sale and described in this Prospectus and the
related Prospectus Supplement. The Securities of a Series will consist of
Certificates which evidence beneficial ownership of a trust (each, a "Trust
Fund") established by Headlands Mortgage Securities Inc. (the "Sponsor")
and/or Notes secured by the assets of a Trust Fund. As specified in the
related Prospectus Supplement, the Trust Fund for a Series of Securities will
include certain assets (the "Trust Fund Assets") which will consist of the
following types of single family mortgage loans (the "Loans"): (i) mortgage
loans secured by first and/or subordinate liens on one- to four-family
residential properties (the "Mortgage Loans"), (ii) closed-end loans (the
"Closed End Loans") and/or revolving home equity loans or certain balances
thereof (the "Revolving Credit Line Loans", and together with the Closed End
Loans, the "Home Equity Loans") secured by first or subordinate liens on one-
to four-family residential properties and (iii) home improvement installment
sale contracts and installment loan agreements (the "Home Improvement
Contracts") that are either unsecured or secured by subordinate liens on one-
to four-family residential properties, or by purchase money security
interests in the home improvements financed thereby (the "Home
Improvements"). The Trust Fund Assets will be acquired by the Sponsor,
either directly or indirectly, from one or more institutions (each, a
"Seller"), which may be affiliates of the Sponsor, and conveyed by the
Sponsor to the related Trust Fund. A Trust Fund also may include insurance
policies, surety bonds, cash accounts, reinvestment income, guaranties or
letters of credit to the extent described in the related Prospectus
Supplement. See "Index of Defined Terms" on page __ of this Prospectus for
the location of the definitions of certain capitalized terms.
Each Series of Securities will be issued in one or more classes. Each
class of Certificates of a Series will evidence beneficial ownership of a
specified percentage (which may be 0%) or portion of future interest payments
and a specified percentage (which may be 0%) or portion of future principal
payments on the related Trust Fund Assets. Each class of Notes of a Series
will be secured by the related Trust Fund Assets or, if so specified in the
related Prospectus Supplement, a portion thereof. A Series of Securities may
include one or more classes that are senior in right of payment to one or
more other classes of Securities of such Series. One or more classes of
Securities of a Series may be entitled to receive distributions of principal,
interest or any combination thereof prior to one or more other classes of
Securities of such Series or after the occurrence of specified events, in
each case as specified in the related Prospectus Supplement.
Distributions to Securityholders will be made monthly, quarterly, semi-
annually or at such other intervals and on the dates specified in the related
Prospectus Supplement. Distributions on the Securities of a Series will be
made from the related Trust Fund Assets or proceeds thereof pledged for the
benefit of the Securityholders as specified in the related Prospectus
Supplement.
The related Prospectus Supplement will describe any insurance or
guarantee provided with respect to the related Series of Securities
including, without limitation, any insurance or guarantee provided by the
Department of Housing and Urban Development, the United States Department of
Veterans' Affairs or any private insurer or guarantor. The only obligations
of the Sponsor with respect to a Series of Securities will be to obtain
certain representations and warranties from each Seller and to assign to the
Trustee for the related Series of Securities the Sponsor's rights with
respect to such representations and warranties. The principal obligations of
the Master Servicer named in the related Prospectus Supplement with respect
to the related Series of Securities will be limited to obligations pursuant
to certain representations and warranties and to its contractual servicing
obligations, including any obligation it may have to advance delinquent
payments on the related Trust Fund Assets.
The yield on each class of Securities of a Series will be affected by,
among other things, the rate of payments of principal (including prepayments)
on the related Trust Fund Assets and the timing of receipt of such payments
as described under "Risk Factors Prepayment and Yield Considerations" and
"Yield and Prepayment Considerations" herein and in the related Prospectus
Supplement. A Trust Fund may be subject to early termination under the
circumstances described under "The Agreements Termination; Optional
Termination herein and in the related Prospectus Supplement.
If specified in the related Prospectus Supplement, one or more elections
may be made to treat a Trust Fund or specified portions thereof as a "real
estate mortgage investment conduit" ("REMIC") for federal income tax
purposes. See "Federal Income Tax Consequences."
---------------
FOR A DISCUSSION OF CERTAIN RISKS ASSOCIATED WITH AN INVESTMENT IN THE
SECURITIES, SEE THE INFORMATION UNDER "RISK FACTORS" ON PAGE 12.
THE CERTIFICATES OF A GIVEN SERIES WILL REPRESENT BENEFICIAL INTERESTS IN,
AND THE NOTES OF A GIVEN SERIES WILL REPRESENT OBLIGATIONS OF, THE
RELATED TRUST FUND ONLY AND WILL NOT REPRESENT INTERESTS IN OR
OBLIGATIONS OF THE SPONSOR, THE MASTER SERVICER, ANY SELLER OR
ANY AFFILIATES THEREOF, EXCEPT TO THE EXTENT DESCRIBED IN THE
RELATED PROSPECTUS SUPPLEMENT. THE SECURITIES AND THE
LOANS WILL NOT BE INSURED OR GUARANTEED BY ANY GOVERNMENTAL
AGENCY OR INSTRUMENTALITY OR BY THE SPONSOR OR ANY OTHER
PERSON OR ENTITY, EXCEPT IN EACH CASE TO THE EXTENT
DESCRIBED IN THE RELATED PROSPECTUS SUPPLEMENT.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS OR THE
RELATED PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
-----------------
Prior to issuance there will have been no market for the Securities of
any Series and there can be no assurance that a secondary market for any
Securities will develop, or if it does develop, that it will continue or
provide Securityholders with a sufficient level of liquidity of investment.
This Prospectus may not be used to consummate sales of Securities of any
Series unless accompanied by a Prospectus Supplement. Offers of the
Securities may be made through one or more different methods, including
offerings through underwriters, as more fully described under "Method of
Distribution" herein and in the related Prospectus Supplement.
________________, 1997
Until 90 days after the date of each Prospectus Supplement, all dealers
effecting transactions in the securities covered by such Prospectus
Supplement, whether or not participating in the distribution thereof, may be
required to deliver such Prospectus Supplement and this Prospectus. This is
in addition to the obligation of dealers to deliver a Prospectus and
Prospectus Supplement when acting as underwriters and with respect to their
unsold allotments or subscriptions.
PROSPECTUS SUPPLEMENT OR CURRENT REPORT ON FORM 8-K
The Prospectus Supplement or Current Report on Form 8-K relating to the
Securities of each Series to be offered hereunder will, among other things,
set forth with respect to such Securities, as appropriate: (i) the aggregate
principal amount, interest rate and authorized denominations of each class of
such Series of Securities; (ii) information as to the assets comprising the
Trust Fund, including the general characteristics of the related Trust Fund
Assets included therein and, if applicable, the insurance policies, surety
bonds, guaranties, letters of credit or other instruments or agreements
included in the Trust Fund or otherwise, and the amount and source of any
reserve account or other cash account; (iii) the circumstances, if any, under
which the Trust Fund may be subject to early termination; (iv) the
circumstances, if any, under which the Notes of such Series are subject to
redemption; (v) the method used to calculate the amount of principal to be
distributed or paid with respect to each class of Securities; (vi) the order
of application of distributions or payments to each of the classes within
such Series, whether sequential, pro rata, or otherwise; (vii) the
Distribution Dates with respect to such Series; (viii) additional information
with respect to the method of distribution of such Securities; (ix) whether
one or more REMIC elections will be made with respect to the Trust Fund and,
if so, the designation of the regular interests and the residual interests;
(x) the aggregate original percentage ownership interest in the Trust Fund to
be evidenced by each class of Certificates; (xi) the stated maturity of each
class of Notes of such Series; (xii) information as to the nature and extent
of subordination with respect to any class of Securities that is subordinate
in right of payment to any other class; and (xiii) information as to the
Seller, the Master Servicer and the Trustee.
AVAILABLE INFORMATION
The Sponsor has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act of 1933, as
amended, with respect to the Securities. This Prospectus, which forms a part
of the Registration Statement, and the Prospectus Supplement relating to each
Series of Securities contain descriptions of the material terms of the
documents referred to herein and therein, but do not contain all of the
information set forth in the Registration Statement pursuant to the Rules and
Regulations of the Commission. For further information, reference is made to
such Registration Statement and the exhibits thereto. Such Registration
Statement and exhibits can be inspected and copied at prescribed rates at the
public reference facilities maintained by the Commission at its Public
Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549, and at its
Regional Offices located as follows: Midwest Regional Office, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661; and Northeast Regional
Office, Seven World Trade Center, Suite 1300, New York, New York 10048. The
Commission also maintains a Web site at http://www.sec.gov from which such
Registration Statement and exhibits may be obtained.
No person has been authorized to give any information or to make any
representation other than those contained in this Prospectus and any
Prospectus Supplement with respect hereto and, if given or made, such
information or representations must not be relied upon. This Prospectus and
any Prospectus Supplement with respect hereto do not constitute an offer to
sell or a solicitation of an offer to buy any securities other than the
Securities offered hereby and thereby nor an offer of the Securities to any
person in any state or other jurisdiction in which such offer would be
unlawful. The delivery of this Prospectus at any time does not imply that
information herein is correct as of any time subsequent to its date.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents subsequently filed by or on behalf of the Trust Fund
referred to in the accompanying Prospectus Supplement with the Commission
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), after the date of this
Prospectus and prior to the termination of any offering of the Securities
issued by such Trust Fund shall be deemed to be incorporated by reference in
this Prospectus and to be a part of this Prospectus from the date of the
filing of such documents. Any statement contained in a document incorporated
or deemed to be incorporated by reference herein shall be deemed to be
modified or superseded for all purposes of this Prospectus to the extent that
a statement contained herein (or in the accompanying Prospectus Supplement)
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference modifies or replaces such statement. Any such
statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus. Neither the
Sponsor nor the Master Servicer for any Series intends to file with the
Commission periodic reports with respect to the related Trust Fund following
completion of the reporting period required by Rule 15d-1 or Regulation 15D
under the Exchange Act.
The Trustee or such other entity specified in the related Prospectus
Supplement on behalf of any Trust Fund will provide without charge to each
person to whom this Prospectus is delivered, on the written or oral request
of such person, a copy of any or all of the documents referred to above that
have been or may be incorporated by reference in this Prospectus (not
including exhibits to the information that is incorporated by reference
unless such exhibits are specifically incorporated by reference into the
information that this Prospectus incorporates). Such requests should be
directed to the Corporate Trust Office of the Trustee or the address of such
other entity specified in the accompanying Prospectus Supplement. Included
in the accompanying Prospectus Supplement is the name, address, telephone
number, and, if available, facsimile number of the office or contact person
at the Corporate Trust Office of the Trustee or such other entity.
REPORTS TO SECURITYHOLDERS
Periodic and annual reports concerning the related Trust Fund for a
Series of Securities will be forwarded to Securityholders. However, such
reports will neither be examined nor reported on by an independent public
accountant. See "Description of the Securities Reports to Securityholders".
SUMMARY OF TERMS
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus and in the related
Prospectus Supplement with respect to the Series of Securities offered
thereby and to the related Agreement (as such term is defined below)
which will be prepared in connection with each Series of Securities.
Unless otherwise specified, capitalized terms used and not defined in
this Summary of Terms have the meanings given to them in this Prospectus
and in the related Prospectus Supplement. See "Index of Defined Terms"
on Page 81 of this Prospectus for the location of the definitions of
certain capitalized terms.
Title of Securities Asset Backed Certificates (the
"Certificates") and Asset Backed Notes
(the "Notes" and, together with the
Certificates, the "Securities"), which are
issuable in Series.
Sponsor . . . . . Headlands Mortgage Securities Inc., a
Delaware corporation.
Trustee . . . . . The trustee(s) (the "Trustee") for each
Series of Securities will be specified
in the related Prospectus Supplement.
See "The Agreements" herein for a
description of the Trustee's rights and
obligations.
Master Servicer . The entity or entities named as Master
Servicer (the "Master Servicer") in the
related Prospectus Supplement, which may
be an affiliate of the Sponsor. See
"The Agreements Certain Matters
Regarding the Master Servicer and the
Sponsor".
Trust Fund Assets Assets of the Trust Fund for a Series of
Securities will include certain assets
(the "Trust Fund Assets") which will
consist of the Loans, together with
payments in respect of such Trust Fund
Assets, as specified in the related
Prospectus Supplement. At the time of
issuance of the Securities of the
Series, the Sponsor will assign the
Loans comprising the related Trust Fund
to the Trustee, without recourse. The
Loans will be collected in a pool (each,
a "Pool") as of the first day of the
month of the issuance of the related
Series of Securities or such other date
specified in the related Prospectus
Supplement (the "Cut-off Date"). Trust
Fund Assets also may include insurance
policies, surety bonds, cash accounts,
reinvestment income, guaranties or
letters of credit to the extent
described in the related Prospectus
Supplement. See "Credit Enhancement".
In addition, if the related Prospectus
Supplement so provides, the related
Trust Fund Assets will include the funds
on deposit in an account (a "Pre-Funding
Account") which will be used to purchase
additional Loans during the period
specified in such Prospectus Supplement.
See "The Agreements Pre-Funding
Account".
Loans . . . . . . The Loans will consist of (i) mortgage
loans secured by first and/or
subordinate liens on one- to four-family
residential properties (each, a
"Mortgage Loan"), (ii) closed-end loans
(the "Closed-End Loans") and/or
revolving home equity loans or certain
balances thereof (the "Revolving Credit
Line Loans", together with the Closed-
End Loans, the "Home Equity Loans"), and
(iii) home improvement installment sales
contracts and installment loan
agreements (the "Home Improvement
Contracts"). All Loans will have been
purchased by the Sponsor, either directly
or through an affiliate, from one or more
Sellers. As specified in the related
Prospectus Supplement, the Mortgage Loans
and the Home Equity Loans will, and the
Home Improvement Contracts may, be secured
by mortgages or deeds of trust or other
similar security instruments creating a
lien on a Mortgaged Property, which may
be subordinated to one or more senior
liens on the Mortgaged Property, as
described in the related Prospectus
Supplement. As specified in the related
Prospectus Supplement, Home Improvement
Contracts may be unsecured or secured by
purchase money security interests in the
Home Improvements financed thereby. The
Mortgaged Properties and the Home
Improvements are collectively referred
to herein as the "Properties".
Description of
the Securities Each Security will represent a
beneficial ownership interest in, or be
secured by the assets of, a Trust Fund
created by the Sponsor pursuant to an
Agreement among the Sponsor, the Master
Servicer and the Trustee for the related
Series. The Securities of any Series
may be issued in one or more classes as
specified in the related Prospectus
Supplement. A Series of Securities may
include one or more classes of senior
Securities (collectively, the "Senior
Securities") and one or more classes of
subordinate Securities (collectively,
the "Subordinated Securities"). Certain
Series or classes of Securities may be
covered by insurance policies or other
forms of credit enhancement, in each
case as described under "Credit
Enhancement" herein and in the related
Prospectus Supplement.
One or more classes of Securities of
each Series (i) may be entitled to
receive distributions allocable only to
principal, only to interest or to any
combination thereof; (ii) may be
entitled to receive distributions only
of prepayments of principal throughout
the lives of the Securities or during
specified periods; (iii) may be
subordinated in the right to receive
distributions of scheduled payments of
principal, prepayments of principal,
interest or any combination thereof to
one or more other classes of Securities
of such Series throughout the lives of
the Securities or during specified
periods; (iv) may be entitled to receive
such distributions only after the
occurrence of events specified in the
related Prospectus Supplement; (v) may
be entitled to receive distributions in
accordance with a schedule or formula or
on the basis of collections from
designated portions of the related Trust
Fund Assets; (vi) as to Securities
entitled to distributions allocable to
interest, may be entitled to receive
interest at a fixed rate or a rate that
is subject to change from time to time;
and (vii) as to Securities entitled to
distributions allocable to interest, may
be entitled to distributions allocable
to interest only after the occurrence of
events specified in the related
Prospectus Supplement and may accrue
interest until such events occur, in
each case as specified in the related
Prospectus Supplement. The timing and
amounts of such distributions may vary
among classes or over time, as specified
in the related Prospectus Supplement.
Distributions on
the Securities Distributions on the Securities entitled
thereto will be made monthly, quarterly,
semi-annually or at such other intervals
and on the dates specified in the
related Prospectus Supplement (each, a
"Distribution Date") out of the payments
received in respect of the assets of the
related Trust Fund or Funds or other
assets pledged for the benefit of the
Securities as described under "Credit
Enhancement" herein to the extent
specified in the related Prospectus
Supplement. The amount allocable to
payments of principal and interest on
any Distribution Date will be determined
as specified in the related Prospectus
Supplement. The Prospectus Supplement
for a Series of Securities will describe
the method for allocating distributions
among Securities of different classes as
well as the method for allocating
distributions among Securities for any
particular class.
Unless otherwise specified in the
related Prospectus Supplement, the
aggregate original principal balance of
the Securities will not exceed the
aggregate distributions allocable to
principal that such Securities will be
entitled to receive. If specified in
the related Prospectus Supplement, the
Securities will have an aggregate
original principal balance equal to the
aggregate unpaid principal balance of
the Trust Fund Assets as of the related
Cut-off Date and will bear interest in
the aggregate at a rate equal to the
interest rate borne by the underlying
Loans (the "Loan Rate") net of the
aggregate servicing fees and any other
amounts specified in the related
Prospectus Supplement or at such other
interest rate as may be specified in
such Prospectus Supplement.
The rate (each, a "Pass-Through Rate")
at which interest will be passed through
or paid to holders of each class of
Securities entitled thereto may be a
fixed rate or a rate that is subject to
change from time to time from the time
and for the periods, in each case, as
specified in the related Prospectus
Supplement. Any such rate may be
calculated on a loan-by-loan or weighted
average basis or calculated based on a
notional amount, in each case, as
described in the related Prospectus
Supplement.
Compensating Interest
If so specified in the related Prospectus
Supplement, the Master Servicer will be
required to remit to the Trustee, with
respect to each Loan in the related Trust
Fund as to which a principal prepayment in
full or a principal payment which is in
excess of the scheduled monthly payment
and is not intended to cure a delinquency
was received during any Due Period, an
amount, from and to the extent of amounts
otherwise payable to the Master Servicer
as servicing compensation, equal to (i)
the excess, if any, of (a) 30 days'
interest on the principal balance of the
related Loan at the Loan Rate net of the
per annum rate at which the Master
Servicer's servicing fee accrues, over (b)
the amount of interest actually received
on such Loan during such Due Period, net
of the Master Servicer's servicing fee or
(ii) such other amount as described in the
related Prospectus Supplement. See
"Description of the
Securities Compensating Interest".
Credit Enhancement
The Trust Fund Assets or the Securities of
one or more classes in the related Series
may have the benefit of one or more types
of credit enhancement as described in the
related Prospectus Supplement. The
protection against losses afforded by any
such credit support may be limited. The
type, characteristics and amount of credit
enhancement will be determined
based on the characteristics of the
Loans comprising the Trust Fund Assets
and other factors and will be
established on the basis of requirements
of each Rating Agency rating the
Securities of such Series. See "Credit
Enhancement."
If specified in the related Prospectus
Supplement, the coverage provided by one
or more of the forms of credit
enhancement described in this Prospectus
may apply concurrently to two or more
separate Trust Funds. If applicable,
the related Prospectus Supplement will
identify the Trust Funds to which such
credit enhancement relates and the
manner of determining the amount of
coverage provided to such Trust Funds
thereby and of the application of such
coverage to the identified Trust Funds.
A. Subordination A Series of Securities may consist of
one or more classes of Senior
Securities and one or more classes of
Subordinated Securities. The rights of
the holders of the Subordinated
Securities of a Series to receive
distributions with respect to the
related Trust Fund Assets will be
subordinated to such rights of the
holders of the Senior Securities of the
same Series to the extent described in
the related Prospectus Supplement. This
subordination is intended to enhance the
likelihood of regular receipt by holders
of Senior Securities of such Series of
the full amount of monthly payments of
principal and interest due them. The
protection afforded to the holders of
Senior Securities of a Series by means
of the subordination feature will be
accomplished by (i) the preferential
right of such holders to receive, prior
to any distribution being made in
respect of the related Subordinated
Securities, the amounts of interest
and/or principal due them on each
Distribution Date out of the funds
available for distribution on such date
in the related Security Account and, to
the extent described in the related
Prospectus Supplement, by the right of
such holders to receive future
distributions on the related Trust Fund
Assets that would otherwise have been
payable to the holders of Subordinated
Securities; (ii) reducing the ownership
interest (if applicable) of the related
Subordinated Securities; or (iii) a
combination of clauses (i) and (ii)
above. If so specified in the related
Prospectus Supplement, subordination may
apply only in the event of certain types
of losses not covered by other forms of
credit support, such as hazard losses
not covered by standard hazard insurance
policies or losses due to the bankruptcy
or fraud of the borrower. The related
Prospectus Supplement will set forth
information concerning, among other
things, the amount of subordination of a
class or classes of Subordinated
Securities in a Series, the
circumstances in which such
subordination will be applicable, and
the manner, if any, in which the amount
of subordination will decrease over
time.
B. Reserve Account
One or more reserve accounts or other cash
accounts (each, a "Reserve Account") may
be established and maintained for each
Series of Securities. The related
Prospectus Supplement will specify whether
or not such Reserve Accounts will be
included in the corpus of the Trust Fund
for such Series and will also specify the
manner of funding such Reserve Accounts
and the conditions under which the amounts
in any such Reserve Accounts will be used
to make distributions to holders of Securities
of a particular class or released from
such Reserve Accounts.
C. Letter of Credit
If so specified in the related Prospectus
Supplement, credit support for a Series
may be provided by one or more letters of
credit. A letter of credit may provide
limited protection against certain losses
in addition to or in lieu of other credit
support. The issuer of the letter of
credit (the "L/C Bank") will be obligated
to honor demands with respect to such
letter of credit, to the extent of the
amount available thereunder to provide
funds under the circumstances and subject
to such conditions as are specified in the
related Prospectus Supplement. The
liability of the L/C Bank under its letter
of credit will be reduced by the amount of
unreimbursed payments thereunder.
The maximum liability of a L/C Bank
under its letter of credit will be an
amount equal to a percentage specified
in the related Prospectus Supplement of
the initial aggregate outstanding
principal balance of the Loans in the
related Trust Fund or one or more
Classes of Securities of the related
Series. The maximum amount available at
any time to be paid under a letter of
credit will be determined in the manner
specified therein and in the related
Prospectus Supplement.
D. Insurance Policies;
Surety Bonds and
Guarantees . . If so specified in the related
Prospectus Supplement, credit support
for a Series may be provided by an
insurance policy and/or a surety bond
issued by one or more insurance
companies or sureties. Such certificate
guarantee insurance or surety bond will
guarantee timely distributions of
interest and/or full distributions of
principal on the basis of a schedule of
principal distributions set forth in or
determined in the manner specified in
the related Prospectus Supplement. If
specified in the related Prospectus
Supplement, one or more bankruptcy
bonds, special hazard insurance
policies, other insurance or third-party
guarantees may be used to provide
coverage for the risks of default or
types of losses set forth in such
Prospectus Supplement.
E. Over-Collateralization
If so provided in the Prospectus
Supplement for a Series of Securities, a
portion of the interest payment on each
Loan may be applied as an additional
distribution in respect of principal to
reduce the principal balance of a certain
class or classes of such Series of
Securities and, thus, accelerate the rate
of payment of principal on such class or
classes of such Series of Securities.
F. Loan Pool
Insurance Policy
A mortgage pool insurance policy or
policies may be obtained and maintained
for Loans relating to any Series of
Securities, which shall be limited in
scope and shall cover defaults on the
related Loans in an initial amount equal
to a specified percentage of the aggregate
principal balance of all Loans included
in the Pool as of the related Cut-off
Date.
G. FHA Insurance If specified in the related Prospectus
Supplement, all or a portion of the
Loans in a Pool may be (i) insured by
the Federal Housing Administration (the
"FHA") and/or (ii) partially guaranteed
by the Department of Veterans' Affairs
(the "VA").
H. Cross-Support If specified in the related Prospectus
Supplement, separate classes of a Series
of Securities may evidence the
beneficial ownership of, or be secured
by, separate groups of assets included
in a Trust Fund. In such case, credit
support may be provided by a cross
support feature which requires that
distributions be made with respect to
Securities evidencing a beneficial
ownership interest in, or secured by,
one or more asset groups prior to
distributions to Subordinated Securities
evidencing a beneficial ownership
interest in, or secured by, other asset
groups within the same Trust Fund. See
"Credit Enhancement Cross Support."
Advances . . . . The Master Servicer and, if applicable,
each mortgage servicing institution that
services a Loan in a Pool on behalf of
the Master Servicer (each, a
"Sub-Servicer") may be obligated to
advance amounts (each, an "Advance")
corresponding to delinquent interest
and/or principal payments on such Loan
until the date, as specified in the
related Prospectus Supplement, following
the date on which the related Property
is sold at a foreclosure sale or the
related Loan is otherwise liquidated.
Any obligation to make Advances may be
subject to limitations as specified in
the related Prospectus Supplement. If
so specified in the related Prospectus
Supplement, Advances may be drawn from a
cash account available for such purpose
as described in such Prospectus
Supplement. Advances will be
reimbursable to the extent described
under "Description of the
Securities Advances" herein and in the
related Prospectus Supplement.
In the event the Master Servicer or
Sub-Servicer fails to make a required
Advance, the Trustee may be obligated to
advance such amounts otherwise required
to be advanced by the Master Servicer or
Sub-Servicer. See "Description of the
Securities Advances."
Optional Termination
The Master Servicer or the party specified
in the related Prospectus Supplement,
including the holder of the residual
interest in a REMIC, may have the option
to effect early retirement of a Series of
Securities through the purchase of the
Trust Fund Assets. The Master Servicer
will deposit the proceeds of any such
purchase in the Security Account for each
Trust Fund as described under "The
Agreements Payments on Loans; Deposit to
Security Account." Any such purchase of
Trust Fund Assets and property acquired in
respect of Trust Fund Assets evidenced by
a Series of Securities will be made at the
option of the Master Servicer, such other
person or, if applicable, such holder of
the REMIC residual interest, at a price
specified in the related Prospectus
Supplement. The exercise of such right
will effect early retirement of the
Securities of that Series, but the right
of the Master Servicer, such other person
or, if applicable, such holder of the
REMIC residual interest, to so purchase is
subject to the principal balance of the
related Trust Fund Assets being less than
the percentage specified in the related
Prospectus Supplement of the aggregate
principal balance of the Trust Fund
Assets at the Cut-off Date for the
Series. The foregoing is subject to the
provision that if a REMIC election is
made with respect to a Trust Fund, any
such purchase will be made only in
connection with a "qualified
liquidation" of the REMIC within the
meaning of Section 860F(g)(4) of the
Internal Revenue Code of 1986, as
amended (the "Code").
Legal Investment The Prospectus Supplement for each
Series of Securities will specify which,
if any, of the classes of Securities
offered thereby constitute "mortgage
related securities" for purposes of the
Secondary Mortgage Market Enhancement
Act of 1984 ("SMMEA"). Classes of
Securities that qualify as "mortgage
related securities" will be legal
investments for certain types of
institutional investors to the extent
provided in SMMEA, subject, in any case,
to any other regulations which may
govern investments by such institutional
investors. Institutions whose
investment activities are subject to
review by federal or state authorities
should consult with their counsel or the
applicable authorities to determine
whether an investment in a particular
class of Securities (whether or not such
class constitutes a "mortgage related
security") complies with applicable
guidelines, policy statements or
restrictions. See "Legal Investment."
Federal Income Tax
Consequences . The federal income tax consequences to
Securityholders will vary depending on
whether one or more elections are made
to treat the Trust Fund or specified
portions thereof as a REMIC under the
provisions of the Code. The Prospectus
Supplement for each Series of Securities
will specify whether such an election
will be made.
If a REMIC election is made, Securities
representing regular interests in a
REMIC will generally be taxable to
holders in the same manner as evidences
of indebtedness issued by the REMIC.
Stated interest on such regular
interests will be taxable as ordinary
income and taken into account using the
accrual method of accounting, regardless
of the holder's normal accounting
method. If no REMIC election is made,
interest (other than original issue
discount ("OID")) on Securities that are
characterized as indebtedness for
federal income tax purposes will be
includible in income by holders thereof
in accordance with their usual method of
accounting.
Certain classes of Securities may be
issued with OID. A Securityholder
should be aware that the Code and the
Treasury regulations promulgated
thereunder do not adequately address
certain issues relevant to prepayable
securities, such as the Securities.
Securityholders that will be required to
report income with respect to the
related Securities under the accrual
method of accounting will do so without
giving effect to delays and reductions
in distributions attributable to a
default or delinquency on the Loans,
except possibly to the extent that it
can be established that such amounts are
uncollectible. As a result, the amount
of income (including OID) reported by a
Securityholder in any period could
significantly exceed the amount of cash
distributed to such Securityholder in
that period.
In the opinion of Brown & Wood LLP, if a
REMIC election is made with respect to a
Series of Securities, then the
arrangement by which such Securities are
issued will be treated as a REMIC as
long as all of the provisions of the
applicable Agreement are complied with
and the statutory and regulatory
requirements are satisfied. Securities
will be designated as "regular
interests" or "residual interests" in a
REMIC. A REMIC will not be subject to
entity-level tax. Rather, the taxable
income or net loss of a REMIC will be
taken into account by the holders of
residual interests. Such holders will
report their proportionate share of the
taxable income of the REMIC whether or
not they receive cash distributions from
the REMIC attributable to such income.
The portion of the REMIC taxable income
consisting of "excess inclusions" may
not be offset against other deductions
or losses of the holder, including the
net operating losses.
In the opinion of Brown & Wood LLP, if a
REMIC or a partnership election is not
made with respect to a Series of
Securities, then the arrangement by
which such Securities are issued will be
classified as a grantor trust under
Subpart E, Part I of Subchapter J of the
Code and not as an association taxable
as a corporation. If so provided in the
Prospectus Supplement for a Series,
there will be no separation of the
principal and interest payments on the
Loans. In such circumstances, the
Securityholder will be considered to
have purchased a pro rata undivided
interest in each of the Loans. In other
cases, sale of the Securities will
produce a separation in the ownership of
all or a portion of the principal
payments from all or a portion of the
interest payments on the Loans.
In the opinion of Brown & Wood LLP, if a
partnership election is made, the Trust
Fund will not be treated as an
association or a publicly traded
partnership taxable as a corporation as
long as all of the provisions of the
applicable Agreement are complied with
and the statutory and regulatory
requirements are satisfied. If Notes
are issued by such Trust Fund, such
Notes will be treated as indebtedness
for federal income tax purposes. The
holders of the Certificates issued by
such Trust Fund, if any, will agree to
treat the Certificates as equity
interests in a partnership.
The Securities will be treated as assets
described in Section 7701(a)(19)(C) of
the Code and as real estate assets
described in Section 856(c) of the Code.
Generally, gain or loss will be
recognized on a sale of Securities in
the amount equal to the difference
between the amount realized and the
seller's tax basis in the Securities
sold.
The material federal income tax
consequences for investors associated
with the purchase, ownership and
disposition of the Securities are set
forth herein under "Federal Income Tax
Consequences". The material federal
income tax consequences for
investors associated with the purchase,
ownership and disposition of Securities
of any particular Series will be set
forth under the heading "Federal Income
Tax Consequences" in the related
Prospectus Supplement. See "Federal
Income Tax Consequences".
ERISA Considerations
A fiduciary of any employee benefit plan
or other retirement plan or arrangement
subject to the Employee Retirement Income
Security Act of 1974, as amended
("ERISA"), or the Code should carefully
review with its legal advisors whether the
purchase or holding of Securities could
give rise to a transaction prohibited or
not otherwise permissible under ERISA or
the Code. See "ERISA Considerations".
Certain classes of Securities may not be
transferred unless the Trustee is
furnished with a letter of representation
or an opinion of counsel to the effect
that such transfer will not result in a
violation of the prohibited transaction
provisions of ERISA and the Code and will
not subject the Trustee, the Sponsor, the
Seller or the Master Servicer to
additional obligations. See "Description
of the Securities--General" and "ERISA
Considerations".
Risk Factors . . For a discussion of certain risks
associated with an investment in the
Securities, see "Risk Factors" on page
12 herein and in the related
Prospectus Supplement.
RISK FACTORS
Investors should consider the following factors in connection with the
purchase of the Securities.
LIMITED LIQUIDITY
There will be no market for the Securities of any Series prior to the
issuance thereof, and there can be no assurance that a secondary market will
develop or, if it does develop, that it will provide Securityholders with
liquidity of investment or will continue for the life of the Securities of
such Series.
LIMITED SOURCE OF PAYMENTS - NO RECOURSE TO SPONSOR, SELLER, MASTER SERVICER
OR TRUSTEE
The Sponsor does not have, nor is it expected to have, any significant
assets. Unless otherwise specified in the related Prospectus Supplement, the
Securities of a Series will be payable solely from the Trust Fund for such
Securities and will not have any claim against or security interest in the
Trust Fund for any other Series. There will be no recourse to the Sponsor or
any other person for any failure to receive distributions on the Securities.
Further, at the times set forth in the related Prospectus Supplement, certain
Trust Fund Assets and/or any balance remaining in the Security Account
immediately after making all payments due on the Securities of such Series,
after making adequate provision for future payments on certain classes of
Securities and after making any other payments specified in the related
Prospectus Supplement, may be promptly released or remitted to the Sponsor,
the Master Servicer, any credit enhancement provider or any other person
entitled thereto and will no longer be available for making payments to
Securityholders. Consequently, holders of Securities of each Series must
rely solely upon payments with respect to the Trust Fund Assets and the other
assets constituting the Trust Fund for a Series of Securities, including, if
applicable, any amounts available pursuant to any credit enhancement for such
Series, for the payment of principal of and interest on the Securities of
such Series.
The Securities will not represent an interest in or obligation of the
Sponsor, the Master Servicer, the Trustee, any Seller or any of their
respective affiliates. The only obligations, if any, of the Sponsor with
respect to the Trust Fund Assets or the Securities of any Series will be
pursuant to certain representations and warranties and certain document
delivery requirements. The Sponsor does not have, and is not expected in the
future to have, any significant assets with which to meet any obligation to
repurchase Trust Fund Assets with respect to which there has been a breach of
any representation or warranty. If, for example, the Sponsor were required
to repurchase a Loan, its only sources of funds to make such repurchase would
be from funds obtained (i) from the enforcement of a corresponding
obligation, if any, on the part of the related Seller or originator of such
Loan, or (ii) to the extent provided in the related Prospectus Supplement,
from a Reserve Account or similar credit enhancement established to
provide funds for such repurchases.
The only obligations of any Seller with respect to Trust Fund Assets or
the Securities of any Series will be pursuant to certain representations and
warranties and certain document delivery requirements. A Seller may be
required to repurchase or substitute for any Loan with respect to which such
representations and warranties or document delivery requirements are
breached. There is no assurance, however, that such Seller will have the
financial ability to effect such repurchase or substitution.
CREDIT ENHANCEMENT
Although credit enhancement is intended to reduce the risk of delinquent
payments or losses to holders of Securities entitled to the benefit thereof,
the amount of such credit enhancement will be limited, as set forth in the
related Prospectus Supplement, and may be subject to periodic reduction in
accordance with a schedule or formula or otherwise decline, and could be
depleted under certain circumstances prior to the payment in full of the
related Series of Securities, and as a result Securityholders of the related
Series may suffer losses. Moreover, such credit enhancement may not cover
all potential losses or risks. For example, credit enhancement may or may
not cover fraud or negligence by a loan originator or other parties. In
addition, the Trustee will generally be permitted to reduce, terminate or
substitute all or a portion of the credit enhancement for any Series of
Securities, provided the applicable Rating Agency indicates that the then-
current rating of the Securities of such Series will not be adversely
affected. See "Credit Enhancement".
PREPAYMENT AND YIELD CONSIDERATIONS
The timing of principal payments of the Securities of a Series will be
affected by a number of factors, including the following: (i) the extent of
prepayments (including for this purpose prepayments resulting from
refinancing or liquidations of the Loans due to defaults, casualties,
condemnations and repurchases by the Sponsor or the Master Servicer) of the
Loans comprising the Trust Fund, which prepayments may be influenced by a
variety of factors including general economic conditions, prevailing interest
rate levels, the availability of alternative financing and homeowner
mobility, (ii) the manner of allocating principal and/or payments among the
classes of Securities of a Series as specified in the related Prospectus
Supplement, (iii) the exercise by the party entitled thereto of any right of
optional termination and (iv) the rate and timing of payment defaults and
losses incurred with respect to the Trust Fund Assets. The repurchase of
Loans by the Sponsor or the Seller may result from repurchases of Trust Fund
Assets due to material breaches of the Sponsor's or the Seller's
representations and warranties, as applicable. The yields to maturity and
weighted average lives of the Securities will be affected primarily by the
rate and timing of prepayment of the Loans comprising the Trust Fund Assets.
In addition, the yields to maturity and weighted average lives of the
Securities will be affected by the distribution of amounts remaining in
any Pre-Funding Account following the end of the related Funding Period.
Any reinvestment risks resulting from a faster or slower incidence of
prepayment of Loans held by a Trust Fund will be borne entirely by the
holders of one or more classes of the related Series of Securities.
See "Yield and Prepayment Considerations" and "The Agreements--Pre-Funding
Account."
Interest payable on the Securities of a Series on a Distribution Date
will include all interest accrued during the period specified in the related
Prospectus Supplement. In the event interest accrues over a period ending
two or more days prior to a Distribution Date, the effective yield to
Securityholders will be reduced from the yield that would otherwise be
obtainable if interest payable on the Securities were to accrue through the
day immediately preceding each Distribution Date, and the effective yield (at
par) to Securityholders will be less than the indicated coupon rate. See
"Description of the Securities -- Distributions on Securities --
Distributions of Interest".
BALLOON PAYMENTS
Certain of the Loans as of the related Cut-off Date may not be fully
amortizing over their terms to maturity and, thus, will require substantial
principal payments (i.e., balloon payments) at their stated maturity. Loans
with balloon payments involve a greater degree of risk because the ability of
a borrower to make a balloon payment typically will depend upon its ability
either to timely refinance the loan or to timely sell the related Property.
The ability of a borrower to accomplish either of these goals will be
affected by a number of factors, including the level of available mortgage
interest rates at the time of sale or refinancing, the borrower's equity in
the related Property, the financial condition of the borrower and tax laws.
Losses on such Loans that are not otherwise covered by the credit enhancement
described in the applicable Prospectus Supplement will be borne by the
holders of one or more classes of Securities of the related Series.
