As filed with the Securities and Exchange Commission on JULY 11, 1997
Registration No. 333-28031
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1 TO
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. PETER S. HUMPHREYS, ESQ.
Tobin & Tobin Brown & Wood LLP DEWEY BALLANTINE
One Montgomery Street One World Trade Center 1301 AVENUE OF THE AMERICAS
San Francisco, California New York, New York 10048 NEW YORK, NEW YORK 10019
94104
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. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<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(2)
Price(1)
<S> <C> <C> <C> <C>
Asset Backed Securities . . . . . . . $750,000,000 100% $750,000,000 $227,272.73
</TABLE>
(1) Estimated for the purpose of calculating the registration fee.
(2) OF WHICH $303.03 HAS BEEN PREVIOUSLY PAID.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment 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.
SUBJECT TO COMPLETION, DATED JULY 11, 1997
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation, or sale would be
unlawful prior to registration or qualification under the securities laws of
any such State.
PROSPECTUS 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> Price to Underwriting Proceeds to
Public (1) Discount(2) the 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 Certifi
cates", "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
r a t e d _ _ _ _ b y
_________________________________________ and
_ _ _ _ _ b y
________________________________________. 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 act as Trustee on behalf of the
Certificateholders.
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 NOTES 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.
HEADLANDS MORTGAGE COMPANY
OVERALL MORTGAGE PORTFOLIO
DELINQUENCY AND FORECLOSURE EXPERIENCE
<TABLE>
<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>
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>
(table continued)
<TABLE>
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>
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:
PRINCIPAL BALANCES
<TABLE>
<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>
GEOGRAPHIC DISTRIBUTION(1)
<TABLE>
<CAPTION> Percent of
Pool
State Number by Cut-off
of Cut-off Date Date
Mortgage Principal Principal
Loans Balance Balance
<S> <C> <C> <C> <C>
$ %
Total . . . . . . . . . . . . . . . . $ 100.00%
</TABLE>
(1) Geographic location is determined by the address of the Mortgaged
Property securing the related Mortgage Loan.
COMBINED LOAN-TO-VALUE RATIOS(1)
<TABLE>
<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.
PROPERTY TYPE
<TABLE>
<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>
LIEN PRIORITY
<TABLE>
<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>
LOAN RATES(1)
<TABLE>
<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.
MARGIN
<TABLE>
<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>
CREDIT LIMIT UTILIZATION RATES
<TABLE>
<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>
CREDIT LIMITS
<TABLE>
<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>
MAXIMUM RATES
<TABLE>
<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 must not be relied upon as having 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 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. Neither the delivery of this Prospectus Supplement and the
Prospectus nor any sale made hereunder shall, under any circumstances, create
any implication that the information contained herein is correct as of any
time subsequent to their respective dates.
TABLE OF CONTENTS
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
Maturity and Prepayment 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
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
HOME EQUITY LOAN TRUST
199__-__
$___________
(Approximate)
Home Equity Loan
Asset Backed Certificates
Series 199_-_
HEADLANDS MORTGAGE
SECURITIES, INC.
Sponsor
(____________________________)
Seller and Master Servicer
________________________________________
PROSPECTUS SUPPLEMENT
___________, 199_
________________________________________
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 JULY 11, 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 89 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 COMMIS-
SION 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 OR AS
A "FINANCIAL ASSET SECURITIZATION INVESTMENT TRUST"
("FASIT") WITHIN THE MEANING OF SECTION 860L 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 A FASIT ELECTION IS MADE, THE MATERIAL FEDERAL INCOME TAX
CONSEQUENCES FOR INVESTORS ASSOCIATED WITH THE PURCHASE, OWNERSHIP
AND DISPOSITION OF SUCH SECURITIES WILL BE SET FORTH UNDER THE
HEADING "FEDERAL INCOME TAX CONSEQUENCES" IN THE RELATED PROSPECTUS
SUPPLEMENT.
IF NO REMIC OR FASIT 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 OR DEWEY BALLANTINE, AS SPECIAL
TAX COUNSEL TO THE SPONSOR (EACH, A "SPECIAL TAX COUNSEL"), 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 SPECIAL TAX COUNSEL, if a REMIC, FASIT 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 SPECIAL TAX COUNSEL, 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. The holders of the Certificates
issued by such Trust Fund, if any, will agree to treat the
Certificates as equity interests in a partnership. IF THERE IS
ONLY ONE HOLDER OF THE CERTIFICATES ISSUED BY SUCH TRUST FUND, THE
TRUST FUND WILL NOT BE TREATED AS A PARTNERSHIP. INSTEAD, IT WILL
BE TREATED AS AN ENTITY NOT DISTINCT FROM ITS OWNER, THE HOLDER OF
THE CERTIFICATES. IF NOTES ARE ISSUED BY SUCH TRUST FUND, SUCH
NOTES WILL BE TREATED AS INDEBTEDNESS FOR FEDERAL INCOME TAX
PURPOSES. THE FEDERAL INCOME TAX CONSEQUENCES TO THE HOLDERS OF
THE NOTES WILL BE THE SAME REGARDLESS OF THE NUMBER OF
CERTIFICATEHOLDERS.