NATURE OF MORTGAGES
Property Values. There are several factors that could adversely affect
the value of Properties such that the outstanding balance of the related
Loans, together with any senior financing on the Properties, if applicable,
would equal or exceed the value of the Properties. Among the factors that
could adversely affect the value of the Properties are an overall decline in
the residential real estate market in the areas in which the Properties are
located or a decline in the general condition of the Properties as a result
of failure of borrowers to maintain adequately the Properties or of natural
disasters that are not necessarily covered by insurance,
such as earthquakes and floods. Such decline could extinguish the value of
the interest of a junior mortgagee in the Property before having any effect
on the interest of the related senior mortgagee. If such a decline occurs,
the actual rates of delinquencies, foreclosures and losses on all Loans could
be higher than those currently experienced in the mortgage lending industry
in general. Losses on such Loans that are not otherwise covered by the
credit enhancement described in the applicable Prospectus Supplement will be
borne by the holder of one or more classes of Securities of the related
Series.
Delays Due to Liquidation. Even assuming that the Properties provide
adequate security for the Loans, substantial delays could be encountered in
connection with the liquidation of defaulted Loans and corresponding delays
in the receipt of related proceeds by Securityholders could occur. An action
to foreclose on a Property securing a Loan is regulated by state statutes and
rules and is subject to many of the delays and expenses of other lawsuits if
defenses or counterclaims are interposed, sometimes requiring several years
to complete. Furthermore, in some states an action to obtain a deficiency
judgment is not permitted following a nonjudicial sale of a Property. In the
event of a default by a borrower, these restrictions, among other things, may
impede the ability of the Master Servicer to foreclose on or sell the
Property or to obtain liquidation proceeds sufficient to repay all amounts
due on the related Loan. In addition, the Master Servicer will be entitled
to deduct from related liquidation proceeds all expenses reasonably incurred
in attempting to recover amounts due on defaulted Loans and not yet repaid,
including payments to senior lienholders, legal fees and costs of legal
action, real estate taxes and maintenance and preservation expenses.
Disproportionate Effect of Liquidation Expenses. Liquidation expenses
with respect to defaulted Loans do not vary directly with the outstanding
principal balance of the Loan at the time of default. Therefore, assuming
that a servicer took the same steps in liquidating a defaulted Loan having a
small remaining principal balance as it would in the case of a defaulted Loan
having a large remaining principal balance, the amount realized after
expenses of liquidation would be smaller as a percentage of the outstanding
principal balance of the small Loan than would be the case with the defaulted
Loan having a large remaining principal balance.
Junior Liens. Since the mortgages and deeds of trust, if any, securing
the Loans will be primarily junior liens subordinate to the rights of the
mortgagee under the related senior mortgage(s) or deed(s) of trust, the
proceeds from any liquidation, insurance or condemnation proceeds will be
available to satisfy the outstanding balance of such junior lien only to the
extent that the claims of such senior mortgagees have been satisfied in full,
including any related foreclosure costs. In addition, a junior mortgagee may
not foreclose on the property securing a junior mortgage unless it forecloses
subject to any senior mortgage, in which case it must either pay the entire
amount due on any senior mortgage to the related senior mortgagee at or prior
to the foreclosure sale or undertake the obligation to make payments on
any such senior mortgage in the event the mortgagor is in default
thereunder. The Trust Fund will not have any source of funds to satisfy
any senior mortgages or make payments due to any senior mortgagees and
may therefore be prevented from foreclosing on the related property.
Consumer Protection Laws. Applicable state laws generally regulate
interest rates and other charges, require certain disclosures, and require
licensing of certain originators and servicers of Loans. 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 which may apply to the origination, servicing and collection of the
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 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 the Loans".
ENVIRONMENTAL RISKS
Real property pledged as security to a lender may be subject to certain
environmental risks. Under the laws of certain states, contamination of a
property may give rise to a lien on the property to assure the costs of
cleanup. In several states, such a lien has priority over the lien of an
existing mortgage against such property. In addition under the laws of some
states and under the federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980 ("CERCLA"), a lender may be liable, as
an "owner" or "operator", for costs of addressing releases or threatened
releases of hazardous substances that require remedy at a property, if agents
or employees of the lender have become sufficiently involved in the
operations of the borrower, regardless of whether the environmental damage or
threat was caused by a prior owner. Such costs could result in a loss to the
holders of one or more classes of Securities of the related Series. A lender
also risks such liability on foreclosure of the related property. See
"Certain Legal Aspects of the Loans--Environmental Risks".
CERTAIN OTHER LEGAL ASPECTS OF THE LOANS
Consumer Protection Laws. Applicable state laws generally regulate
interest rates and other charges and require certain disclosures. In
addition, other state laws, public policy and generally principles of equity
relating to the protection of consumers, unfair and deceptive practices and
debt collection practices may apply to the origination, servicing and
collection of the 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 Loans, may entitle
the borrower to a refund of amounts previously paid and, in addition, could
subject the owner of the Loan to damages and administrative enforcement.
The Loans may also be subject to federal laws, including:
(i) the Federal Truth in Lending Act and Regulation Z promulgated
thereunder, which require certain disclosures to the borrowers regarding
the terms of the Loans;
(ii) the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race,
color, sex, religion, marital status, national origin, receipt of public
assistance or the exercise of any right under the Consumer Credit
Protection Act, in the extension of credit;
(iii) the Fair Credit Reporting Act, which regulates the use
and reporting of information related to the borrower's credit
experience; and
(iv) for Loans that were originated or closed after November 7,
1989, the Home Equity Loan Consumer Protection Act of 1988, which
requires additional application disclosures, limits changes that may be
made to the loan documents without the borrower's consent and restricts
a lender's ability to declare a default or to suspend or reduce a
borrower's credit limit to certain enumerated events.
The Riegle Act. Certain Loans may be subject to the Riegle Community
Development and Regulatory Improvement Act of 1994 (the "Riegle Act") which
incorporates the Home Ownership and Equity Protection Act of 1994. These
provisions impose additional disclosure and other requirements on creditors
with respect to non-purchase money mortgage loans with high interest rates or
high up-front fees and charges. The provisions of the Riegle Act apply on a
mandatory basis to all Loans originated on or after October 1, 1995. These
provisions can impose specific statutory liabilities upon creditors who fail
to comply with their provisions and may affect the enforceability of the
related Loans. In addition, any assignee of the creditor would generally be
subject to all claims and defenses that the consumer could assert against the
creditor, including, without limitation, the right to rescind the Loan.
Holder in Due Course Rules. The Home Improvement Contracts are also
subject to the Preservation of Consumers' Claims and Defenses regulations of
the Federal Trade Commission and other similar federal and state statutes and
regulations (collectively, the "Holder in Due Course Rules"), which protect
the homeowner from defective craftsmanship or incomplete work by a
contractor. These laws permit the obligor to withhold payment if the work
does not meet the quality and durability standards agreed to by the
homeowner and the contractor. The Holder in Due Course Rules have the effect
of subjecting any assignee of the seller in a consumer credit transaction to
all claims and defenses which the obligor in the credit sale transaction
could assert against the seller of the goods.
RATING OF THE SECURITIES
It will be a condition to the issuance of a class of Securities offered
hereby that they be rated in one of the four highest rating categories by the
Rating Agency identified in the related Prospectus Supplement. Any such
rating would be based on, among other things, the adequacy of the value of
the related Trust Fund Assets and any credit enhancement with respect to such
class and will represent such Rating Agency's assessment solely of the
likelihood that holders of such class of Securities will receive payments to
which such Securityholders are entitled under the related Agreement. Such
rating will not constitute an assessment of the likelihood that principal
prepayments on the related Loans will be made, the degree to which the rate
of such prepayments might differ from that originally anticipated or the
likelihood of early optional termination of the Series of Securities. Such
rating shall not be deemed a recommendation to purchase, hold or sell
Securities, inasmuch as it does not address market price or suitability for a
particular investor. Such rating will not address the possibility that
prepayment at higher or lower rates than anticipated by an investor may cause
such investor to experience a lower than anticipated yield or that an
investor purchasing a Security at a significant premium might fail to recoup
its initial investment under certain prepayment scenarios.
There is also no assurance that any such rating will remain in effect
for any given period of time or that it may not be lowered or withdrawn
entirely by the Rating Agency in the future if in its judgment circumstances
in the future so warrant. In addition to being lowered or withdrawn due to
any erosion in the adequacy of the value of the Trust Fund Assets or any
credit enhancement with respect to a Series of Securities, such rating might
also be lowered or withdrawn because of, among other reasons, an adverse
change in the financial or other condition of a credit enhancement provider
or a change in the rating of such credit enhancement provider's long term
debt.
The amount, type and nature of credit enhancement, if any, established
with respect to a class of Securities will be determined on the basis of
criteria established by each Rating Agency rating classes of such Series.
Such criteria are sometimes based upon an actuarial analysis of the behavior
of similar loans in a larger group. Such analysis is often the basis upon
which each Rating Agency determines the amount of credit enhancement required
with respect to each such class. There can be no assurance that the
historical data supporting any such actuarial analysis will accurately
reflect future experience nor any assurance that the data derived from a
large pool of similar loans accurately predicts the delinquency, foreclosure
or loss experience of any particular pool of Loans. No assurance can be
given that the values of any Properties have remained or will remain at
their levels on the respective dates of origination of the related Loans.
If the residential real estate markets should experience an overall decline
in property values such that the outstanding principal balances of the Loans
in a particular Trust Fund and any other financing on the related Properties
become equal to or greater than the value of the Properties, the rates of
delinquencies, foreclosures and losses could be higher than those now
generally experienced in the mortgage lending industry. In addition, adverse
economic conditions (which may or may not affect real property values) may
affect the timely payment by mortgagors of scheduled payments of principal
and interest on the Loans and, accordingly, the rates of delinquencies,
foreclosures and losses with respect to any Trust Fund. To the extent that
such losses are not covered by credit enhancement, such losses will be
borne, at least in part, by the holders of one or more classes of Securities
of the related Series. See "Rating".
BOOK-ENTRY REGISTRATION
If issued in book-entry form, such registration may reduce the liquidity
of the Securities in the secondary trading market since investors may be
unwilling to purchase Securities for which they cannot obtain physical
certificates. Since transactions in Book-Entry Securities can be effected
only through the Depository Trust Company ("DTC"), participating
organizations, Financial Intermediaries and certain banks, the ability of a
Securityholder to pledge a Book-Entry Security to persons or entities that do
not participate in the DTC system may be limited due to lack of a physical
certificate representing such Securities. Security Owners will not be
recognized as Securityholders as such term is used in the related Agreement,
and Security Owners will be permitted to exercise the rights of
Securityholders only indirectly through DTC and its Participants.
In addition, Securityholders may experience some delay in their receipt
of distributions of interest and principal on Book-Entry Securities since
distributions are required to be forwarded by the Trustee to DTC and DTC will
then be required to credit such distributions to the accounts of Sponsors
participants which thereafter will be required to credit them to the accounts
of Securityholders either directly or indirectly through Financial
Intermediaries. See "Description of the Securities--Book-Entry Registration
of Securities".
PRE-FUNDING ACCOUNTS
If so provided in the related Prospectus Supplement, on the related
Closing Date the Sponsor will deposit cash in an amount (the "Pre-Funded
Amount") specified in such Prospectus Supplement into an account (the "Pre-
Funding Account"). In no event shall the Pre-Funded Amount exceed 50% of the
initial aggregate principal amount of the Certificates and/or Notes of the
related Series of Securities. The Pre-Funded Amount will be used to purchase
Loans ("Subsequent Loans") in a period from the related Closing Date to a
date not more than one year after such Closing Date (such period, the
"Funding Period") from the Sponsor (which, in turn, will acquire such
Subsequent Loans from the Seller or Sellers specified in the related
Prospectus Supplement). The Pre-Funding Account will be maintained
with the Trustee for the related Series of Securities and is designed
solely to hold funds to be applied by such Trustee during the Funding
Period to pay to the Sponsor the purchase price for Subsequent Loans.
Monies on deposit in the Pre-Funding Account will not be
available to cover losses on or in respect of the related Loans. To the
extent that the entire Pre-Funded Amount has not been applied to the purchase
of Subsequent Loans by the end of the related Funding Period, any amounts
remaining in the Pre-Funding Account will be distributed as a prepayment of
principal to Securityholders on the Distribution Date immediately following
the end of the Funding Period, in the amounts and pursuant to the priorities
set forth in the related Prospectus Supplement. Any reinvestment risk
resulting from such prepayment will be borne entirely by the holders of one
or more classes of the related Series of Securities.
BANKRUPTCY AND INSOLVENCY RISKS
The Seller and the Sponsor will treat the transfer of the Loans by the
Seller to the Sponsor as a sale for accounting purposes. The Sponsor and the
Trust Fund will treat the transfer of Loans from the Sponsor to the Trust
Fund as a sale for accounting purposes. As a sale of the Loans by the Seller
to the Sponsor, the Loans would not be part of the Seller's bankruptcy estate
and would not be available to the Seller's creditors. However, in the event
of the insolvency of the Seller, it is possible that the bankruptcy trustee
or a creditor of the Seller may attempt to recharacterize the sale of the
Loans as a borrowing by the Seller, secured by a pledge of the Loans.
Similarly, as a sale of the Loans by the Sponsor to the Trust Fund, the Loans
would not be part of the Sponsor's bankruptcy estate and would not be
available to the Sponsor's creditors. However, in the event of the
insolvency of the Sponsor, it is possible that the bankruptcy trustee or a
creditor of the Sponsor may attempt to recharacterize the sale of the Loans
as a borrowing by the Sponsor, secured by a pledge of the Loans. In either
case, this position, if argued before and/or accepted by a court, could
prevent timely payments of amounts due on the Securities and result in a
reduction of payments due on the Securities.
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 Securityholders from appointing a successor Servicer. The time period
during which cash collections may be commingled with the Master Servicer's
own funds prior to each Distribution Date will be specified in the related
Prospectus Supplement. In the event of the insolvency of the Master Servicer
and if such cash collections are commingled with the Master Servicer's own
funds for at least ten days, the Trust Fund will likely not have a perfected
interest in such collections since such collections would not have been
deposited in a segregated account within ten days after the collection
thereof, and the inclusion thereof in the bankruptcy estate of the Master
Servicer may result in delays in payment and failure to pay amounts due on
the Securities of the related Series.
In addition, 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 its security. For example, in a proceeding under the federal
Bankruptcy Code, a lender may not foreclose on a mortgaged property without
the permission of the bankruptcy court. The rehabilitation plan proposed by
the debtor may provide, if the mortgaged property is not the debtor's
principal residence and the court determines that the value of the mortgaged
property is less than the principal balance of the mortgage loan, for the
reduction of the secured indebtedness to the value of the mortgaged property
as of the date of the commencement of the bankruptcy, rendering the lender a
general unsecured creditor for the difference, and also may reduce the
monthly payments due under such mortgage loan, change the rate of interest
and alter the mortgage loan repayment schedule. The effect of any such
proceedings under the federal Bankruptcy Code, including but not limited to
any automatic stay, could result in delays in receiving payments on the Loans
underlying a Series of Securities and possible reductions in the aggregate
amount of such payments.
VALUE OF TRUST FUND ASSETS
There is no assurance that the market value of the Trust Fund Assets or
any other assets relating to a Series of Securities described under "Credit
Enhancement" herein will at any time be equal to or greater than the
principal amount of the Securities of such Series then outstanding, plus
accrued interest thereon. Moreover, upon an event of default under the
Agreement for a Series of Securities and a sale of the related Trust Fund
Assets or upon a sale of the assets of a Trust Fund for a Series of
Securities, the Trustee, the Master Servicer, the credit enhancer, if any,
and any other service provider specified in the related Prospectus Supplement
generally will be entitled to receive the proceeds of any such sale to the
extent of unpaid fees and other amounts owing to such persons under the
related Agreement prior to distributions to Securityholders. Upon any such
sale, the proceeds thereof may be insufficient to pay in full the principal
of and interest on the Securities of such Series.
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/F1/ Whenever the terms "Pool", "Certificates", "Notes" and "Securities"
are used in this Prospectus, such terms will be deemed to apply, unless the
context indicates otherwise, to one specific Pool and the Securities of one
Series including the Certificates representing certain undivided interests
in, and/or Notes secured by the assets of, a single Trust Fund consisting
primarily of the Loans in such Pool. Similarly, the term "Pass-Through Rate"
will refer to the Pass-Through Rate borne by the Certificates and the term
"interest rate" will refer to the interest rate borne by the Notes of one
specific Series, as applicable, and the term "Trust Fund" will refer to one
specific Trust Fund.
THE TRUST FUND
GENERAL
The Securities of each Series will represent interests in the assets of
the related Trust Fund, and the Notes of each Series will be secured by the
pledge of the assets of the related Trust Fund. The Trust Fund for each
Series will be held by the Trustee for the benefit of the related
Securityholders. Each Trust Fund will consist of certain assets (the "Trust
Fund Assets") consisting of a pool (each, a "Pool") comprised of Loans as
specified in the related Prospectus Supplement, together with payments in
respect of such Loans, as specified in the related Prospectus Supplement./F1/
The Pool will be created on the first day of the month of the issuance of the
related Series of Securities or such other date specified in the related
Prospectus Supplement (the "Cut-off Date"). The Securities will be entitled
to payment from the assets of the related Trust Fund or Funds or other assets
pledged for the benefit of the Securityholders, as specified in the related
Prospectus Supplement and will not be entitled to payments in respect of the
assets of any other trust fund established by the Sponsor.
The Trust Fund Assets will be acquired by the Sponsor, either directly
or through affiliates, from originators or sellers which may be affiliates of
the Sponsor (the "Sellers"), and conveyed without recourse by the Sponsor to
the related Trust Fund. Loans acquired by the Sponsor will have been
originated in accordance with the underwriting criteria specified below under
"Loan Program--Underwriting Standards" or as otherwise described in the
related Prospectus Supplement. See "Loan Program--Underwriting Standards".
The Sponsor will cause the Trust Fund Assets 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 named
in the related Prospectus Supplement will service the Trust Fund Assets,
either directly or through other servicing institutions ("Sub-Servicers"),
pursuant to a Pooling and Servicing Agreement among the Sponsor, the Master
Servicer and the Trustee with respect to a Series consisting of Certificates,
or a master servicing agreement (each, a "Master Servicing Agreement")
between the Trustee and the Master Servicer with respect to a Series
consisting of Certificates and Notes, and will receive a fee for such
services. See "Loan Program" and "The Agreements". With respect to Loans
serviced by the Master Servicer through a Sub-Servicer, the Master Servicer
will remain liable for its servicing obligations under the related Agreement
as if the Master Servicer alone were servicing such Loans.
As used herein, "Agreement" means, with respect to a Series consisting
of Certificates, the Pooling and Servicing Agreement, and with respect to a
Series consisting of Certificates and Notes, the Trust Agreement, the
Indenture and the Master Servicing Agreement, as the context requires.
If so specified in the related Prospectus Supplement, a Trust Fund
relating to a Series of Securities may be a business trust formed under the
laws of the state specified in the related Prospectus Supplement pursuant to
a trust agreement (each, a "Trust Agreement") between the Sponsor and the
trustee of such Trust Fund.
With respect to each Trust Fund, prior to the initial offering of the
related Series of Securities, the Trust Fund will have no assets or
liabilities. No Trust Fund is expected to engage in any activities other
than acquiring, managing and holding the related Trust Fund Assets and other
assets contemplated herein specified and in the related Prospectus Supplement
and the proceeds thereof, issuing Securities and making payments and
distributions thereon and certain related activities. No Trust Fund is
expected to have any source of capital other than its assets and any related
credit enhancement.
Unless otherwise specified in the related Prospectus Supplement, the
only obligations of the Sponsor with respect to a Series of Securities will
be to obtain certain representations and warranties from the Sellers and to
assign to the Trustee for such Series of Securities the Sponsor's rights with
respect to such representations and warranties. See "The Agreements--
Assignment of the Trust Fund Assets". The obligations of the Master Servicer
with respect to the Loans will consist principally of its contractual
servicing obligations under the related Agreement (including its obligation
to enforce the obligations of the Sub-Servicers or Sellers, or both, as more
fully described herein under "Loan Program--Representations by Sellers;
Repurchases" and "The Agreements--Sub-Servicing By Sellers" and "--
Assignment of the Trust Fund Assets") and its obligation, if any, to make
certain cash advances in the event of delinquencies in payments on or with
respect to the Loans in the amounts described herein under "Description of
the Securities--Advances". The obligations of the Master Servicer to make
advances may be subject to limitations, to the extent provided herein and in
the related Prospectus Supplement.
The following is a brief description of the assets expected to be
included in the Trust Funds. If specific information respecting
the Trust Fund Assets is not known at the time the related Series of
Securities initially is offered, more general information of the nature
described below will be provided in the related Prospectus Supplement, and
specific information will be set forth in a report on Form 8-K to be filed
with the Securities and Exchange Commission within fifteen days after the
initial issuance of such Securities (the "Detailed Description"). A copy of
the Agreement with respect to each Series of Securities will be available for
inspection at the corporate trust office of the Trustee specified in the
related Prospectus Supplement. A schedule of the Loans relating to such
Series will be attached to the Agreement delivered to the Trustee upon
delivery of the Securities.
THE LOANS
General. Loans will consist of Mortgage Loans, Home Equity Loans or
Home Improvement Contracts. For purposes hereof, "Home Equity Loans"
includes "Closed-End Loans" and "Revolving Credit Line Loans". As more
fully described in the related Prospectus Supplement, the Loans may be
"conventional" loans or loans that are insured or guaranteed by a
governmental agency such as the FHA or VA.
The Loans in a Pool will have monthly payments due on the first day of
each month or on such other day of the month specified in the related
Prospectus Supplement. The payment terms of the Loans to be included in a
Trust Fund will be described in the related Prospectus Supplement and may
include any of the following features (or combination thereof), all as
described below or in the related Prospectus Supplement:
(a) Interest may be payable at a fixed rate, a rate adjustable
from time to time in relation to an index (which will be specified in
the related Prospectus Supplement), a rate that is fixed for a period of
time or under certain circumstances and is followed by an adjustable
rate, a rate that otherwise varies from time to time, or a rate that is
convertible from an adjustable rate to a fixed rate. Changes to an
adjustable rate may be subject to periodic limitations, maximum rates,
minimum rates or a combination of such limitations. Accrued interest
may be deferred and added to the principal of a Loan for such periods
and under such circumstances as may be specified in the related
Prospectus Supplement.
(b) Principal may be payable on a level debt service basis to
fully amortize the Loan over its term, may be calculated on the basis of
an assumed amortization schedule that is significantly longer than the
original term to maturity or on an interest rate that is different from
the Loan Rate or may not be amortized during all or a portion of the
original term. Payment of all or a substantial portion of the principal
may be due on maturity ("balloon payment"). Principal may include
interest that has been deferred and added to the principal balance
of the Loan.
(c) Monthly payments of principal and interest may be fixed for
the life of the Loan, may increase over a specified period of time or
may change from period to period. Loans may include limits on periodic
increases or decreases in the amount of monthly payments and may include
maximum or minimum amounts of monthly payments.
(d) Prepayments of principal may be subject to a prepayment fee,
which may be fixed for the life of the Loan or may decline over time.
Certain Loans may permit prepayments after expiration of certain periods
("lockout periods"). Other Loans may permit prepayments without payment
of a fee unless the prepayment occurs during specified time periods.
The Loans may include "due on sale" clauses which permit the mortgagee
to demand payment of the entire Loan in connection with the sale or
certain transfers of the related Property. Other Loans may be assumable
by persons meeting the then applicable standards set forth in the
Agreement.
A Trust Fund may contain certain Loans ("Buydown Loans") that include
provisions whereby a third party partially subsidizes the monthly payments of
the borrowers on such Loans during the early years of such Loans, the
difference to be made up from a fund (a "Buydown Fund") contributed by such
third party at the time of origination of the Loan. A Buydown Fund will be
in an amount equal either to the discounted value or full aggregate amount of
future payment subsidies. The underlying assumption of buydown plans is that
the income of the borrower will increase during the buydown period as a
result of normal increases in compensation and inflation, so that the
borrower will be able to meet the full loan payments at the end of the
buydown period. To the extent that this assumption as to increased income is
not fulfilled, the possibility of defaults on Buydown Loans is increased.
The related Prospectus Supplement will contain information with respect to
any Buydown Loan concerning limitations on the interest rate paid by the
borrower initially, on annual increases in the interest rate and on the
length of the buydown period.
The real property which secures repayment of the Loans is referred to as
the "Mortgaged Properties". Home Improvement Contracts may, and the other
Loans will, be secured by mortgages or deeds of trust or other similar
security instruments creating a lien on a Mortgaged Property. In the case of
Home Equity Loans, such liens generally will be subordinated to one or more
senior liens on the related Mortgaged Properties as described in the related
Prospectus Supplement. As specified in the related Prospectus Supplement,
Home Improvement Contracts may be unsecured or secured by purchase money
security interests in the Home Improvements financed thereby. The Mortgaged
Properties and the Home Improvements are collectively referred to herein as
the "Properties". The Properties relating to Loans will consist of
detached or semi-detached one- to four-family dwelling units, townhouses,
rowhouses, individual condominium units, manufactured homes, individual units
in planned unit developments, and certain other dwelling units ("Single
Family Properties"). Such Properties may include vacation and second homes,
investment properties and dwellings situated on leasehold estates. In the
case of leasehold interests, the term of the leasehold will exceed the
scheduled maturity of the Loan by at least five years, unless otherwise
specified in the related Prospectus Supplement. The Properties may be
located in any one of the fifty states, the District of Columbia, Guam,
Puerto Rico or any other territory of the United States.
Loans with certain Loan-to-Value Ratios and/or certain principal
balances may be covered wholly or partially by primary mortgage guaranty
insurance policies (each, a "Primary Mortgage Insurance Policy"). The
existence, extent and duration of any such coverage will be described in the
applicable Prospectus Supplement.
The aggregate principal balance of Loans secured by Properties that are
owner-occupied may be disclosed in the related Prospectus Supplement. The
basis for a representation that a given percentage of the Loans is secured by
Single Family Properties that are owner-occupied will be either (i) the
making of a representation by the borrower at origination of the Loan either
that the underlying Property will be used by the borrower for a period of at
least six months every year or that the borrower intends to use the Property
as a primary residence or (ii) a finding that the address of the underlying
Property is the borrower's mailing address.
Home Equity Loans. As more fully described in the related Prospectus
Supplement, interest on each Revolving Credit Line Loan, excluding
introduction rates offered from time to time during promotional periods, is
computed and payable monthly on the average daily outstanding principal
balance of such Loan. Principal amounts on a Revolving Credit Line Loan may
be drawn down (up to a maximum amount as set forth in the related Prospectus
Supplement) or repaid under each Revolving Credit Line Loan from time to
time, but may be subject to a minimum periodic payment. As specified in the
related Prospectus Supplement, the Trust Fund may include any amounts
borrowed under a Revolving Credit Line Loan after the Cut-Off Date.
The full amount of a Closed-End Loan is advanced at the origination of
the Loan and generally is repayable in equal (or substantially equal)
installments of an amount to fully amortize such Loan at its stated maturity
or is a Balloon Loan. As more fully described in the related Prospectus
Supplement, interest on each Closed-End Loan is calculated on the basis of
the outstanding principal balance of such Loan multiplied by the Loan Rate
thereon and further multiplied by either a fraction, the numerator of which
is the number of days in the period elapsed since the preceding payment of
interest was made and the denominator of which is the number of days in the
annual period for which interest accrues on such Loan, or a fraction which is
30 over 360. Except to the extent provided in the related Prospectus
Supplement, the original terms to stated maturity of Closed-End Loans
generally will not exceed 360 months.
Under certain circumstances, under either a Revolving Credit Line Loan
or a Closed-End Loan, a borrower may choose an interest only payment option
and is obligated to pay only the amount of interest which accrues on the Loan
during the billing cycle. An interest only payment option may be available
for a specified period before the borrower must begin paying at least the
minimum monthly payment of a specified percentage of the average outstanding
balance of the Loan.
Home Improvement Contracts. The Trust Fund Assets for a Series of
Securities may consist, in whole or in part, of Home Improvement Contracts
originated by a home improvement contractor, a thrift or a commercial
mortgage banker in the ordinary course of business. The Home Improvements
securing the Home Improvement Contracts may include, but are not limited to,
replacement windows, house siding, new roofs, swimming pools, satellite
dishes, kitchen and bathroom remodeling goods and solar heating panels. As
specified in the related Prospectus Supplement, the Home Improvement
Contracts will either be unsecured or secured by mortgages on Single Family
Properties which are generally subordinate to other mortgages on the same
Property, or secured by purchase money security interests in the Home
Improvements financed thereby. Except as otherwise specified in the related
Prospectus Supplement, the Home Improvement Contracts will be fully
amortizing and may have fixed interest rates or adjustable interest rates and
may provide for other payment characteristics as described below and in the
related Prospectus Supplement. The initial Loan-to-Value Ratio of a Home
Improvement Contract is computed in the manner described in the related
Prospectus Supplement.
Additional Information. Each Prospectus Supplement will contain
information, as of the date of such Prospectus Supplement and to the extent
then specifically known to the Sponsor, with respect to the Loans contained
in the related Pool, including (i) the aggregate outstanding principal
balance and the average outstanding principal balance of the Loans as of the
applicable Cut-off Date, (ii) the type of property securing the Loan (e.g.,
single family residences, individual units in condominium apartment
buildings, two- to four-family dwelling units, other real property or Home
Improvements), (iii) the original terms to maturity of the Loans, (iv) the
largest principal balance and the smallest principal balance of any of the
Loans, (v) the earliest origination date and latest maturity date of any of
the Loans, (vi) the Loan-to-Value Ratios or Combined Loan-to-Value Ratios, as
applicable, of the Loans, (vii) the Loan Rates or annual percentage rates
("APR") or range of Loan Rates or APR's borne by the Loans, (viii) the
maximum and minimum per annum Loan Rates, and (ix) the geographical location
of the Loans. If specific information regarding the Loans is not known to
the Sponsor at the time the related Securities are initially offered, more
general information of the nature described above will be provided in the
related Prospectus Supplement, and specific information will be set forth
in the Detailed Description.
Generally, the "Loan-to-Value Ratio" (or "LTV") of a Loan at any given
time is the fraction, expressed as a percentage, the numerator of which is
the original principal balance of the related Loan and the denominator of
which is the Collateral Value of the related Property. Generally, the
"Combined Loan-to-Value Ratio" (or "CLTV") of a Loan at any given time is the
ratio, expressed as a percentage, of (i) the sum of (a) the original
principal balance of the Loan (or, in the case of a Revolving Credit Line
Loan, the maximum amount thereof available) and (b) the outstanding principal
balance at the date of origination of the Loan of any senior mortgage loan(s)
or, in the case of any open-ended senior mortgage loan, the maximum available
line of credit with respect to such mortgage loan, regardless of any lesser
amount actually outstanding at the date of origination of the Loan, to (ii)
the Collateral Value of the related Property. The "Collateral Value" of the
Property, other than with respect to certain Loans the proceeds of which were
used to refinance an existing mortgage loan (each, a "Refinance Loan"), is
the lesser of (a) the appraised value determined in an appraisal obtained at
origination of such Loan and (b) the sales price for such Property if the
proceeds of such Loan are used to purchase the related Property. In the case
of Refinance Loans, the "Collateral Value" of the related Property is the
appraised value thereof determined in an appraisal obtained at the time of
refinancing.
No assurance can be given that values of the Properties have remained or
will remain at their levels on the dates of origination of the related Loans.
If the residential real estate market should experience an overall decline in
property values such that the sum of the outstanding principal balances of
the Loans and any primary or secondary financing on the Properties, as
applicable, in a particular Pool become equal to or greater than the value of
the Properties, the actual rates of delinquencies, foreclosures and losses
could be higher than those now generally experienced in the mortgage lending
industry. In addition, adverse economic conditions and other factors (which
may or may not affect real property values) may affect the timely payment by
borrowers of scheduled payments of principal and interest on the Loans and,
accordingly, the actual rates of delinquencies, foreclosures and losses with
respect to any Pool. To the extent that such losses are not covered by
subordination provisions or alternative arrangements, such losses will be
borne by the holders of the Securities of the related Series.
SUBSTITUTION OF TRUST FUND ASSETS
Substitution of Trust Fund Assets may be permitted in the event of
breaches of representations and warranties with respect to certain Trust Fund
Assets or in the event the documentation with respect to any Trust Fund Asset
is determined by the Trustee to be incomplete or as further specified in
the related Prospectus Supplement. The period during which such
substitution will be permitted generally will be indicated in the related
Prospectus Supplement.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Securities will be
applied by the Sponsor to the purchase of Trust Fund Assets or will be used
by the Sponsor for general corporate purposes. The Sponsor expects to sell
Securities in Series from time to time, but the timing and amount of
offerings of Securities will depend on a number of factors, including the
volume of Trust Fund Assets acquired by the Sponsor, prevailing interest
rates, availability of funds and general market conditions.
THE SPONSOR
Headlands Mortgage Securities Inc., a Delaware corporation (the
"Sponsor"), was organized on November 18, 1996 for the limited purpose of
acquiring, owning and transferring Trust Fund Assets and selling interests
therein or bonds secured thereby. The Sponsor is a subsidiary of Headlands
Mortgage Company, a closely-held California S-corporation ("Headlands"). The
Sponsor maintains its principal office at 700 Larkspur Landing Circle, Suite
240, Larkspur, California 94939. Its telephone number is (415) 925-5442.
Neither the Sponsor nor any of the Sponsor's affiliates will insure or
guarantee distributions on the Securities of any Series.
LOAN PROGRAM
The Loans will have been purchased by the Sponsor, either directly or
through affiliates, from Sellers. Unless otherwise specified in the related
Prospectus Supplement, the Loans so acquired by the Sponsor will have been
originated in accordance with the underwriting criteria specified below under
"Underwriting Standards".
UNDERWRITING STANDARDS
Each Seller will represent and warrant that all Loans originated and/or
sold by it to the Sponsor will have been underwritten in accordance with
standards consistent with those utilized by mortgage lenders generally during
the period of origination for similar types of loans. As to any Loan insured
by the FHA or partially guaranteed by the VA, the Seller will represent that
it has complied with underwriting policies of the FHA or the VA, as the case
may be.
Underwriting standards are applied by or on behalf of a lender to
evaluate the borrower's credit standing and repayment ability,
and the value and adequacy of the related Property mortgaged property as
collateral. In general, a prospective borrower applying for a mortgage loan
is required to fill out a detailed application designed to provide to the
underwriting officer pertinent credit information. As part of the description
of the borrower's financial condition, the borrower generally is required to
provide a current list of assets and liabilities and a statement of income
and expenses, as well as an authorization to apply for a credit report which
summarizes the borrower's credit history with local merchants and lenders and
any record of bankruptcy or other significant public records. In most cases,
an employment verification is obtained from an independent source (typically
the borrower's employer), which verification reports the length of employment
with that organization, the borrower's current salary and whether it is
expected that the borrower will continue such employment in the future. If a
prospective borrower is self-employed, the borrower may be required to submit
copies of signed tax returns. The borrower may also be required to authorize
verification of deposits at financial institutions where the borrower has
demand or savings accounts.
In determining the adequacy of the Property as collateral, an appraisal
will generally be made of each property considered for financing. The
appraiser is required to inspect the property and verify that it is in good
repair and that construction, if new, has been completed. The appraisal is
based on the market value of comparable homes, the estimated rental income
(if considered applicable by the appraiser) and the cost of replacing the
home.
Once all applicable employment, credit and property information is
received, a determination generally is made as to whether the prospective
borrower has sufficient monthly income available (i) to meet the borrower's
monthly obligations on the proposed mortgage loan (generally determined on
the basis of the monthly payments due in the year of origination) and other
expenses related to the property (such as property taxes and hazard
insurance) and (ii) to meet monthly housing expenses and other financial
obligations and monthly living expenses. The underwriting standards applied
by a Seller, particularly with respect to the level of loan documentation and
the borrower's income and credit history, may be varied in appropriate cases
where factors such as low Combined Loan-to-Value Ratios or other favorable
credit aspects exist.
If specified in the related Supplement, a portion of the Loans in a Pool
may have been originated under a limited documentation program. Under a
limited documentation program, more emphasis is placed on the value and
adequacy of the property as collateral and other assets of the borrower than
on credit underwriting. Under a limited documentation program, certain
credit underwriting documentation concerning income or income verification
and/or employment verification is waived. The Prospectus Supplement for each
Series of Securities will indicate the types of limited documentation
programs pursuant to which the related Loans were originated and the
underwriting standards applicable to such limited documentation programs.
In the case of a Loan secured by a leasehold interest in real property,
the title to which is held by a third party lessor, the Seller will represent
and warrant, among other things, that the remaining term of the lease and any
sublease is at least five years longer than the remaining term on the related
mortgage note.
Certain of the types of Loans that may be included in a Trust may
involve additional uncertainties not present in traditional types of loans.
For example, certain of such Loans may provide for escalating or variable
payments by the borrower. These types of Loans are underwritten on the basis
of a judgment that the borrowers have the ability to make the monthly
payments required initially. In some instances, however, a borrower's income
may not be sufficient to permit continued loan payments as such payments
increase. These types of Loans may also be underwritten primarily upon the
basis of Combined Loan to Value Ratios or other favorable credit factors.
QUALIFICATIONS OF SELLERS
Each Seller must be an institution experienced in originating and
servicing loans of the type contained in the related Pool in accordance with
accepted practices and prudent guidelines, and must maintain satisfactory
facilities to originate and service those loans. Each Seller must be a
seller/servicer approved by either FNMA or FHLMC. Each Seller must be a
mortgagee approved by the FHA or an institution the deposit accounts of which
are insured by the Federal Deposit Insurance Corporation.
REPRESENTATIONS BY SELLERS; REPURCHASES
Each Seller will have made representations and warranties in respect of
the Loans sold by such Seller and evidenced by all, or a part, of a Series of
Securities. Such representations and warranties may include, among other
things: (i) that title insurance (or in the case of Properties located in
areas where such policies are generally not available, an attorney's
certificate of title) and any required hazard insurance policy were effective
at origination of each Loan and that each policy (or certificate of title as
applicable) remained in effect on the date of purchase of the Loan from the
Seller by or on behalf of the Sponsor; (ii) that the Seller had good title to
each such Loan and such Loan was subject to no offsets, defenses,
counterclaims or rights of rescission except to the extent that any buydown
agreement may forgive certain indebtedness of a borrower; (iii) that each
Loan constituted a valid lien on, or a perfected security interest with
respect to, the Property (subject only to permissible liens disclosed, if
applicable, title insurance exceptions, if applicable, and certain other
exceptions described in the Agreement) and that the Property was free from
damage and was in acceptable condition; (iv) that there were no delinquent
tax or assessment liens against the Property; (v) that no required payment
on a Loan was delinquent more than the number of days specified in
the related Prospectus Supplement; and (vi) that each Loan was made in
compliance with, and is enforceable under, all applicable state and
federal laws and regulations in all material respects.
The Master Servicer or the Trustee will promptly notify the relevant
Seller of any breach of any representation or warranty made by it in respect
of a Loan which materially and adversely affects the interests of the
Securityholders in such Loan. Unless otherwise specified in the related
Prospectus Supplement, if such Seller cannot cure such breach within the time
period specified in the related Prospectus Supplement following notice from
the Master Servicer or the Trustee, as the case may be, then such Seller will
be obligated either (i) to repurchase such Loan from the Trust Fund at a
price (the "Purchase Price") equal to 100% of the unpaid principal balance
thereof as of the date of the repurchase plus accrued interest thereon to the
first day of the month following the month of repurchase at the Loan Rate
(less any Advances or amount payable as related servicing compensation if the
Seller is the Master Servicer) or (ii) substitute for such Loan a replacement
loan that satisfies the criteria specified in the related Prospectus
Supplement. If a REMIC election is to be made with respect to a Trust Fund
the Master Servicer or a holder of the related residual certificate generally
will be obligated to pay any prohibited transaction tax which may arise in
connection with any such repurchase or substitution and the Trustee must have
received a satisfactory opinion of counsel that any such substitution will
not cause the Trust Fund to lose its status as a REMIC or otherwise subject
the Trust Fund to a prohibited transaction tax. This repurchase or
substitution obligation will constitute the sole remedy available to holders
of Securities or the Trustee for a breach of representation by a Seller.
Neither the Sponsor nor the Master Servicer (unless the Master Servicer
is the Seller) will be obligated to purchase or substitute a Loan if a Seller
defaults on its obligation to do so, and no assurance can be given that
Sellers will carry out their respective repurchase or substitution
obligations with respect to Loans.
DESCRIPTION OF THE SECURITIES
Each Series of Certificates will be issued pursuant to separate
agreements (each, a "Pooling and Servicing Agreement" or a "Trust Agreement")
among the Sponsor, the Master Servicer and the Trustee. A form of Pooling
and Servicing Agreement and Trust Agreement has been filed as an exhibit to
the Registration Statement of which this Prospectus forms a part. Each
Series of Notes will be issued pursuant to an indenture (the "Indenture")
between the related Trust Fund and the entity named in the related Prospectus
Supplement as trustee (the "Trustee") with respect to such Series, and the
related Loans will be serviced by the Master Servicer pursuant to a Master
Servicing Agreement. A form of Indenture and Master Servicing Agreement has
been filed as an exhibit to the Registration Statement of which this
Prospectus forms a part.
A Series of Securities may consist of both Notes and Certificates. Each
Agreement, dated as of the related Cut-off Date, will be among the Seller,
the Sponsor, the Master Servicer and the Trustee for the benefit of the
holders of the Securities of such Series. The provisions of each Agreement
will vary depending upon the nature of the Securities to be issued thereunder
and the nature of the related Trust Fund. The following are descriptions of
the material provisions which may appear in each Agreement. The descriptions
are subject to, and are qualified in their entirety by reference to, all of
the provisions of the Agreement for each Series of Securities and the
applicable Prospectus Supplement. The Sponsor will provide a copy of the
Agreement (without exhibits) relating to any Series without charge upon
written request of a holder of record of a Security of such Series addressed
to Headlands Mortgage Securities Inc., 700 Larkspur Landing Circle, Suite
240, Larkspur, California 94939, Attention: Secretary.
GENERAL
Unless otherwise described in the related Prospectus Supplement, the
Securities of each Series will be issued in book-entry or fully registered
form, in the authorized denominations specified in the related Prospectus
Supplement, will, in the case of Certificates, evidence specified beneficial
ownership interests in, and in the case of Notes, be secured by, the assets
of the related Trust Fund created pursuant to each Agreement and will not be
entitled to payments in respect of the assets included in any other Trust
Fund established by the Sponsor. Unless otherwise specified in the related
Prospectus Supplement, the Securities will not represent obligations of the
Sponsor or any affiliate of the Sponsor. Certain of the Loans may be
guaranteed or insured as set forth in the related Prospectus Supplement.
Each Trust Fund will consist of, to the extent provided in the related
Agreement, (i) the Trust Fund Assets as are subject to the related Agreement
(exclusive of any amounts specified in the related Prospectus Supplement
("Retained Interest")), including all payments of interest and principal
received with respect to the Loans after the Cut-off Date (to the extent not
applied in computing the principal balance of such Loans as of the Cut-off
Date (the "Cut-off Date Principal Balance")); (ii) such assets as from time
to time are required to be deposited in the related Security Account, as
described below under "The Agreements--Payments on Loans; Deposits to
Security Account"; (iii) property which secured a Loan and which is acquired
on behalf of the Securityholders by foreclosure or deed in lieu of
foreclosure and (iv) any insurance policies or other forms of credit
enhancement required to be maintained pursuant to the related Agreement. If
so specified in the related Prospectus Supplement, a Trust Fund may also
include one or more of the following: reinvestment income on payments
received on the Trust Fund Assets, a Reserve Account, a mortgage pool
insurance policy, a special hazard insurance policy, a bankruptcy bond, one
or more letters of credit, a surety bond, guaranties or similar instruments.
Each Series of Securities will be issued in one or more classes. Each
class of Certificates of a Series will evidence beneficial ownership of a
specified percentage (which may be 0%) or portion of future interest payments
and a specified percentage (which may be 0%) or portion of future principal
payments on, and each class of Notes of a Series will be secured by, the
related Trust Fund Assets. A Series of Securities may include one or more
classes that are senior in right to payment to one or more other classes of
Securities of such Series. Certain Series or classes of Securities may be
covered by insurance policies, surety bonds or other forms of credit
enhancement, in each case as described under "Credit Enhancement" herein and
in the related Prospectus Supplement. One or more classes of Securities of a
Series may be entitled to receive distributions of principal, interest or any
combination thereof. Distributions on one or more classes of a Series of
Securities may be made prior to one or more other classes, after the
occurrence of specified events, in accordance with a schedule or formula or
on the basis of collections from designated portions of the related Trust
Fund Assets, in each case as specified in the related Prospectus Supplement.
The timing and amounts of such distributions may vary among classes or over
time as specified in the related Prospectus Supplement.
Distributions of principal and interest (or, where applicable, of
principal only or interest only) on the related Securities will be made by
the Trustee on each Distribution Date (i.e., monthly, quarterly, semi-
annually or at such other intervals and on the dates as are specified in the
related Prospectus Supplement) in proportion to the percentages specified in
the related Prospectus Supplement. Distributions will be made to the persons
in whose names the Securities are registered at the close of business on the
dates specified in the related Prospectus Supplement (each, a "Record Date").
Distributions will be made in the manner specified in the related Prospectus
Supplement to the persons entitled thereto at the address appearing in the
register maintained for Securityholders (the "Security Register"); provided,
however, that the final distribution in retirement of the Securities will be
made only upon presentation and surrender of the Securities at the office or
agency of the Trustee or other person specified in the notice to
Securityholders of such final distribution.
The Securities will be freely transferable and exchangeable at the
Corporate Trust Office of the Trustee as set forth in the related Prospectus
Supplement. No service charge will be made for any registration of exchange
or transfer of Securities of any Series, but the Trustee may require payment
of a sum sufficient to cover any related tax or other governmental charge.
Under current law the purchase and holding of a class of Securities
entitled only to a specified percentage of payments of either interest or
principal or a notional amount of other interest
or principal on the related Loans or a class of Securities entitled to
receive payments of interest and principal on the Loans only after payments
to other classes or after the occurrence of certain specified events by or on
behalf of any employee benefit plan or other retirement arrangement
(including individual retirement accounts and annuities, Keogh plans and
collective investment funds in which such plans, accounts or arrangements are
invested) subject to provisions of ERISA or the Code may result in prohibited
transactions within the meaning of ERISA and the Code. See "ERISA
Considerations". Unless otherwise specified in the related Prospectus
Supplement, the transfer of Securities of such a class will not be registered
unless the transferee (i) represents that it is not, and is not purchasing on
behalf of, any such plan, account or arrangement or (ii) provides an opinion
of counsel satisfactory to the Trustee and the Depositor that the purchase of
Securities of such a class by or on behalf of such plan, account or
arrangement is permissible under applicable law and will not subject the
Trustee, the Master Servicer or the Depositor to any obligation or liability
in addition to those undertaken in the Agreements.
As to each Series, an election may be made to treat the related Trust
Fund or designated portions thereof as a "real estate mortgage investment
conduit" or "REMIC" as defined in the Code. The related Prospectus
Supplement will specify whether a REMIC election is to be made.
Alternatively, the Agreement for a Series of Securities may provide that a
REMIC election may be made at the discretion of the Sponsor or the Master
Servicer and may only be made if certain conditions are satisfied. As to any
such Series, the terms and provisions applicable to the making of a REMIC
election will be set forth in the related Prospectus Supplement. If such an
election is made with respect to a Series of Securities, one of the classes
will be designated as evidencing the sole class of "residual interests" in
the related REMIC, as defined in the Code. All other classes of Securities
in such a Series will constitute "regular interests" in the related REMIC, as
defined in the Code. As to each Series of Securities with respect to which a
REMIC election is to be made, the Master Servicer, the Trustee or a holder of
the related residual certificate will be obligated to take all actions
required in order to comply with applicable laws and regulations.
DISTRIBUTIONS ON SECURITIES
General. In general, the method of determining the amount of
distributions on a particular Series of Securities will depend on the type of
credit support, if any, that is used with respect to such Series. See
"Credit Enhancement". Set forth below are descriptions of various methods
that may be used to determine the amount of distributions on the Securities
of a particular Series. The Prospectus Supplement for each Series of
Securities will describe the method to be used in determining the amount of
distributions on the Securities of such Series.
Distributions allocable to principal and interest on the Securities will
be made by the Trustee out of, and only to the extent of, funds in the
related Security Account, including any funds transferred from any Reserve
Account (a "Reserve Account"). As between Securities of different classes
and as between distributions of principal (and, if applicable, between
distributions of Principal Prepayments, as defined below, and scheduled
payments of principal) and interest, distributions made on any Distribution
Date will be applied as specified in the related Prospectus Supplement. The
Prospectus Supplement will also describe the method for allocating
distributions among Securities of a particular class.
Available Funds. All distributions on the Securities of each Series on
each Distribution Date will be made from the Available Funds described below,
in accordance with the terms described in the related Prospectus Supplement
and specified in the Agreement. "Available Funds" for each Distribution Date
will generally equal the amount on deposit in the related Security Account on
such Distribution Date (net of related fees and expenses payable by the
related Trust Fund) other than amounts to be held therein for distribution on
future Distribution Dates.
Distributions of Interest. Interest will accrue on the aggregate
principal balance of the Securities (or, in the case of Securities entitled
only to distributions allocable to interest, the aggregate notional amount)
of each class of Securities (the "Class Security Balance") entitled to
interest from the date, at the Pass-Through Rate or interest rate, as
applicable (which in either case may be a fixed rate or rate adjustable as
specified in such Prospectus Supplement), and for the periods specified in
such Prospectus Supplement. To the extent funds are available therefor,
interest accrued during each such specified period on each class of
Securities entitled to interest (other than a class of Securities that
provides for interest that accrues, but is not currently payable, referred to
hereafter as "Accrual Securities") will be distributable on the Distribution
Dates specified in the related Prospectus Supplement until the aggregate
Class Security Balance of the Securities of such class has been distributed
in full or, in the case of Securities entitled only to distributions
allocable to interest, until the aggregate notional amount of such Securities
is reduced to zero or for the period of time designated in the related
Prospectus Supplement. Except in the case of the Accrual Securities, the
original Class Security Balance of each Security will equal the aggregate
distributions allocable to principal to which such Security is entitled.
Distributions allocable to interest on each Security that is not entitled to
distributions allocable to principal will be calculated based on the notional
amount of such Security. The notional amount of a Security will not evidence
an interest in or entitlement to distributions allocable to principal but
will be used solely for convenience in expressing the calculation of interest
and for certain other purposes.
Interest payable on the Securities of a Series on a Distribution Date
will include all interest accrued during the period specified in the related
Prospectus Supplement. In the event interest accrues over a period ending
two or more days prior to a Distribution Date, the effective yield to
Securityholders will be reduced from the yield that would otherwise be
obtainable if interest payable on the Security were to accrue through the day
immediately preceding such Distribution Date, and the effective yield (at
par) to Securityholders will be less than the indicated coupon rate.
With respect to any class of Accrual Securities, if specified in the
related Prospectus Supplement, any interest that has accrued but is not paid
on a given Distribution Date will be added to the aggregate Class Security
Balance of such class of Securities on that Distribution Date. Distributions
of interest on any class of Accrual Securities will commence only after the
occurrence of the events specified in such Prospectus Supplement. Prior to
such time, the beneficial ownership interest in the Trust Fund or the
principal balance, as applicable, of such class of Accrual Securities, as
reflected in the aggregate Class Security Balance of such class of Accrual
Securities, will increase on each Distribution Date by the amount of interest
that accrued on such class of Accrual Securities during the preceding
interest accrual period but that was not required to be distributed to such
class on such Distribution Date. Any such class of Accrual Securities will
thereafter accrue interest on its outstanding Class Security Balance as so
adjusted.
Distributions of Principal. The related Prospectus Supplement will
specify the method by which the amount of principal to be distributed on the
Securities on each Distribution Date will be calculated and the manner in
which such amount will be allocated among the classes of Securities entitled
to distributions of principal. The aggregate Class Security Balance of any
class of Securities entitled to distributions of principal generally will be
the aggregate original Class Security Balance of such class of Securities
specified in such Prospectus Supplement, reduced by all distributions
reported to the holders of such Securities as allocable to principal and, (i)
in the case of Accrual Securities, as specified in the related Prospectus
Supplement, increased by all interest accrued but not then distributable on
such Accrual Securities and (ii) in the case of adjustable rate Securities,
subject to the effect of negative amortization, if applicable.
If so provided in the related Prospectus Supplement, one or more classes
of Securities will be entitled to receive all or a disproportionate
percentage of the payments of principal which are received from borrowers in
advance of their scheduled due dates and are not accompanied by amounts
representing scheduled interest due after the month of such payments
("Principal Prepayments") in the percentages and under the circumstances or
for the periods specified in such Prospectus Supplement. Any such allocation
of Principal Prepayments to such class or classes of Securities will
have the effect of accelerating the amortization of such Securities while
increasing the interests evidenced by one or more other classes of Securities
in the Trust Fund. Increasing the interests of the other classes of
Securities relative to that of certain Securities is intended to preserve the
availability of the subordination provided by such other Securities. See
"Credit Enhancement--Subordination".
Unscheduled Distributions. If specified in the related Prospectus
Supplement, the Securities will be subject to receipt of distributions before
the next scheduled Distribution Date under the circumstances and in the
manner described below and in such Prospectus Supplement. If applicable, the
Trustee will be required to make such unscheduled distributions on the day
and in the amount specified in the related Prospectus Supplement if, due to
substantial payments of principal (including Principal Prepayments) on the
Trust Fund Assets, the Trustee or the Master Servicer determines that the
funds available or anticipated to be available from the Security Account and,
if applicable, any Reserve Account, may be insufficient to make required
distributions on the Securities on such Distribution Date. Unless otherwise
specified in the related Prospectus Supplement, the amount of any such
unscheduled distribution that is allocable to principal will not exceed the
amount that would otherwise have been required to be distributed as principal
on the Securities on the next Distribution Date. Unless otherwise specified
in the related Prospectus Supplement, the unscheduled distributions will
include interest at the applicable Pass-Through Rate (if any) or interest
rate (if any) on the amount of the unscheduled distribution allocable to
principal for the period and to the date specified in such Prospectus
Supplement.
ADVANCES
To the extent provided in the related Prospectus Supplement, the Master
Servicer will be required to advance on or before each Distribution Date
(from its own funds, funds advanced by Sub-Servicers or funds held in the
Security Account for future distributions to the holders of Securities of the
related Series), an amount equal to the aggregate of payments of interest
and/or principal that were delinquent on the related Determination Date (as
such term is defined in the related Prospectus Supplement) and were not
advanced by any Sub-Servicer, subject to the Master Servicer's determination
that such advances may be recoverable out of late payments by borrowers,
Liquidation Proceeds, Insurance Proceeds or otherwise.
In making Advances, the Master Servicer will endeavor to maintain a
regular flow of scheduled interest and principal payments to Securityholders,
rather than to guarantee or insure against losses. If Advances are made by
the Master Servicer from cash being held for future distribution to
Securityholders, the Master Servicer will replace such funds on or before any
future Distribution Date to the extent that funds in the applicable
Security Account on such Distribution Date would be less than the amount
required to be available for distributions to Securityholders on such date.
Any Master Servicer funds advanced will be reimbursable to the Master
Servicer out of recoveries on the specific Loans with respect to which such
Advances were made (e.g., late payments made by the related borrower, any
related Insurance Proceeds, Liquidation Proceeds or proceeds of any Loan
purchased by the Sponsor, a Sub-Servicer or a Seller pursuant to the related
Agreement). Advances by the Master Servicer (and any advances by a
Sub-Servicer) also will be reimbursable to the Master Servicer (or
Sub-Servicer) from cash otherwise distributable to Securityholders (including
the holders of Senior Securities) to the extent that the Master Servicer
determines that any such Advances previously made are not ultimately
recoverable as described above. To the extent provided in the related
Prospectus Supplement, the Master Servicer also will be obligated to make
Advances, to the extent recoverable out of Insurance Proceeds, Liquidation
Proceeds or otherwise, in respect of certain taxes and insurance premiums not
paid by borrowers on a timely basis. Funds so advanced are reimbursable to
the Master Servicer to the extent permitted by the related Agreement. The
obligations of the Master Servicer to make advances may be supported by a
cash advance reserve fund, a surety bond or other arrangement of the type
described herein under "Credit Enhancement", in each case as described in the
related Prospectus Supplement.
If specified in the related Prospectus Supplement, in the event the
Master Servicer or a Sub-Servicer fails to make a required Advance, the
Trustee will be obligated to make such Advance in its capacity as successor
servicer. If the Trustee makes such an Advance, it will be entitled to be
reimbursed for such Advance to the same extent and degree as the Master
Servicer or a Sub-Servicer is entitled to be reimbursed for Advances. See
"Description of the Securities--Distributions on Securities".
COMPENSATING INTEREST
If so specified in the related Prospectus Supplement, the Master
Servicer will be required to remit to the Trustee, with respect to each Loan
in the related Trust Fund as to which a principal prepayment in full or a
principal payment which is in excess of the scheduled monthly payment and is
not intended to cure a delinquency was received during any Due Period, an
amount, from and to the extent of amounts otherwise payable to the Master
Servicer as servicing compensation, equal to (i) the excess, if any, of (a)
30 days' interest on the principal balance of the related Loan at the Loan
Rate net of the per annum rate at which the Master Servicer's servicing fee
accrues, over (b) the amount of interest actually received on such Loan
during such Due Period, net of the Master Servicer's servicing fee or (ii)
such other amount as described in the related Prospectus Supplement.
REPORTS TO SECURITYHOLDERS
Prior to or concurrently with each distribution on a Distribution Date
the Master Servicer or the Trustee will furnish to each Securityholder of
record of the related Series a statement setting forth, to the extent
applicable to such Series of Securities, among other things:
(i) the amount of such distribution allocable to principal,
separately identifying the aggregate amount of any Principal Prepayments
and if so specified in the related Prospectus Supplement, any applicable
prepayment penalties included therein;
(ii) the amount of such distribution allocable to interest;
(iii) the amount of any Advance;
(iv) the aggregate amount (a) otherwise allocable to the
Subordinated Securityholders on such Distribution Date, and (b)
withdrawn from the Reserve Account, if any, that is included in the
amounts distributed to the Senior Securityholders;
(v) the outstanding principal balance or notional amount of each
class of the related Series after giving effect to the distribution of
principal on such Distribution Date;
(vi) the percentage of principal payments on the Loans (excluding
prepayments), if any, which each such class will be entitled to receive
on the following Distribution Date;
(vii) the percentage of Principal Prepayments on the Loans, if any,
which each such class will be entitled to receive on the following
Distribution Date;
(viii) the related amount of the servicing compensation retained or
withdrawn from the Security Account by the Master Servicer, and the
amount of additional servicing compensation received by the Master
Servicer attributable to penalties, fees, excess Liquidation Proceeds
and other similar charges and items;
(ix) the number and aggregate principal balances of Loans (A)
delinquent (exclusive of Loans in foreclosure) (1) 1 to 30 days, (2) 31
to 60 days, (3) 61 to 90 days and (4) 91 or more days and (B) in
foreclosure and delinquent (1) 1 to 30 days, (2) 31 to 60 days, (3) 61
to 90 days and (4) 91 or more days, as of the close of business on the
last day of the calendar month preceding such Distribution Date;
(x) the book value of any real estate acquired through foreclosure
or grant of a deed in lieu of foreclosure;
(xi) the Pass-Through Rate or interest rate, as applicable, if
adjusted from the date of the last statement, of any such class expected
to be applicable to the next distribution to such class;
(xii) if applicable, the amount remaining in any Reserve Account at
the close of business on the Distribution Date;
(xiii) the Pass-Through Rate or interest rate, as applicable, as of
the day prior to the immediately preceding Distribution Date;
and
(xiv) any amounts remaining under letters of credit, Pool policies
or other forms of credit enhancement.
Where applicable, any amount set forth above may be expressed as a
dollar amount per single Security of the relevant class specified in the
related Prospectus Supplement. The report to Securityholders for any Series
of Securities may include additional or other information of a similar nature
to that specified above.
In addition, within a reasonable period of time after the end of each
calendar year, the Master Servicer or the Trustee will mail to each
Securityholder of record at any time during such calendar year a report (a)
as to the aggregate of amounts reported pursuant to (i) and (ii) above for
such calendar year or, in the event such person was a Securityholder of
record during a portion of such calendar year, for the applicable portion of
such year and (b) such other customary information as may be deemed necessary
or desirable for Securityholders to prepare their tax returns.
CATEGORIES OF CLASSES OF SECURITIES
The Securities of any Series may be comprised of one or more classes.
Such classes, in general, fall into different categories. The following
chart identifies and generally defines certain of the more typical
categories. The Prospectus Supplement for a Series of Securities may
identify the classes which comprise such Series by reference to the following
categories.
CATEGORIES OF CLASSES DEFINITION
PRINCIPAL TYPES
Accretion Directed A class that receives principal payments from the
accredit interest from specified classes of Accrual
Securities. An Accretion Directed Class also may
receive principal payments from principal paid on
the underlying Trust Fund Assets for the related
Series.
Component Securities A class consisting of "Components." The
Components of a class of Component Securities
may have different principal and/or interest
payment characteristics but together constitute
a single class. Each Component of a class of
Component Securities may be identified as
falling into one or more of the categories in
this chart.
Notional Amount
Securities A class having no principal balance and bearing interest
on the related notional amount. The notional amount is
used for purposes of the determination of interest
distributions.
Planned Principal Class
(also sometimes
referred to as "PACs") A class that is designed to receive principal
payments using a predetermined principal
balance schedule derived by assuming two
constant prepayment rates for the underlying
Trust Fund Assets. These two rates are the
endpoints for the "structuring range" for the
Planned Principal Class. The Planned Principal
Classes in any Series of Securities may be
subdivided into different categories (e.g.,
Primary Planned Principal Classes, Secondary
Planned Principal Classes and so forth) having
different effective structuring ranges and
different principal payment priorities. The
structuring range for the Secondary Planned
Principal Class of a Series of Securities will
be narrower than that for the Primary Planned
Principal Class of such Series.
Scheduled Principal Class A class that is designed to receive
principal payments using a predetermined
principal balance schedule but is not
designated as a Planned Principal Class
or Targeted Principal Class. In many
cases, the schedule is derived by assuming
two constant prepayment rates for the
underlying Trust Fund Assets. These two
rates are the endpoints for the
"structuring range" for the Scheduled
Principal Class.
Sequential Pay Classes that receive principal payments in a prescribed
sequence, that do not have predetermined principal
balance schedules and that under all circumstances
receive payments of principal continuously from the first
Distribution Date on which they receive principal until
they are retired. A single class that receives principal
payments before or after all other classes in the same
Series of Securities may be identified as a Sequential
Pay Class.
Strip A class that receives a constant proportion, or "strip," of
the principal payments on the underlying Trust Fund Assets.
The constant proportion of such principal payments may or may
not vary for each Mortgage Asset included in the Trust Fund
and will be calculated in the manner described in the related
Prospectus Supplement. Such Classes may also receive payments
of interest.
Support Class (also
sometimes referred to
as "Companion Classes") A class that receives principal payments
on any Distribution Date only if scheduled
payments have been made on specified
Planned Principal Classes, Targeted
Principal Classes and/or Scheduled
Principal Classes.
Targeted Principal Class
(also sometimes
referred to as "TACs") A class that is designed to receive principal
payments using a predetermined principal
balance schedule derived by assuming a single
constant prepayment rate for the underlying
Trust Fund Assets.
INTEREST TYPES
Accrual A class that accretes the amount of accrued interest otherwise
distributable on such class, which amount will be added as
principal to the principal balance of such class, which amount
will be added as principal to the principal balance of such
class on each applicable Distribution Date. Such accretion
may continue until some specified event has occurred or until
such Accrual Class is retired.
Fixed Rate A class with a Pass-Through Rate that is fixed throughout
the life of the class.
Floating Rate A class with a Pass-Through Rate that resets periodically
based upon a designated index and that varies directly
with changes in such index.
Inverse Floating Rate A class with a Pass-Through Rate that resets
periodically based upon a designated index and
that varies inversely with changes in such
index.
Interest Only A class that receives some or all of the interest
payments made on the underlying Trust Fund Assets and
little or no principal. Interest Only Classes have
either a nominal principal balance or a notional amount.
A nominal principal balance represents actual principal
that will be paid on the class. It is referred to as
nominal since it is extremely small compared to other
classes. A notional amount is the amount used as a
reference to calculate the amount of interest due on an
Interest Only Class that is not entitled to any
distributions in respect of principal.
Variable Rate A class with an interest rate that resets periodically
and is calculated by reference to the rate or rates of
interest applicable to specified assets or instruments
(e.g., the Loan Rates borne by the underlying Loans).
Principal Only A class that does not bear interest and is entitled to
receive only distributions in respect of principal.
Partial Accrual A class that accretes a portion of the amount of
accrued interest thereon, which amount will be added
to the principal balance of such class on each
applicable Distribution Date, with the remainder of
such accrued interest to be distributed currently as
interest on such class. Such accretion may continue
until a specified event has occurred or until such
Partial Accrual Class is retired.
BOOK-ENTRY REGISTRATION OF SECURITIES
As described in the related Prospectus Supplement, if not issued in
fully registered form, each class of Securities will be registered as
book-entry certificates (the "Book-Entry Securities"). Persons acquiring
beneficial ownership interests in the Securities ("Security Owners") will
hold their Securities through the Depository Trust Company ("DTC") in the
United States, or Cedel Bank, soci t anonyme ("CEDEL") or the Euroclear
System ("Euroclear") in Europe, if they are participants of such systems, or
indirectly through organizations which are participants in such systems. The
Book-Entry Securities will be issued in one or more certificates which equal
the aggregate principal balance of the Securities and will initially be
registered in the name of Cede &
Co., the nominee of DTC. CEDEL and Euroclear will hold omnibus positions on
behalf of their participants through customers' securities accounts in
CEDEL's and Euroclear's names on the books of their respective depositaries
which in turn will hold such positions in customers' securities accounts in
the depositaries' names on the books of DTC. Citibank, N.A., will act as
depositary for CEDEL and The Chase Manhattan Bank will act as depositary for
Euroclear (in such capacities, individually the "Relevant Depositary" and
collectively the "European Depositaries"). Except as described below, no
person acquiring a Book-Entry Security (each, a "beneficial owner") will be
entitled to receive a physical certificate representing such Security (a
"Definitive Security"). Unless and until Definitive Securities are issued,
it is anticipated that the only "Securityholder" of the Securities will be
Cede & Co., as nominee of DTC. Security Owners are only permitted to
exercise their rights indirectly through Participants and DTC.
The beneficial owner's ownership of a Book-Entry Security will be
recorded on the records of the brokerage firm, bank, thrift institution or
other financial intermediary (each, a "Financial Intermediary") that
maintains the beneficial owner's account for such purpose. In turn, the
Financial Intermediary's ownership of such Book-Entry Security will be
recorded on the records of DTC (or of a participating firm that acts as agent
for the Financial Intermediary, whose interest will in turn be recorded on
the records of DTC, if the beneficial owner's Financial Intermediary is not a
DTC participant, and on the records of CEDEL or Euroclear, as appropriate).
Security Owners will receive all distributions of principal of, and
interest on, the Securities from the Trustee through DTC and DTC
participants. While the Securities are outstanding (except under the
circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC is required
to make book-entry transfers among Participants on whose behalf it acts with
respect to the Securities and is required to receive and transmit
distributions of principal of, and interest on, the Securities. Participants
and indirect participants with whom Security Owners have accounts with
respect to Securities are similarly required to make book-entry transfers and
receive and transmit such distributions on behalf of their respective
Security Owners. Accordingly, although Security Owners will not possess
certificates, the Rules provide a mechanism by which Security Owners will
receive distributions and will be able to transfer their interest.
Security Owners will not receive or be entitled to receive certificates
representing their respective interests in the Securities, except under the
limited circumstances described below. Unless and until Definitive
Securities are issued, Security Owners who are not Participants may transfer
ownership of Securities only through Participants and indirect participants
by instructing such Participants and indirect 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
Participants and indirect participants will make debits or credits, as the
case may be, on their records on behalf of the selling and purchasing
Security Owners.
Because of time zone differences, credits of securities received in
CEDEL or Euroclear as a result of a transaction with a Participant will be
made during subsequent securities settlement processing and dated the
business day following the DTC settlement date. Such credits or any
transactions in such securities settled during such processing will be
reported to the relevant Euroclear or CEDEL Participants on such business
day. Cash received in CEDEL or Euroclear as a result of sales of securities
by or through a CEDEL Participant (as defined herein) or Euroclear
Participant (as defined herein) to a DTC Participant will be received with
value on the DTC settlement date but will be available in the relevant CEDEL
or Euroclear cash account only as of the business day following settlement
with DTC.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC
in accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross-market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in
accordance with its rules and procedures and within its established deadlines
(European time). The relevant European international clearing system will,
if the transaction meets its settlement requirements, deliver instructions to
the Relevant Depositary to take action to effect final settlement on its
behalf by delivering or receiving securities in DTC, and making or receiving
payment in accordance with normal procedures for same day funds settlement
applicable to DTC. CEDEL Participants and Euroclear Participants may not
deliver instructions directly to the European Depositaries.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations
("CEDEL Participants") and facilitates the clearance and settlement of
securities transactions between CEDEL Participants through electronic
book-entry changes in accounts of CEDEL Participants, thereby eliminating the
need for physical movement of certificates. Transactions may be settled in
CEDEL in any of 28 currencies, including United States dollars. CEDEL
provides to its CEDEL Participants, among other things, services
for safekeeping, administration, clearance and settlement of internationally
traded securities and securities lending and borrowing. CEDEL interfaces
with domestic markets in several countries. As a professional depository,
CEDEL is subject to regulation by the Luxembourg Monetary Institute.
CEDEL participants are recognized financial institutions around the world,
including underwriters, securities brokers and dealers, banks, trust
companies, clearing corporations and certain other organizations. Indirect
access to CEDEL is also available to others, such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a CEDEL Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for its participants
("Euroclear Participants") and to clear and settle transactions between
Euroclear Participants through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities
and cash. Transactions may be settled in any of 32 currencies, including
United States dollars. Euroclear includes various other services, including
securities lending and borrowing and interfaces with domestic markets in
several countries generally similar to the arrangements for cross-market
transfers with DTC described above. Euroclear is operated by the Brussels,
Belgium office of Morgan Guaranty Trust Company of New York ("Morgan" and in
such capacity, the "Euroclear Operator"), under contract with Euroclear
Clearance Systems S.C., a Belgian cooperative corporation (the "Belgian
Cooperative"). All operations are conducted by Morgan, and all Euroclear
securities clearance accounts and Euroclear cash accounts are accounts with
the Euroclear Operator, not the Belgian Cooperative. The Belgian Cooperative
establishes policy for Euroclear on behalf of Euroclear Participants.
Euroclear Participants include banks (including central banks), securities
brokers and dealers and other professional financial intermediaries.
Indirect access to Euroclear is also available to other firms that clear
through or maintain a custodial relationship with a Euroclear Participant,
either directly or indirectly.
Morgan is the Belgian branch of a New York banking corporation which is
a member bank of the Federal Reserve System. As such, it is regulated and
examined by the Board of Governors of the Federal Reserve System and the New
York State Banking Department, as well as the Belgian Banking Commission.
Securities clearance accounts and cash accounts with Morgan are governed
by the Terms and Conditions Governing Use of Euroclear and the related
Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities
and cash from Euroclear, and receipts of payments with respect to securities
in Euroclear. All securities in Euroclear are held on a fungible basis
without attribution of specific certificates to specific securities
clearance accounts. The Euroclear Operator acts under the Terms and
Conditions only on behalf of Euroclear Participants, and has no record of
or relationship with persons holding through Euroclear Participants.
Under a book-entry format, beneficial owners of the Book-Entry
Securities may experience some delay in their receipt of payments, since such
payments will be forwarded by the Trustee to Cede & Co., as nominee of DTC.
Distributions with respect to Securities held through CEDEL or Euroclear will
be credited to the cash accounts of CEDEL Participants or Euroclear
Participants in accordance with the relevant system's rules and procedures,
to the extent received by the Relevant Depositary. Such distributions will
be subject to tax reporting in accordance with relevant United States tax
laws and regulations. See "Federal Income Tax Consequences -Tax Treatment of
Foreign Investors" and "--Tax Consequences to Holders of the Notes--Backup
Withholding" herein. Because DTC can only act on behalf of Financial
Intermediaries, the ability of a beneficial owner to pledge Book-Entry
Securities to persons or entities that do not participate in the Depository
system may be limited due to the lack of physical certificates for such
Book-Entry Securities. In addition, issuance of the Book-Entry Securities in
book-entry form may reduce the liquidity of such Securities in the secondary
market since certain potential investors may be unwilling to purchase
Securities for which they cannot obtain physical certificates.
Monthly and annual reports on the Trust will be provided to Cede & Co.,
as nominee of DTC, and may be made available by Cede & Co. to beneficial
owners upon request, in accordance with the rules, regulations and procedures
creating and affecting the Depository, and to the Financial Intermediaries to
whose DTC accounts the Book-Entry Securities of such beneficial owners are
credited.
DTC has advised the Trustee that, unless and until Definitive Securities
are issued, DTC will take any action permitted to be taken by the holders of
the Book-Entry Securities under the applicable Agreement only at the
direction of one or more Financial Intermediaries to whose DTC accounts the
Book-Entry Securities are credited, to the extent that such actions are taken
on behalf of Financial Intermediaries whose holdings include such Book-Entry
Securities. CEDEL or the Euroclear Operator, as the case may be, will take
any other action permitted to be taken by a Securityholder under the
Agreement on behalf of a CEDEL Participant or Euroclear Participant only in
accordance with its relevant rules and procedures and subject to the ability
of the Relevant Depositary to effect such actions on its behalf through DTC.
DTC may take actions, at the direction of the related Participants, with
respect to some Securities which conflict with actions taken with respect to
other Securities.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all beneficial
owners of the occurrence of such event and the availability through DTC of
Definitive Securities. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Securities and instructions for
re-registration, the Trustee will issue Definitive Securities, and thereafter
the Trustee will recognize the holders of such Definitive Securities as
Securityholders under the applicable Agreement.
Although DTC, CEDEL and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Securities among participants
of DTC, CEDEL and Euroclear, they are under no obligation to perform or
continue to perform such procedures and such procedures may be discontinued
at any time.
None of the Master Servicer, the Sponsor or the Trustee will have any
responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the Book-Entry Securities held
by Cede & Co., as nominee of DTC, or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
CREDIT ENHANCEMENT
GENERAL
Credit enhancement may be provided with respect to one or more classes
of a Series of Securities or with respect to the related Trust Fund Assets.
Credit enhancement may be in the form of a limited financial guaranty policy
issued by an entity named in the related Prospectus Supplement, the
subordination of one or more classes of the Securities of such Series, the
establishment of one or more Reserve Accounts, the use of a
cross-collateralization feature, use of a mortgage pool insurance policy, FHA
Insurance, VA Guarantee, bankruptcy bond, special hazard insurance policy,
surety bond, letter of credit, guaranteed investment contract,
overcollateralization, or another method of credit enhancement contemplated
herein and described in the related Prospectus Supplement, or any combination
of the foregoing. Unless otherwise specified in the related Prospectus
Supplement, 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 which exceed the amount
covered by credit enhancement or which are not covered by the credit
enhancement, Securityholders will bear their allocable share of any
deficiencies.
If specified in the related Prospectus Supplement, the coverage provided
by one or more of the forms of credit enhancement described in this
Prospectus may apply concurrently to two or more separate Trust Funds. If
applicable, the related Prospectus Supplement will identify the Trust Funds
to which such credit enhancement relates and the manner of determining the
amount of coverage provided to such Trust Funds thereby and of the
application of such coverage to the identified Trust Funds.
SUBORDINATION
If so specified in the related Prospectus Supplement, protection
afforded to holders of one or more classes of Securities of a Series by means
of the subordination feature may be accomplished by the preferential right of
holders of one or more other classes of such Series (the "Senior Securities")
to distributions in respect of scheduled principal, Principal Prepayments,
interest or any combination thereof that otherwise would have been payable to
holders of Subordinated Securities under the circumstances and to the extent
specified in the related Prospectus Supplement. Protection may also be
afforded to the holders of Senior Securities of a Series by: (i) reducing the
ownership interest (if applicable) of the related Subordinated Securities;
(ii) a combination of the immediately preceding sentence and clause (i)
above; or (iii) as otherwise described in the related Prospectus Supplement.
If so specified in the related Prospectus Supplement, delays in receipt of
scheduled payments on the Loans and losses on defaulted Loans may be borne
first by the various classes of Subordinated Securities and thereafter by the
various classes of Senior Securities, in each case under the circumstances
and subject to the limitations specified in such Prospectus Supplement. The
aggregate distributions in respect of delinquent payments on the Loans over
the lives of the Securities or at any time, the aggregate losses in respect
of defaulted Loans which must be borne by the Subordinated Securities by
virtue of subordination and the amount of the distributions otherwise
distributable to the Subordinated Securityholders that will be distributable
to Senior Securityholders on any Distribution Date may be limited as
specified in the related Prospectus Supplement. If aggregate distributions
in respect of delinquent payments on the Loans or aggregate losses in respect
of such Loans were to exceed an amount specified in the related Prospectus
Supplement, holders of Senior Securities would experience losses on their
Securities.