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
ay 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.
- - --------------------
/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 SPECIAL TAX COUNSEL. 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 OR A FASIT 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 OR FASIT 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, SPECIAL TAX COUNSEL 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." IF A FASIT
ELECTION IS MADE, THE MATERIAL FEDERAL TAX INCOME CONSEQUENCES FOR INVESTORS
ASSOCIATED WITH THE PURCHASE, OWNERSHIP AND DISPOSITION OF SUCH SECURITIES
WILL BE SET FORTH UNDER THE HEADING "FEDERAL INCOME TAX CONSEQUENCES" IN THE
RELATED PROSPECTUS SUPPLEMENT.
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 SPECIAL TAX COUNSEL, 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
election is not made, in the opinion of SPECIAL TAX COUNSEL, 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
SPECIAL TAX COUNSEL will deliver its opinion that a Trust Fund
will not be TREATED AS A 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 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. SPECIAL TAX COUNSEL 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 SPECIAL TAX COUNSEL, 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 TREATED AS A
PUBLICLY TRADED PARTNERSHIP 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 OR
DEWEY BALLANTINE, New York, New York. Brown & Wood LLP, NEW YORK, NEW YORK
OR DEWEY BALLANTINE, 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.
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
FASIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
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
SPECIAL TAX COUNSEL . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
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 SECURITIES being registered under
this Registration Statement, other than underwriting discounts and
commissions:
SEC Registration Fee $ 222,272.73
Printing and Engraving $ 35,000.00
Legal Fees and Expenses $ 65,000.00
Trustee Fees and Expenses $ 15,000.00
Accounting Fees and Expenses $ 25,000.00
Blue Sky Fees and Expenses $ 5,000.00
Rating Agency Fees $ 125,000.00
Miscellaneous $ 5,000.00
TOTAL(*) $ 502,272.73
____________________
* ALL AMOUNTS EXCEPT THE SEC REGISTRATION FEE ARE ESTIMATES OF
EXPENSES INCURRED IN CONNECTION WITH THE ISSUANCE AND DISTRIBUTION OF A
SERIES OF SECURITIES IN AN AGGREGATE PRINCIPAL AMOUNT ASSUMED FOR THESE
PURPOSES TO BE EQUAL TO $250,000,000 OF SECURITIES REGISTERED HEREBY.
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.
4.2 Form of Trust Agreement.
4.3 Form of Indenture.
4.4 Form of Mortgage Loan Purchase 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-5).
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 11TH day of July, 1997.
HEADLANDS MORTGAGE SECURITIES, INC.
By /s/ Gilbert J. MacQuarrie
--------------
Name: Gilbert J. MacQuarrie
Title: Vice President
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 July
- - -------------------
11, 1997
Peter T. Paul (Principal Executive Officer)
/s/ Gilbert J. Vice President, Secretary, July 11, 1997
MacQuarrie Treasurer and Director
- - -------------------- (Principal Financial Officer
Gilbert J. MacQarrie and Principal Accounting
Officer)
* Director July 11, 1997
- - ----------------------------------
Steve Abreu
* Director July 11, 1997
- - ----------------------------------
Kenneth Siprelle
* Director July
- - ----------------------------------
John Edmonds
* By: /s/ Gilbert J. MacQuarrie
------------------------------------
Name: Gilbert J. MacQuarrie
Attorney-in-Fact
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director of
Headlands Mortgage Securities Inc., a Delaware corporation, hereby
constitutes and appoints Peter T. Paul and Gilbert J. MacQuarrie, each with
full power of substitution and resubstitution, her true and lawful attorneys
and agents to sign the name of the undersigned Director in the capacity
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 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 person in the
capacity and on the date indicated.
Signature Title Date
- - --------- ----- ----
/s/ Becky S. Poisson Director July 11, 1997
- - ---------------------
Becky S. Poisson
EXHIBIT INDEX
-------------
Exhibit
No. Description of Exhibit
- - ------- ----------------------
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.
4.2 Form of Trust Agreement.
4.3 Form of Indenture.
4.4 Form of Mortgage Loan Purchase 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).
Exhibit 1.1
Form of Underwriting Agreement
HEADLANDS MORTGAGE SECURITIES INC.
$___________ (approximate)
Home Equity Loan Asset Backed Certificates,
Series 199_-_
(Date)
UNDERWRITING AGREEMENT
----------------------
(Underwriter)
Ladies and Gentlemen:
SECTION 1. Introduction. Headlands Mortgage Securities Inc., a
------------
Delaware corporation (the "Company"), proposes to sell to you (sometimes
referred to herein as the "Underwriter"), $__________ principal amount of its
Home Equity Loan Asset Backed Certificates identified in Schedule I hereto
(the "Offered Certificates") having the aggregate Initial Certificate
Balances set forth in Schedule I (subject to an upward or downward variance,
not to exceed the percentage set forth in such Schedule I, the precise
Initial Certificate Balance within such range to be determined by the Company
in its sole discretion). The Offered Certificates, together with the ___
Classes of subordinate certificates (the "Non-Offered Certificates") and the
Class of residual certificates (the "Residual Certificates", and together
with the Offered Certificates and the Non-Offered Certificates, the
"Certificates"), evidence the entire ownership interest in the assets of a
trust fund (the "Trust") consisting primarily of home equity revolving credit
line loans made under home equity revolving credit line loan agreements and
closed-end home equity loans, as described in Schedule I (the "Mortgage
Loans") acquired by the Company pursuant to the Mortgage Loan Purchase
Agreement (the "Loan Purchase Agreement"), dated as of ( ), between the
Company and Headlands Mortgage Company (the "Seller"), and having, as of the
close of business on the date specified in Schedule I as the cut-off date
(the "Cut-Off Date"), the aggregate principal balance set forth in Schedule
I. An election will be made to treat the Trust as a (
) for purposes of federal income taxation. The Certificates are to be
issued pursuant to a pooling and servicing agreement (the "Pooling Agree-
ment"), dated as of the Cut-Off Date, among the Company, as sponsor, the
Seller, Headlands Mortgage Company, as master servicer (in such capacity, the
"Master Servicer") and ( ), as trustee (the "Trustee"). The
Offered Certificates will be issued in the denominations specified in
Schedule I.
Capitalized terms used herein that are not otherwise defined herein have
the meanings assigned thereto in the Pooling Agreement.
SECTION 2. Representations and Warranties of the Company. Each
---------------------------------------------
of the Seller and the Company represents and warrants to the Underwriter as
follows:
(a) A Registration Statement on Form S-3 (File No. 333-( ))
(i) has been prepared by the Company in conformity with the requirements
of the Securities Act of 1933, as amended (the "Act") and the rules and
regulations (the "Rules and Regulations of the United States Securities
and Exchange Commission (the "Commission") thereunder, (ii) been filed
with the Commission under the Act and (iii) became effective under the
Act. Copies of such Registration Statement have been delivered by the
Company to the Underwriter. As used in this Agreement, "Effective Time"
means the date and the time as of which such Registration Statement, or
the most recent post-effective amendment thereto, if any, was declared
effective by the Commission; "Effective Date" means the date of the
Effective Time. "Registration Statement" means such registration
statement at the Effective Time, including any documents incorporated by
reference therein at such time; "Preliminary Prospectus" means each
prospectus included in such Registration Statement, including a
preliminary prospectus supplement which, as completed, may be used in
connection with the sale of the Offered Certificates; and "Prospectus"
means such final prospectus, as supplemented by a prospectus supplement
(the "Prospectus Supplement") relating to the Offered Certificates in
the form first filed with the Commission pursuant to paragraph (1) or
(4) of Rule 424(b) of the Rules and Regulations. Reference made herein
to any Preliminary Prospectus or to the Prospectus shall be deemed to
refer to and include any documents incorporated by reference therein
pursuant to Item 12 of Form S-3 under the Act, as of the date of such
Preliminary Prospectus or the Prospectus, as the case may be, and any
reference to any amendment or supplement to any Preliminary Prospectus
or the Prospectus shall be deemed to refer to and include any document
filed under the Securities Exchange Act of 1934 (the "Exchange Act")
after the date of such Preliminary Prospectus or the Prospectus, as the
case may be, and incorporated by reference in such Preliminary
Prospectus or the Prospectus, as the case may be; and any reference to
any amendment to the Registration Statement shall be deemed to include
any report of the Company filed with the Commission pursuant to Section
13(a) or 15(d) of the Exchange Act after the Effective Time that is
incorporated by reference in the Registration Statement. There are no
contracts or documents of the Company which are required to be filed as
exhibits to the Registration Statement pursuant to the Act which have
not been so filed or incorporated by reference therein on or prior to
the Effective Date. The conditions for use of Form S-3, as set forth in
the General Instructions thereto, have been satisfied.
To the extent that the Underwriter (i) has provided to the Company
Collateral Term Sheets (as hereinafter defined) that the Underwriter has
provided to a prospective investor, the Company has filed such
Collateral Term Sheets as an exhibit to a report on Form 8-K within two
business days of its receipt thereof, or (ii) has provided to the
Company Structural Term Sheets or Computational Materials (each as
defined below) that the Underwriter has provided to a prospective
investor, the Company will file or cause to be filed with the Commission
a report on Form 8-K containing such Structural Term Sheet and
Computational Materials, as soon as reasonably practicable after the
date of this Agreement, but in any event, not later than the date on
which the Prospectus is filed with the Commission pursuant to Rule 424
of the Rules and Regulations.