In addition to or in lieu of the foregoing, if so specified in the
related Prospectus Supplement, all or any portion of distributions otherwise
payable to holders of Subordinated Securities on any Distribution Date may
instead be deposited into one or more Reserve Accounts established with the
Trustee or distributed to holders of Senior Securities. Such deposits may be
made on each Distribution Date, for specified periods or until the balance in
the Reserve Account has reached a specified amount and, following payments
from the Reserve Account to holders of Senior Securities or otherwise,
thereafter to the extent necessary to restore the balance in the Reserve
Account to required levels, in each case as specified in the related
Prospectus Supplement. Amounts on deposit in the Reserve Account may be
released to the holders of certain classes of Securities at the times
and under the circumstances specified in such Prospectus Supplement.
If specified in the related Prospectus Supplement, various classes of
Senior Securities and Subordinated Securities may themselves be subordinate
in their right to receive certain distributions to other classes of Senior
and Subordinated Securities, respectively, through a cross-collateralization
mechanism or otherwise. As between classes of Senior Securities and as
between classes of Subordinated Securities, distributions may be allocated
among such classes (i) in the order of their scheduled final Distribution
Dates, (ii) in accordance with a schedule or formula, (iii) in relation to
the occurrence of events, or (iv) otherwise, in each case as specified in the
related Prospectus Supplement. As between classes of Subordinated
Securities, payments to holders of Senior Securities on account of
delinquencies or losses and payments to any Reserve Account will be allocated
as specified in the related Prospectus Supplement.
LETTER OF CREDIT
The letter of credit, if any, with respect to a Series of Securities
will be issued by the bank or financial institution specified in the related
Prospectus Supplement (the "L/C Bank"). Under the letter of credit, the L/C
Bank will be obligated to honor drawings thereunder in an aggregate fixed
dollar amount, net of unreimbursed payments thereunder, equal to the
percentage specified in the related Prospectus Supplement of the aggregate
principal balance of the Loans on the related Cut-off Date or of one or more
Classes of Securities. If so specified in the related Prospectus Supplement,
the letter of credit may permit drawings in the event of losses not covered
by insurance policies or other credit support, such as losses arising from
damage not covered by standard hazard insurance policies, losses resulting
from the bankruptcy of a borrower and the application of certain provisions
of the federal Bankruptcy Code, or losses resulting from denial of insurance
coverage due to misrepresentations in connection with the origination of a
Loan. The amount available under the letter of credit will, in all cases, be
reduced to the extent of the unreimbursed payments thereunder. The
obligations of the L/C Bank under the letter of credit for each Series of
Securities will expire at the earlier of the date specified in the related
Prospectus Supplement or the termination of the Trust Fund. See "The
Agreements--Termination: Optional Termination." A copy of the letter of
credit for a Series, if any, will be filed with the Commission as an exhibit
to a Current Report on Form 8-K to be filed within 15 days of issuance of the
Securities of the related Series.
INSURANCE POLICIES, SURETY BONDS AND GUARANTIES
If so provided in the Prospectus Supplement for a Series of Securities,
deficiencies in amounts otherwise payable on such Securities or certain
classes thereof will be covered by insurance policies and/or surety bonds
provided by one or more insurance companies or sureties. Such instruments
may cover, with respect to one or more classes of Securities of the related
Series, timely distributions of interest and/or full distributions of
principal on the basis of a schedule of principal distributions set
forth in or determined in the manner specified in the
related Prospectus Supplement. In addition, if specified in the related
Prospectus Supplement, a Trust Fund may also include bankruptcy bonds,
special hazard insurance policies, other insurance or guaranties for the
purpose of (i) maintaining timely payments or providing additional
protection against losses on the assets included in such Trust Fund, (ii)
paying administrative expenses or (iii) establishing a minimum reinvestment
rate on the payments made in respect of such assets or principal payment rate
on such assets. Such arrangements may include agreements under which
Securityholders are entitled to receive amounts deposited in various accounts
held by the Trustee upon the terms specified in such Prospectus Supplement.
A copy of any such instrument for a Series will be filed with the Commission
as an exhibit to a Current Report on Form 8-K to be filed with the Commission
within 15 days of issuance of the Securities of the related Series.
OVER-COLLATERALIZATION
If so provided in the Prospectus Supplement for a Series of Securities,
a portion of the interest payment on each Loan may be applied as an
additional distribution in respect of principal to reduce the principal
balance of a certain class or classes of Securities and, thus, accelerate the
rate of payment of principal on such class or classes of Securities relative
to the principal balance of the Loans in the related Trust Fund.
RESERVE ACCOUNTS
If specified in the related Prospectus Supplement, credit support with
respect to a Series of Securities will be provided by the establishment and
maintenance with the Trustee for such Series of Securities, in trust, of one
or more Reserve Accounts for such Series. The related Prospectus Supplement
will specify whether or not any such Reserve Accounts will be included in the
Trust Fund for such Series.
The Reserve Account for a Series will be funded (i) by the deposit
therein of cash, United States Treasury securities, instruments evidencing
ownership of principal or interest payments thereon, letters of credit,
demand notes, certificates of deposit or a combination thereof in the
aggregate amount specified in the related Prospectus Supplement, (ii) by the
deposit therein from time to time of certain amounts, as specified in the
related Prospectus Supplement to which the Subordinated Securityholders, if
any, would otherwise be entitled or (iii) in such other manner as may be
specified in the related Prospectus Supplement.
Any amounts on deposit in the Reserve Fund and the proceeds of any other
instrument deposited therein upon maturity will be held in cash or will be
invested in investments consisting of United States government securities and
other high-quality investments ("Eligible Investments"). Any instrument
deposited therein will name the Trustee, in its capacity as trustee for
Securityholders, or such other entity as is specified in the related
Prospectus Supplement, as beneficiary and will be issued by an entity
acceptable to each rating agency that rates the Securities. Additional
information with respect to such instruments deposited in the Reserve Funds
will be set forth in the related Prospectus Supplement.
Any amounts so deposited and payments on instruments so deposited will
be available for withdrawal from the Reserve Account for distribution to the
holders of Securities of the related Series for the purposes, in the manner
and at the times specified in the related Prospectus Supplement.
POOL INSURANCE POLICIES
If specified in the related Prospectus Supplement, a separate pool
insurance policy ("Pool Insurance Policy") will be obtained for the Pool and
issued by the insurer (the "Pool Insurer") named in such Prospectus
Supplement. Each Pool Insurance Policy will, subject to the limitations
described below, cover loss by reason of default in payment on Loans in the
Pool in an amount equal to a percentage specified in such Prospectus
Supplement of the aggregate principal balance of such Loans on the Cut-off
Date. As more fully described below, the Master Servicer will present claims
thereunder to the Pool Insurer on behalf of itself, the Trustee and the
holders of the Securities of the related Series. The Pool Insurance
Policies, however, are not blanket policies against loss, since claims
thereunder may only be made respecting particular defaulted Loans and only
upon satisfaction of certain conditions precedent described below. The Pool
Insurance Policies generally will not cover losses due to a failure to pay or
denial of a claim under a Primary Mortgage Insurance Policy.
The Pool Insurance Policies generally will provide that no claims may be
validly presented unless (i) any required Primary Mortgage Insurance Policy
is in effect for the defaulted Loan and a claim thereunder has been submitted
and settled; (ii) hazard insurance on the related Property has been kept in
force and real estate taxes and other protection and preservation expenses
have been paid; (iii) if there has been physical loss or damage to the
Property, it has been restored to its physical condition (reasonable wear and
tear excepted) at the time of issuance of the policy; and (iv) the insured
has acquired good and merchantable title to the Property free and clear of
liens except certain permitted encumbrances. Upon satisfaction of these
conditions, the Pool Insurer will have the option either (a) to purchase the
Property securing the defaulted Loan at a price equal to the principal
balance thereof plus accrued and unpaid interest at the
Loan Rate to the date of such purchase and certain expenses incurred by the
Master Servicer on behalf of the Trustee and Securityholders, or (b) to pay
the amount by which the sum of the principal balance of the defaulted Loan
plus accrued and unpaid interest at the Loan Rate to the date of payment of
the claim and the aforementioned expenses exceeds the proceeds received from
an approved sale of the Property, in either case net of certain amounts paid
or assumed to have been paid under the related Primary Mortgage Insurance
Policy. If any Property securing a defaulted Loan is damaged and proceeds,
if any, from the related hazard insurance policy or the applicable special
hazard insurance policy are insufficient to restore the damaged Property to a
condition sufficient to permit recovery under the Pool Insurance Policy, the
Master Servicer will not be required to expend its own funds to restore the
damaged Property unless it determines that (i) such restoration will increase
the proceeds to Securityholders on liquidation of the Loan after
reimbursement of the Master Servicer for its expenses and (ii) such expenses
will be recoverable by it through proceeds of the sale of the Property or
proceeds of the related Pool Insurance Policy or any related Primary Mortgage
Insurance Policy.
The Pool Insurance Policies generally will not insure (and many Primary
Mortgage Insurance Policies do not insure) against loss sustained by reason
of a default arising from, among other things, (i) fraud or negligence in the
origination or servicing of a Loan, including misrepresentation by the
borrower, the originator or persons involved in the origination thereof, or
(ii) failure to construct a Property in accordance with plans and
specifications. A failure of coverage attributable to one of the foregoing
events might result in a breach of the related Seller's representations
described above, and, in such events might give rise to an obligation on the
part of such Seller to repurchase the defaulted Loan if the breach cannot be
cured by such Seller. No Pool Insurance Policy will cover (and many Primary
Mortgage Insurance Policies do not cover) a claim in respect of a defaulted
Loan occurring when the servicer of such Loan, at the time of default or
thereafter, was not approved by the applicable insurer.
The original amount of coverage under each Pool Insurance Policy
generally will be reduced over the life of the related Securities by the
aggregate dollar amount of claims paid less the aggregate of the net amounts
realized by the Pool Insurer upon disposition of all foreclosed properties.
The amount of claims paid will include certain expenses incurred by the
Master Servicer as well as accrued interest on delinquent Loans to the date
of payment of the claim or such other date set forth in the related
Prospectus Supplement. Accordingly, if aggregate net claims paid under any
Pool Insurance Policy reach the original policy limit, coverage under that
Pool Insurance Policy will be exhausted and any further losses will be borne
by the related Securityholders.
CROSS SUPPORT
If specified in the related Prospectus Supplement, the beneficial
ownership of separate groups of assets included in a Trust Fund 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 to Securities evidencing a beneficial
ownership interest in, or secured by, one or more asset groups within the
same Trust Fund prior to distributions to Subordinated Securities evidencing
a beneficial ownership interest in, or secured by, one or more other asset
groups within such Trust Fund. The Prospectus Supplement for a Series of
Securities which includes a cross support feature will describe the manner
and conditions for applying such cross support feature.
OTHER INSURANCE, GUARANTIES, LETTERS OF CREDIT AND SIMILAR INSTRUMENTS OR
AGREEMENTS
If specified in the related Prospectus Supplement, a Trust Fund may also
include insurance, guaranties, letters of credit or similar arrangements for
the purpose of (i) maintaining timely payments or providing additional
protection against losses on the assets included in such Trust Fund, (ii)
paying administrative expenses or (iii) establishing a minimum reinvestment
rate on the payments made in respect of such assets or principal payment rate
on such assets. Such arrangements may include agreements under which
Securityholders are entitled to receive amounts deposited in various accounts
held by the Trustee upon the terms specified in such Prospectus Supplement.
YIELD AND PREPAYMENT CONSIDERATIONS
The yields to maturity and weighted average lives of the Securities will
be affected primarily by the amount and timing of principal payments received
on or in respect of the Trust Fund Assets included in the related Trust Fund.
The original terms to maturity of the Loans in a given Pool will vary
depending upon the type of Loans included therein. Each Prospectus
Supplement will contain information with respect to the type and maturities
of the Loans in the related Pool. The related Prospectus Supplement will
specify the circumstances, if any, under which the related Loans will be
subject to prepayment penalties. The prepayment experience on the Loans in a
Pool will affect the weighted average life of the related Series of
Securities.
The rate of prepayments with respect to conventional mortgage loans has
fluctuated significantly in recent years. In general, if prevailing rates
fall significantly below the Loan Rates borne by the Loans, such Loans are
more likely to be subject to higher prepayment rates than if prevailing
interest rates remain at or above such Loan Rates. Conversely, if prevailing
interest rates rise appreciably above the Loan Rates borne by the Loans, such
Loans are more likely to experience a lower prepayment rate than if
prevailing rates remain at or below such Loan Rates. However, there can be
no assurance that such will be the case.
The rate of prepayment on the Loans cannot be predicted. Home equity
loans and home improvement contracts have been originated in significant
volume only during the past few years and the Sponsor is not aware of any
publicly available studies or statistics on the rate of prepayment of such
loans. Generally, home equity loans and home improvement contracts are not
viewed by borrowers as permanent financing. Accordingly, such Loans may
experience a higher rate of prepayment than traditional first mortgage loans.
On the other hand, because home equity loans such as the Revolving Credit
Line Loans generally are not fully amortizing, the absence of voluntary
borrower prepayments could cause rates of principal payments lower than, or
similar to, those of traditional fully-amortizing first mortgage loans. The
prepayment experience of the related Trust Fund may be affected by a wide
variety of factors, including general economic conditions, prevailing
interest rate levels, the availability of alternative financing, homeowner
mobility and the frequency and amount of any future draws on any Revolving
Credit Line Loans. Other factors that might be expected to affect the
prepayment rate of a pool of home equity mortgage loans or home improvement
contracts include the amounts of, and interest rates on, the underlying
senior mortgage loans, and the use of first mortgage loans as long-term
financing for home purchase and subordinate mortgage loans as shorter-term
financing for a variety of purposes, including home improvement, education
expenses and purchases of consumer durables such as automobiles.
Accordingly, such Loans may experience a higher rate of prepayment than
traditional fixed-rate mortgage loans. In addition, any future limitations
on the right of borrowers to deduct interest payments on home equity loans
for federal income tax purposes may further increase the rate of prepayments
of the Loans. The enforcement of a "due-on-sale" provision (as described
below) will have the same effect as a prepayment of the related Loan. See
"Certain Legal Aspects of the Loans--Due-on-Sale Clauses".
The yield to an investor who purchases Securities in the secondary
market at a price other than par will vary from the anticipated yield if the
rate of prepayment on the Loans is actually different than the rate
anticipated by such investor at the time such Securities were purchased.
Collections on Home Equity Loans may vary because, among other things,
borrowers may (i) make payments during any month as low as the minimum
monthly payment for such month or, during the interest-only period for
certain Revolving Credit Line Loans and, in more limited circumstances,
Closed-End Loans, with respect to which an interest-only payment option has
been selected, the interest and the fees and charges for such month or (ii)
make payments 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 the required periodic payments. In addition,
collections on the Loans may vary due to seasonal purchasing and the payment
habits of borrowers.
As specified in the related Prospectus Supplement, certain of the
conventional Loans will contain "due-on-sale" provisions permitting the
mortgagee to accelerate the maturity of the Loan upon sale or certain
transfers by the borrower of the related Property. Loans insured by the FHA,
and single family loans partially guaranteed by the VA, are assumable with
the consent of the FHA and the VA, respectively. Thus, the rate of
prepayments on such Loans may be lower than that of conventional Loans
bearing comparable interest rates. The Master Servicer generally will
enforce any due-on-sale or due-on-encumbrance clause, to the extent it has
knowledge of the conveyance or further encumbrance or the proposed conveyance
or proposed further encumbrance of the Property and reasonably believes that
it is entitled to do so under applicable law; provided, however, that the
Master Servicer will not take any enforcement action that would impair or
threaten to impair any recovery under any related insurance policy. See "The
Agreements--Collection Procedures" and "Certain Legal Aspects of the Loans"
for a description of certain provisions of each Agreement and certain legal
developments that may affect the prepayment experience on the Loans.
When a full prepayment is made on a Loan, the borrower is charged
interest on the principal amount of the Loan so prepaid only for the number
of days in the month actually elapsed up to the date of the prepayment,
rather than for a full month. The effect of prepayments in full will be to
reduce the amount of interest passed through or paid in the following month
to holders of Securities because interest on the principal amount of any Loan
so prepaid will generally be paid only to the date of prepayment. Partial
prepayments in a given month may be applied to the outstanding principal
balances of the Loans so prepaid on the first day of the month of receipt or
the month following receipt. In the latter case, partial prepayments will
not reduce the amount of interest passed through or paid in such month.
Generally, neither full nor partial prepayments will be passed through or
paid until the month following receipt.
Even assuming that the Properties provide adequate security for the
Loans, substantial delays could be encountered in connection with the
liquidation of defaulted Loans and corresponding delays in the receipt of
related proceeds by Securityholders could occur. An action to foreclose on a
Property securing a Loan is regulated by state statutes and rules and is
subject to many of the delays and expenses of other lawsuits if defenses or
counterclaims are interposed, sometimes requiring several years to complete.
Furthermore, in some states an action to obtain a deficiency judgment is not
permitted following a nonjudicial sale of a property. In the event of a
default by a borrower, these restrictions among other things, may impede the
ability of the Master Servicer to foreclose on or sell the Property or to
obtain liquidation proceeds sufficient to repay all amounts
due on the related Loan. In addition, the Master Servicer will be entitled
to deduct from related liquidation proceeds all expenses reasonably incurred
in attempting to recover amounts due on defaulted Loans and not yet repaid,
including payments to senior lienholders, legal fees and costs of legal
action, real estate taxes and maintenance and preservation expenses.
Liquidation expenses with respect to defaulted mortgage loans do not
vary directly with the outstanding principal balance of the loan at the time
of default. Therefore, assuming that a servicer took the same steps in
realizing upon a defaulted mortgage loan having a small remaining principal
balance as it would in the case of a defaulted mortgage loan having a large
remaining principal balance, the amount realized after expenses of
liquidation would be smaller as a percentage of the remaining principal
balance of the small mortgage loan than would be the case with the other
defaulted mortgage loan having a large remaining principal balance.
If the rate at which interest is passed through or paid to the holders
of Securities of a Series is calculated on a Loan-by-Loan basis,
disproportionate principal prepayments among Loans with different Loan Rates
will affect the yield on such Securities. In most cases, the effective yield
to Securityholders will be lower than the yield otherwise produced by the
applicable Pass-Through Rate and purchase price, because while interest will
accrue on each Loan from the first day of the month (unless otherwise
specified in the related Prospectus Supplement), the distribution of such
interest will not be made earlier than the month following the month of
accrual.
Under certain circumstances, the Master Servicer, the holders of the
residual interests in a REMIC or any person specified in the related
Prospectus Supplement may have the option to purchase the assets of a Trust
Fund and thereby effect earlier retirement of the related Series of
Securities. See "The Agreements--Termination; Optional Termination".
The relative contribution of the various factors affecting prepayment
may vary from time to time. There can be no assurance as to the rate of
payment of principal of the Trust Fund Assets at any time or over the lives
of the Securities.
The Prospectus Supplement relating to a Series of Securities will
discuss in greater detail the effect of the rate and timing of principal
payments (including prepayments), delinquencies and losses on the yield,
weighted average lives and maturities of such Securities.
THE AGREEMENTS
Set forth below is a description of the material provisions of each
Agreement which are not described elsewhere in this Prospectus. The
description is subject to, and qualified in its entirety by reference to, the
provisions of each Agreement. Where particular provisions or terms used in
the Agreements are referred to, such provisions or terms are as specified
in the Agreements.
ASSIGNMENT OF THE TRUST FUND ASSETS
Assignment of the Loans. At the time of issuance of the Securities of a
Series, the Sponsor will assign the Loans comprising the related Trust Fund
to the Trustee, without recourse, together with all principal and interest
received by or on behalf of the Sponsor on or with respect to such Loans
after the Cut-off Date, other than principal and interest due on or before
the Cut-off Date and other than any Retained Interest specified in the
related Prospectus Supplement. The Trustee will, concurrently with such
assignment, deliver such Securities to the Sponsor in exchange for the Loans.
Each Loan will be identified in a schedule appearing as an exhibit to the
related Agreement. Such schedule will include information as to the
outstanding principal balance of each Loan after application of payments due
on or before the Cut-off Date, as well as information regarding the Loan Rate
or APR, the maturity of the Loan, the Loan-to-Value Ratios or Combined Loan-
to-Value Ratios, as applicable, at origination and certain other information.
Unless otherwise specified in the related Prospectus Supplement, the
Agreement will require that, within the time period specified therein, the
Sponsor will also deliver or cause to be delivered to the Trustee (or to the
custodian hereinafter referred to) as to each Mortgage Loan or Home Equity
Loan, among other things, (i) the mortgage note or contract endorsed without
recourse in blank or to the order of the Trustee, (ii) the mortgage, deed of
trust or similar instrument (a "Mortgage") with evidence of recording
indicated thereon (except for any Mortgage not returned from the public
recording office, in which case the Sponsor will deliver or cause to be
delivered a copy of such Mortgage together with a certificate that the
original of such Mortgage was delivered to such recording office), (iii) an
assignment of the Mortgage to the Trustee, which assignment will be in
recordable form in the case of a Mortgage assignment, and (iv) such other
security documents, including those relating to any senior interests in the
Property, as may be specified in the related Prospectus Supplement or the
related Agreement. Unless otherwise specified in the related Prospectus
Supplement, the Sponsor will promptly cause the assignments of the related
Loans to be recorded in the appropriate public office for real property
records. If specified in the related Prospectus Supplement, some or all of
the Loan documents may not be delivered to the Trustee until after the
occurrence of certain events specified in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, the
Sponsor will as to each Home Improvement Contract, deliver or cause to be
delivered to the Trustee the original Home Improvement Contract and copies of
documents and instruments related to each Home Improvement Contract and,
other than in the case of unsecured Home Improvement Contracts, the security
interest in the Property securing such Home Improvement Contract. In order
to give notice of the right, title and interest of Securityholders to
the Home Improvement Contracts, the Sponsor will cause a UCC-1 financing
statement to be executed by the Sponsor or the Seller identifying the
Trustee as the secured party and identifying all Home Improvement Contracts
as collateral. Unless otherwise specified in the related Prospectus
Supplement, the Home Improvement Contracts will not be stamped or
otherwise marked to reflect their assignment to the Trustee. Therefore,
if, through negligence, fraud or otherwise, a subsequent purchaser were
able to take physical possession of the Home Improvement Contracts
without notice of such assignment, the interest of Securityholders in
the Home Improvement Contracts could be defeated. See "Certain Legal
Aspects of the Loans--The Home Improvement Contracts."
The Trustee (or the custodian hereinafter referred to) will review such
Loan documents within the time period specified in the related Prospectus
Supplement after receipt thereof to ascertain that all required documents
have been properly executed and received, and the Trustee will hold such
documents in trust for the benefit of the related Securityholders. 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) will notify the Master Servicer and the Sponsor,
and the Master Servicer will notify the related Seller. If such Seller
cannot cure the omission or defect within the time period specified in the
related Prospectus Supplement after receipt of such notice, such Seller will
be obligated to either (i) purchase the related Loan from the Trust Fund at
the Purchase Price or (ii) if so specified in the related Prospectus
Supplement, remove such Loan from the Trust Fund and substitute in its place
one or more other Loans that meets certain requirements set forth therein.
There can be no assurance that a Seller will fulfill this purchase or
substitution obligation. Unless otherwise specified in the related
Prospectus Supplement, this obligation to cure, purchase or substitute
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 to appoint a custodian pursuant to a
custodial agreement to maintain possession of and, if applicable, to review
the documents relating to the Loans as agent of the Trustee.
Notwithstanding the foregoing provisions, with respect to a Trust Fund
for which a REMIC election is to be made, no purchase or substitution of a
Loan will be made if such purchase or substitution would result in a
prohibited transaction tax under the Code.
No Recourse to Sellers; Sponsor or Master Servicer. As described above
under "--Assignment of the Loans," the Sponsor will assign the Loans
comprising the related Trust Fund to the Trustee, without recourse. However,
each Seller will be obligated to repurchase or substitute for any Loan as to
which certain representations and warranties are breached or for failure to
deliver certain documents relating to the Loans as described herein under
"Assignment of the Loans" and "Loan Program--Representations by Sellers;
Repurchases." These obligations to purchase or substitute constitute
the sole remedy available to the Securityholders or the Trustee for a
breach of any such representation or warranty or failure to deliver a
constituent document.
PAYMENTS ON LOANS; DEPOSITS TO SECURITY ACCOUNT
The Master Servicer will establish and maintain or cause to be
established and maintained with respect to the related Trust Fund a separate
account or accounts for the collection of payments on the related Trust Fund
Assets in the Trust Fund (the "Security Account") which must be an Eligible
Account. An "Eligible Account" is an account or accounts which is (i) main-
tained with a depository institution the short-term debt obligations of which
(or, in the case of a depository institution that is the principal subsidiary
of a holding company, the short-term debt obligations of such holding
company) are rated in one of the two highest short-term rating categories by
the Rating Agency that rated one or more classes of the related Series of
Securities, (ii) an account or accounts the deposits in which are fully
insured by the FDIC, (iii) an account or accounts the deposits in which are
insured by the FDIC to the limits established by the FDIC and the uninsured
deposits in which are otherwise secured such that, as evidenced by an opinion
of counsel, Securityholders have a claim with respect to the funds in such
account or accounts, or a perfected first-priority security interest against
any collateral securing such funds, that is superior to the claims of any
other depositors or general creditors of the depository institution with
which such account or accounts are maintained or (iv) an account or accounts
otherwise acceptable to such Rating Agency. The collateral eligible to
secure amounts in the Security Account is limited to Permitted Investments.
A Security Account may be maintained as an interest bearing account or the
funds held therein may be invested pending each succeeding Distribution Date
in Permitted Investments. The Master Servicer or its designee will be
entitled to receive any such interest or other income earned on funds in the
Security Account as additional compensation and will be obligated to deposit
in the Security Account the amount of any loss immediately as realized. The
Security Account may be maintained with the Master Servicer or with a
depository institution that is an affiliate of the Master Servicer, provided
it meets the standards set forth above.
The Master Servicer will deposit or cause to be deposited in the
Security Account for each Trust Fund, to the extent applicable and unless
otherwise specified in the related Prospectus Supplement and provided in the
Agreement, the following payments and collections received or advances made
by or on behalf of it subsequent to the Cut-off Date (other than certain
payments due on or before the Cut-off Date and exclusive of any amounts
representing Retained Interest):
(i) all payments on account of principal and interest (which, at
its option, may be net of the applicable servicing compensation),
including Principal Prepayments and, if specified in the related
Prospectus Supplement, any applicable prepayment penalties, on the
Loans;
(ii) all proceeds (net of unreimbursed payments of property taxes,
insurance premiums and similar items ("Insured Expenses") incurred, and
unreimbursed Advances made, by the Master Servicer, if any) of the
hazard insurance policies and any Primary Mortgage Insurance Policies,
to the extent such proceeds are not applied to the restoration of the
property or released to the Mortgagor in accordance with the Master
Servicer's normal servicing procedures (collectively, "Insurance
Proceeds") and all other cash amounts (net of unreimbursed expenses
incurred in connection with liquidation or foreclosure ("Liquidation
Expenses") and unreimbursed Advances made, by the Master Servicer, if
any) received and retained in connection with the liquidation of
defaulted Loans, by foreclosure or otherwise ("Liquidation Proceeds"),
together with any net proceeds received on a monthly basis with respect
to any properties acquired on behalf of the Securityholders by
foreclosure or deed in lieu of foreclosure;
(iii) all advances as described herein under "Advances";
(iv) all proceeds of any Loan or property in respect thereof
repurchased by any Seller as described under "Loan Program--
Representations by Sellers; Repurchases" or "--Assignment of Trust Fund
Assets" above and all proceeds of any Loan repurchased as described
under "--Termination; Optional Termination" below;
(v) all payments required to be deposited in the Security Account
with respect to any deductible clause in any blanket insurance policy
described under "--Hazard Insurance" below;
(vi) any amount required to be deposited by the Master Servicer in
connection with losses realized on investments for the benefit of the
Master Servicer of funds held in the Security Account and, to the extent
specified in the related Prospectus Supplement, any payments required to
be made by the Master Servicer in connection with prepayment interest
shortfalls; and
(vii) all other amounts required to be deposited in the Security
Account pursuant to the Agreement.
The Master Servicer (or the Sponsor, as applicable) may from time to
time direct the institution that maintains the Security
Account to withdraw funds from the Security Account for the following
purposes:
(i) to pay to the Master Servicer the servicing fees described in
the related Prospectus Supplement and, as additional servicing
compensation, earnings on or investment income with respect to funds in
the Security Account credited thereto;
(ii) to reimburse the Master Servicer for Advances, such right of
reimbursement with respect to any Loan being limited to amounts received
that represent late recoveries of payments of principal and/or interest
on such Loan (or Insurance Proceeds or Liquidation Proceeds with respect
thereto) with respect to which such Advance was made;
(iii) to reimburse the Master Servicer for any Advances previously
made which the Master Servicer has determined to be nonrecoverable;
(iv) to reimburse the Master Servicer from Insurance Proceeds for
expenses incurred by the Master Servicer and covered by the related
insurance policies;
(v) to reimburse the Master Servicer for unpaid master servicing
fees and unreimbursed out-of-pocket costs and expenses incurred by the
Master Servicer in the performance of its servicing obligations, such
right of reimbursement being limited to amounts received representing
late recoveries of the payments for which such advances were made;
(vi) to pay to the Master Servicer, with respect to each Loan or
property acquired in respect thereof that has been purchased by the
Master Servicer pursuant to the Agreement, all amounts received thereon
and not taken into account in determining the principal balance of such
repurchased Loan;
(vii) to reimburse the Master Servicer or the Sponsor for expenses
incurred and reimbursable pursuant to the Agreement;
(viii) to withdraw any amount deposited in the Security Account
and not required to be deposited therein; and
(ix) to clear and terminate the Security Account upon termination
of the Agreement.
In addition, unless otherwise specified in the related Prospectus
Supplement, on or prior to the business day immediately preceding each
Distribution Date, the Master Servicer shall withdraw from the Security
Account the amount of Available Funds, to the extent on deposit, for deposit
in an account maintained by the Trustee for the related Series of Securities.
The applicable Agreement may require the Master Servicer to establish
and maintain one or more escrow accounts into which mortgagors deposit
amounts sufficient to pay taxes, assessments, hazard insurance premiums or
comparable items. Withdrawals from the escrow accounts maintained for
mortgagors may be made to effect timely payment of taxes, assessments and
hazard insurance premiums or comparable items, to reimburse the Master
Servicer out of related assessments for maintaining hazard insurance, to
refund to mortgagors amounts determined to be overages, to remit to
mortgagors, if required, interest earned, if any, on balances in any of the
escrow accounts, to repair or otherwise protect the Property and to clear and
terminate any of the escrow accounts. The Master Servicer will be solely
responsible for administration of the escrow accounts and will be expected to
make advances to such account when a deficiency exists therein.
PRE-FUNDING ACCOUNT
If so provided in the related Prospectus Supplement, the Master Servicer
will establish and maintain a Pre-Funding Account, in the name of the related
Trustee on behalf of the related Securityholders, into which the Sponsor will
deposit cash in an amount equal to the Pre-Funded Amount on the related
Closing Date. The Pre-Funding Account will be maintained with the Trustee
for the related Series of Securities and is designed solely to hold funds to
be applied by such Trustee during the Funding Period to pay to the Sponsor
the purchase price for Subsequent Loans. Monies on deposit in the Pre-
Funding Account will not be available to cover losses on or in respect of the
related Loans. The Pre-Funded Amount will not exceed 50% of the initial
aggregate principal amount of the Securities of the related Series. The Pre-
Funded Amount will be used by the related Trustee to purchase Subsequent
Loans from the Sponsor from time to time during the Funding Period. The
Funding Period, if any, for a Trust Fund will begin on the related Closing
Date and will end on the date specified in the related Prospectus Supplement,
which in no event will be later than the date that is one year after the
related Closing Date. Monies on deposit in the Pre-Funding Account may be
invested in Permitted Investments under the circumstances and in the manner
described in the related Agreement. Earnings on investment of funds in the
Pre-Funding Account will be deposited into the related Security Account or
such other trust account as is specified in the related Prospectus Supplement
and losses will be charged against the funds on deposit in the Pre-Funding
Account. Any amounts remaining in the Pre-Funding Account at the end of the
Funding Period will be distributed to the related Securityholders in the
manner and priority specified in the related Prospectus Supplement, as a
prepayment of principal of the related Securities.
In addition, if so provided in the related Prospectus Supplement, on the
related Closing Date the Sponsor will deposit in an account (the "Capitalized
Interest Account") cash in such amount as is necessary to cover shortfalls in
interest on the related Series of Securities that may arise as a result of
utilization of the Pre-Funding Account as described above. The Capitalized
Interest Account shall be maintained with the Trustee for the related Series
of Securities and is designed solely to cover the above-mentioned interest
shortfalls. Monies on deposit in the Capitalized Interest Account will
not be available to cover losses on or in respect of the related Loans.
To the extent that the entire amount on deposit in the Capitalized Interest
Account has not been applied to cover shortfalls in interest on the
related Series of Securities by the end of the Funding Period, any
amounts remaining in the Capitalized Interest Account will be paid to the
Sponsor.
SUB-SERVICING BY SELLERS
The Master Servicer may enter into an agreement (each, a "Sub-Servicing
Agreement") with any servicing entity which will act as the Sub-Servicer for
the related Loans, which will not contain any terms inconsistent with the
related Agreement. While each Sub-Servicing Agreement will be a contract
solely between the Master Servicer and the Sub-Servicer, the 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 Loans, the Trustee or any successor Master
Servicer must recognize the Sub-Servicer's rights and obligations under such
Sub-Servicing Agreement. Notwithstanding any such subservicing arrangement,
unless otherwise provided in the related Prospectus Supplement, the Master
Servicer will remain liable for its servicing duties and obligations under
the Master Servicing Agreement as if the Master Servicer alone were servicing
the Loans.
COLLECTION PROCEDURES
The Master Servicer, directly or through one or more Sub-Servicers, will
make reasonable efforts to collect all payments called for under the Loans
and will, consistent with each Agreement and any Pool Insurance Policy,
Primary Mortgage Insurance Policy, FHA Insurance, VA Guaranty, bankruptcy
bond or alternative arrangements, follow such collection procedures as are
customary with respect to loans that are comparable to the Loans. Consistent
with the above, the Master Servicer may, in its discretion, (i) waive any
prepayment charge, assumption fee, late payment or other charge in connection
with a Loan and (ii) to the extent not inconsistent with the coverage of such
Loan by a Pool Insurance Policy, Primary Mortgage Insurance Policy, FHA
Insurance, VA Guaranty, bankruptcy bond or alternative arrangements, if
applicable, suspend or reduce regular monthly payment for a period of up to
six months, or arrange with a borrower a schedule for the liquidation of
delinquencies. To the extent the Master Servicer is obligated to make or
cause to be made Advances, such obligation will remain during any period of
such an arrangement.
Under the Agreement, the Master Servicer will be required to enforce
"due-on-sale" clauses with respect to any Loans to the
extent contemplated by the terms of such Loans and permitted by applicable
law. Where an assumption of, or substitution of liability with respect to, a
Loan is required by law, upon receipt of assurance that the Primary Mortgage
Insurance Policy covering such Loan will not be affected, the Master Servicer
may permit the assumption of a Loan, pursuant to which the borrower would
remain liable on the related loan note, or a substitution of liability with
respect to such Loan, pursuant to which the new borrower would be substituted
for the original borrower as being liable on the loan note. Any fees
collected for entering into an assumption or substitution of liability
agreement may be retained by the Master Servicer as additional servicing
compensation. In connection with any assumption or substitution, the Loan
Rate borne by the related loan note may not be changed.
HAZARD INSURANCE
Except as otherwise specified in the related Prospectus Supplement, the
Master Servicer will require the mortgagor or obligor on each Loan to
maintain a hazard insurance policy providing coverage against loss by fire
and other hazards which are covered under the standard extended coverage
endorsement customary for the type of Property in the state in which such
Property is located. Such coverage will be in an amount that is at least
equal to the lesser of (i) the maximum insurable value of the improvements
securing such Loan from time to time, or (ii) the greater of (y) the combined
principal balance owing on such Loan and any mortgage loan senior to such
Loan and (z) an amount such that the proceeds of such policy shall be
sufficient to prevent the mortgagor or obligor and/or the lender from
becoming a co-insurer. All amounts collected by the Master Servicer under
any hazard policy (except for amounts to be applied to the restoration or
repair of the Property or released to the mortgagor or obligor in accordance
with the Master Servicer's normal servicing procedures) will be deposited in
the related Security Account. In the event that the Master Servicer maintains
a blanket policy insuring against hazard losses on all the Loans comprising
part of a Trust Fund, it will conclusively be deemed to have satisfied its
obligation relating to the maintenance of hazard insurance. Such blanket
policy may contain a deductible clause, in which case the Master Servicer
will be required to deposit from its own funds into the related Security
Account the amounts which would have been deposited therein but for such
clause.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements securing a Loan
by fire, lightning, explosion, smoke, windstorm and hail, riot, strike and
civil commotion, subject to the conditions and exclusions particularized in
each policy. Although the policies relating to the Loans may have been
underwritten by different insurers under different state laws in accordance
with different applicable forms and therefore may not contain identical terms
and conditions, the basic terms thereof are dictated by respective state
laws, and most such policies typically do not
cover (among other things) any physical damage resulting from the following:
war, revolution, governmental actions, floods and other water-related causes,
earth movement (including earthquakes, landslides and mud flows), 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.
If, however, any Mortgaged Property at the time of origination of the
related Loan is located in an area identified by the Flood Emergency
Management Agency as having special flood hazards and flood insurance has
been made available, the Master Servicer will cause to be maintained with a
generally acceptable insurance carrier a flood insurance policy in accordance
with mortgage servicing industry practice. Such flood insurance policy will
provide coverage in an amount not less than the lesser of (i) the principal
balance of the Loan or (ii) the minimum amount required under the terms of
coverage to compensate for any damage or loss on a replacement cost basis,
but not more than the maximum amount of such insurance available for the
related Mortgaged Property under either the regular or emergency programs of
the National Flood Insurance Program.
The hazard insurance policies covering properties securing the Loans
typically contain a clause which in effect requires the insured at all time
to carry insurance of a specified percentage (generally 80% to 90%) of the
full replacement value of the insured property in order to recover the full
amount of any partial loss. If the insured's coverage falls below this
specified percentage, then the insurer's liability in the event of partial
loss will not exceed the larger of (i) the replacement costs of the
improvements less physical depreciation and (ii) such proportion of the loss
as the amount of insurance carried bears to the specified percentage of the
full replacement cost of such improvements. Since the amount of hazard
insurance the Master Servicer may cause to be maintained on the improvements
securing the Loans declines as the principal balances owing thereon decrease,
and since improved real estate generally has appreciated in value over time
in the past, the effect of this requirement in the event of partial loss may
be that hazard insurance proceeds will be insufficient to restore fully the
damaged property.
PRIMARY MORTGAGE INSURANCE
The Master Servicer will maintain or cause to be maintained, as the case
may be, in full force and effect, to the extent specified in the related
Prospectus Supplement, a Primary Mortgage Insurance Policy with regard to
each Loan for which such coverage is required. The Master Servicer will not
cancel or refuse to renew any such Primary Mortgage Insurance Policy in
effect at the time of the initial issuance of a Series of Securities that is
required to be kept in force under the applicable Agreement unless the
replacement Primary Mortgage Insurance Policy for such cancelled or
nonrenewed policy is maintained with an insurer (a "Primary Insurer") whose
claims-paying ability is sufficient to maintain the current rating of the
classes of Securities of such Series that have been rated.
Although the terms and conditions of primary mortgage insurance vary,
the amount of a claim for benefits under a Primary Mortgage Insurance Policy
covering a Mortgage Loan will consist of the insured percentage of the unpaid
principal amount of the covered Loan and accrued and unpaid interest thereon
and reimbursement of certain expenses, less (i) all rents or other payments
collected or received by the insured (other than the proceeds of hazard
insurance) that are derived from or in any way related to the Property, (ii)
hazard insurance proceeds in excess of the amount required to restore the
Property and which have not been applied to the payment of the Loan, (iii)
amounts expended but not approved by the Primary Insurer of the related
Primary Mortgage Insurance Policy, (iv) claim payments previously made by the
Primary Insurer and (v) unpaid premiums.
Primary Mortgage Insurance Policies reimburse certain losses sustained
by reason of default in payments by borrowers. Primary Mortgage Insurance
Policies will not insure against, and exclude from coverage, a loss sustained
by reason of a default arising from or involving certain matters, including
(i) fraud or negligence in ordination or servicing of the Loans, including
misrepresentation by the originator, mortgagor (or obligor) or other persons
involved in the origination of the Loan; (ii) failure to construct the
Property subject to the Loan in accordance with specified plans; (iii)
physical damage to the Property; and (iv) the related sub-servicer not being
approved as a servicer by the Primary Insurer.
Evidence of each Primary Mortgage Insurance Policy will be provided to
the Trustee simultaneously with the transfer to the Trustee of the related
Loan. The Master Servicer, on behalf of itself, the Trustee and
Securityholders, is required to present claims to the insurer under any
Primary Mortgage Insurance Policy and to take such reasonable steps as are
necessary to permit recovery thereunder with respect to defaulted Loans.
Amounts collected by the Master Servicer on behalf of the Master Servicer,
the Trustee and Securityholders shall be deposited in the related Security
Account for distribution as set forth above. The Master Servicer will not
cancel or refuse to renew any Primary Mortgage Insurance Policy required to
be kept in force by the Agreement.
CLAIMS UNDER INSURANCE POLICIES AND OTHER REALIZATION UPON DEFAULTED LOANS
The Master Servicer, on behalf of the Trustee and Securityholders, will
present claims to the insurer under any applicable Insurance Policies. If
the Property securing a defaulted Loan is damaged and proceeds, if any, from
the related hazard insurance policy are insufficient to restore the damaged
Property, 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 Securityholders on liquidation
of the Loan after reimbursement of the Master Servicer for its expenses and
(ii) that such expenses will be recoverable by it from related Insurance
Proceeds or Liquidation Proceeds.
If recovery on a defaulted Loan under any related Insurance Policy is
not available, or if the defaulted Loan is not covered by an Insurance
Policy, the Master Servicer will be obligated to follow or cause to be
followed such normal practices and procedures as it deems necessary or
advisable to realize upon the defaulted Loan. If the proceeds of any
liquidation of the Property securing the defaulted Loan are less than the
principal balance of such Loan plus interest accrued thereon that is payable
to Securityholders, the Trust Fund will realize a loss in the amount of such
difference plus the aggregate of expenses incurred by the Master Servicer in
connection with such proceedings and which are reimbursable under the
Agreement.
The proceeds from any liquidation of a Loan will be applied in the
following order of priority: first, to reimburse the Master Servicer for any
unreimbursed expenses incurred by it to restore the related Property and any
unreimbursed servicing compensation payable to the Master Servicer with
respect to such Loan; second, to reimburse the Master Servicer for any
unreimbursed Advances with respect to such Loan; third, to accrued and unpaid
interest (to the extent no Advance has been made for such amount) on such
Loan; and fourth, as a recovery of principal of such Loan.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The Master Servicer's primary compensation for its activities as Master
Servicer will come from the payment to it, with respect to each interest
payment on a Loan, of the amount specified in the related Prospectus
Supplement (the "Master Servicing Fee"). As principal payments are made on
the Loans, the portion of each monthly payment which represents interest will
decline, and thus servicing compensation to the Master Servicer will decrease
as the Loans amortize. Prepayments and liquidations of Loans prior to
maturity will also cause servicing compensation to the Master Servicer to
decrease. As compensation for its servicing duties, a Sub-Servicer, if any,
will be entitled to a monthly servicing fee as described in the related
Prospectus Supplement. In addition, the Master Servicer or Sub-Servicer will
retain all prepayment charges, assumption fees and late payment charges, to
the extent collected from borrowers, and any benefit that may accrue as a
result of the investment of funds in the applicable Security Account (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 Fund and incurred by it in connection
with its responsibilities under the related Agreement, including, without
limitation, and if so specified in the related Prospectus Supplement, payment
of any fee or other amount payable in respect of any credit enhancement
arrangements, payment of the fees and disbursements of the Trustee, any
custodian appointed by the Trustee, the certificate registrar and any
paying agent, and payment of expenses incurred in enforcing the obligations
of Sub-Servicers and Sellers. The Master Servicer will be entitled to
reimbursement of expenses incurred in enforcing the obligations of Sub-
Servicers and Sellers under certain limited circumstances.
EVIDENCE AS TO COMPLIANCE
Each Agreement will provide that the Master Servicer at its expense
shall cause a firm of independent public accountants to furnish a report
annually to the Trustee to the effect that such firm has performed certain
procedures specified in the Agreement and that such review has disclosed no
items of noncompliance with the provisions of such Agreement which, in the
opinion of such firm, are material, except for such items of noncompliance as
shall be set forth in such report.
Each Agreement will also provide for delivery to the Trustee, on or
before a specified date in each year, of an annual statement signed by an
officer of the Master Servicer to the effect that the Master Servicer has
fulfilled its obligations under the Agreement throughout the preceding year.
CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE SPONSOR
The Master Servicer under each Pooling and Servicing Agreement or Master
Servicing Agreement, as applicable, will be named in the related Prospectus
Supplement. The entity serving as Master Servicer may have normal business
relationships with the Sponsor or the Sponsor's affiliates.
Each Agreement will provide that the Master Servicer may not resign from
its obligations and duties under the Agreement except upon (a) appointment of
a successor servicer and receipt by the Trustee of a letter from the Rating
Agency that such resignation and appointment will not result in a downgrade
of the Securities and (b) a determination that its duties thereunder are no
longer permissible under applicable law. The Master Servicer may, however,
be removed from its obligations and duties as set forth in the Agreement. No
such resignation will become effective until the Trustee or a successor
servicer has assumed the Master Servicer's obligations and duties under the
Agreement.
Each Agreement will further provide that neither the Master Servicer,
the Sponsor nor any director, officer, employee, or agent of the Master
Servicer or the Sponsor (collectively, the "Indemnified Parties") will be
under any liability to the related Trust Fund or Securityholders for any
action taken or for refraining from the taking of any action in good faith
pursuant to the Agreement, or for errors in judgment; provided, however, that
neither the Master Servicer, the Sponsor nor any such person will
be protected against any liability which would otherwise be imposed by reason
of wilful misfeasance, bad faith or gross negligence in the performance of
duties thereunder or by reason of reckless disregard of obligations and
duties thereunder. Each Agreement will further provide that each Indemnified
Party will be entitled to indemnification by the related Trust Fund and will
be held harmless against any loss, liability or expense incurred in
connection with any legal action relating to the Agreement or the Securities
for such Series, other than any loss, liability or expense related to any
specific Loan or Loans (except any such loss, liability or expense otherwise
reimbursable pursuant to the Agreement) and any loss, liability or expense
incurred by reason of willful misfeasance, bad faith or gross negligence in
the performance of such Indemnified Party's duties thereunder or by reason of
reckless disregard by such Indemnified Party of obligations and duties
thereunder. In addition, each Agreement will provide that neither the Master
Servicer nor the Sponsor will be under any obligation to appear in, prosecute
or defend any legal action which is not incidental to its respective
responsibilities under the Agreement and which in its opinion may involve it
in any expense or liability. The Master Servicer or the Sponsor may,
however, in its discretion undertake any such action which it may deem
necessary or desirable with respect to the Agreement and the rights and
duties of the parties thereto and the interests of the Securityholders
thereunder. In such event, the legal expenses and costs of such action and
any liability resulting therefrom will be expenses, costs and liabilities of
the Trust Fund and the Master Servicer or the Sponsor, as the case may be,
will be entitled to be reimbursed therefor out of funds otherwise
distributable to Securityholders.
Except as otherwise specified in the related Prospectus Supplement, any
person into which the Master Servicer may be merged or consolidated, or any
person resulting from any merger or consolidation to which the Master
Servicer is a party, or any person succeeding to the business of the Master
Servicer, will be the successor of the Master Servicer under each Agreement,
provided that such person is qualified to sell mortgage loans to, and service
mortgage loans on behalf of, FNMA or FHLMC and further provided that such
merger, consolidation or succession does not adversely affect the then
current rating or ratings of the class or classes of Securities of such
Series that have been rated.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
Pooling and Servicing Agreement; Master Servicing Agreement. Except as
otherwise specified in the related Prospectus Supplement, Events of Default
under each Agreement will consist of (i) (a) any failure by the Master
Servicer to make an Advance which continues unremedied for one business day
or (b) any failure by the Master Servicer to make or cause to be made any
other required payment pursuant to the Agreement which continues unremedied
for five days after written notice of such failure to the Master Servicer in
the manner specified in the Agreement; (ii) any failure by the Master
Servicer duly to observe or perform in any material respect any of its other
covenants or agreements in the Agreement which continues unremedied for sixty
days after written notice of such failure to the Master Servicer in the
manner specified in the Agreement; and (iii) certain events of insolvency,
readjustments of debt, marshalling of assets and liabilities or similar
proceedings and certain actions by or on behalf of the Master Servicer
indicating its insolvency, reorganization or inability to pay its
obligations.
If specified in the related Prospectus Supplement, the Agreement will
permit the Trustee to sell the Trust Fund Assets and the other assets of the
Trust Fund described under "Credit Enhancement" herein in the event that
payments in respect thereto are insufficient to make payments required in the
Agreement. The Trust Fund Assets will be sold only under the circumstances
and in the manner specified in the related Prospectus Supplement.
Unless otherwise provided in the related Prospectus Supplement, so long
as an Event of Default under an Agreement remains unremedied, the Trustee
may, and at the direction of holders of Securities evidencing not less than
25% of the aggregate voting rights of such Series and under such other
circumstances as may be specified in such Agreement, the Trustee shall
terminate all of the rights and obligations of the Master Servicer under the
Agreement relating to such Trust Fund and in and to the related Trust Fund
Assets, whereupon the Trustee will succeed to all of the responsibilities,
duties and liabilities of the Master Servicer under the Agreement, including,
if specified in the related Prospectus Supplement, the obligation to make
Advances, and will be entitled to similar compensation arrangements. In the
event that the Trustee is unwilling or unable so to act, it may appoint, or
petition a court of competent jurisdiction for the appointment of, a housing
and home finance institution which is a FNMA or FHLMC approved servicer with
a net worth of a least $10,000,000 to act as successor to the Master Servicer
under the Agreement. Pending such appointment, the Trustee is obligated to
act in such capacity. The Trustee and any such successor may agree upon the
servicing compensation to be paid, which in no event may be greater than the
compensation payable to the Master Servicer under the Agreement.
Unless otherwise provided in the related Prospectus Supplement, no
Securityholder, solely by virtue of such holder's status as a Securityholder,
will have any right under any Agreement to institute any proceeding with
respect to such Agreement, unless such holder previously has given to the
Trustee written notice of default and unless the holders of Securities
evidencing not less than 25% of the aggregate voting rights for such Series
have made written request upon the Trustee to institute such proceeding in
its own name as Trustee thereunder and have offered to the Trustee reasonable
indemnity, and the Trustee for 60 days has neglected or refused to institute
any such proceeding. However, the Trustee is under no obligation to exercise
any of the trusts or powers vested in it by the Agreement for any Series 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 Securityholders, unless such
Securityholders have offered and provided to the Trustee reasonable
security or indemnity against the costs, expenses and liabilities which
may be incurred therein or thereby.
Indenture. Except as otherwise specified in the related Prospectus
Supplement, Events of Default under the Indenture for each Series of Notes
include: (i) a default in the payment of any principal of or interest on any
Note of such Series which continues unremedied for no more than five days
after the giving of written notice of such default is given as specified in
the related Prospectus Supplement; (ii) failure to perform in any material
respect any other covenant of the Sponsor or the Trust Fund in the Indenture
which continues for a period of sixty (60) days after notice thereof is given
in accordance with the procedures described in the related Prospectus
Supplement; (iii) certain events of bankruptcy, insolvency, receivership or
liquidation of the Sponsor or the Trust Fund; or (iv) any other Event of
Default provided with respect to Notes of that Series including but not
limited to certain defaults on the part of the issuer, if any, of a credit
enhancement instrument supporting such Notes.
If an Event of Default with respect to the Notes of any Series at the
time outstanding occurs and is continuing, either the Trustee or the holders
of a majority of the then aggregate outstanding amount of the Notes of such
Series may declare the principal amount (or, if the Notes of that Series have
an interest rate of 0%, such portion of the principal amount as may be
specified in the terms of that Series, as provided in the related Prospectus
Supplement) of all the Notes of such Series to be due and payable
immediately. Such declaration may, under certain circumstances, be rescinded
and annulled by the holders of more than 50% of the aggregate voting rights
of the Notes of such Series.
If, following an Event of Default with respect to any Series of Notes,
the Notes of such Series have been declared to be due and payable, the
Trustee may, in its discretion, notwithstanding such acceleration, elect to
maintain possession of the collateral securing the Notes of such Series and
to continue to apply distributions on such collateral as if there had been no
declaration of acceleration if such collateral continues to provide
sufficient funds for the payment of principal of and interest on the Notes of
such Series as they would have become due if there had not been such a
declaration. In addition, unless otherwise specified in the related
Prospectus Supplement, the Trustee may not sell or otherwise liquidate the
collateral securing the Notes of a Series following an Event of Default,
other than a default in the payment of any principal or interest on any Note
of such Series for which continues unremedied for no more than five days
after written notice of such default is given as specified in the related
Prospectus Supplement, unless (a) the holders of 100% of the aggregate voting
rights of the Notes of such Series consent to such
sale, (b) the proceeds of such sale or liquidation are sufficient to pay in
full the principal of and accrued interest, due and unpaid, on the
outstanding Notes of such Series at the date of such sale or (c) the Trustee
determines that such collateral would not be sufficient on an ongoing basis
to make all payments on such Notes as such payments would have become due if
such Notes had not been declared due and payable, and the Trustee obtains the
consent of the holders of 662/3% of the aggregate voting rights of the Notes
of such Series.
In the event that the Trustee liquidates the collateral in connection
with an Event of Default involving a default in the payment of principal of
or interest on the Notes of a Series which continues unremedied for no more
than five days after written notice of such default is given as specified in
the related Prospectus Supplement, the Indenture provides that the Trustee
will have a prior lien on the proceeds of any such liquidation for unpaid
fees and expenses. As a result, upon the occurrence of such an Event of
Default, the amount available for distribution to the Noteholders would be
less than would otherwise be the case. However, the Trustee may not
institute a proceeding for the enforcement of its lien except in connection
with a proceeding for the enforcement of the lien of the Indenture for the
benefit of the Noteholders after the occurrence of such an Event of Default.
Except as otherwise specified in the related Prospectus Supplement, in
the event the principal of the Notes of a Series is declared due and payable,
as described above, the holders of any such Notes issued at a discount from
par may be entitled to receive no more than an amount equal to the unpaid
principal amount thereof less the amount of such discount which is
unamortized.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default shall occur and be continuing with
respect to a Series of Notes, the Trustee shall be under no obligation to
exercise any of the rights or powers under the Indenture at the request or
direction of any of the holders of Notes of such Series, unless such holders
offered to the Trustee security or indemnity satisfactory to it against the
costs, expenses and liabilities which might be incurred by it in complying
with such request or direction. Subject to such provisions for
indemnification and certain limitations contained in the Indenture, the
holders of a majority of the then aggregate outstanding amount of the Notes
of such Series shall have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or
exercising any trust or power conferred on the Trustee with respect to the
Notes of such Series, and the holders of a majority of the then aggregate
outstanding amount of the Notes of such Series may, in certain cases, waive
any default with respect thereto, except a default in the payment of
principal or interest or a default in respect of a covenant or provision of
the Indenture that cannot be modified without the waiver or consent of all
the holders of the outstanding Notes of such Series affected thereby.
AMENDMENT
Except as otherwise specified in the related Prospectus Supplement, each
Agreement may be amended by the Sponsor, the Master Servicer and the Trustee,
without the consent of any of the Securityholders, (i) to cure any ambiguity;
(ii) to correct a defective provision or correct or supplement any provision
therein which may be inconsistent with any other provision therein; (iii) to
make any other revisions with respect to matters or questions arising under
the Agreement which are not inconsistent with the provisions thereof; or (iv)
to comply with any requirements imposed by the Code or any regulation
thereunder, provided, however, that no such amendments (except those pursuant
to clause (iv)) will adversely affect in any material respect the interests
of any Securityholder of that Series. An amendment will be deemed not to
adversely affect in any material respect the interests of the Securityholders
if the Trustee receives a letter from each Rating Agency requested to rate
the class or classes of Securities of such Series stating that such amendment
will not result in the downgrading or withdrawal of the respective ratings
then assigned to such Securities. Each Agreement may also be amended by the
Sponsor, the Master Servicer and the Trustee with consent of holders of
Securities of such Series evidencing not less than 66 2/3% of the aggregate
voting rights of each class affected thereby for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions
of the Agreement or of modifying in any manner the rights of the holders of
the related Securities; provided, however, that no such amendment may (i)
reduce in any manner the amount of, or delay the timing of, payments received
on Loans which are required to be distributed on any Security without the
consent of the holder of such Security, or (ii) with respect to any Series of
Certificates, reduce the aforesaid percentage of Securities of any class the
holders of which are required to consent to any such amendment without the
consent of the holders of all Securities of such class covered by such
Agreement then outstanding. If a REMIC election is made with respect to a
Trust Fund, the Trustee will not be entitled to consent to an amendment to
the related Agreement without having first received an opinion of counsel to
the effect that such amendment will not cause such Trust Fund to fail to
qualify as a REMIC.
TERMINATION; OPTIONAL TERMINATION
Pooling and Servicing Agreement; Trust Agreement. Unless otherwise
specified in the related Agreement, the obligations created by each Pooling
and Servicing Agreement and Trust Agreement for each Series of Securities
will terminate upon the payment to the related Securityholders of all amounts
held in the Security Account or by the Master Servicer and required to be
paid to them pursuant to such Agreement following the later of (i) the final
payment of or other liquidation of the last of the Trust Fund Assets subject
thereto or the disposition of all property acquired
upon foreclosure of any such Trust Fund Assets remaining in the Trust Fund
and (ii) the purchase by the Master Servicer or, if REMIC treatment has been
elected and if specified in the related Prospectus Supplement, by the holder
of the Residual Interest Security or any other party specified to have such
rights (see "Federal Income Tax Consequences" below), from the related Trust
Fund of all of the remaining Trust Fund Assets and all property acquired in
respect of such Trust Fund Assets.
Unless otherwise specified by the related Prospectus Supplement, any
such purchase of Trust Fund Assets and property acquired in respect of Trust
Fund Assets evidenced by a Series of Securities will be made at the option of
the Master Servicer, such other person or, if applicable, such holder of the
REMIC residual interest, at a price specified in the related Prospectus
Supplement. The exercise of such right will effect early retirement of the
Securities of that Series, but the right of the Master Servicer, such other
person or, if applicable, such holder of the REMIC residual interest, to so
purchase is subject to the principal balance of the related Trust Fund Assets
being less than the percentage specified in the related Prospectus Supplement
of the aggregate principal balance of the Trust Fund Assets at the Cut-off
Date for the Series. The foregoing is subject to the provision that if a
REMIC election is made with respect to a Trust Fund, any repurchase pursuant
to clause (ii) above will be made only in connection with a "qualified
liquidation" of the REMIC within the meaning of Section 860F(g)(4) of the
Code.
Indenture. The Indenture will be discharged with respect to a Series of
Notes (except with respect to certain continuing rights specified in the
Indenture) upon the delivery to the Trustee for cancellation of all the Notes
of such Series or, with certain limitations, upon deposit with the Trustee of
funds sufficient for the payment in full of all of the Notes of such Series.
In addition to such discharge with certain limitations, the Indenture
will provide that, if so specified with respect to the Notes of any Series,
the related Trust Fund will be discharged from any and all obligations in
respect of the Notes of such Series (except for certain obligations relating
to temporary Notes and exchange of Notes, to register the transfer of or
exchange Notes of such Series, to replace stolen, lost or mutilated Notes of
such Series, to maintain paying agencies and to hold monies for payment in
trust) upon the deposit with the Trustee, in trust, of money and/or direct
obligations of or obligations guaranteed by the United States of America
which through the payment of interest and principal in respect thereof in
accordance with their terms will provide money in an amount sufficient to pay
the principal of and each installment of interest on the Notes of such Series
on the last scheduled Distribution Date for such Notes and any installment of
interest on such Notes in accordance with the terms of the Indenture and the
Notes of such Series. In the event of any such defeasance and discharge of
Notes of such Series, holders of Notes of such Series would be able to look
only to such money and/or direct obligations for payment of principal and
interest, if any, on their Notes until maturity.
THE TRUSTEE
The Trustee under each Agreement will be named in the applicable
Prospectus Supplement. The commercial bank, savings and loan association or
trust company serving as Trustee may have normal banking relationships with
the Sponsor, the Master Servicer and any of their respective affiliates.
CERTAIN LEGAL ASPECTS OF THE LOANS
The following discussion contains summaries, which are general in
nature, of certain legal matters relating to the Loans. Because such legal
aspects are governed primarily by applicable state law (which laws may differ
substantially), the descriptions do not, except as expressly provided below,
reflect the laws of any particular state, nor do they encompass the laws of
all states in which the security for the Loans is situated. The descriptions
are qualified in their entirety by reference to the applicable federal laws
and the appropriate laws of the states in which Loans may be originated.
GENERAL
The Loans for a Series may be secured by deeds of trust, mortgages,
security deeds or deeds to secure debt, depending upon the prevailing
practice in the state in which the property subject to the loan is located.
Deeds of trust are used almost exclusively in California instead of
mortgages. A mortgage creates a lien upon the real property encumbered by
the mortgage, which lien is generally not prior to the lien for real estate
taxes and assessments. Priority between mortgages depends on their terms and
generally on the order of recording with a state or county office. There are
two parties to a mortgage, the mortgagor, who is the borrower and owner of
the mortgaged property, and the mortgagee, who is the lender. Under the
mortgage instrument, the mortgagor delivers to the mortgagee a note or bond
and the mortgage. Although a deed of trust is similar to a mortgage, a deed
of trust formally has three parties, the borrower-property owner 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. A security deed and a deed to secure debt are
special types of deeds which indicate on their face that they are granted to
secure an underlying debt. By executing a security deed or deed to secure
debt, the grantor conveys title to, as opposed to merely creating a lien
upon, the subject property to the grantee until such time as the underlying
debt is repaid. The trustee's authority under a deed of trust, the
mortgagee's authority under a mortgage and the grantee's authority under a
security deed or deed to secure debt are governed by law and, with respect to
some deeds of trust, the directions of the beneficiary.
FORECLOSURE/REPOSSESSION
Deed of Trust. Foreclosure of a deed of trust is generally accomplished
by a non-judicial sale under a specific provision in the deed of trust which
authorizes the trustee to sell the property at public auction upon any
default by the borrower under the terms of the note or deed of trust. In
certain states, such foreclosure also may be accomplished by judicial action
in the manner provided for foreclosure of mortgages. In addition to any
notice requirements contained in a deed of trust, in some states (such as
California), the trustee must record a notice of default and send a copy to
the borrower-trustor, to any person who has recorded a request for a copy of
any notice of default and notice of sale, to any successor in interest to the
borrower-trustor, to the beneficiary of any junior deed of trust and to
certain other persons. In some states (including California), the borrower-
trustor has the right to reinstate the loan at any time following default
until shortly before the trustee's sale. In general, the borrower, or any
other person having a junior encumbrance on the real estate, may, during a
statutorily prescribed reinstatement period, cure a monetary default by
paying the entire amount in arrears plus other designated costs and expenses
incurred in enforcing the obligation. Generally, state law controls the
amount of foreclosure expenses and costs, including attorney's fees, which
may be recovered by a lender. After the reinstatement period has expired
without the default having been cured, the borrower or junior lienholder no
longer has the right to reinstate the loan and must pay the loan in full to
prevent the scheduled foreclosure sale. If the deed of trust is not
reinstated within any applicable cure period, a notice of sale must be posted
in a public place and, in most states (including California), published for a
specific period of time in one or more newspapers. In addition, some state
laws require that a copy of the notice of sale be posted on the property and
sent to all parties having an interest of record in the real property. In
California, the entire process from recording a notice of default to a non-
judicial sale usually takes four to five months.
Mortgages. Foreclosure of a mortgage is generally accomplished by
judicial action. The action is initiated by the service of legal pleadings
upon all parties having an interest in the real property. Delays in
completion of the foreclosure may occasionally result from difficulties in
locating necessary parties. Judicial foreclosure proceedings are often not
contested by any of the parties. When the mortgagee's right to foreclosure
is contested, the legal proceedings necessary to resolve the issue can be
time consuming. After the completion of a judicial foreclosure proceeding,
the court generally issues a judgment of foreclosure and appoints a referee
or other court officer to conduct the sale of the property. In some states,
mortgages may also be foreclosed by advertisement, pursuant to a power of
sale provided in the mortgage.
Although foreclosure sales are typically public sales, frequently no
third party purchaser bids in excess of the lender's lien because of the
difficulty of determining the exact status of title to the property, the
possible deterioration of the property during the foreclosure proceedings and
a requirement that the purchaser pay for the property in cash or by cashier's
check. Thus the foreclosing lender often purchases the property from the
trustee or referee for an amount equal to the principal amount outstanding
under the loan, accrued and unpaid interest and the expenses of foreclosure
in which event the mortgagor's debt will be extinguished or the lender may
purchase for a lesser amount in order to preserve its right against a
borrower to seek a deficiency judgment in states where such judgment is
available. Thereafter, subject to the right of the borrower in some states
to remain in possession during the redemption period, the lender will assume
the burden 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.
Any loss may be reduced by the receipt of any mortgage guaranty insurance
proceeds.
Courts have imposed general equitable principles upon foreclosure, which
are generally designed to mitigate the legal consequences to the borrower of
the borrower's defaults under the loan documents. Some courts have been
faced with the issue of whether federal or state constitutional provisions
reflecting due process concerns for fair notice require that borrowers under
deeds of trust receive notice longer than that prescribed by statute. 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 does not
involve sufficient state action to afford constitutional protection to the
borrower.
When the beneficiary under a junior mortgage or deed of trust cures the
default and reinstates or redeems by paying the full amount of the senior
mortgage or deed of trust, the amount paid by the beneficiary so to cure or
redeem becomes a part of the indebtedness secured by the junior mortgage or
deed of trust. See "Junior Mortgages; Rights of Senior Mortgagees" below.
ENVIRONMENTAL RISKS
Real property pledged as security to a lender may be subject to
unforeseen environmental risks. Under the laws of certain states,
contamination of a property may give risks to a lien on the property to
assure the payment of the costs of clean-up. In several states such a lien
has priority over the lien of an
existing mortgage against such property. In addition, under CERCLA, the
United States Environmental Protection Agency ("EPA") may impose a lien on
property where EPA has incurred clean-up costs. However, a CERCLA lien is
subordinate to pre-existing, perfected security interests.
Under the laws of some states, and under CERCLA, it is conceivable that
a secured lender may be held liable as an "owner" or "operator" for the costs
of addressing releases or threatened releases of hazardous substances at a
property, even though the environmental damage or threat was caused by a
prior or current owner or operator. CERCLA imposes liability for such costs
on any and all "responsible parties," including owners or operators.
However, CERCLA excludes from the definition of "owner or operator" a secured
creditor who holds indicia of ownership primarily to protect its security
interest but without "participating in the management" of the Property (the
"Secured Creditor Exclusion"). Thus, if a lender's activities begin to
encroach on the actual management of a contaminated facility or property, the
lender may incur liability as an "owner or operator" under CERCLA. Similarly,
if a lender forecloses and takes title to a contaminated facility or
property, the lender may incur CERCLA liability in various circumstances,
including, but not limited to, when it holds the facility or property as an
investment (including leasing the facility or property to third party), or
fails to market the property in a timely fashion.
Whether actions taken by a lender would constitute participation in the
management of a mortgaged property or the business of a borrower so as to
render the secured creditor exemption unavailable to a lender has been a
matter of judicial interpretation of the statutory language, and court
decisions have been inconsistent. In 1990, the Court of Appeals for the
Eleventh Circuit suggested that the mere capacity of the lender to influence
a borrower's decisions regarding disposal of hazardous substances was
sufficient participation in the management of the borrower's business to deny
the protection of the Secured Creditor Exclusion to the lender.
This ambiguity appears to have been resolved by the enactment of the
Asset Conservation, Lender Liability and Deposit Insurance Protection Act of
1996, which was signed into law by President Clinton on September 30, 1996.
The new legislation provides that in order to be deemed to have participated
in the management of a mortgaged property, a lender must actually participate
in the operational affairs of the property or the borrower. The legislation
also provides that participation in the management of the property does not
include "merely having the capacity to influence, or unexercised right to
control" operations. Rather, a lender will lose the protection of the
Secured Creditor Exclusion only if it exercises decision-making control over
the borrower's environmental compliance and hazardous substance handling and
disposal practices, or assumes day-to-day management of all operational
functions of the mortgaged property.
If a lender is or becomes liable, it can bring an action for
contribution against any other "responsible parties," including a previous
owner or operator, who created the environmental hazard, but those persons or
entities may be bankrupt or otherwise judgment proof. The costs associated
with environmental cleanup may be substantial. It is conceivable that such
costs arising from the circumstances set forth above would result in a loss
to Securityholders.
CERCLA does not apply to petroleum products, and the Secured Creditor
Exclusion does not govern liability for cleanup costs under federal laws
other than CERCLA, in particular Subtitle I of the federal Resource
Conservation and Recovery Act ("RCRA"), which regulates underground petroleum
storage tanks (except heating oil tanks). The EPA has adopted a lender
liability rule for underground storage tanks under Subtitle I of RCRA. Under
such rule, a holder of a security interest in an underground storage tank or
real property containing an underground storage tank is not considered an
operator of the underground storage tank as long as petroleum is not added
to, stored in or dispensed from the tank. In addition, under the Asset
Conservation, Lender Liability and Deposit Insurance Protection Act of 1996,
the protections accorded to lenders under CERCLA are also accorded to the
holders of security interests in underground storage tanks. Liability for
cleanup of petroleum contamination may, however, be governed by state law,
which may not provide for any specific protection for secured creditors.
Except as otherwise specified in the related Prospectus Supplement, at
the time the Loans were originated, no environmental assessments or very
limited environmental assessments of the Properties were conducted.
RIGHTS OF REDEMPTION
In some states, after sale pursuant to a deed of trust or foreclosure of
a mortgage, the borrower and foreclosed junior lienors are given a statutory
period in which to redeem the property from the foreclosure sale. In certain
other states (including California), this right of redemption applies only to
sales following judicial foreclosure, and not to sales pursuant to a non-
judicial power of sale. In most states where the right of redemption is
available, statutory redemption may occur upon payment of the foreclosure
purchase price, accrued interest and taxes. 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 exercise of a right of
redemption would defeat the title of any purchaser from the lender subsequent
to foreclosure or sale under a deed of trust. Consequently, the practical
effect of the redemption right is to force the lender to retain the property
and pay the expenses of ownership until the redemption period has run. In
some states, there is no right to redeem property after a trustee's sale
under a deed of trust.
ANTI-DEFICIENCY LEGISLATION; BANKRUPTCY LAWS; TAX LIENS
Certain states have imposed statutory and judicial restrictions that
limit the remedies of a beneficiary under a deed of trust or a mortgagee
under a mortgage. In some states, including California, statutes and case
law limit the right of the beneficiary or mortgagee to obtain a deficiency
judgment against borrowers financing the purchase of their residence or
following sale under a deed of trust or certain other foreclosure
proceedings. A deficiency judgment is a personal judgment against the
borrower equal in most cases to the difference between the amount due to the
lender and the fair market value of the real property at the time of the
foreclosure sale. As a result of these prohibitions, it is anticipated that
in most instances the Master Servicer will utilize the non-judicial
foreclosure remedy and will not seek deficiency judgments against defaulting
borrowers.
Some state statutes require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an
attempt to satisfy the full debt before bringing a personal action against
the borrower. In certain other states, the lender has the option of bringing
a personal action against the borrower on the debt without first exhausting
such security; however, in some of these states, the lender, following
judgment on such personal action, may be deemed to have elected a remedy and
may be precluded from exercising remedies with respect to the security.
Consequently, the practical effect of the election requirement, when
applicable, is that lenders will usually proceed first against the security
rather than bringing a personal action against the borrower. In some states,
exceptions to the anti-deficiency statutes are provided for in certain
instances where the value of the lender's security has been impaired by acts
or omissions of the borrower, for example, in the event of waste of the
property. Finally, other statutory provisions limit any deficiency judgment
against the former borrower following a foreclosure sale to the excess of the
outstanding debt over the fair market value of the property at the time of
the public sale. The purpose of these statutes is generally to prevent a
beneficiary or a mortgagee from obtaining a large deficiency judgment against
the former borrower as a result of low or no bids at the foreclosure sale.
In addition to anti-deficiency and related legislation, 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 its
security. For example, in a proceeding under the federal Bankruptcy Code, a
lender may not foreclose on a mortgaged property without the permission of
the bankruptcy court. The rehabilitation plan proposed by the debtor may
provide, if the mortgaged property is not the debtor's
principal residence and the court determines that the value of the mortgaged
property is less than the principal balance of the mortgage loan, for the
reduction of the secured indebtedness to the value of the mortgaged property
as of the date of the commencement of the bankruptcy, rendering the lender a
general unsecured creditor for the difference, and also may reduce the
monthly payments due under such mortgage loan, change the rate of interest
and alter the mortgage loan repayment schedule. The effect of any such
proceedings under the federal Bankruptcy Code, including but not limited to
any automatic stay, could result in delays in receiving payments on the Loans
underlying a Series of Securities and possible reductions in the aggregate
amount of such payments.
The federal tax laws provide priority to certain tax liens over the lien
of a mortgage or secured party.
DUE-ON-SALE CLAUSES
Each conventional Loan generally will contain a due-on-sale clause which
will generally provide that if the mortgagor or obligor sells, transfers or
conveys the Property, the Loan or contract may be accelerated by the
mortgagee or secured party. Court decisions and legislative actions have
placed substantial restrictions on the right of lenders to enforce such
clauses in many states. For instance, the California Supreme Court in August
1978 held that due-on-sale clauses were generally unenforceable. However,
the Garn-St Germain Depository Institutions Act of 1982 (the "Garn-St Germain
Act"), subject to certain exceptions, preempts state constitutional,
statutory and case law prohibiting the enforcement of due-on-sale clauses.
As a result, due-on-sale clauses are generally enforceable except in those
states whose legislatures exercised their authority to regulate the
enforceability of such clauses with respect to mortgage loans that were (i)
originated or assumed during the "window period" under the Garn-St Germain
Act which ended in all cases not later than October 15, 1982, and (ii)
originated by lenders other than national banks, federal savings institutions
and federal credit unions. FHLMC has taken the position in its published
mortgage servicing standards that, out of a total of eleven "window period
states," five states (Arizona, Michigan, Minnesota, New Mexico and Utah) have
enacted statutes extending, on various terms and for varying periods, the
prohibition on enforcement of due-on-sale clauses with respect to certain
categories of window period loans. Also, 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.
As to loans secured by an owner-occupied residence, the Garn-St Germain
Act sets forth nine specific instances in which a mortgagee covered by the
Act may not exercise its rights under a due-on-sale clause, notwithstanding
the fact that a transfer of the property may have occurred. The inability to
enforce a due-on-sale clause may result in transfer of the related Property
to an uncreditworthy person, which could increase the likelihood of
default or may result in a mortgage bearing an interest rate below the
current market rate being assumed by a new home buyer, which may affect the
average life of the Loans and the number of Loans which may extend to
maturity.
In addition, under federal bankruptcy law, due-on-sale clauses may not
be enforceable in bankruptcy proceedings and may, under certain
circumstances, be eliminated in any modified mortgage resulting from such
bankruptcy proceeding.
ENFORCEABILITY OF PREPAYMENT AND LATE PAYMENT FEES
Forms of notes, mortgages and deeds of trust used by lenders may contain
provisions obligating the borrower to pay a late charge if payments are not
timely made, and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states,
there are or may be specific limitations upon the late charges which a lender
may collect from a borrower for delinquent payments. Certain states also
limit the amounts that a lender may collect from a borrower as an additional
charge if the loan is prepaid. Under certain state laws, prepayment charges
may not be imposed after a certain period of time following the origination
of mortgage loans with respect to prepayments on loans secured by liens
encumbering owner-occupied residential properties. Since many of the
Properties will be owner-occupied, it is anticipated that prepayment charges
may not be imposed with respect to many of the Loans. The absence of such a
restraint on prepayment, particularly with respect to fixed rate Loans having
higher Loan Rates, may increase the likelihood of refinancing or other early
retirement of such Loans or contracts. Late charges and prepayment fees are
typically retained by servicers as additional servicing compensation.