(b) The documents incorporated by reference in the Preliminary
Prospectus or Prospectus, as the case may be, when they became effective
or were filed with the Commission, as the case may be, conformed in all
material respects to the requirements of the Act or the Exchange Act, as
applicable, and the Rules and Regulations, and none of such documents
contained an untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading; and any further documents so filed
and incorporated by reference in the Preliminary Prospectus or
Prospectus, as the case may be, when such documents become effective or
are filed with the Commission, as the case may be, will conform in all
material respects to the requirements of the Act or the Exchange Act, as
applicable, and the Rules and Regulations and will not contain an untrue
statement of a material fact or omit to state a material fact necessary
in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(c) The Registration Statement conforms, and the Prospectus and
any further amendments or supplements to the Registration Statement or
the Prospectus will, when they become effective or are filed with the
Commission, as the case may be, conform in all respects to the
requirements of the Act and the Rules and Regulations. The Registration
Statement, as of the Effective Date thereof, did not contain any untrue
statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein not
misleading. The Prospectus, as amended or supplemented at the Closing
Date, if applicable, will not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements
contained therein, in the light of the circumstances under which they
were made, not misleading; except that the foregoing does not apply to
statements or omissions in the Registration Statement or the Prospectus,
as amended or supplemented, if applicable, based upon written
information furnished to the Company by the Underwriter specifically for
use therein.
(d) Since the respective dates as of which information is given in
the Prospectus, except as otherwise stated therein, (i) there has been
no material adverse change in the condition, financial or otherwise,
earnings, affairs or business prospects of the Company, whether or not
arising in the ordinary course of business and (ii) there have been no
material transactions entered into by the Company other than those in
the ordinary course of business.
(e) Each of the Company and the Seller has been duly incorporated
and is validly existing as a corporation in good standing under the laws
of its respective jurisdiction of incorporation with corporate power and
authority to execute, deliver and perform the transactions contemplated
by this Agreement, the Loan Purchase Agreement and the Pooling
Agreement.
(f) Each of the Company and the Seller is not in violation of its
respective charter or in default in the performance or observance of any
obligation, agreement, covenant or condition contained in any material
contract, indenture, mortgage, loan agreement, note, lease or other
instrument to which it is a party or by which it or any of its
properties may be bound; no consent, approval, authorization or order of
any court or governmental authority or agency is required for the
consummation by the Company or the Seller of the transactions
contemplated by this Agreement, except such as may be required under the
Act, the Rules and Regulations or state securities or Blue Sky laws; and
the execution and delivery of this Agreement, the Loan Purchase
Agreement and the Pooling Agreement and the consummation of the
transactions contemplated herein and therein by the Company and the
Seller will not conflict with or constitute a breach of, or default
under, or result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of either the Company or the
Seller pursuant to, any material contract, indenture, mortgage, loan
agreement, note, lease or other instrument to which the Company or the
Seller is a party or by which either such party may be bound or to which
any of the property or assets of the Company or the Seller is subject,
nor will such action result in any violation of the provisions of the
charter or by-laws of either the Company or the Seller or any law,
administrative regulation or administrative or court decree applicable
to either the Company or the Seller.
(g) There is no action, investigation, suit or proceeding before
or by any court or governmental agency or body, domestic or foreign, now
pending or, to the knowledge of the Company or the Seller, threatened
against or affecting either the Company or the Seller, which might
result in any material adverse change in the condition, financial or
otherwise, earnings, affairs or business prospects of the Company or the
Seller, or might materially and adversely affect the properties or
assets thereof or might materially and adversely affect the performance
by the Company or the Seller of its respective obligations under, or the
validity and enforceability of, this Agreement, the Loan Purchase
Agreement or the Pooling Agreement.
(h) This Agreement has been, and the Pooling Agreement and the
Loan Purchase Agreement when executed and delivered as contemplated
hereby and thereby will have been, duly authorized, executed and
delivered by each of the Company and the Seller, and this Agreement
constitutes, and the Pooling Agreement and the Loan Purchase Agreement,
when executed and delivered as contemplated herein, will constitute,
legal, valid and binding instruments enforceable against each of the
Company and the Seller in accordance with their respective terms,
subject as to enforceability to (x) applicable bankruptcy,
reorganization, insolvency, moratorium or other similar laws affecting
creditors' rights generally, (y) general principles of equity
(regardless of whether enforcement is sought in a proceeding in equity
or at law), and (z) with respect to rights of indemnity under this
Agreement, limitations of public policy under applicable securities
laws.
(i) The Certificates have been duly authorized, and, when executed
and authenticated in accordance with the provisions of the Pooling
Agreement and delivered to and, with respect to the Offered
Certificates, paid for by the Underwriter in accordance with this
Agreement, will be validly issued and outstanding and entitled to the
benefits of the Pooling Agreement.
(j) At the time of execution and delivery of the Pooling
Agreement, the Company will: (i) have beneficial ownership of the
Mortgage Loans conveyed by the Seller, free and clear of any lien,
mortgage, pledge, charge, encumbrance, adverse claim or other security
interest (collectively, "Liens"); (ii) not have assigned to any person
(other than the Trustee) any of its right, title or interest in the
Mortgage Loans, in the Purchase Agreement or in the Pooling Agreement;
and (iii) have the power and authority to sell its interest in the
Mortgage Loans to the Trustee and to sell the Offered Certificates to
the Underwriter. Upon execution and delivery of the Pooling Agreement
by the Trustee, the Trustee will have acquired beneficial ownership of
all of the Company's right, title and interest in and to the Mortgage
Loans. Upon delivery to the Underwriter of the Offered Certificates,
the Underwriter will have good title to the Offered Certificates free of
any Liens.