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. The Office of
Thrift Supervision, as successor to the Federal Home Loan Bank Board, is
authorized to issue rules and regulations and to publish interpretations
governing implementation of Title V. Title V authorized the states to
reimpose interest rate limits by adopting, before April 1, 1983, a law or
constitutional provision which expressly rejects application of the federal
law. Fifteen states adopted such a law prior to the April 1, 1983 deadline.
In addition, even where Title V was not so rejected, any state is authorized
by the law to adopt a provision limiting discount points or other charges on
mortgage loans covered by Title V. Certain states have taken action to
reimpose interest rate limits and/or to limit discount points or other
charges.
THE HOME IMPROVEMENT CONTRACTS
General. The Home Improvement Contracts, other than those Home
Improvement Contracts that are unsecured or secured by mortgages on real
estate (such Home Improvement Contracts are hereinafter referred to in this
section as "contracts") generally are "chattel paper" or constitute "purchase
money security interests" each as defined in the UCC. Pursuant to the UCC,
the sale of chattel paper is treated in a manner similar to perfection of a
security interest in chattel paper. Under the related Agreement, the Sponsor
will transfer physical possession of the contracts to the Trustee or a
designated custodian or may retain possession of the contracts as custodian
for the Trustee. In addition, the Sponsor will make an appropriate filing of
a UCC-1 financing statement in the appropriate states to, among other things,
give notice of the Trust Fund's ownership of the contracts. Unless otherwise
specified in the related Prospectus Supplement, the contracts will not be
stamped or otherwise marked to reflect their assignment from the Sponsor to
the Trustee. Therefore, if through negligence, fraud or otherwise, a
subsequent purchaser were able to take physical possession of the contracts
without notice of such assignment, the Trust Fund's interest in the contracts
could be defeated.
Security Interests in Home Improvements. The contracts that are secured
by the Home Improvements financed thereby grant to the originator of such
contracts a purchase money security interest in such Home Improvements to
secure all or part of the purchase price of such Home Improvements and
related services. A financing statement generally is not required to be
filed to perfect a purchase money security interest in consumer goods. Such
purchase money security interests are assignable. In general, a purchase
money security interest grants to the holder a security interest that has
priority over a conflicting security interest in the same collateral and the
proceeds of such collateral. However, to the extent that the collateral
subject to a purchase money security interest becomes a fixture, in order for
the related purchase money security interest to take priority over a
conflicting interest in the fixture, the holder's interest in such Home
Improvement must generally be perfected by a timely fixture filing. In
general, a security interest does not exist under the UCC in ordinary
building material incorporated into an improvement on land. Home Improvement
Contracts that finance lumber, bricks, other types of ordinary building
material or other goods that are deemed to lose such characterization upon
incorporation of such materials into the related property, will not be
secured by a purchase money security interest in the Home Improvement being
financed.
Enforcement of Security Interest in Home Improvements. So long as the
Home Improvement has not become subject to the real estate law, a creditor
can repossess a Home Improvement securing a contract by voluntary surrender,
by "self-help" repossession that is "peaceful" (i.e., without breach of the
peace) or, in the absence of voluntary surrender and the ability to repossess
without breach of the peace, by judicial process. The holder of a contract
must give the debtor a number of days' notice, which varies from 10
to 30 days depending on the state, prior to commencement of any
repossession. The UCC and consumer protection laws in most states
place restrictions on repossession sales, including requiring prior
notice to the debtor and commercial reasonableness in effecting such a
sale. The law in most states also requires that the debtor be given
notice of any sale prior to resale of the unit that the debtor may redeem
at or before such resale.
Under the laws applicable in most states, a creditor is entitled to
obtain a deficiency judgment from a debtor for any deficiency on repossession
and resale of the property securing the debtor's loan. However, some states
impose prohibitions or limitations on deficiency judgments, and in many cases
the defaulting borrower would have no assets with which to pay a judgment.
Certain other statutory provisions, including federal and state
bankruptcy and insolvency laws and general equitable principles, may limit or
delay the ability of a lender to repossess and resell collateral or enforce a
deficiency judgment.
Consumer Protection Laws. The so-called "Holder-in-Due Course" rule of
the Federal Trade Commission is intended to defeat the ability of the
transferor of a consumer credit contract which is the seller of goods which
gave rise to the transaction (and certain related lenders and assignees) to
transfer such contract free of notice of claims by the debtor thereunder.
The effect of this rule is to subject the assignee of such a contract to all
claims and defenses which the debtor could assert against the seller of
goods. Liability under this rule is limited to amounts paid under a
contract; however, the obligor also may be able to assert the rule to set off
remaining amounts due as a defense against a claim brought by the Trustee
against such obligor. Numerous other federal and state consumer protection
laws impose requirements applicable to the origination and lending pursuant
to the contracts, including the Truth in Lending Act, the Federal Trade
Commission Act, the Fair Credit Billing Act, the Fair Credit Reporting Act,
the Equal Credit Opportunity Act, the Fair Debt Collection Practices Act and
the Uniform Consumer Credit Code. In the case of some of these laws, the
failure to comply with their provisions may affect the enforceability of the
related contract.
Applicability of Usury Laws. Title V of the Depository Institutions
Deregulation and Monetary Control Act of 1980, as amended ("Title V"),
provides that, subject to the following conditions, state usury limitations
shall not apply to any contract which is secured by a first lien on certain
kinds of consumer goods. The contracts would be covered if they satisfy
certain conditions governing, among other things, the terms of any
prepayments, late charges and deferral fees and requiring a 30-day notice
period prior to instituting any action leading to repossession of the related
unit.
Title V authorized any state to reimpose limitations on interest rates
and finance charges by adopting before April 1, 1983 a law or constitutional
provision which expressly rejects application of the federal law. Fifteen
states adopted such a law prior to the April 1, 1983 deadline. In addition,
even where Title V was not so rejected, any state is authorized by the law to
adopt a provision limiting discount points or other charges on loans covered
by Title V.
INSTALLMENT CONTRACTS
The Loans may also consist of installment contracts. Under an
installment contract ("Installment Contract") the seller (hereinafter
referred to in this section as the "lender") retains legal title to the
property and enters into an agreement with the purchaser hereinafter referred
to in this section as the "borrower") for the payment of the purchase price,
plus interest, over the term of such contract. Only after full performance
by the borrower of the contract is the lender obligated to convey title to
the property to the purchaser. As with mortgage or deed of trust financing,
during the effective period of the Installment Contract, the borrower is
generally responsible for maintaining the property in good condition and for
paying real estate taxes, assessments and hazard insurance premiums
associated with the property.
The method of enforcing the rights of the lender under an Installment
Contract varies on a state-by-state basis depending upon the extent to which
state courts are willing, or able pursuant to state statute, to enforce the
contract strictly according to its terms. The terms of Installment Contracts
generally provide that upon a default by the borrower, the borrower loses his
or her right to occupy the property, the entire indebtedness is accelerated,
and the buyer's equitable interest in the property is forfeited. The lender
in such a situation does not have to foreclose in order to obtain title to
the property, although in some cases a quiet title action is in order if the
borrower has filed the Installment Contract in local land records and an
ejectment action may be necessary to recover possession. In a few states,
particularly in cases of borrower default during the early years of an
Installment Contract, the courts will permit ejectment of the buyer and a
forfeiture of his or her interest in the property. However, most state
legislatures have enacted provisions by analogy to mortgage law protecting
borrowers under Installment Contracts from the harsh consequences of
forfeiture. Under such statutes, a judicial or nonjudicial foreclosure may
be required, the lender may be required to give notice of default and the
borrower may be granted some grace period during which the Installment
Contract may be reinstated upon full payment of the default amount and the
borrower may have a post-foreclosure statutory redemption right. In other
states, courts in equity may permit a borrower with significant investment in
the property under an Installment Contract for the sale of real estate to
share in the proceeds of sale of the property after the indebtedness is
repaid or may otherwise refuse to enforce the forfeiture clause.
Nevertheless, generally speaking, the lender's procedures for obtaining
possession and clear title under an Installment Contract in a given
state are simpler and less time-consuming and costly than are the procedures
for foreclosing and obtaining clear title to a property subject to one or
more liens.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
Generally, under the terms of the Soldiers' and Sailors' Civil Relief
Act of 1940, as amended (the "Relief Act"), a borrower who enters military
service after the origination of such borrower's Loan (including a borrower
who is a member of the National Guard or is in reserve status at the time of
the origination of the Loan and is later called to active duty) may not be
charged interest above an annual rate of 6% during the period of such
borrower's active duty status, unless a court orders otherwise upon
application of the lender. It is possible that such interest rate limitation
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
Loans. Unless otherwise provided in the related Prospectus Supplement, any
shortfall in interest collections resulting from the application of the
Relief Act could result in losses to Securityholders. The Relief Act also
imposes limitations which would impair the ability of the Master Servicer to
foreclose on an affected Loan during the borrower's period of active duty
status. Moreover, the Relief Act permits the extension of a Loan's maturity
and the re-adjustment of its payment schedule beyond the completion of
military service. Thus, in the event that such a Loan goes into default,
there may be delays and losses occasioned by the inability to realize upon
the Property in a timely fashion.
JUNIOR MORTGAGES; RIGHTS OF SENIOR MORTGAGEES
To the extent that the Loans comprising the Trust Fund for a Series are
secured by mortgages which are junior to other mortgages held by other
lenders or institutional investors, the rights of the Trust Fund (and
therefore the Securityholders), as mortgagee under any such junior mortgage,
are subordinate to those of any mortgagee under any senior mortgage. The
senior mortgagee has the right to receive hazard insurance and condemnation
proceeds and to cause the property securing the Loan to be sold upon default
of the mortgagor, thereby extinguishing the junior mortgagee's lien unless
the junior mortgagee asserts its subordinate interest in the property in
foreclosure litigation and, possibly, satisfies the defaulted senior
mortgage. A junior mortgagee may satisfy a defaulted senior loan in full
and, in some states, may cure a default and bring the senior loan current, in
either event adding the amounts expended to the balance due on the junior
loan. In most states, absent a provision in the mortgage or deed of trust,
no notice of default is required to be given to a junior mortgagee.
The standard form of the mortgage used by most institutional lenders
confers on the mortgagee the right both to receive all
proceeds collected under any hazard insurance policy and all awards made in
connection with condemnation proceedings, and to apply such proceeds and
awards to any indebtedness secured by the mortgage, in such order as the
mortgagee may determine. Thus, in the event improvements on the property are
damaged or destroyed by fire or other casualty, or in the event the property
is taken by condemnation, the mortgagee or beneficiary under a senior
mortgage will have the prior right to collect any insurance proceeds payable
under a hazard insurance policy and any award of damages in connection with
the condemnation and to apply the same to the indebtedness secured by the
senior mortgage. Proceeds in excess of the amount of senior mortgage
indebtedness, in most cases, may be applied to the indebtedness of a junior
mortgage.
Another provision sometimes found in the form of the mortgage or deed of
trust used by institutional lenders obligates the mortgagor to pay before
delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property which appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding
purporting to affect the property or the rights of the mortgagee under the
mortgage. Upon a failure of the mortgagor to perform any of these
obligations, the mortgagee is given the right under certain mortgages to
perform the obligation itself, at its election, with the mortgagor
reimbursing the mortgagee for any sums expended by the mortgagee on behalf of
the mortgagor. All sums so expended by the mortgagee become part of the
indebtedness secured by the mortgage.
The form of credit line trust deed or mortgage generally used by most
institutional lenders which make Revolving Credit Line Loans typically
contains a "future advance" clause, which provides, in essence, that
additional amounts advanced to or on behalf of the borrower by the
beneficiary or lender are to be secured by the deed of trust or mortgage.
Any amounts so advanced after the Cut-off Date with respect to any Mortgage
will not be included in the Trust Fund. The priority of the lien securing
any advance made under the clause may depend in most states on whether the
deed of trust or mortgage is called and recorded as a credit line deed of
trust or mortgage. If the beneficiary or lender advances additional amounts,
the advance is entitled to receive the same priority as amounts initially
advanced under the trust deed or mortgage, notwithstanding the fact that
there may be junior trust deeds or mortgages and other liens which intervene
between the date of recording of the trust deed or mortgage and the date of
the future advance, and notwithstanding that the beneficiary or lender had
actual knowledge of such intervening junior trust deeds or mortgages and
other liens at the time of the advance. In most states, the trust deed or
mortgage lien securing mortgage loans of the type which includes home equity
credit lines applies retroactively to the date of the original recording of
the trust deed or mortgage, provided that the total amount of advances under
the home equity credit line does not exceed the maximum specified principal
amount of the recorded trust deed or mortgage, except as to advances made
after receipt by the lender of a written notice of lien from a judgment lien
creditor of the trustor.
CONSUMER PROTECTION LAWS
Numerous federal and state consumer protection laws impose substantive
requirements upon mortgage lenders in connection with the originating,
servicing and enforcing of loans secured by Single Family Properties. These
laws include the federal Truth-in-Lending Act and Regulation Z promulgated
thereunder, Real Estate Settlement Procedures Act and Regulation B
promulgated thereunder, Equal Credit Opportunity Act, Fair Credit Billing
Act, Fair Credit Reporting Act and related statutes and regulations. In
particular, Regulation Z requires certain disclosures to borrowers regarding
the terms of the Loans; the Equal Credit Opportunity Act and Regulation B
promulgated thereunder prohibit discrimination in the extension of credit on
the basis of age, race, color, sex, religion, marital status, national
origin, receipt of public assistance or the exercise of any right under the
Consumer Credit Protection Act; and, the Fair Credit Reporting Act regulates
the use and reporting of information related to the borrower's credit
experience. Certain provisions of these laws impose specific statutory
liabilities upon lenders who fail to comply therewith. In addition,
violations of such laws may limit the ability of the Sellers to collect all
or part of the principal of or interest on the Loans and could subject the
Sellers and in some cases their assignees to damages and administrative
enforcement.
FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a summary of the anticipated material federal income
tax consequences of the purchase, ownership, and disposition of the
Securities and is based on advice of Brown & Wood LLP, special counsel to the
Sponsor. The summary is based upon the provisions of the Code, the
regulations promulgated thereunder, including, where applicable, proposed
regulations, and the judicial and administrative rulings and decisions now in
effect, all of which are subject to change or possible differing
interpretations. The statutory provisions, regulations, and interpretations
on which this interpretation is based are subject to change, and such a
change could apply retroactively.
The summary does not purport to deal with all aspects of federal income
taxation that may affect particular investors in light of their individual
circumstances, nor with certain types of investors subject to special
treatment under the federal income tax laws. This summary focuses primarily
upon investors who will hold Securities as "capital assets" (generally,
property held for investment) within the meaning of Section 1221 of the Code,
but much of the discussion is applicable to other investors as well.
Prospective investors are advised to consult their own tax advisers
concerning the federal, state, local and any other tax consequences to them
of the purchase, ownership and disposition of the Securities.
The federal income tax consequences to Holders will vary depending on
whether (i) the Securities of a Series are classified as indebtedness; (ii)
an election is made to treat the Trust Fund relating to a particular Series
of Securities as a REMIC under the Internal Revenue Code of 1986, as amended
(the "Code"); (iii) the Securities represent an ownership interest in some or
all of the assets included in the Trust Fund for a Series; or (iv) an
election is made to treat the Trust Fund relating to a particular Series of
Certificates as a partnership. The Prospectus Supplement for each Series of
Securities will specify how the Securities will be treated for federal income
tax purposes and will discuss whether a REMIC election, if any, will be made
with respect to such Series.
TAXATION OF DEBT SECURITIES
Status as Real Property Loans. Except to the extent otherwise provided
in the related Prospectus Supplement, Brown & Wood LLP will have advised the
Sponsor that: (i) Securities held by a domestic building and loan
association will constitute "loans... secured by an interest in real
property" within the meaning of Code section 7701(a)(19)(C)(v); and (ii)
Securities held by a real estate investment trust will constitute "real
estate assets" within the meaning of Code section 856(c)(5)(A) and interest
on such Securities will be considered "interest on obligations secured by
mortgages on real property or on interests in real property" within the
meaning of Code section 856(c)(3)(B).
The Small Business Job Protection Act of 1996, as part of the repeal of
the bad debt reserve method for thrift institutions, repealed the application
of Code section 593(d) to any taxable year beginning after December 31, 1995.
Interest and Acquisition Discount. Securities representing regular
interests in a REMIC ("Regular Interest Securities") are generally taxable to
holders in the same manner as evidences of indebtedness issued by the REMIC.
Stated interest on the Regular Interest Securities will be taxable as
ordinary income and taken into account using the accrual method of
accounting, regardless of the Holder's normal accounting method. Interest
(other than original issue discount) on Securities (other than Regular
Interest Securities) that are characterized as indebtedness for federal
income tax purposes will be includible in income by holders thereof in
accordance with their usual methods of accounting. Securities characterized
as debt for federal income tax purposes and Regular Interest Securities will
be referred to hereinafter collectively as "Debt Securities."
Debt Securities that are Compound Interest Securities will, and certain
of the other Debt Securities may, be issued with
"original issue discount" ("OID"). The following discussion is based in part
on the rules governing OID which are set forth in Sections 1271-1275 of the
Code and the Treasury regulations issued thereunder on February 2, 1994 (the
"OID Regulations"). A Holder should be aware, however, that the OID
Regulations do not adequately address certain issues relevant to prepayable
securities, such as the Debt Securities.
In general, OID, if any, will equal the difference between the stated
redemption price at maturity of a Debt Security and its issue price. A
holder of a Debt Security must include such OID in gross income as ordinary
interest income as it accrues under a method taking into account an economic
accrual of the discount. In general, OID must be included in income in
advance of the receipt of the cash representing that income. The amount of
OID on a Debt Security will be considered to be zero if it is less than a de
minimis amount determined under the Code.
The issue price of a Debt Security is the first price at which a
substantial amount of Debt Securities of that class are sold to the public
(excluding bond houses, brokers, underwriters or wholesalers). If less than
a substantial amount of a particular class of Debt Securities is sold for
cash on or prior to the related Closing Date, the issue price for such class
will be treated as the fair market value of such class on such Closing Date.
The issue price of a Debt Security also includes the amount paid by an
initial Debt Security holder for accrued interest that relates to a period
prior to the issue date of the Debt Security. The stated redemption price at
maturity of a Debt Security includes the original principal amount of the
Debt Security, but generally will not include distributions of interest if
such distributions constitute "qualified stated interest."
Under the OID Regulations, qualified stated interest generally means
interest payable at a single fixed rate or qualified variable rate (as
described below) provided that such interest payments are unconditionally
payable at intervals of one year or less during the entire term of the Debt
Security. The OID Regulations state that interest payments are
unconditionally payable only if a late payment or nonpayment is expected to
be penalized or reasonable remedies exist to compel payment. Certain Debt
Securities may provide for default remedies in the event of late payment or
nonpayment of interest. The interest on such Debt Securities will be
unconditionally payable and constitute qualified stated interest, not OID.
However, absent clarification of the OID Regulations, where Debt Securities
do not provide for default remedies, the interest payments will be included
in the Debt Security's stated redemption price at maturity and taxed as OID.
Interest is payable at a single fixed rate only if the rate appropriately
takes into account the length of the interval between payments.
Distributions of interest on Debt Securities with respect to which deferred
interest will accrue, will not constitute qualified stated interest payments,
in which case the stated redemption price at maturity of such Debt Securities
includes all distributions of interest as well as principal thereon.
Where the interval between the issue date and the first Distribution Date
on a Debt Security is either longer or shorter than the interval between
subsequent Distribution Dates, all or part of the interest foregone, in
the case of the longer interval, and all of the additional interest, in
the case of the shorter interval, will be included in the stated
redemption price at maturity and tested under the de minimis rule
described below. In the case of a Debt Security with a long first
period which has non-de minimis OID, all stated interest in excess
of interest payable at the effective interest rate for the
long first period will be included in the stated redemption price at maturity
and the Debt Security will generally have OID. Holders of Debt Securities
should consult their own tax advisors to determine the issue price and stated
redemption price at maturity of a Debt Security.
Under the de minimis rule, OID on a Debt Security will be considered to
be zero if such OID is less than 0.25% of the stated redemption price at
maturity of the Debt Security multiplied by the weighted average maturity of
the Debt Security. For this purpose, the weighted average maturity of the
Debt Security is computed as the sum of the amounts determined by multiplying
the number of full years (i.e., rounding down partial years) from the issue
date until each distribution in reduction of stated redemption price at
maturity is scheduled to be made by a fraction, the numerator of which is the
amount of each distribution included in the stated redemption price at
maturity of the Debt Security and the denominator of which is the stated
redemption price at maturity of the Debt Security. Holders generally must
report de minimis OID pro rata as principal payments are received, and such
income will be capital gain if the Debt Security is held as a capital asset.
However, accrual method holders may elect to accrue all de minimis OID as
well as market discount under a constant interest method.
Debt Securities may provide for interest based on a qualified variable
rate. Under the OID Regulations, interest is treated as payable at a
qualified variable rate and not as contingent interest if, generally, (i)
such interest is unconditionally payable at least annually, (ii) the issue
price of the debt instrument does not exceed the total noncontingent
principal payments and (iii) interest is based on a "qualified floating
rate," an "objective rate," or a combination of "qualified floating rates"
that do not operate in a manner that significantly accelerates or defers
interest payments on such Debt Security. In the case of Compound Interest
Securities, certain Interest Weighted Securities (as defined herein under "--
Interest Weighted Securities"), and certain of the other Debt Securities,
none of the payments under the instrument will be considered qualified stated
interest, and thus the aggregate amount of all payments will be included in
the stated redemption price.
The Internal Revenue Service (the "IRS") recently issued final
regulations (the "Contingent Regulations") governing the calculation of OID
on instruments having contingent interest
payments. The Contingent Regulations specifically do not apply for purposes
of calculating OID on debt instruments subject to Code Section 1272(a)(6),
such as the Debt Security. Additionally, the OID Regulations do not contain
provisions specifically interpreting Code Section 1272(a)(6). Until the
Treasury issues guidance to the contrary, the Trustee intends to base its
computation on Code Section 1272(a)(6) and the OID Regulations as described
in this Prospectus. However, because no regulatory guidance currently exists
under Code Section 1272(a)(6), there can be no assurance that such
methodology represents the correct manner of calculating OID.
The holder of a Debt Security issued with OID must include in gross
income, for all days during its taxable year on which it holds such Debt
Security, the sum of the "daily portions" of such OID. The amount of OID
includible in income by a holder will be computed by allocating to each day
during a taxable year a pro rata portion of the OID that accrued during the
relevant accrual period. In the case of a Debt Security that is not a
Regular Interest Security and the principal payments on which are not subject
to acceleration resulting from prepayments on the Loans, the amount of OID
includible in income of a Holder for an accrual period (generally the period
over which interest accrues on the debt instrument) will equal the product of
the yield to maturity of the Debt Security and the adjusted issue price of
the Debt Security, reduced by any payments of qualified stated interest. The
adjusted issue price is the sum of its issue price plus prior accruals or
OID, reduced by the total payments made with respect to such Debt Security in
all prior periods, other than qualified stated interest payments.
The amount of OID to be included in income by a holder of a debt
instrument, such as certain Classes of the Debt Securities, that is subject
to acceleration due to prepayments on other debt obligations securing such
instruments (a "Pay-Through Security"), is computed by taking into account
the anticipated rate of prepayments assumed in pricing the debt instrument
(the "Prepayment Assumption"). The amount of OID that will accrue during an
accrual period on a Pay-Through Security is the excess (if any) of the sum of
(a) the present value of all payments remaining to be made on the Pay-Through
Security as of the close of the accrual period and (b) the payments during
the accrual period of amounts included in the stated redemption price of the
Pay-Through Security, over the adjusted issue price of the Pay-Through
Security at the beginning of the accrual period. The present value of the
remaining payments is to be determined on the basis of three factors: (i)
the original yield to maturity of the Pay-Through Security (determined on the
basis of compounding at the end of each accrual period and properly adjusted
for the length of the accrual period), (ii) events which have occurred before
the end of the accrual period and (iii) the assumption that the remaining
payments will be made in accordance with the original Prepayment Assumption.
The effect of this method is to increase the portions of OID required to be
included in income by a Holder to take into account prepayments
with respect to the Loans at a rate that exceeds the Prepayment Assumption,
and to decrease (but not below zero for any period) the portions of OID
required to be included in income by a Holder of a Pay-Through Security to
take into account prepayments with respect to the Loans at a rate that is
slower than the Prepayment Assumption. Although OID will be reported to
Holders of Pay-Through Securities based on the Prepayment Assumption, no
representation is made to Holders that Loans will be prepaid at that rate or
at any other rate.
The Sponsor may adjust the accrual of OID on a Class of Regular Interest
Securities (or other regular interests in a REMIC) in a manner that it
believes to be appropriate, to take account of realized losses on the Loans,
although the OID Regulations do not provide for such adjustments. If the IRS
were to require that OID be accrued without such adjustments, the rate of
accrual of OID for a Class of Regular Interest Securities could increase.
Certain classes of Regular Interest Securities may represent more than
one class of REMIC regular interests. Unless otherwise provided in the
related Prospectus Supplement, the Trustee intends, based on the OID
Regulations, to calculate OID on such Securities as if, solely for the
purposes of computing OID, the separate regular interests were a single debt
instrument.
A subsequent holder of a Debt Security will also be required to include
OID in gross income, but such a holder who purchases such Debt Security for
an amount that exceeds its adjusted issue price will be entitled (as will an
initial holder who pays more than a Debt Security's issue price) to offset
such OID by comparable economic accruals of portions of such excess.
Effects of Defaults and Delinquencies. Holders will be required to
report income with respect to the related Securities under an accrual method
without giving effect to delays and reductions in distributions attributable
to a default or delinquency on the Loans, except possibly to the extent that
it can be established that such amounts are uncollectible. As a result, the
amount of income (including OID) reported by a holder of such a Security in
any period could significantly exceed the amount of cash distributed to such
holder in that period. The holder will eventually be allowed a loss (or will
be allowed to report a lesser amount of income) to the extent that the
aggregate amount of distributions on the Securities is deducted as a result
of a Loan default. However, the timing and character of such losses or
reductions in income are uncertain and, accordingly, holders of Securities
should consult their own tax advisors on this point.
Interest Weighted Securities. It is not clear how income should be
accrued with respect to Regular Interest Securities or Stripped Securities
(as defined under "--Tax Status as a Grantor Trust; General" herein) the
payments on which consist solely or primarily of a specified portion of the
interest payments on qualified mortgages held by the REMIC or on Loans
underlying Pass-Through Securities ("Interest Weighted Securities"). The
Issuer intends to take the position that all of the income derived from an
Interest Weighted Security should be treated as OID and that the
amount and rate of accrual of such OID should be calculated by
treating the Interest Weighted Security as a Compound Interest
Security. However, in the case of Interest Weighted
Securities that are entitled to some payments of principal and that are
Regular Interest Securities the IRS could assert that income derived from an
Interest Weighted Security should be calculated as if the Security were a
security purchased at a premium equal to the excess of the price paid by such
holder for such Security over its stated principal amount, if any. Under
this approach, a holder would be entitled to amortize such premium only if it
has in effect an election under Section 171 of the Code with respect to all
taxable debt instruments held by such holder, as described below.
Alternatively, the IRS could assert that an Interest Weighted Security should
be taxable under the rules governing bonds issued with contingent payments.
Such treatment may be more likely in the case of Interest Weighted Securities
that are Stripped Securities as described below. See "--Tax Status as a
Grantor Trust--Discount or Premium on Pass-Through Securities."
Variable Rate Debt Securities. In the case of Debt Securities bearing
interest at a rate that varies directly, according to a fixed formula, with
an objective index, it appears that (i) the yield to maturity of such Debt
Securities and (ii) in the case of Pay-Through Securities, the present value
of all payments remaining to be made on such Debt Securities, should be
calculated as if the interest index remained at its value as of the issue
date of such Securities. Because the proper method of adjusting accruals of
OID on a variable rate Debt Security is uncertain, holders of variable rate
Debt Securities should consult their own tax advisers regarding the
appropriate treatment of such Securities for federal income tax purposes.
Market Discount. A purchaser of a Security may be subject to the market
discount rules of Sections 1276-1278 of the Code. A Holder that acquires a
Debt Security with more than a prescribed de minimis amount of "market
discount" (generally, the excess of the principal amount of the Debt Security
over the purchaser's purchase price) will be required to include accrued
market discount in income as ordinary income in each month, but limited to an
amount not exceeding the principal payments on the Debt Security received in
that month and, if the Securities are sold, the gain realized. Such market
discount would accrue in a manner to be provided in Treasury regulations but,
until such regulations are issued, such market discount would in general
accrue either (i) on the basis of a constant yield (in the case of a
Pay-Through Security, taking into account a Prepayment Assumption) or (ii) in
the ratio of (a) in the case of Securities (or in the case of a Pass-Through
Security (as defined herein), as set forth below, the Loans underlying such
Security) not originally issued with OID, stated interest payable in the
relevant period to total stated interest remaining to be paid at the
beginning of the period or (b) in the case of Securities (or, in the case
of a Pass-Through Security, as described below, the Loans underlying such
Security) originally issued at a discount, OID in the relevant period
to total OID remaining to be paid.
Section 1277 of the Code provides that, regardless of the origination
date of the Debt Security (or, in the case of a Pass-Through Security, the
Loans), the excess of interest paid or accrued to purchase or carry a
Security (or, in the case of a Pass-Through Security, as described below, the
underlying Loans) with market discount over interest received on such
Security is allowed as a current deduction only to the extent such excess is
greater than the market discount that accrued during the taxable year in
which such interest expense was incurred. In general, the deferred portion
of any interest expense will be deductible when such market discount is
included in income, including upon the sale, disposition, or repayment of the
Security (or in the case of a Pass-Through Security, an underlying Loan). A
holder may elect to include market discount in income currently as it
accrues, on all market discount obligations acquired by such holder during
the taxable year such election is made and thereafter, in which case the
interest deferral rule will not apply.
Premium. A holder who purchases a Debt Security (other than an Interest
Weighted Security to the extent described above) at a cost greater than its
stated redemption price at maturity, generally will be considered to have
purchased the Security at a premium, which it may elect to amortize as an
offset to interest income on such Security (and not as a separate deduction
item) on a constant yield method. Although no regulations addressing the
computation of premium accrual on securities similar to the Securities have
been issued, the legislative history of the 1986 Act indicates that premium
is to be accrued in the same manner as market discount. Accordingly, it
appears that the accrual of premium on a Class of Pay-Through Securities will
be calculated using the Prepayment Assumption used in pricing such Class. If
a holder makes an election to amortize premium on a Debt Security, such
election will apply to all taxable debt instruments (including all REMIC
regular interests and all pass-through certificates representing ownership
interests in a trust holding debt obligations) held by the holder at the
beginning of the taxable year in which the election is made, and to all
taxable debt instruments acquired thereafter by such holder, and will be
irrevocable without the consent of the IRS. Purchasers who pay a premium for
the Securities should consult their tax advisers regarding the election to
amortize premium and the method to be employed.
On June 27, 1996 the IRS issued proposed regulations (the "Amortizable
Bond Premium Regulations") dealing with amortizable bond premium. These
regulations specifically do not apply to prepayable debt instruments subject
to Code Section 1272(a)(6) such as the Securities. Absent further guidance
from the IRS, the Trustee intends to account for amortizable bond premium in
the manner described above. Prospective purchasers of the Securities
should consult their tax advisors regarding the possible application
of the Amortizable Bond Premium Regulations.
Election to Treat All Interest as Original Issue Discount. The OID
Regulations permit a holder of a Debt Security to elect to accrue all
interest, discount (including de minimis market or OID) and premium income as
interest, based on a constant yield method for Debt Securities acquired on or
after April 4, 1994. If such an election were to be made with respect to a
Debt Security with market discount, the holder of the Debt Security would be
deemed to have made an election to include in income currently market
discount with respect to all other debt instruments having market discount
that such holder of the Debt Security acquires during the year of the
election or thereafter. Similarly, a holder of a Debt Security that makes
this election for a Debt Security that is acquired at a premium will be
deemed to have made an election to amortize bond premium with respect to all
debt instruments having amortizable bond premium that such holder owns or
acquires. The election to accrue interest, discount and premium on a
constant yield method with respect to a Debt Security is irrevocable.
TAXATION OF THE REMIC AND ITS HOLDERS
General. In the opinion of Brown & Wood LLP, special counsel to the
Sponsor, if a REMIC election is made with respect to a Series of Securities,
then the arrangement by which the Securities of that Series are issued will
be treated as a REMIC as long as all of the provisions of the applicable
Agreement are complied with and the statutory and regulatory requirements are
satisfied. Securities will be designated as "regular interests" or "residual
interests" in a REMIC, as specified in the related Prospectus Supplement.
Except to the extent specified otherwise in a Prospectus Supplement, if
a REMIC election is made with respect to a Series of Securities, (i)
Securities held by a domestic building and loan association will constitute
"a regular or a residual interest in a REMIC" within the meaning of Code
Section 7701(a)(19)(C)(xi) (assuming that at least 95% of the REMIC's assets
consist of cash, government securities, "loans secured by an interest in real
property," and other types of assets described in Code Section
7701(a)(19)(C)); and (ii) Securities held by a real estate investment trust
will constitute "real estate assets" within the meaning of Code Section
856(c)(6)(B), and income with respect to the Securities will be considered
"interest on obligations secured by mortgages on real property or on
interests in real property" within the meaning of Code Section 856(c)(3)(B)
(assuming, for both purposes, that at least 95% of the REMIC's assets are
qualifying assets). If less than 95% of the REMIC's assets consist of assets
described in (i) or (ii) above, then a Security will qualify for the tax
treatment described in (i), (ii) or (iii) in the proportion that such REMIC
assets are qualifying assets.
The Small Business Job Protection Act of 1996, as part of the repeal of
the bad debt reserve method for thrift institutions, repealed the application
of Code Section 593(d) to any taxable year beginning after December 31, 1995.
REMIC EXPENSES; SINGLE CLASS REMICS
As a general rule, all of the expenses of a REMIC will be taken into
account by holders of the Residual Interest Securities. In the case of a
"single class REMIC," however, the expenses will be allocated, under Treasury
regulations, among the holders of the Regular Interest Securities and the
holders of the Residual Interest Securities (as defined herein) on a daily
basis in proportion to the relative amounts of income accruing to each Holder
on that day. In the case of a holder of a Regular Interest Security who is
an individual or a "pass-through interest holder" (including certain
pass-through entities but not including real estate investment trusts), such
expenses will be deductible only to the extent that such expenses, plus other
"miscellaneous itemized deductions" of the Holder, exceed 2% of such Holder's
adjusted gross income. In addition, for taxable years beginning after
December 31, 1990, the amount of itemized deductions otherwise allowable for
the taxable year for an individual whose adjusted gross income exceeds the
applicable amount (which amount will be adjusted for inflation for taxable
years beginning after 1990) will be reduced by the lesser of (i) 3% of the
excess of adjusted gross income over the applicable amount, or (ii) 80% of
the amount of itemized deductions otherwise allowable for such taxable year.
The reduction or disallowance of this deduction may have a significant impact
on the yield of the Regular Interest Security to such a Holder. In general
terms, a single class REMIC is one that either (i) would qualify, under
existing Treasury regulations, as a grantor trust if it were not a REMIC
(treating all interests as ownership interests, even if they would be
classified as debt for federal income tax purposes) or (ii) is similar to
such a trust and which is structured with the principal purpose of avoiding
the single class REMIC rules. Unless otherwise specified in the related
Prospectus Supplement, the expenses of the REMIC will be allocated to holders
of the related Residual Interest
Securities.
TAXATION OF THE REMIC
General. Although a REMIC is a separate entity for federal income tax
purposes, a REMIC is not generally subject to entity-level tax. Rather, the
taxable income or net loss of a REMIC is taken into account by the holders of
residual interests. As described above, the regular interests are generally
taxable as debt of the REMIC.
Calculation of REMIC Income. The taxable income or net loss of a REMIC
is determined under an accrual method of accounting and in the same manner as
in the case of an individual, with certain adjustments. In general, the
taxable income or net loss will be
the difference between (i) the gross income produced by the REMIC's assets,
including stated interest and any OID or market discount on loans and other
assets, and (ii) deductions, including stated interest and OID accrued on
Regular Interest Securities, amortization of any premium with respect to
Loans, and servicing fees and other expenses of the REMIC. A holder of a
Residual Interest Security that is an individual or a "pass-through interest
holder" (including certain pass-through entities, but not including real
estate investment trusts) will be unable to deduct servicing fees payable on
the loans or other administrative expenses of the REMIC for a given taxable
year, to the extent that such expenses, when aggregated with such holder's
other miscellaneous itemized deductions for that year, do not exceed two
percent of such holder's adjusted gross income.
For purposes of computing its taxable income or net loss, the REMIC
should have an initial aggregate tax basis in its assets equal to the
aggregate fair market value of the regular interests and the residual
interests on the Startup Day (generally, the day that the interests are
issued). That aggregate basis will be allocated among the assets of the
REMIC in proportion to their respective fair market values.
The OID provisions of the Code apply to loans of individuals originated
on or after March 2, 1984, and the market discount provisions apply to loans
originated after July 18, 1984. Subject to possible application of the de
minimis rules, the method of accrual by the REMIC of OID income on such loans
will be equivalent to the method under which holders of Pay-Through
Securities accrue OID (i.e., under the constant yield method taking into
account the Prepayment Assumption). The REMIC will deduct OID on the Regular
Interest Securities in the same manner that the holders of the Regular
Interest Securities include such discount in income, but without regard to
the de minimis rules. See "Taxation of Debt Securities" above. However, a
REMIC that acquires loans at a market discount must include such market
discount in income currently, as it accrues, on a constant interest basis.
To the extent that the REMIC's basis allocable to loans that it holds
exceeds their principal amounts, the resulting premium, if attributable to
mortgages originated after September 27, 1985, will be amortized over the
life of the loans (taking into account the Prepayment Assumption) on a
constant yield method. Although the law is somewhat unclear regarding
recovery of premium attributable to loans originated on or before such date,
it is possible that such premium may be recovered in proportion to payments
of loan principal.