(k) Neither the Seller, the Company nor the Trust created by the
Pooling Agreement is an "investment company" within the meaning of such
term under the Investment Company Act of 1940 (the "1940 Act") and the
rules and regulations of the Commission thereunder.
(l) At the Closing Date, the Certificates and the Pooling
Agreement will conform in all material respects to the descriptions
thereof contained in the Prospectus.
(m) At the Closing Date, the Class A Certificates shall have been
rated in the highest rating category by at least two nationally
recognized rating agencies.
(n) The Company is not aware of (i) any request by the Commission
for any further amendment of the Registration Statement or the
Prospectus or for any additional information, (ii) the issuance by the
Commission of any stop order suspending the effectiveness of the
Registration Statement or the institution or threatening of any proceed-
ing for that purpose or (iii) any notification with respect to the
suspension of the qualification of the Offered Certificates for sale in
any jurisdiction or the initiation or threatening of any proceeding for
such purpose.
(o) _____________ is an independent public accountant with respect
to the Master Servicer, the Seller and the Company as required by the
Act and the Rules and Regulations.
(p) Each of the Company and the Seller possesses all material
licenses, certificates, authorities or permits issued by the appropriate
state, federal or foreign regulatory agencies or bodies necessary to
conduct the business now conducted by it and as described in the
Prospectus, and neither the Seller nor the Company has received notice
of proceedings relating to the revocation or modification of any such
license, certificate, authority or permit which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding,
would materially and adversely affect the conduct of its business,
operations or financial condition.
(q) The Pooling Agreement is not required to be registered under
the Trust Indenture Act of 1939, as amended, as in effect on the date
hereof.
(r) Any taxes, fees and other governmental charges in connection
with the execution, delivery and issuance of this Agreement, the Loan
Purchase Agreement, the Pooling Agreement and the Certificates have been
paid or will be paid at or prior to the Closing Date.
(s) On the Closing Date, each of the representations and
warranties of the Seller and the Company set forth in the Pooling
Agreement and in the Loan Sale Agreement will be true and correct in all
material respects.
Any certificate signed by an officer of either the Seller or the
Company and delivered to you or counsel for the Underwriter in connection
with an offering of the Offered Certificates shall be deemed, and shall state
that it is, a representation and warranty as to the matters covered thereby
to each person to whom the representations and warranties in this Section 1
are made.
SECTION 3. Purchase, Sale and Delivery of Offered Certificates.
---------------------------------------------------
On the basis of the representations, warranties and agreements herein
contained, but subject to the terms and conditions herein set forth, the
Company agrees to instruct the Trustee to issue and agrees to sell to the
Underwriter, and the Underwriter agrees to purchase from the Company at a
purchase price set forth in Schedule 1 hereto, the respective principal
amount of Offered Certificates set forth in Schedule I hereto.
The Company will deliver the Offered Certificates to the Underwriter,
against payment of the purchase price therefor in same day funds wired to
such bank as may be designated by the Company, or by such other manner of
payment as may agreed upon by the Company and you, at the offices of (
), on ( ) or at such other place or time not later than
seven full business days thereafter as you and the Company determine, such
time being referred to herein as the "Closing Date."
The Offered Certificates so to be delivered will be in such
denominations and registered in such names as you request two full business
days prior to the Closing Date, as the case may be, and will be made
available for examination by the Underwriter no later than 2:00 p.m. New York
City time on the first business day prior to the Closing Date.
SECTION 4. Offering by the Underwriter. It is understood that the
---------------------------
Underwriter proposes to offer the Offered Certificates subject to this
Agreement for sale to the public on the terms as set forth in the Prospectus.
SECTION 5. Covenants of the Company. The Company hereby
------------------------
covenants and agrees with the Underwriter that:
(a) Immediately following the execution of this Agreement, the
Company will prepare the Prospectus Supplement in a form approved by the
Underwriter setting forth the amount of Offered Certificates covered
thereby and the terms thereof not otherwise specified in the Prospectus,
the price at which the Offered Certificates are to be purchased by the
Underwriter from the Company, either the initial public offering price
or the method by which the price at which the Offered Certificates are
to be sold will be determined, the selling concessions and allowances,
if any, and such other information as the Company deems appropriate in
connection with the offering of such Offered Certificates, but the
Company will not file any amendments to the Registration Statement as in
effect with respect to the Offered Certificates, or any amendments or
supplements to the Prospectus, without your consent, which will not be
unreasonably withheld.
(b) If, during such period of time after the first date of the
public offering of the Offered Certificates as in the opinion of counsel
for the Underwriter a prospectus relating to the Offered Certificates is
required by law to be delivered in connection with sales by the
Underwriter or dealer, any event occurs as a result of which the
Prospectus as then amended or supplemented would, in the judgment of the
Underwriter and its counsel, include any untrue statement of a material
fact, or omit to state a material fact necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading, or if it is necessary at any time to amend or supplement the
Prospectus to comply with the Act or any other law, the Company will
promptly prepare and file with the Commission, an amendment or
supplement which will correct such statement or omission or an amendment
that will effect such compliance and will notify you and, upon your
request, prepare and furnish without charge to the Underwriter and to
any dealer in securities as many copies as you may from time to time
reasonably request of an amended Prospectus or a supplement to the
Prospectus which will correct such statement or omission or effect such
compliance.
(c) The Company will deliver to the Underwriter such number of the
following documents as the Underwriter shall reasonably request: (i)
conformed copies of the Registration Statement and of each amendment
thereto (including exhibits filed therewith or incorporated by reference
therein); (ii) the Prospectus and any amendment or supplement thereto;
and (iii) any document incorporated by reference in the Prospectus
(including exhibits thereto).
(d) The Company will endeavor, in cooperation with you, to qualify
the Offered Certificates for offering and sale under the applicable
securities laws of such states and other jurisdictions of the United
States as you may designate, and will maintain such qualifications in
effect for as long as may be required for the distribution of the
Offered Certificates; provided, however, that the Company shall not be
required to qualify to do business in any jurisdiction where it is now
not qualified or to take any action which would subject it to general or
unlimited service of process in any jurisdiction in which it is now
subject to service of process. The Company will file such statements
and reports as may be required by the laws of each jurisdiction in which
the Offered Certificates have been qualified as above provided.
(e) The Company will notify you immediately, and confirm the
notice in writing, of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or the
initiation of any proceedings for that purpose. The Company will make
every reasonable effort to prevent the issuance of any stop order and,
if any stop order is issued, to obtain the lifting thereof at the
earliest possible moment.
(f) The Company will make generally available to holders of the
Offered Certificates as soon as practicable, but in any event not later
than 90 days after the close of the period covered thereby, an earnings
statement of the Trust (which need not be audited) complying with
Section 11(a) of the 1933 Act and the Rules and Regulations (including,
at the option of the Company, Rule 158) and covering a period of at
least twelve consecutive months beginning not later than the first day
of the first fiscal quarter following the Closing Date.
(g) Neither the Seller or the Company will, without your prior
written consent, publicly offer or sell or contract to sell any mortgage
pass-through certificates, mortgage pass-through notes or collateralized
mortgage obligations or other similar securities representing interests
in or secured by other mortgage-related assets originated or owned by
either such entity for a period of 30 days following the commencement of
the offering of the Offered Certificates to the public.
(h) So long as the Offered Certificates shall be outstanding, the
Company will deliver to the Underwriter the annual statement as to
compliance delivered to the Trustee pursuant to Section ____ of the
Pooling Agreement and the annual statement of a firm of independent
public accountants furnished to the Trustee pursuant to Section ____ of
the Pooling Agreement, as soon as such statements are furnished to the
Trustee.
(i) The Company will apply the net proceeds from the sale of the
Offered Certificates in the manner set forth in the Prospectus.
SECTION 6. Conditions to the Obligations of the Underwriter. The
------------------------------------------------
obligations of the Underwriter to purchase and pay for the Offered
Certificates on the Closing Date will be subject to the accuracy of the
representations and warranties on the part of the Seller and the Company
herein as of the date hereof and as of the Closing Date with the same force
and effect as if made as of that date, to the performance by the Seller and
the Company of their respective obligations hereunder and to the following
additional conditions precedent:
(a) The Underwriter shall have received confirmation of the
effectiveness of the Registration Statement. Prior to the Closing Date
no stop order suspending the effectiveness of the Registration Statement
shall have been issued and no proceedings for that purpose shall have
been instituted, or to the knowledge of the Company or you, shall have
been contemplated by the Commission. Any request of the Commission for
inclusion of additional information in the Registration Statement or the
Prospectus shall have been complied with.
(b) The Underwriter shall not have discovered and disclosed to the
Company on or prior to the Closing Date that the Registration Statement
or the Prospectus or any amendment or supplement thereto contains an
untrue statement of a fact or omits to state a fact which, in the
opinion of ( ), counsel for the Underwriter, is
material and is required to be stated therein or is necessary to make
the statements therein not misleading.