Prohibited Transactions and Contributions Tax. The REMIC will be
subject to a 100% tax on any net income derived from a "prohibited
transaction." For this purpose, net income will be calculated without taking
into account any losses from prohibited transactions or any deductions
attributable to any prohibited transaction that resulted in a loss. In
general, prohibited transactions include: (i) subject to limited
exceptions, the sale or other disposition of any qualified mortgage
transferred to the REMIC; (ii) subject to limited exceptions,
the sale or other disposition of a cash flow
investment; (iii) the receipt of any income from assets not permitted to be
held by the REMIC pursuant to the Code; or (iv) the receipt of any fees or
other compensation for services rendered by the REMIC. It is anticipated
that a REMIC will not engage in any prohibited transactions in which it would
recognize a material amount of net income. In addition, subject to a number
of exceptions, a tax is imposed at the rate of 100% on amounts contributed to
a REMIC after the close of the three-month period beginning on the Startup
Day. The holders of Residual Interest Securities will generally be
responsible for the payment of any such taxes imposed on the REMIC. To the
extent not paid by such holders or otherwise, however, such taxes will be
paid out of the Trust Fund and will be allocated pro rata to all outstanding
classes of Securities of such REMIC.
TAXATION OF HOLDERS OF RESIDUAL INTEREST SECURITIES
The holder of a Security representing a residual interest (a "Residual
Interest Security") will take into account the "daily portion" of the taxable
income or net loss of the REMIC for each day during the taxable year on which
such holder held the Residual Interest Security. The daily portion is
determined by allocating to each day in any calendar quarter its ratable
portion of the taxable income or net loss of the REMIC for such quarter, and
by allocating that amount among the holders (on such day) of the Residual
Interest Securities in proportion to their respective holdings on such day.
The holder of a Residual Interest Security must report its proportionate
share of the taxable income of the REMIC whether or not it receives cash
distributions from the REMIC attributable to such income or loss. The
reporting of taxable income without corresponding distributions could occur,
for example, in certain REMIC issues in which the loans held by the REMIC
were issued or acquired at a discount, since mortgage prepayments cause
recognition of discount income, while the corresponding portion of the
prepayment could be used in whole or in part to make principal payments on
REMIC Regular Interests issued without any discount or at an insubstantial
discount (if this occurs, it is likely that cash distributions will exceed
taxable income in later years). Taxable income may also be greater in
earlier years of certain REMIC issues as a result of the fact that interest
expense deductions, as a percentage of outstanding principal on REMIC Regular
Interest Securities, will typically increase over time as lower yielding
Securities are paid, whereas interest income with respect to loans will
generally remain constant over time as a percentage of loan principal.
In any event, because the holder of a Residual Interest Security is
taxed on the net income of the REMIC, the taxable income derived from a
Residual Interest Security in a given taxable
year will not be equal to the taxable income associated with investment in a
corporate bond or stripped instrument having similar cash flow
characteristics and pretax yield. Therefore, the after-tax yield on the
Residual Interest Security may be less than that of such a bond or
instrument.
Limitation on Losses. The amount of the REMIC's net loss that a holder
may take into account currently is limited to the holder's adjusted basis at
the end of the calendar quarter in which such loss arises. A holder's basis
in a Residual Interest Security will initially equal such holder's purchase
price, and will subsequently be increased by the amount of the REMIC's
taxable income allocated to the holder, and decreased (but not below zero) by
the amount of distributions made and the amount of the REMIC's net loss
allocated to the holder. Any disallowed loss may be carried forward
indefinitely, but may be used only to offset income of the REMIC generated by
the same REMIC. The ability of holders of Residual Interest Securities to
deduct net losses may be subject to additional limitations under the Code, as
to which such holders should consult their tax advisers.
Distributions. Distributions on a Residual Interest Security (whether
at their scheduled times or as a result of prepayments) will generally not
result in any additional taxable income or loss to a holder of a Residual
Interest Security. If the amount of such payment exceeds a holder's adjusted
basis in the Residual Interest Security, however, the holder will recognize
gain (treated as gain from the sale of the Residual Interest Security) to the
extent of such excess.
Sale or Exchange. A holder of a Residual Interest Security will
recognize gain or loss on the sale or exchange of a Residual Interest
Security equal to the difference, if any, between the amount realized and
such holder's adjusted basis in the Residual Interest Security at the time of
such sale or exchange. Except to the extent provided in regulations, which
have not yet been issued, any loss upon disposition of a Residual Interest
Security will be disallowed if the selling holder acquires any residual
interest in a REMIC or similar mortgage pool within six months before or
after such disposition.
Excess Inclusions. The portion of the REMIC taxable income of a holder
of a Residual Interest Security consisting of "excess inclusion" income may
not be offset by other deductions or losses, including net operating losses,
on such holder's federal income tax return. Further, if the holder of a
Residual Interest Security is an organization subject to the tax on unrelated
business income imposed by Code Section 511, such holder's excess inclusion
income will be treated as unrelated business taxable income of such holder.
In addition, under Treasury regulations yet to be issued, if a real estate
investment trust, a regulated investment company, a common trust fund, or
certain cooperatives were to own a Residual Interest Security, a portion of
dividends (or other distributions) paid by the real estate investment trust
(or other entity) would be
treated as excess inclusion income. If a Residual Security is owned by a
foreign person excess inclusion income is subject to tax at a rate of 30%
which may not be reduced by treaty, is not eligible for treatment as
"portfolio interest" and is subject to certain additional limitations. See
"Tax Treatment of Foreign Investors." The Small Business Job Protection Act
of 1996 has eliminated the special rule permitting Section 593 institutions
("thrift institutions") to use net operating losses and other allowable
deductions to offset their excess inclusion income from REMIC residual
certificates that have "significant value" within the meaning of the REMIC
Regulations, effective for taxable years beginning after December 31, 1995,
except with respect to residual certificates continuously held by a thrift
institution since November 1, 1995.
In addition, the Small Business Job Protection Act of 1996 provides
three rules for determining the effect of excess inclusions on the
alternative minimum taxable income of a residual holder. First, alternative
minimum taxable income for such residual holder is determined without regard
to the special rule that taxable income cannot be less than excess
inclusions. Second, a residual holder's alternative minimum taxable income
for a tax year cannot be less than excess inclusions for the year. Third,
the amount of any alternative minimum tax net operating loss deductions must
be computed without regard to any excess inclusions. These rules are
effective for tax years beginning after December 31, 1986, unless a residual
holder elects to have such rules apply only to tax years beginning after
August 20, 1996.
The excess inclusion portion of a REMIC's income is generally equal to
the excess, if any, of REMIC taxable income for the quarterly period
allocable to a Residual Interest Security, over the daily accruals for such
quarterly period of (i) 120% of the long term applicable federal rate on the
Startup Day multiplied by (ii) the adjusted issue price of such Residual
Interest Security at the beginning of such quarterly period. The adjusted
issue price of a residual interest at the beginning of each calendar quarter
will equal its issue price (calculated in a manner analogous to the
determination of the issue price of a Regular Interest), increased by the
aggregate of the daily accruals for prior calendar quarters, and decreased
(but not below zero) by the amount of loss allocated to a holder and the
amount of distributions made on the Residual Interest Security before the
beginning of the quarter. The long-term federal rate, which is announced
monthly by the Treasury Department, is an interest rate that is based on the
average market yield of outstanding marketable obligations of the United
States government having remaining maturities in excess of nine years.
Under the REMIC Regulations, in certain circumstances, transfers of
Residual Securities may be disregarded. See "--Restrictions on Ownership and
Transfer of Residual Interest Securities" and "--Tax Treatment of Foreign
Investors" below.
Restrictions on Ownership and Transfer of Residual Interest Securities.
As a condition to qualification as a REMIC, reasonable arrangements must be
made to prevent the ownership of a Residual Interest Security by any
"Disqualified Organization." Disqualified Organizations include the United
States, any State or political subdivision thereof, any foreign government,
any international organization, or any agency or instrumentality of any of
the foregoing, a rural electric or telephone cooperative described in Section
1381(a)(2)(C) of the Code, or any entity exempt from the tax imposed by
Sections 1-1399 of the Code, if such entity is not subject to tax on its
unrelated business income. Accordingly, the applicable Pooling and Servicing
Agreement will prohibit Disqualified Organizations from owning a Residual
Interest Security. In addition, no transfer of a Residual Interest Security
will be permitted unless the proposed transferee shall have furnished to the
Trustee an affidavit representing and warranting that it is neither a
Disqualified Organization nor an agent or nominee acting on behalf of a
Disqualified Organization.
If a Residual Interest Security is transferred to a Disqualified
Organization (in violation of the restrictions set forth above), a
substantial tax will be imposed on the transferor of such Residual Interest
Security at the time of the transfer. In addition, if a Disqualified
Organization holds an interest in a pass-through entity (including, among
others, a partnership, trust, real estate investment trust, regulated
investment company, or any person holding as nominee), that owns a Residual
Interest Security, the pass-through entity will be required to pay an annual
tax on its allocable share of the excess inclusion income of the REMIC.
Under the REMIC Regulations, if a Residual Interest Security is a
"noneconomic residual interest," as described below, a transfer of a Residual
Interest Security to a United States person will be disregarded for all
Federal tax purposes unless no significant purpose of the transfer was to
impede the assessment or collection of tax. A Residual Interest Security is
a "noneconomic residual interest" unless, at the time of the transfer (i) the
present value of the expected future distributions on the Residual Interest
Security at least equals the product of the present value of the anticipated
excess inclusions and the highest 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 REMIC at or after the time at
which the taxes accrue on the anticipated excess inclusions in an amount
sufficient to satisfy the accrued taxes. If a transfer of a residual
interest is disregarded, the transferor would be liable for any Federal
income tax imposed upon taxable income derived by the transferee from the
REMIC. The REMIC Regulations provide no guidance as to how to determine if a
significant purpose of a transfer is to impede the assessment or collection
of tax. A similar type of limitation exists with respect to certain
transfers of Residual Interest Securities by foreign persons to United States
persons. See "--Tax Treatment of Foreign Investors."
Mark to Market Rules. Prospective purchasers of a Residual Interest
Security should be aware that the IRS recently released proposed regulations
(the "Proposed Mark-to-Market Regulations") which provide that a Residual
Interest Security acquired after January 3, 1995 cannot be marked-to-market.
The Proposed Mark-to-Market Regulations replace the temporary regulations
which allowed a Residual Interest Security to be marked-to-market provided
that it was not a negative value residual interest and did not have the same
economic effect as a negative value residual interest. The IRS could issue
subsequent regulations, which could apply retroactively, providing additional
or different requirements with respect to such deemed negative value residual
interests. Prospective purchasers of a Residual Interest Security should
consult their tax advisors regarding the possible application of the Proposed
Mark-to-Market Regulations.
ADMINISTRATIVE MATTERS
The REMIC's books must be maintained on a calendar year basis and the
REMIC must file an annual federal income tax return. The REMIC will also be
subject to the procedural and administrative rules of the Code applicable to
partnerships, including the determination of any adjustments to, among other
things, items of REMIC income, gain, loss, deduction, or credit, by the IRS
in a unified administrative proceeding.
TAX STATUS AS A GRANTOR TRUST
General. As specified in the related Prospectus Supplement if a REMIC
or partnership election is not made, in the opinion of Brown & Wood LLP,
special counsel to the Sponsor, the Trust Fund relating to a Series of
Securities will be classified for federal income tax purposes as a grantor
trust under Subpart E, Part I of Subchapter J of the Code and not as an
association taxable as a corporation (the Securities of such Series, "Pass-
Through Securities"). In some Series there will be no separation of the
principal and interest payments on the Loans. In such circumstances, a
Holder will be considered to have purchased a pro rata undivided interest in
each of the Loans. In other cases ("Stripped Securities"), sale of the
Securities will produce a separation in the ownership of all or a portion of
the principal payments from all or a portion of the interest payments on the
Loans.
Each Holder must report on its federal income tax return its share of
the gross income derived from the Loans (not reduced by the amount payable as
fees to the Trustee and the Servicer and similar fees (collectively, the
"Servicing Fee")), at the same time and in the same manner as such items
would have been reported under the Holder's tax accounting method had it held
its interest in the Loans directly, received directly its share of the
amounts received with respect to the Loans, and paid directly its share of
the Servicing Fees. In the case of Pass-Through Securities other than
Stripped Securities, such income will consist of a pro rata share
of all of the income derived from all of the Loans and, in the case of
Stripped Securities, such income will consist of a pro rata share of the
income derived from each stripped bond or stripped coupon in which the Holder
owns an interest. The holder of a Security will generally be entitled to
deduct such Servicing Fees under Section 162 or Section 212 of the Code to
the extent that such Servicing Fees represent "reasonable" compensation for
the services rendered by the Trustee and the Servicer (or third parties that
are compensated for the performance of services). In the case of a
noncorporate holder, however, Servicing Fees (to the extent not otherwise
disallowed, e.g., because they exceed reasonable compensation) will be
deductible in computing such holder's regular tax liability only to the
extent that such fees, when added to other miscellaneous itemized deductions,
exceed 2% of adjusted gross income and may not be deductible to any extent in
computing such holder's alternative minimum tax liability. In addition, the
amount of itemized deductions otherwise allowable for the taxable year for an
individual whose adjusted gross income exceeds the applicable amount (which
amount will be adjusted for inflation) will be reduced by the lesser of (i)
3% of the excess of adjusted gross income over the applicable amount or (ii)
80% of the amount of itemized deductions otherwise allowable for such taxable
year.
Discount or Premium on Pass-Through Securities. The holder's purchase
price of a Pass-Through Security is to be allocated among the Loans in
proportion to their fair market values, determined as of the time of purchase
of the Securities. In the typical case, the Trustee (to the extent necessary
to fulfill its reporting obligations) will treat each Loan as having a fair
market value proportional to the share of the aggregate principal balances of
all of the Loans that it represents, since the Securities, unless otherwise
specified in the related Prospectus Supplement, will have a relatively
uniform interest rate and other common characteristics. To the extent that
the portion of the purchase price of a Pass-Through Security allocated to a
Loan (other than to a right to receive any accrued interest thereon and any
undistributed principal payments) is less than or greater than the portion of
the principal balance of the Loan allocable to the Security, the interest in
the Loan allocable to the Pass-Through Security will be deemed to have been
acquired at a discount or premium, respectively.
The treatment of any discount will depend on whether the discount
represents OID or market discount. In the case of a Loan with OID in excess
of a prescribed de minimis amount or a Stripped Security, a holder of a
Security will be required to report as interest income in each taxable year
its share of the amount of OID that accrues during that year in the manner
described above. OID with respect to a Loan could arise, for example, by
virtue of the financing of points by the originator of the Loan, or by virtue
of the charging of points by the originator of the Loan in an amount greater
than a statutory de minimis exception, in circumstances under which the
points are not currently deductible pursuant to applicable Code provisions.
Any market discount or premium on a
Loan will be includible in income, generally in the manner described above,
except that in the case of Pass-Through Securities, market discount is
calculated with respect to the Loans underlying the Certificate, rather than
with respect to the Security. A Holder that acquires an interest in a Loan
originated after July 18, 1984 with more than a de minimis amount of market
discount (generally, the excess of the principal amount of the Loan over the
purchaser's allocable purchase price) will be required to include accrued
market discount in income in the manner set forth above. See "--Taxation of
Debt Securities; Market Discount" and "--Premium" above.
In the case of market discount on a Pass-Through Security attributable
to Loans originated on or before July 18, 1984, the holder generally will be
required to allocate the portion of such discount that is allocable to a Loan
among the principal payments on the Loan and to include the discount
allocable to each principal payment in ordinary income at the time such
principal payment is made. Such treatment would generally result in discount
being included in income at a slower rate than discount would be required to
be included in income using the method described in the preceding paragraph.
Stripped Securities. A Stripped Security may represent a right to
receive only a portion of the interest payments on the Loans, a right to
receive only principal payments on the Loans, or a right to receive certain
payments of both interest and principal. Certain Stripped Securities ("Ratio
Strip Securities") may represent a right to receive differing percentages of
both the interest and principal on each Loan. Pursuant to Section 1286 of
the Code, the separation of ownership of the right to receive some or all of
the interest payments on an obligation from ownership of the right to receive
some or all of the principal payments results in the creation of "stripped
bonds" with respect to principal payments and "stripped coupons" with respect
to interest payments. Section 1286 of the Code applies the OID rules to
stripped bonds and stripped coupons. For purposes of computing OID, a
stripped bond or a stripped coupon is treated as a debt instrument issued on
the date that such stripped interest is purchased with an issue price equal
to its purchase price or, if more than one stripped interest is purchased,
the ratable share of the purchase price allocable to such stripped interest.
Servicing Fees in excess of reasonable servicing fees ("Excess Servicing
Fees") will be treated under the stripped bond rules. If the Excess
Servicing Fees are less than 100 basis points (i.e., 1% interest on the Loan
principal balance) or the Securities are initially sold with a de minimis
discount (assuming no Prepayment Assumption is required), any non-de minimis
discount arising from a subsequent transfer of the Securities should be
treated as market discount. The IRS appears to require that reasonable
Servicing Fees be calculated on a Loan by Loan basis, which could result in
some Loans being treated as having more than 100 basis points of interest
stripped off.
The Code, OID Regulations and judicial decisions provide no direct
guidance as to how the interest and OID rules are to apply to Stripped
Securities and other Pass-Through Securities. Under the method described
above for Pay-Through Securities (the "Cash Flow Bond Method"), a Prepayment
Assumption is used and periodic recalculations are made which take into
account with respect to each accrual period the effect of prepayments during
such period. However, the 1986 Act does not, absent Treasury regulations,
appear specifically to cover instruments such as the Stripped Securities
which technically represent ownership interests in the underlying Loans,
rather than being debt instruments "secured by" those Loans. Nevertheless,
it is believed that the Cash Flow Bond Method is a reasonable method of
reporting income for such Securities, and it is expected that OID will be
reported on that basis unless otherwise specified in the related Prospectus
Supplement. In applying the calculation to Pass-Through Securities, the
Trustee will treat all payments to be received by a holder with respect to
the underlying Loans as payments on a single installment obligation. The IRS
could, however, assert that OID must be calculated separately for each Loan
underlying a Security.
Under certain circumstances, if the Loans prepay at a rate faster than
the Prepayment Assumption, the use of the Cash Flow Bond Method may
accelerate a Holder's recognition of income. If, however, the Loans prepay
at a rate slower than the Prepayment Assumption, in some circumstances the
use of this method may decelerate a Holder's recognition of income.
In the case of a Stripped Security that is an Interest Weighted
Security, the Trustee intends, absent contrary authority, to report income to
Securityholders as OID, in the manner described above for Interest Weighted
Securities.
Possible Alternative Characterizations. The characterizations of the
Stripped Securities described above are not the only possible interpretations
of the applicable Code provisions. Among other possibilities, the IRS could
contend that (i) in certain Series, each non-Interest Weighted Security is
composed of an unstripped undivided ownership interest in Loans and an
installment obligation consisting of stripped principal payments; (ii) the
non-Interest Weighted Securities are subject to the contingent payment
provisions of the Contingent Regulations; or (iii) each Interest Weighted
Stripped Security is composed of an unstripped undivided ownership interest
in Loans and an installment obligation consisting of stripped interest
payments.
Given the variety of alternatives for treatment of the Stripped
Securities and the different federal income tax consequences that result from
each alternative, potential purchasers are urged to consult their own tax
advisers regarding the proper treatment of the Securities for federal income
tax purposes.
Character as Qualifying Loans. In the case of Stripped Securities,
there is no specific legal authority existing regarding whether the character
of the Securities, for federal income tax purposes, will be the same as the
Loans. The IRS could take the position that the Loans' character is not
carried over to the Securities in such circumstances. Pass-Through
Securities will be, and, although the matter is not free from doubt, Stripped
Securities should be considered to represent "real estate assets" within the
meaning of Section 856(c)(6)(B) of the Code and "loans secured by an interest
in real property" within the meaning of Section 7701(a)(19)(C)(v) of the
Code; and interest income attributable to the Securities should be considered
to represent "interest on obligations secured by mortgages on real property
or on interests in real property" within the meaning of Section 856(c)(3)(B)
of the Code. Reserves or funds underlying the Securities may cause a
proportionate reduction in the above-described qualifying status categories
of Securities.
SALE OR EXCHANGE
Subject to the discussion below with respect to Trust Funds as to which
a partnership election is made, a Holder's tax basis in its Security is the
price such holder pays for a Security, plus amounts of original issue or
market discount included in income and reduced by any payments received
(other than qualified stated interest payments) and any amortized premium.
Gain or loss recognized on a sale, exchange, or redemption of a Security,
measured by the difference between the amount realized and the Security's
basis as so adjusted, will generally be capital gain or loss, assuming that
the Security is held as a capital asset. In the case of a Security held by a
bank, thrift, or similar institution described in Section 582 of the Code,
however, gain or loss realized on the sale or exchange of a Regular Interest
Security will be taxable as ordinary income or loss. In addition, gain from
the disposition of a Regular Interest Security that might otherwise be
capital gain will be treated as ordinary income to the extent of the excess,
if any, of (i) the amount that would have been includible in the holder's
income if the yield on such Regular Interest Security had equaled 110% of the
applicable federal rate as of the beginning of such holder's holding period,
over the amount of ordinary income actually recognized by the holder with
respect to such Regular Interest Security. For taxable years beginning after
December 31, 1993, the maximum tax rate on ordinary income for individual
taxpayers is 39.6% and the maximum tax rate on long-term capital gains
reported after December 31, 1990 for such taxpayers is 28%. The maximum tax
rate on both ordinary income and long-term capital gains of corporate
taxpayers is 35%.
MISCELLANEOUS TAX ASPECTS
Backup Withholding. Subject to the discussion below with respect to
Trust Funds as to which a partnership election is made, a Holder, other than
a holder of a Residual Interest Security, may, under certain circumstances,
be subject to "backup withholding" at
a rate of 31% with respect to distributions or the proceeds of a sale of
certificates to or through brokers that represent interest or OID on the
Securities. This withholding generally applies if the holder of a Security
(i) fails to furnish the Trustee with its taxpayer identification number
("TIN"); (ii) furnishes the Trustee an incorrect TIN; (iii) fails to report
properly interest, dividends or other "reportable payments" as defined in the
Code; or (iv) under certain circumstances, fails to provide the Trustee or
such holder's securities broker with a certified statement, signed under
penalty of perjury, that the TIN provided is its correct number and that the
holder is not subject to backup withholding. Backup withholding will not
apply, however, with respect to certain payments made to Holders, including
payments to certain exempt recipients (such as exempt organizations) and to
certain Nonresidents (as defined below). Holders should consult their tax
advisers as to their qualification for exemption from backup withholding and
the procedure for obtaining the exemption.
The Trustee will report to the Holders and to the Servicer for each
calendar year the amount of any "reportable payments" during such year and
the amount of tax withheld, if any, with respect to payments on the
Securities.
TAX TREATMENT OF FOREIGN INVESTORS
Subject to the discussion below with respect to Trust Funds as to which
a partnership election is made, under the Code, unless interest (including
OID) paid on a Security (other than a Residual Interest Security) is
considered to be "effectively connected" with a trade or business conducted
in the United States by a nonresident alien individual, foreign partnership
or foreign corporation ("Nonresidents"), such interest will normally qualify
as portfolio interest (except where (i) the recipient is a holder, directly
or by attribution, of 10% or more of the capital or profits interest in the
issuer, or (ii) the recipient is a controlled foreign corporation to which
the issuer is a related person) and will be exempt from federal income tax.
Upon receipt of appropriate ownership statements, the issuer normally will be
relieved of obligations to withhold tax from such interest payments. These
provisions supersede the generally applicable provisions of United States law
that would otherwise require the issuer to withhold at a 30% rate (unless
such rate were reduced or eliminated by an applicable tax treaty) on, among
other things, interest and other fixed or determinable, annual or periodic
income paid to Nonresidents. Holders of Pass-Through Securities and Stripped
Securities, including Ratio Strip Securities, however, may be subject to
withholding to the extent that the Loans were originated on or before July
18, 1984.
Interest and OID of Holders who are foreign persons are not subject to
withholding if they are effectively connected with a United States business
conducted by the Holder. They will, however, generally be subject to the
regular United States income tax.
Payments to holders of Residual Interest Securities who are foreign
persons will generally be treated as interest for purposes of the 30% (or
lower treaty rate) United States withholding tax. Holders should assume that
such income does not qualify for exemption from United States withholding tax
as "portfolio interest." It is clear that, to the extent that a payment
represents a portion of REMIC taxable income that constitutes excess
inclusion income, a holder of a Residual Interest Security will not be
entitled to an exemption from or reduction of the 30% (or lower treaty rate)
withholding tax rule. If the payments are subject to United States
withholding tax, they generally will be taken into account for withholding
tax purposes only when paid or distributed (or when the Residual Interest
Security is disposed of). The Treasury has statutory authority, however, to
promulgate regulations which would require such amounts to be taken into
account at an earlier time in order to prevent the avoidance of tax. Such
regulations could, for example, require withholding prior to the distribution
of cash in the case of Residual Interest Securities that do not have
significant value. Under the REMIC Regulations, if a Residual Interest
Security has tax avoidance potential, a transfer of a Residual Interest
Security to a Nonresident will be disregarded for all federal tax purposes.
A Residual Interest Security has tax avoidance potential unless, at the time
of the transfer the transferor reasonably expects that the REMIC will
distribute to the transferee amounts that will equal at least 30% of each
excess inclusion, and that such amounts will be distributed at or after the
time at which the excess inclusions accrue and not later than the calendar
year following the calendar year of accrual. If a Nonresident transfers a
Residual Interest Security to a United States person, and if the transfer has
the effect of allowing the transferor to avoid tax on accrued excess
inclusions, then the transfer is disregarded and the transferor continues to
be treated as the owner of the Residual Interest Security for purposes of the
withholding tax provisions of the Code. See "--Excess Inclusions."
TAX CHARACTERIZATION OF THE TRUST FUND AS A PARTNERSHIP
Brown & Wood LLP, special counsel to the Sponsor, will deliver its
opinion that a Trust Fund for which a partnership election is made will not
be an association (or publicly traded partnership) taxable as a corporation
for federal income tax purposes. This opinion will be based on the
assumption that the terms of the Trust Agreement and related documents will
be complied with, and on counsel's conclusions that (1) the Trust Fund will
not have certain characteristics necessary for a business trust to be
classified as an association taxable as a corporation and (2) the nature of
the income of the Trust Fund will exempt it from the rule that certain
publicly traded partnerships are taxable as corporations or the issuance of
the Securities has been structured as a private placement under an IRS safe
harbor, so that the Trust Fund will not be characterized as a publicly traded
partnership taxable as a corporation.
If the Trust Fund were taxable as a corporation for federal income tax
purposes, the Trust Fund would be subject to corporate income tax on its
taxable income. The Trust Fund's taxable income would include all its
income, possibly reduced by its interest expense on the Notes. Any such
corporate income tax could materially reduce cash available to make payments
on the Notes and distributions on the Certificates, and Certificateholders
could be liable for any such tax that is unpaid by the Trust Fund.
TAX CONSEQUENCES TO HOLDERS OF THE NOTES
Treatment of the Notes as Indebtedness. The Trust Fund will agree, and
the Noteholders will agree by their purchase of Notes, to treat the Notes as
debt for federal income tax purposes. Brown & Wood LLP, special counsel to
the Sponsor will, except as otherwise provided in the related Prospectus
Supplement, advise the Sponsor that the Notes will be classified as debt for
federal income tax purposes. The discussion below assumes this
characterization of the Notes is correct.
OID, Indexed Securities, etc. The discussion below assumes that all
payments on the Notes are denominated in U.S. dollars, and that the Notes are
not Indexed Securities or Strip Notes. Moreover, the discussion assumes that
the interest formula for the Notes meets the requirements for "qualified
stated interest" under the OID Regulations, and that any OID on the Notes
(i.e., any excess of the principal amount of the Notes over their issue
price) does not exceed a de minimis amount (i.e., 0.25% of their principal
amount multiplied by the number of full years included in their term), all
within the meaning of the OID Regulations. If these conditions are not
satisfied with respect to any given series of Notes, additional tax
considerations with respect to such Notes will be disclosed in the applicable
Prospectus Supplement.
Interest Income on the Notes. Based on the above assumptions, except as
discussed in the following paragraph, the Notes will not be considered issued
with OID. The stated interest thereon will be taxable to a Noteholder as
ordinary interest income when received or accrued in accordance with such
Noteholder's method of tax accounting. Under the OID Regulations, a holder
of a Note issued with a de minimis amount of OID must include such OID in
income, on a pro rata basis, as principal payments are made on the Note. It
is believed that any prepayment premium paid as a result of a mandatory
redemption will be taxable as contingent interest when it becomes fixed and
unconditionally payable. A purchaser who buys a Note for more or less than
its principal amount will generally be subject, respectively, to the premium
amortization or market discount rules of the Code.
A holder of a Note that has a fixed maturity date of not more than one
year from the issue date of such Note (a "Short-Term Note") may be subject to
special rules. An accrual basis holder of a Short-Term Note (and certain
cash method holders, including
regulated investment companies, as set forth in Section 1281 of the Code)
generally would be required to report interest income as interest accrues on
a straight-line basis over the term of each interest period. Other cash
basis holders of a Short-Term Note would, in general, be required to report
interest income as interest is paid (or, if earlier, upon the taxable
disposition of the Short-Term Note). However, a cash basis holder of a
Short-Term Note reporting interest income as it is paid may be required to
defer a portion of any interest expense otherwise deductible on indebtedness
incurred to purchase or carry the Short-Term Note until the taxable
disposition of the Short-Term Note. A cash basis taxpayer may elect under
Section 1281 of the Code to accrue interest income on all nongovernment debt
obligations with a term of one year or less, in which case the taxpayer would
include interest on the Short-Term Note in income as it accrues, but would
not be subject to the interest expense deferral rule referred to in the
preceding sentence. Certain special rules apply if a Short-Term Note is
purchased for more or less than its principal amount.
Sale or Other Disposition. If a Noteholder sells a Note, the holder
will recognize gain or loss in an amount equal to the difference between the
amount realized on the sale and the holder's adjusted tax basis in the Note.
The adjusted tax basis of a Note to a particular Noteholder will equal the
holder's cost for the Note, increased by any market discount, acquisition
discount, OID and gain previously included by such Noteholder in income with
respect to the Note and decreased by the amount of bond premium (if any)
previously amortized and by the amount of principal payments previously
received by such Noteholder with respect to such Note. Any such gain or loss
will be capital gain or loss if the Note was held as a capital asset, except
for gain representing accrued interest and accrued market discount not
previously included in income. Capital losses generally may be used only to
offset capital gains.
Foreign Holders. Interest payments made (or accrued) to a Noteholder
who is a nonresident alien, foreign corporation or other non-United States
person (a "foreign person") generally will be considered "portfolio
interest", and generally will not be subject to United States federal income
tax and withholding tax, if the interest is not effectively connected with
the conduct of a trade or business within the United States by the foreign
person and the foreign person (i) is not actually or constructively a "10
percent shareholder" of the Trust Fund or the Seller (including a holder of
10% of the outstanding Certificates) or a "controlled foreign corporation"
with respect to which the Trust Fund or the Seller is a "related person"
within the meaning of the Code and (ii) provides the Owner Trustee or other
person who is otherwise required to withhold U.S. tax with respect to the
Notes with an appropriate statement (on Form W-8 or a similar form), signed
under penalties of perjury, certifying that the beneficial owner of the Note
is a foreign person and providing the foreign person's name and address. If
a Note is held through a securities clearing organization or certain other
financial institutions, the organization or
institution may provide the relevant signed statement to the withholding
agent; in that case, however, the signed statement must be accompanied by a
Form W-8 or substitute form provided by the foreign person that owns the
Note. If such interest is not portfolio interest, then it will be subject to
United States federal income and withholding tax at a rate of 30 percent,
unless reduced or eliminated pursuant to an applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person will be exempt from United
States federal income and withholding tax, provided that (i) such gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (ii) in the case of an individual foreign
person, the foreign person is not present in the United States for 183 days
or more in the taxable year.
Backup Withholding. Each holder of a Note (other than an exempt holder
such as a corporation, tax-exempt organization, qualified pension and
profit-sharing trust, individual retirement account or nonresident alien who
provides certification as to status as a nonresident) will be required to
provide, under penalties of perjury, a certificate containing the holder's
name, address, correct federal taxpayer identification number and a statement
that the holder is not subject to backup withholding. Should a nonexempt
Noteholder fail to provide the required certification, the Trust Fund will be
required to withhold 31 percent of the amount otherwise payable to the
holder, and remit the withheld amount to the IRS as a credit against the
holder's federal income tax liability.
Possible Alternative Treatments of the Notes. If, contrary to the
opinion of Brown & Wood LLP, special counsel to the Sponsor, the IRS
successfully asserted that one or more of the Notes did not represent debt
for federal income tax purposes, the Notes might be treated as equity
interests in the Trust Fund. If so treated, the Trust Fund might be taxable
as a corporation with the adverse consequences described above (and the
taxable corporation would not be able to reduce its taxable income by
deductions for interest expense on Notes recharacterized as equity).
Alternatively, and most likely in the view of special counsel to the Sponsor,
the Trust Fund might be treated as a publicly traded partnership that would
not be taxable as a corporation because it would meet certain qualifying
income tests. Nonetheless, treatment of the Notes as equity interests in
such a publicly traded partnership could have adverse tax consequences to
certain holders. For example, income to certain tax-exempt entities
(including pension funds) would be "unrelated business taxable income",
income to foreign holders generally would be subject to U.S. tax and U.S. tax
return filing and withholding requirements, and individual holders might be
subject to certain limitations on their ability to deduct their share of the
Trust Fund's expenses.
TAX CONSEQUENCES TO HOLDERS OF THE CERTIFICATES
Treatment of the Trust Fund as a Partnership. The Trust Fund and the
Master Servicer will agree, and the Certificateholders will agree by their
purchase of Certificates, to treat the Trust Fund as a partnership for
purposes of federal and state income tax, franchise tax and any other tax
measured in whole or in part by income, with the assets of the partnership
being the assets held by the Trust Fund, the partners of the partnership
being the Certificateholders, and the Notes being debt of the partnership.
However, the proper characterization of the arrangement involving the Trust
Fund, the Certificates, the Notes, the Trust Fund and the Servicer is not
clear because there is no authority on transactions closely comparable to
that contemplated herein.
A variety of alternative characterizations are possible. For example,
because the Certificates have certain features characteristic of debt, the
Certificates might be considered debt of the Trust Fund. Any such
characterization would not result in materially adverse tax consequences to
Certificateholders as compared to the consequences from treatment of the
Certificates as equity in a partnership, described below. The following
discussion assumes that the Certificates represent equity interests in a
partnership.
Indexed Securities, etc. The following discussion assumes that all
payments on the Certificates are denominated in U.S. dollars, none of the
Certificates are Indexed Securities or Strip Certificates, and that a Series
of Securities includes a single class of Certificates. If these conditions
are not satisfied with respect to any given Series of Certificates,
additional tax considerations with respect to such Certificates will be
disclosed in the applicable Prospectus Supplement.
Partnership Taxation. As a partnership, the Trust Fund will not be
subject to federal income tax. Rather, each Certificateholder will be
required to separately take into account such holder's allocated share of
income, gains, losses, deductions and credits of the Trust Fund. The Trust
Fund's income will consist primarily of interest and finance charges earned
on the Loans (including appropriate adjustments for market discount, OID and
bond premium) and any gain upon collection or disposition of Loans. The
Trust Fund's deductions will consist primarily of interest accruing with
respect to the Notes, servicing and other fees, and losses or deductions upon
collection or disposition of Loans.
The tax items of a partnership are allocable to the partners in
accordance with the Code, Treasury regulations and the partnership agreement
(here, the Trust Agreement and related documents). The Trust Agreement will
provide, in general, that the Certificateholders will be allocated taxable
income of the Trust Fund for each month equal to the sum of (i) the interest
that accrues on the Certificates in accordance with their terms for such
month, including interest accruing at the Pass-Through Rate for such month
and interest on amounts previously due on the Certificates but not yet
distributed; (ii) any Trust Fund income attributable to discount on the Loans
that corresponds to any excess of the principal amount of the Certificates
over their initial issue price (iii) prepayment premium payable to the
Certificateholders for such month; and (iv) any other amounts of income
payable to the Certificateholders for such month. Such allocation will be
reduced by any amortization by the Trust Fund of premium on Loans that
corresponds to any excess of the issue price of Certificates over their
principal amount. All remaining taxable income of the Trust Fund will be
allocated to the Sponsor. Based on the economic arrangement of the parties,
this approach for allocating Trust Fund income should be permissible under
applicable Treasury regulations, although no assurance can be given that the
IRS would not require a greater amount of income to be allocated to
Certificateholders. Moreover, even under the foregoing method of allocation,
Certificateholders may be allocated income equal to the entire Pass-Through
Rate plus the other items described above even though the Trust Fund might
not have sufficient cash to make current cash distributions of such amount.
Thus, cash basis holders will in effect be required to report income from the
Certificates on the accrual basis and Certificateholders may become liable
for taxes on Trust Fund income even if they have not received cash from the
Trust Fund to pay such taxes. In addition, because tax allocations and tax
reporting will be done on a uniform basis for all Certificateholders but
Certificateholders may be purchasing Certificates at different times and at
different prices, Certificateholders may be required to report on their tax
returns taxable income that is greater or less than the amount reported to
them by the Trust Fund.
All of the taxable income allocated to a Certificateholder that is a
pension, profit sharing or employee benefit plan or other tax-exempt entity
(including an individual retirement account) will constitute "unrelated
business taxable income" generally taxable to such a holder under the Code.
An individual taxpayer's share of expenses of the Trust Fund (including
fees to the Servicer but not interest expense) would be miscellaneous
itemized deductions. Such deductions might be disallowed to the individual
in whole or in part and might result in such holder being taxed on an amount
of income that exceeds the amount of cash actually distributed to such holder
over the life of the Trust Fund.
The Trust Fund intends to make all tax calculations relating to income
and allocations to Certificateholders on an aggregate basis. If the IRS were
to require that such calculations be made separately for each Loan, the Trust
Fund might be required to incur additional expense but it is believed that
there would not be a material adverse effect on Certificateholders.
Discount and Premium. It is believed that the Loans were not issued
with OID, and, therefore, the Trust Fund should not have OID income.
However, the purchase price paid by the Trust Fund for the Loans may be
greater or less than the remaining principal balance of the Loans at the time
of purchase. If so, the Loan will have been acquired at a premium or
discount, as the case may be. (As indicated above, the Trust Fund will make
this calculation on an aggregate basis, but might be required to recompute it
on a Loan by Loan basis.)
If the Trust Fund acquires the Loans at a market discount or premium,
the Trust Fund will elect to include any such discount in income currently as
it accrues over the life of the Loans or to offset any such premium against
interest income on the Loans. As indicated above, a portion of such market
discount income or premium deduction may be allocated to Certificateholders.