(c) You shall have received an opinion of Tobin & Tobin LLP, dated
the Closing Date, to the effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of
Delaware with corporate power and authority to execute, deliver and
perform the transactions contemplated by this Agreement, the Loan
Purchase Agreement and the Pooling Agreement;
(ii) Each of this Agreement, the Loan Purchase Agreement and
the Pooling Agreement has been duly authorized, executed and
delivered by the Company;
(iii) The Certificates have been duly authorized, executed and
delivered by the Company;
(iv) No consent, approval, authorization or order of any court
or governmental authority or agency is required for the
consummation by the Company of the transactions contemplated by the
terms of this Agreement, the Loan Purchase Agreement or the Pooling
Agreement, except such as may be required under the state
securities or Blue Sky laws of any jurisdiction in connection with
the offering, sale or acquisition of the Certificates and such
other approvals as have been obtained;
(v) The sale of the Mortgage Loans to the Trust pursuant to
the Pooling Agreement, the execution and delivery of this
Agreement, the Loan Purchase Agreement and the Pooling Agreement by
the Company and the consummation of the transactions contemplated
herein or therein do not conflict with or constitute a breach of,
or default under, or result in the creation or imposition of any
lien, charge or encumbrance upon any property or assets of the
Company pursuant to any material contract, indenture, mortgage,
loan agreement, note, lease or other instrument to which the
Company is a party or by which it may be bound or to which any of
the property or assets of the Company is subject, nor will such
action result in any violation of the provisions of the charter or
by-laws of the Company, or any law, administrative regulation or
administrative or court decree applicable to the Company;
(vi) Assuming each of the Loan Purchase Agreement and the
Pooling Agreement has been duly authorized, executed and delivered
by the parties thereto, each of such documents constitutes a legal,
valid and binding obligation of the Company, enforceable against
the Company in accordance with its terms, subject, as to
enforceability, to bankruptcy, insolvency, reorganization,
moratorium, or other similar laws affecting creditors' rights
generally and to general principles of equity regardless of whether
enforcement is sought in a proceeding in equity or at law;
(vii) The Registration Statement has become effective under the
Act; no stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose have
been instituted or threatened under the Act; and the Registration
Statement, the Prospectus and each amendment or supplement thereto
(other than the financial and statistical information therein as to
which such counsel need express no opinion) as of their respective
effective or issue dates complied as to form in all material
respects with the requirements of the Act and the Rules and
Regulations;
(viii) The Pooling Agreement and the Certificates conform in all
material respects to the descriptions thereof contained in the
Registration Statement and the Prospectus;
(ix) The Pooling Agreement will not be required to be
qualified under the Trust Indenture Act of 1939, as amended, and
neither the Company nor the Trust is required to be registered
under the Investment Company Act of 1940, as amended;
(x) Assuming that the Certificates have been duly authorized,
executed and authenticated in the manner contemplated in the
Pooling Agreement, when delivered and paid for by you as provided
in this Agreement, the Certificates purchased by you will be
validly issued and outstanding and entitled to the benefits of the
Pooling Agreement;
(xi) There are no legal or governmental actions,
investigations or proceedings pending to which the Company is a
party, or, to the best knowledge of such counsel, threatened
against the Company, (A) asserting the invalidity of this
Agreement, the Pooling Agreement or Loan Purchase Agreement, (B)
seeking to prevent the sale of the Mortgage Loans to the Trust or
the consummation of any of the transactions contemplated by this
Agreement, the Loan Purchase Agreement or the Pooling Agreement or
(C) which might materially and adversely affect the performance by
the Company of its obligations under, or the validity or
enforceability of, the Loan Purchase Agreement, the Pooling
Agreement or the Mortgage Loans;
(xii) The conditions to the use by the Company of a
registration statement on Form S-3 under the Securities Act, as set
forth in the General Instructions to Form S-3, have been satisfied
with respect to the Registration Statement and the Prospectus.
(xiii) To the best of such counsel's knowledge, there are no
material contracts, indentures or other documents of a character
required to be described or referred to in the Registration
Statement or the Prospectus or to be filed as exhibits to the
Registration Statement other than those described or referred to
therein or filed or incorporated by reference as exhibits thereto.
Such counsel also shall state that it has no reason to believe that at
its effective date the Registration Statement contained any untrue
statement of a material fact or omitted to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading or that the Prospectus on the Closing Date
includes any untrue statement of a material fact or omits to state a
material fact necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading (other than
the financial and statistical information contained therein as to which
such counsel need express no opinion);
(d) You shall have received an opinion of Tobin & Tobin, counsel
to the Seller and Master Servicer ("HMC"), dated the Closing Date, to
the effect that:
(i) HMC has been duly incorporated, is validly existing as a
corporation in good standing under the laws of the state of its
incorporation with corporate power and authority to execute,
deliver and perform the transactions contemplated by this
Agreement, the Loan Purchase Agreement and the Pooling Agreement;
(ii) Each of this Agreement, the Pooling Agreement and the
Loan Purchase Agreement has been duly authorized, executed and
delivered by HMC;
(iii) No consent, approval, authorization or order of any court
or governmental authority or agency is required for the
consummation by HMC of the transactions contemplated by the terms
of this Agreement, the Loan Purchase Agreement or the Pooling
Agreement, except such as may be required under the "Blue Sky" or
state securities laws of any jurisdiction in connection with the
offering, sale or acquisition of the Certificates and such other
approvals as have been obtained;
(iv) The sale of the Mortgage Loans to the Company pursuant to
the Loan Purchase Agreement, the execution and delivery of this
Agreement, the Loan Purchase Agreement and the Pooling Agreement by
HMC and the consummation of any of the transactions contemplated
herein or therein do not conflict with or constitute a breach of,
or default under, or result in the creation or imposition of any
lien, charge or encumbrance upon any property or assets of HMC
pursuant to any material contract, indenture, mortgage, loan
agreement, note, lease or other instrument to which HMC is a party
or by which it may be bound or to which any property or assets of
HMC is subject, nor will such action result in any violation of the
provisions of the charter or by-laws of HMC, or any law,
administrative regulation or administrative or court decree
applicable to the Seller;
(v) There are no legal or governmental actions,
investigations or proceedings pending to which HMC is a party, or,
to the best knowledge of such counsel, threatened against HMC, (A)
asserting the invalidity of this Agreement, the Pooling Agreement
or Loan Purchase Agreement, (B) seeking to prevent the sale of the
Mortgage Loans to the Company or the consummation of any of the
transactions contemplated by this Agreement, the Loan Purchase
Agreement or the Pooling Agreement or (C) which might materially
and adversely affect the performance by HMC of its obligations
under, or the validity or enforceability of, the Loan Purchase
Agreement, the Pooling Agreement or the Mortgage Loans;
(vi) Assuming that each of the Loan Purchase Agreement and the
Pooling Agreement has each been duly authorized, executed and
delivered by the other parties thereto, each constitutes a legal,
valid and binding obligation of HMC, enforceable against HMC in
accordance with its terms, subject, as to enforceability to
bankruptcy, insolvency, reorganization, moratorium or other similar
laws affecting creditors' rights generally and to general
principles of equity regardless of whether enforcement is sought in
a proceeding in equity or at law; and
(e) You shall have received copies of any opinions of counsel for
the Company that the Company is required to deliver to the Rating
Agency. Any such opinions shall be dated the Closing Date and addressed
to the Underwriter or accompanied by reliance letters addressed to the
Underwriter.