Section 708 Termination. Under Section 708 of the Code, the Trust Fund
will be deemed to terminate for federal income tax purposes if 50% or more of
the capital and profits interests in the Trust Fund are sold or exchanged
within a 12-month period. If such a termination occurs, the Trust Fund will
be considered to distribute its assets to the partners, who would then be
treated as recontributing those assets to the Trust Fund as a new
partnership. The Trust Fund will not comply with certain technical
requirements that might apply when such a constructive termination occurs.
As a result, the Trust Fund may be subject to certain tax penalties and may
incur additional expenses if it is required to comply with those
requirements. Furthermore, the Trust Fund might not be able to comply due to
lack of data.
Disposition of Certificates. Generally, capital gain or loss will be
recognized on a sale of Certificates in an amount equal to the difference
between the amount realized and the seller's tax basis in the Certificates
sold. A Certificateholder's tax basis in a Certificate will generally equal
the holder's cost increased by the holder's share of Trust Fund income
(includible in income) and decreased by any distributions received with
respect to such Certificate. In addition, both the tax basis in the
Certificates and the amount realized on a sale of a Certificate would include
the holder's share of the Notes and other liabilities of the Trust Fund. A
holder acquiring Certificates at different prices may be required to maintain
a single aggregate adjusted tax basis in such Certificates, and, upon sale or
other disposition of some of the Certificates, allocate a portion of such
aggregate tax basis to the Certificates sold (rather than maintaining a
separate tax basis in each Certificate for purposes of computing gain or loss
on a sale of that Certificate).
Any gain on the sale of a Certificate attributable to the holder's share
of unrecognized accrued market discount on the Loans would generally be
treated as ordinary income to the holder and would give rise to special tax
reporting requirements. The Trust Fund does not expect to have any other
assets that would give rise
to such special reporting requirements. Thus, to avoid those special
reporting requirements, the Trust Fund will elect to include market discount
in income as it accrues.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise
to a capital loss upon the retirement of the Certificates.
Allocations Between Transferors and Transferees. In general, the Trust
Fund's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the
Certificateholders in proportion to the principal amount of Certificates
owned by them as of the close of the last day of such month. As a result, a
holder purchasing Certificates may be allocated tax items (which will affect
its tax liability and tax basis) attributable to periods before the actual
transaction.
The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or
losses of the Trust Fund might be reallocated among the Certificateholders.
The Trust Fund's method of allocation between transferors and transferees may
be revised to conform to a method permitted by future regulations.
Section 754 Election. In the event that a Certificateholder sells its
Certificates at a profit (loss), the purchasing Certificateholder will have a
higher (lower) basis in the Certificates than the selling Certificateholder
had. The tax basis of the Trust Fund's assets will not be adjusted to
reflect that higher (or lower) basis unless the Trust Fund were to file an
election under Section 754 of the Code. In order to avoid the administrative
complexities that would be involved in keeping accurate accounting records,
as well as potentially onerous information reporting requirements, the Trust
Fund will not make such election. As a result, Certificateholders might be
allocated a greater or lesser amount of Trust Fund income than would be
appropriate based on their own purchase price for Certificates.
Administrative Matters. The Owner Trustee is required to keep or have
kept complete and accurate books of the Trust Fund. Such books will be
maintained for financial reporting and tax purposes on an accrual basis and
the fiscal year of the Trust Fund will be the calendar year. The Trustee
will file a partnership information return (IRS Form 1065) with the IRS for
each taxable year of the Trust Fund and will report each Certificateholder's
allocable share of items of Trust Fund income and expense to holders and the
IRS on Schedule K-1. The Trust Fund will provide the Schedule K-l
information to nominees that fail to provide the Trust Fund with the
information statement described below and such nominees will be
required to forward such information to the beneficial owners of the
Certificates. Generally, holders must file tax returns that are consistent
with the information return filed by the Trust Fund or be subject to
penalties unless the holder notifies the IRS of all such inconsistencies .
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Trust
Fund with a statement containing certain information on the nominee, the
beneficial owners and the Certificates so held. Such information includes
(i) the name, address and taxpayer identification number of the nominee and
(ii) as to each beneficial owner (x) the name, address and identification
number of such person, (y) whether such person is a United States person, a
tax-exempt entity or a foreign government, an international organization, or
any wholly owned agency or instrumentality of either of the foregoing, and
(z) certain information on Certificates that were held, bought or sold on
behalf of such person throughout the year. In addition, brokers and
financial institutions that hold Certificates through a nominee are required
to furnish directly to the Trust Fund information as to themselves and their
ownership of Certificates. A clearing agency registered under Section 17A of
the Exchange Act is not required to furnish any such information statement to
the Trust Fund. The information referred to above for any calendar year must
be furnished to the Trust Fund on or before the following January 31.
Nominees, brokers and financial institutions that fail to provide the Trust
Fund with the information described above may be subject to penalties.
The Sponsor will be designated as the tax matters partner in the related
Trust Agreement and, as such, will be responsible for representing the
Certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which
the partnership information return is filed. Any adverse determination
following an audit of the return of the Trust Fund by the appropriate taxing
authorities could result in an adjustment of the returns of the
Certificateholders, and, under certain circumstances, a Certificateholder may
be precluded from separately litigating a proposed adjustment to the items of
the Trust Fund. An adjustment could also result in an audit of a
Certificateholder's returns and adjustments of items not related to the
income and losses of the Trust Fund.
Tax Consequences to Foreign Certificateholders. It is not clear whether
the Trust Fund would be considered to be engaged in a trade or business in
the United States for purposes of federal withholding taxes with respect to
non-U.S. persons because there is no clear authority dealing with that issue
under facts substantially similar to those described herein. Although it is
not expected that the Trust Fund would be engaged in a trade or
business in the United States for such purposes, the Trust Fund will withhold
as if it were so engaged in order to protect the Trust Fund from possible
adverse consequences of a failure to withhold. The Trust Fund expects to
withhold on the portion of its taxable income that is allocable to foreign
Certificateholders pursuant to Section 1446 of the Code, as if such income
were effectively connected to a U.S. trade or business, at a rate of 35% for
foreign holders that are taxable as corporations and 39.6% for all other
foreign holders. Subsequent adoption of Treasury regulations or the issuance
of other administrative pronouncements may require the Trust Fund to change
its withholding procedures. In determining a holder's withholding status,
the Trust Fund may rely on IRS Form W-8, IRS Form W-9 or the holder's
certification of nonforeign status signed under penalties of perjury.
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 whose income is subject to U.S. federal income tax regardless of its
source of income, or a trust if a court within the United States is able to
exercise primary supervision of the administration of the trust and one or
more United States fiduciaries have the authority to control all substantial
decisions of the trust.
Each foreign holder might be required to file a U.S. individual or
corporate income tax return (including, in the case of a corporation, the
branch profits tax) on its share of the Trust Fund's income. Each foreign
holder must obtain a taxpayer identification number from the IRS and submit
that number to the Trust Fund on Form W-8 in order to assure appropriate
crediting of the taxes withheld. A foreign holder generally would be
entitled to file with the IRS a claim for refund with respect to taxes
withheld by the Trust Fund taking the position that no taxes were due because
the Trust Fund was not engaged in a U.S. trade or business. However,
interest payments made (or accrued) to a Certificateholder who is a foreign
person generally will be considered guaranteed payments to the extent such
payments are determined without regard to the income of the Trust Fund. If
these interest payments are properly characterized as guaranteed payments,
then the interest will not be considered "portfolio interest." As a result,
Certificateholders will be subject to United States federal income tax and
withholding tax at a rate of 30 percent, unless reduced or eliminated
pursuant to an applicable treaty. In such case, a foreign holder would only
be entitled to claim a refund for that portion of the taxes in excess of the
taxes that should be withheld with respect to the guaranteed payments.
Backup Withholding. Distributions made on the Certificates and proceeds
from the sale of the Certificates will be subject to a "backup" withholding
tax of 31% if, in general, the Certificateholder fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in "Federal
Income Tax Consequences," potential investors should consider the state and
local income tax consequences of the acquisition, ownership, and disposition
of the Securities. State and local income tax law may differ substantially
from the corresponding federal law, and this discussion does not purport to
describe any aspect of the income tax laws of any state or locality.
Therefore, potential investors should consult their own tax advisors with
respect to the various state and local tax consequences of an investment in
the Securities.
ERISA CONSIDERATIONS
The following describes certain considerations under ERISA and the Code,
which apply only to Securities of a Series that are not divided into
subclasses. If Securities are divided into subclasses the related Prospectus
Supplement will contain information concerning considerations relating to
ERISA and the Code that are applicable to such Securities.
ERISA imposes requirements on employee benefit plans (and on certain
other retirement plans and arrangements, including individual retirement
accounts and annuities, Keogh plans and collective investment funds and
separate accounts in which such plans, accounts or arrangements are invested)
(collectively "Plans") subject to ERISA and on persons who are fiduciaries
with respect to such Plans. Generally, ERISA applies to investments made by
Plans. Among other things, ERISA requires that the assets of Plans be held
in trust and that the trustee, or other duly authorized fiduciary, have
exclusive authority and discretion to manage and control the assets of such
Plans. ERISA also imposes certain duties on persons who are fiduciaries of
Plans. Under ERISA, any person who exercises any authority or control
respecting the management or disposition of the assets of a Plan is
considered to be a fiduciary of such Plan (subject to certain exceptions not
here relevant). Certain employee benefit plans, such as governmental plans
(as defined in ERISA Section 3(32)) and, if no election has been made under
Section 410(d) of the Code, church plans (as defined in ERISA Section 3(33)),
are not subject to ERISA requirements. Accordingly, assets of such plans may
be invested in Securities without regard to the ERISA considerations
described above and below, subject to the provisions of applicable state law.
Any such plan which is qualified and exempt from taxation under Code Sections
401(a) and 501(a), however, is subject to the prohibited transaction rules
set forth in Code Section 503.
On November 13, 1986, the United States Department of Labor (the "DOL")
issued final regulations concerning the definition of what constitutes the
assets of a Plan. (Labor Reg. Section 2510.3-101) Under this regulation, the
underlying assets and properties of corporations, partnerships and certain
other entities in which a Plan makes an "equity" investment could be deemed
for purposes of ERISA to be assets of the investing Plan in certain
circumstances. However, the regulation provides that, generally, the
assets of a corporation or partnership in which a Plan invests will not
be deemed for purposes of ERISA to be assets of such Plan if the equity
interest acquired by the investing Plan is a publicly-offered security.
A publicly-offered security, as defined in the Labor Reg. Section
2510.3-101, is a security that is widely held,
freely transferable and registered under the Securities Exchange Act of 1934,
as amended.
In addition to the imposition of general fiduciary standards of
investment prudence and diversification, ERISA prohibits a broad range of
transactions involving Plan assets and persons ("Parties in Interest") having
certain specified relationships to a Plan and imposes additional prohibitions
where Parties in Interest are fiduciaries with respect to such Plan. Because
the Loans may be deemed Plan assets of each Plan that purchases Securities,
an investment in the Securities by a Plan might be a prohibited transaction
under ERISA Sections 406 and 407 and subject to an excise tax under Code
Section 4975 unless a statutory or administrative exemption applies.
In Prohibited Transaction Exemption 83-1 ("PTE 83-1"), which amended
Prohibited Transaction Exemption 81-7, the DOL exempted from ERISA's
prohibited transaction rules certain transactions relating to the operation
of residential mortgage pool investment trusts and the purchase, sale and
holding of "mortgage pool pass-through certificates" in the initial issuance
of such certificates. PTE 83-1 permits, subject to certain conditions,
transactions which might otherwise be prohibited between Plans and Parties in
Interest with respect to those Plans related to the origination, maintenance
and termination of mortgage pools consisting of mortgage loans secured by
first or second mortgages or deeds of trust on single-family residential
property, and the acquisition and holding of certain mortgage pool pass-
through certificates representing an interest in such mortgage pools by
Plans. If the general conditions (discussed below) of PTE 83-1 are
satisfied, investments by a Plan in Securities that represent interests in a
Pool consisting of Loans ("Single Family Securities") will be exempt from the
prohibitions of ERISA Sections 406(a) and 407 (relating generally to
transactions with Parties in Interest who are not fiduciaries) if the Plan
purchases the Single Family Securities at no more than fair market value and
will be exempt from the prohibitions of ERISA Sections 406(b)(1) and (2)
(relating generally to transactions with fiduciaries) if, in addition, the
purchase is approved by an independent fiduciary, no sales commission is paid
to the pool sponsor, the Plan does not purchase more than 25% of all Single
Family Securities, and at least 50% of all Single Family Securities are
purchased by persons independent of the pool sponsor or pool trustee. PTE
83-1 does not provide an exemption for transactions involving Subordinate
Securities. Accordingly, no transfer of a Subordinate Security or
a Security which is not a Single Family Security may be made to a Plan unless
specified in the related Prospectus Supplement.
The discussion in this and the next succeeding paragraph applies only to
Single Family Securities. The Sponsor believes that, for purposes of PTE
83-1, the term "mortgage pass-through certificate" would include: (i)
Securities issued in a Series consisting of only a single class of
Securities; and (ii) Securities issued in a Series in which there is only one
class of such Securities; provided that the Securities in the case of clause
(i), or the Securities in the case of clause (ii), evidence the beneficial
ownership of both a specified percentage of future interest payments (greater
than 0%) and a specified percentage (greater than 0%) of future principal
payments on the Loans. It is not clear whether a class of Securities that
evidences the beneficial ownership in a Trust Fund divided into Loan groups,
beneficial ownership of a specified percentage of interest payments only or
principal payments only, or a notional amount of either principal or interest
payments, or a class of Securities entitled to receive payments of interest
and principal on the Loans only after payments to other classes or after the
occurrence of certain specified events would be a "mortgage pass-through
certificate" for purposes of PTE 83-1.
PTE 83-1 sets forth three general conditions which must be satisfied for
any transaction to be eligible for exemption: (i) the maintenance of 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 one percent of the aggregate
principal balance of all covered pooled mortgage loans or the principal
balance of the largest covered pooled mortgage loan; (ii) the existence of a
pool trustee who is not an affiliate of the pool sponsor; and (iii) a
limitation on the amount of the payment retained by the pool sponsor,
together with other funds inuring to its benefit, to not more than adequate
consideration for selling the mortgage loans plus reasonable compensation for
services provided by the pool sponsor to the pool. The Sponsor believes that
the first general condition referred to above will be satisfied with respect
to the Securities in a Series issued without a subordination feature, or the
Securities only in a Series issued with a subordination feature, provided
that the subordination and Reserve Account, subordination by shifting of
interests, the pool insurance or other form of credit enhancement described
under "Credit Enhancement" herein (such subordination, pool insurance or
other form of credit enhancement being the system of insurance or other
protection referred to above) with respect to a Series of Securities is
maintained in an amount not less than the greater of one percent of the
aggregate principal balance of the Loans or the principal balance of the
largest Loan. See "Description of the Securities" herein. In the absence of
a ruling that the system of insurance or other protection with respect to a
Series of Securities satisfies the first general condition referred to above,
there can be no assurance that these features will be so viewed by the DOL.
The Trustee will not be affiliated with the Sponsor.
Each Plan fiduciary who is responsible for making the investment
decisions whether to purchase or commit to purchase and to hold Single Family
Securities must make its own determination as to whether the first and third
general conditions, and the specific conditions described briefly in the
preceding paragraphs, of PTE 83-1 have been satisfied, or as to the
availability of any other prohibited transaction exemptions. Each Plan
fiduciary should also determine whether, under the general fiduciary
standards of investment prudence and diversification, an investment in the
Securities is appropriate for the Plan, taking into account the overall
investment policy of the Plan and the composition of the Plan's investment
portfolio.
The DOL has granted to certain underwriters individual administrative
exemptions (the "Underwriter Exemptions") from certain of the prohibited
transaction rules of ERISA and the related excise tax provisions of Section
4975 of the Code with respect to the initial purchase, the holding and the
subsequent resale by Plans of certificates in pass-through trusts that
consist of certain receivables, loans and other obligations that meet the
conditions and requirements of the Underwriter Exemptions.
While each Underwriter Exemption is an individual exemption separately
granted to a specific underwriter, the terms and conditions which generally
apply to the Underwriter Exemptions are substantially the following:
(1) the acquisition of the certificates by a Plan is on terms
(including the price for the certificates) that are at least as
favorable to the Plan as they would be in an arm's-length transaction
with an unrelated party;
(2) the rights and interests evidenced by the certificates
acquired by the Plan are not subordinated to the rights and interests
evidenced by other certificates of the trust fund;
(3) the certificates required by the Plan have received a rating
at the time of such acquisition that is one of the three highest generic
rating categories from Standard & Poor's Ratings Group, a Division of
The McGraw-Hill Companies ("S&P"), Moody's Investors Service, Inc.
("Moody's"), Duff & Phelps Credit Rating Co. ("DCR") or Fitch Investors
Service, Inc. ("Fitch");
(4) the trustee must not be an affiliate of any other member of
the Restricted Group as defined below;
(5) the sum of all payments made to and retained by the
underwriters in connection with the distribution of the certificates
represents not more than reasonable compensation
for underwriting the certificates; the sum of all payments made to and
retained by the seller pursuant to the assignment of the loans to the
trust fund represents not more than the fair market value of such loans;
the sum of all payments made to and retained by the servicer and any
other servicer represents not more than reasonable compensation for such
person's services under the agreement pursuant to which the loans are
pooled and reimbursements of such person's reasonable expenses in
connection therewith; and
(6) the Plan investing in the certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the Securities
and Exchange Commission under the Securities Act of 1933 as amended.
The trust fund must also meet the following requirements:
(i) the corpus of the trust fund must consist solely of assets of
the type that have been included in other investment pools;
(ii) certificates in such other investment pools must have been
rated in one of the three highest rating categories of S&P, Moody's,
Fitch or DCR for at least one year prior to the Plan's acquisition of
certificates; and
(iii) certificates evidencing interests in such other investment
pools must have been purchased by investors other than Plans for at
least one year prior to any Plan's acquisition of certificates.
Moreover, the Underwriter Exemptions generally provide relief from
certain self-dealing/conflict of interest prohibited transactions that may
occur when the Plan fiduciary causes a Plan to acquire certificates in a
trust as to which the fiduciary (or its affiliate) is an obligor on the
receivables held in the trust provided that, among other requirements: (i) in
the case of an acquisition in connection with the initial issuance of
certificates, at least fifty percent (50%) of each class of certificates in
which Plans have invested is acquired by persons independent of the
Restricted Group (as defined below), (ii) such fiduciary (or its affiliate)
is an obligor with respect to five percent (5%) or less of the fair market
value of the obligations contained in the trust; (iii) the Plan's investment
in certificates of any class does not exceed twenty-five percent (25%) of all
of the certificates of that class outstanding at the time of the acquisition;
and (iv) immediately after the acquisition, no more than twenty-five percent
(25%) of the assets of the Plan with respect to which such person is a
fiduciary is invested in certificates representing an interest in one or more
trusts containing assets sold or serviced by the same entity. The
Underwriter Exemptions do not apply to Plans sponsored by the Seller, the
related Underwriter, the Trustee, the Master Servicer, any insurer with
respect to the Loans, any obligor with respect to
Loans included in the Trust Fund constituting more than five percent (5%) of
the aggregate unamortized principal balance of the assets in the Trust Fund,
or any affiliate of such parties (the "Restricted Group").
The Prospectus Supplement for each Series of Securities will indicate
the classes of Securities, if any, offered thereby as to which it is expected
that an Underwriter Exemption will apply.
The Underwriter Exemption contains several requirements, some of which
differ from those in PTE 83-l. The Underwriter Exemption contains an
expanded definition of "certificate" which includes an interest which
entitles the holder to pass-through payments of principal, interest and/or
other payments. The Underwriter Exemption contains an expanded definition of
"trust" which permits the trust corpus to consist of secured consumer
receivables. The definition of "trust", however, does not include any
investment pool unless, inter alia, (i) the investment pool consists only of
assets of the type which have been included in other investment pools, (ii)
certificates evidencing interests in such other investment pools have been
purchased by investors other than Plans for at least one year prior to the
Plan's acquisition of certificates pursuant to the Underwriter Exemption, and
(iii) certificates in such other investment pools have been rated in one of
the three highest generic rating categories of the four credit rating
agencies noted below. Generally, the Underwriter Exemption holds that the
acquisition of the certificates by a Plan must be on terms (including the
price for the certificates) that are at least as favorable to the Plan as
they would be in an arm's length transaction with an unrelated party. The
Underwriter Exemption requires that the rights and interests evidenced by the
certificates not be "subordinated" to the rights and interests evidenced by
other certificates of the same trust. The Underwriter Exemption requires
that certificates acquired by a Plan have received a rating at the time of
their acquisition that is in one of the three highest generic rating
categories of S&P, Moody's, Fitch or DCR. The Underwriter Exemption
specifies that the pool trustee must not be an affiliate of the pool sponsor,
nor an affiliate of the Underwriter, the pool servicer, any obligor with
respect to mortgage loans included in the trust constituting more than five
percent of the aggregate unamortized principal balance of the assets in the
trust, or any affiliate of such entities. Finally, the Underwriter Exemption
stipulates that any Plan investing in the certificates must be an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the Securities and
Exchange Commission under the Securities Act of 1933, as amended.
Any Plan fiduciary which proposes to cause a Plan to purchase Securities
should consult with their counsel concerning the impact of ERISA and the
Code, the applicability of PTE 83-1 and the Underwriter Exemption, and the
potential consequences in their specific circumstances, prior to making such
investment. Moreover, each Plan fiduciary should determine whether under the
general fiduciary standards of investment prudence and diversification an
investment in the Securities is appropriate for the Plan, taking into account
the overall investment policy of the Plan and the composition of the Plan's
investment portfolio.
LEGAL INVESTMENT
The Prospectus Supplement for each series of Securities will specify
which, if any, of the classes of Securities offered thereby constitute
"mortgage related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA"). Classes of Securities that qualify as
"mortgage related securities" will be legal investments for persons, trusts,
corporations, partnerships, associations, business trusts, and business
entities (including depository institutions, life insurance companies and
pension funds) created pursuant to or existing under the laws of the United
States or of any state (including the District of Columbia and Puerto Rico)
whose authorized investments are subject to state regulations to the same
extent as, under applicable law, obligations issued by or guaranteed as to
principal and interest by the United States or any such entities. Under
SMMEA, if a state enacted legislation prior to October 4, 1991 specifically
limiting the legal investment authority of any such entities with respect to
"mortgage related securities", Securities will constitute legal investments
for entities subject to such legislation only to the extent provided therein.
Approximately twenty-one states adopted such legislation prior to the October
4, 1991 deadline. 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 securities, or require the sale or
other disposition of securities, so long as such contractual commitment was
made or such securities were 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 in Securities
without limitations as to the percentage of their assets represented thereby,
federal credit unions may invest in mortgage related securities, and national
banks may purchase 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 authority may prescribe. In this connection, federal
credit unions should review the National Credit Union Administration ("NCUA")
Letter to Credit Unions No. 96, as modified by Letter to Credit Unions No.
108, which includes guidelines to assist federal credit unions in making
investment decisions for mortgage related securities and the NCUA's
regulation "Investment and Deposit Activities" (12 C.F.R. Part 703), which
sets forth certain restrictions on investments by federal credit unions in
"mortgage related securities" (in each case whether or not the class of
Securities under consideration for purchase constituted a "mortgage related
security").
All depository institutions considering an investment in the Securities
(whether or not the class of Securities under consideration for purchase
constitutes a "mortgage related security") should review the Federal
Financial Institutions Examination Council's Supervisory Policy Statement on
the Securities Activities (to the extent adopted by their respective
regulators) (the "Policy Statement") setting forth, in relevant part, certain
securities trading and sales practices deemed unsuitable for an institution's
investment portfolio, and guidelines for (and restrictions on) investing in
mortgage derivative products, including "mortgage related securities", which
are "high-risk mortgage securities" as defined in the Policy Statement.
According to the Policy Statement, such "high-risk mortgage securities"
include securities such as Securities not entitled to distributions allocated
to principal or interest, or Subordinated Securities. Under the Policy
Statement, it is the responsibility of each depository institution to
determine, prior to purchase (and at stated intervals thereafter), whether a
particular mortgage derivative product is a "high-risk mortgage security",
and whether the purchase (or retention) of such a product would be consistent
with the Policy Statement.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders guidelines or agreements generally
governing investments made by a particular investor, including, but not
limited to "prudent investor" provisions which may restrict or prohibit
investment in securities which are not "interest bearing" or "income paying".
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase Securities or to
purchase Securities representing more than a specified percentage of the
investor's assets. Investors should consult their own legal advisors in
determining whether and to what extent the Securities constitute legal
investments for such investors.
METHOD OF DISTRIBUTION
Securities are being offered hereby in Series from time to time (each
Series evidencing or relating to a separate Trust Fund) through any of the
following methods:
1. By negotiated firm commitment underwriting and public
reoffering by underwriters;
2. By agency placements through one or more placement agents
primarily with institutional investors and dealers; and
3. By placement directly by the Sponsor with institutional
investors.
A Prospectus Supplement will be prepared for each Series which will
describe the method of offering being used for that Series and
will set forth the identity of any underwriters thereof and either the price
at which such Series is being offered, the nature and amount of any
underwriting discounts or additional compensation to such underwriters and
the proceeds of the offering to the Sponsor, or the method by which the price
at which the underwriters will sell the Securities will be determined. Each
Prospectus Supplement for an underwritten offering will also contain
information regarding the nature of the underwriters' obligations, any
material relationship between the Sponsor and any underwriter and, where
appropriate, information regarding any discounts or concessions to be allowed
or reallowed to dealers or others and any arrangements to stabilize the
market for the Securities so offered. In firm commitment underwritten
offerings, the underwriters will be obligated to purchase all of the
Securities of such Series if any such Securities are purchased. Securities
may be acquired by the underwriters for their own accounts and may be resold
from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices
determined at the time of sale.
Underwriters and agents may be entitled under agreements entered into
with the Sponsor to indemnification by the Sponsor against certain civil
liabilities, including liabilities under the Securities Act of 1933, as
amended, or to contribution with respect to payments which such underwriters
or agents may be required to make in respect thereof.
If a Series is offered other than through underwriters, the Prospectus
Supplement relating thereto 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.
LEGAL MATTERS
The validity of the Certificates will be passed upon for the Sponsor by
Tobin & Tobin, a professional corporation, San Francisco, California.
Certain federal income tax consequences with respect to the Certificates will
be passed upon for the Sponsor by Brown & Wood LLP, New York, New York.
Brown & Wood LLP, New York, New York will act as counsel for the Underwriter.
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each Series of
Securities and no Trust Fund will engage in any business activities or have
any assets or obligations prior to the issuance of the related Series of
Securities. Accordingly, no financial statements with respect to any Trust
Fund will be included in this Prospectus or in the related Prospectus
Supplement.
RATING
It is a condition to the issuance of the Securities of each Series
offered hereby and by the Prospectus Supplement that they shall have been
rated in one of the four highest rating categories by the nationally
recognized statistical rating agency or agencies (each, a "Rating Agency")
specified in the related Prospectus Supplement.
Any such rating would be based on, among other things, the adequacy of
the value of the Trust Fund Assets and any credit enhancement with respect to
such class and will reflect such Rating Agency's assessment solely of the
likelihood that holders of a class of Securities will receive payments to
which such Securityholders are entitled under the related Agreement. Such
rating will not constitute an assessment of the likelihood that principal
prepayments on the related Loans will be made, the degree to which the rate
of such prepayments might differ from that originally anticipated or the
likelihood of early optional termination of the Series of Securities. Such
rating should not be deemed a recommendation to purchase, hold or sell
Securities, inasmuch as it does not address market price or suitability for a
particular investor. Each security rating should be evaluated independently
of any other security rating. Such rating will not address the possibility
that prepayment at higher or lower rates than anticipated by an investor may
cause such investor to experience a lower than anticipated yield or that an
investor purchasing a Security at a significant premium might fail to recoup
its initial investment under certain prepayment scenarios.
There is also no assurance that any such rating will remain in effect
for any given period of time or that it may not be lowered or withdrawn
entirely by the Rating Agency in the future if in its judgment circumstances
in the future so warrant. In addition to being lowered or withdrawn due to
any erosion in the adequacy of the value of the Trust Fund Assets or any
credit enhancement with respect to a Series, such rating might also be
lowered or withdrawn for other reasons, including, but not limited to, an
adverse change in the financial or other condition of a credit enhancement
provider or a change in the rating of such credit enhancement provider's long
term debt.
The amount, type and nature of credit enhancement, if any, established
with respect to a Series of Securities will be determined on the basis of
criteria established by each Rating Agency rating classes of such Series.
Such criteria are sometimes based upon an actuarial analysis of the behavior
of mortgage loans in a larger group. Such analysis is often the basis upon
which each Rating Agency determines the amount of credit enhancement required
with respect to each such class. There can be no assurance that the
historical data supporting any such actuarial analysis will accurately
reflect future experience nor any assurance that the data derived from a
large pool of mortgage loans accurately predicts the delinquency, foreclosure
or loss experience of any particular pool of Loans. No assurance
can be given that values of any Properties have remained or
will remain at their levels on the respective dates of
origination of the related Loans. If the residential real estate
markets should experience an overall decline in property values such that the
outstanding principal balances of the Loans in a particular Trust Fund and
any secondary financing on the related Properties become equal to or greater
than the value of the Properties, the rates of delinquencies, foreclosures
and losses could be higher than those now generally experienced in the
mortgage lending industry. In additional, adverse economic conditions (which
may or may not affect real property values) may affect the timely payment by
mortgagors of scheduled payments of principal and interest on the Loans and,
accordingly, the rates of delinquencies, foreclosures and losses with respect
to any Trust Fund. To the extent that such losses are not covered by credit
enhancement, such losses will be borne, at least in part, by the holders of
one or more classes of the Securities of the related Series.
<PAGE>
INDEX OF DEFINED TERMS
Term Page
- ---- ----
Accretion Directed . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Accrual Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Advance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Amortizable Bond Premium Regulations . . . . . . . . . . . . . . . . . . 61
APR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Available Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
balloon payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Belgian Cooperative . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Beneficial owner . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Book-Entry Securities . . . . . . . . . . . . . . . . . . . . . . . . . . 31
borrower . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Buydown Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Buydown Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Capitalized Interest Account . . . . . . . . . . . . . . . . . . . . . . 43
Cash Flow Bond Method . . . . . . . . . . . . . . . . . . . . . . . . . . 67
CEDEL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
CEDEL Participants . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
CERCLA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14, 51
Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 4
Class Security Balance . . . . . . . . . . . . . . . . . . . . . . . . . 26
Closed End Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Closed-End Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
CLTV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9, 10, 58
Collateral Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Combined Loan-to-Value Ratio . . . . . . . . . . . . . . . . . . . . . . 21
Commission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Companion classes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Component Securities . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Contingent Regulations . . . . . . . . . . . . . . . . . . . . . . . . . 59
contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Cut-off Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4, 18
Cut-off Date Principal Balance . . . . . . . . . . . . . . . . . . . . . 24
DCR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
Debt Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Definitive Certificate . . . . . . . . . . . . . . . . . . . . . . . . . 31
Detailed Description . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Distribution Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
DOL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
DTC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16, 31
Eligible Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Eligible Investments . . . . . . . . . . . . . . . . . . . . . . . . . . 36
EPA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Euroclear . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Euroclear Operator . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Euroclear Participants . . . . . . . . . . . . . . . . . . . . . . . . . 33
European Depositaries . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Excess servicing . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
Exchange Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
FHA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Financial Intermediary . . . . . . . . . . . . . . . . . . . . . . . . . 31
Fitch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
Fixed Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Floating Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Foreign person . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
Funding Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Garn-St Germain Act . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Headlands . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Holder in Due Course Rules . . . . . . . . . . . . . . . . . . . . . . . 15
Home Equity Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 4
Home Improvement Contracts . . . . . . . . . . . . . . . . . . . . 1, 4, 20
Home Improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Indenture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Installment Contract . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Insurance Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Insured Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Interest Only . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Interest Weighted Securities . . . . . . . . . . . . . . . . . . . . . . 60
Inverse Floating Rate . . . . . . . . . . . . . . . . . . . . . . . . . . 31
IRS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
L/C Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7, 35
L/C Percentage . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 35
Lender . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Liquidation Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Liquidation Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Loan Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Loan-to-Value Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
lockout periods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
LTV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Master Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Master Servicing Agreement . . . . . . . . . . . . . . . . . . . . . . . 18
Moody's . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
Morgan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Mortgage Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Mortgaged Properties . . . . . . . . . . . . . . . . . . . . . . . . . . 20
NCUA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Nonresidents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 4
Notional Amount Securities . . . . . . . . . . . . . . . . . . . . . . . 29
OID . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10, 58
OID Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
PACs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Partial Accrual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Parties in Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Pass-Through Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Pass-Through Securities . . . . . . . . . . . . . . . . . . . . . . . . . 66
Pay-Through Security . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Planned Principal Class . . . . . . . . . . . . . . . . . . . . . . . . . 29
Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Policy Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Pool . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4, 17
Pool Insurance Policy . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Pool Insurer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Pooling and Servicing Agreement . . . . . . . . . . . . . . . . . . . . . 24
Pre-Funded Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Pre-Funding Account . . . . . . . . . . . . . . . . . . . . . . . . . . 4, 16
Prepayment Assumption . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Primary Mortgage Insurance Policy . . . . . . . . . . . . . . . . . . . . 20
Principal Only . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Principal Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5, 20
Proposed Mark-to-Market Regulations . . . . . . . . . . . . . . . . . . . 65
PTE 83-1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Rating Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Ratio Strip Securities . . . . . . . . . . . . . . . . . . . . . . . . . 67
RCRA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Refinance Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Regular Interest Securities . . . . . . . . . . . . . . . . . . . . . . . 58
Relevant Depositary . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Relief Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
REMIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 25, 58
Reserve Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7, 26
Residual Interest Security . . . . . . . . . . . . . . . . . . . . . . . 63
Restricted Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
Retained Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Revolving Credit Line Loans . . . . . . . . . . . . . . . . . . . . . . 1, 4
Riegle Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
S&P . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
Scheduled Principal Class . . . . . . . . . . . . . . . . . . . . . . . . 30
Secured Creditor Exclusion . . . . . . . . . . . . . . . . . . . . . . . 51
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 4
Security Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Security Owners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Security Register . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Securityholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Seller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Sellers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Senior Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . 5, 34
Sequential Pay . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Series . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Servicing Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Short-Term Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
Single Family Properties . . . . . . . . . . . . . . . . . . . . . . . . 20
Single Family Securities . . . . . . . . . . . . . . . . . . . . . . . . 75
SMMEA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9, 78
Sponsor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 22
Strip . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Stripped Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Sub-Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Sub-Servicers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Sub-Servicing Agreement . . . . . . . . . . . . . . . . . . . . . . . . . 43
Subordinated Securities . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Subsequent Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Support Class . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
TACs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Targeted Principal Class . . . . . . . . . . . . . . . . . . . . . . . . 30
Terms and Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Thrift institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
TIN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
Title V . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54, 55
Trust Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . 18, 24
Trust Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Trust Fund Assets . . . . . . . . . . . . . . . . . . . . . . . . . 1, 4, 17
Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4, 24
U.S. Person . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
Underwriter Exemptions . . . . . . . . . . . . . . . . . . . . . . . . . 76
VA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Variable Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses in connection with
the issuance and distribution of the Certificates being registered under this
Registration Statement, other than underwriting discounts and commissions:
SEC Registration Fee $ 303.03
Printing and Engraving $ *
Legal Fees and Expenses $ *
Trustee Fees and Expenses $ *
Rating Agency Fees $ *
Miscellaneous $ *
Total $ *
____________________
* To be completed by amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant's Certificate of Incorporation and By-Laws provide for
indemnification of directors and officers of the Registrant to the fullest
extent permitted by Delaware law.
Section 145 of the Delaware General Corporation Law, provides, in
substance, that Delaware corporations shall have the power, under specified
circumstances, to indemnify their directors, officers, employees and agents
in connection with actions, suits or proceedings brought against them by a
third party or in the right of the corporation, by reason of the fact that
they were or are such directors, officers, employees or agents, against
expenses incurred in any such action, suit or proceeding. The Delaware
General Corporation Law also provides that the Registrant may purchase
insurance on behalf of any such director, officer, employee or agent.
ITEM 16. FINANCIAL STATEMENT AND EXHIBITS.
1.1* Form of Underwriting Agreement.
3.1 Certificate of Incorporation of the Registrant.
3.2* Bylaws of the Registrant.
4.1* Form of Pooling and Servicing Agreement.
5.1* Opinion of Tobin & Tobin as to legality of the Certificates
(including consent of such firm).
8.1* Opinion of Brown & Wood LLP as to certain tax matters (including
consent of such firm).
23.1* Consent of Tobin & Tobin (included in exhibit 5.1 hereof).
23.1* Consent of Brown & Wood LLP (included in exhibit 8.1 hereof).
24.1 Power of Attorney (included at II-3).
_____________
*To be filed by Amendment
ITEM 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change of such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of
the registrant's annual report pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(f) The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements,
certificates in such denominations and registered in such names as required
by the underwriter to permit prompt delivery to each purchaser.
(h) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Larkspur, State of California, on
the 28th day of May, 1997.
HEADLANDS MORTGAGE SECURITIES, INC.
By /s/ Peter T. Paul
------------------------------
Name: Peter T. Paul
Title: President and Director
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Directors and
Officers of Headlands Mortgage Securities Inc., a Delaware corporation,
hereby constitute and appoint Peter T. Paul and Gilbert J. MacQuarrie, each
with full power of substitution and resubstitution, their true and lawful
attorneys and agents to sign the names of the undersigned Directors and
Officers in the capacities indicated below to the registration statement to
which this Power of Attorney is attached as an exhibit, and all amendments
(including post-effective amendments) and supplements thereto, and all
instruments or documents filed as a part thereof or in connection therewith,
and to file the same, with all exhibits thereto, and all other instruments or
documents in connection therewith, with the Securities and Exchange
Commission; and each of the undersigned hereby ratifies and confirms all that
said attorneys, agents or any of them shall do or cause to be done by virtue
thereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Peter T. Paul President and Director May 28, 1997
- ----------------------------
Peter T. Paul (Principal Executive Officer)
/s/ Gilbert J. MacQuarrie Vice President, Secretary, May 28, 1997
- ----------------------------------
Gilbert J. MacQuarrie Treasurer and Director
(Principal Financial
Officer and Principal
Accounting Officer)
- ------------------------------- Director May ____, 1997
Becky S. Poisson
/s/ Steve Abreu Director May 28, 1997
- -------------------------------
Steve Abreu
/s/ Kenneth Siprelle Director May 28, 1997
- -------------------------------
Kenneth Siprelle
/s/ John Edmonds Director May 28, 1997
- -------------------------------
John Edmonds