(f) You shall have received from ( ), counsel for
the Underwriter, such opinion or opinions, dated the Closing Date, in
form and substance satisfactory to you, with respect to the organization
of the Company, the validity of the Certificates, the Registration
Statement, the Prospectus and other related matters as you may require,
and the Company shall have furnished to such counsel such documents as
they may reasonably request for the purpose of enabling them to pass
upon such matters.
(g) You shall have received from ( ), special tax
counsel for the Company, dated the Closing Date, to the effect that:
(i) The statements in the Prospectus under the headings (
) and the summaries thereof under the headings (
) and the statements in the Prospectus Supplement under
the headings ( ) and the summary thereof
under the heading ( ) to the extent they
constitute matters of Federal law or legal conclusions with respect
thereto, have been reviewed by such counsel and are correct in all
material respects; and
(ii) The Trust described in the Prospectus Supplement and the
Pooling Agreement will qualify as a (
).
(h) At the Closing Date you shall have received a certificate of
each of an executive officer of the Seller and the Company, dated as of
the Closing Date, to the effect that the representations and warranties
contained in Section 2 are true and correct with the same force and
effect as though made on and as of the Closing Date.
(i) You shall have received from ( ), independent
public accountants, two letters, the first delivered the day of but
prior to the execution of, and dated the date of, this Agreement and the
other dated the Closing Date, addressed to the Underwriter, in the form
heretofore agreed (and in the case of the second such letter consistent
with the first such letter) with such variations as are reasonably
acceptable to you.
(j) You shall have received an opinion of _______________________,
counsel to the Trustee, dated the Closing Date, in form and substance
satisfactory to you and your counsel, to the effect that:
(i) the Trustee has been duly incorporated and is validly
existing as a ______________ under the laws of the
_________________ and has the power and authority to enter into and
to perform all actions required of it under the Pooling Agreement;
(ii) the Pooling Agreement has been duly authorized, executed
and delivered by the Trustee and constitutes a legal, valid and
binding obligation of the Trustee, enforceable against the Trustee
in accordance with its terms, except as such enforceability may be
limited by (A) bankruptcy, insolvency, liquidation, reorganization,
moratorium, conservatorship, receivership or other similar laws now
or hereafter in effect relating to the enforcement of creditors'
rights in general, and (B) general principles of equity (regardless
of whether such enforceability is considered in a proceeding in
equity or at law) as well as concepts of reasonableness, good faith
and fair dealing;
(iii) the Certificates have been duly authenticated and
delivered by the Trustee;
(iv) the execution and delivery of the Pooling Agreement by
the Trustee and the performance by the Trustee of the terms thereof
do not conflict with or result in a violation of (A) any law or
regulation of the United States of America or the State of
___________ governing the banking or trust powers of the Trustee,
or (B) the certificate of incorporation or articles of association
or by-laws of the Trustee; and
(v) no approval, authorization or other action by, or filing
with, any governmental authority of the United States of America or
the State of ___________ having jurisdiction over the banking or
trust powers of the Trustee is required in connection with the
execution and delivery by the Trustee of the Pooling Agreement or
the performance by the Trustee thereunder.
(k) Each Class of Offered Certificates shall have been rated not
less than "( )" and "( )" by ( ) and (
), respectively, (each a "Rating Agency") and such ratings shall not
have been rescinded.
(l) At the Closing Date counsel for the Underwriter shall have
been furnished with such other documents and opinions as they may
reasonably require.
If any condition specified in this Section 6 shall not have been
fulfilled when and as required to be fulfilled, this Agreement may be
terminated by the Underwriter by notice to the Company at any time at or
prior to the Closing Date, and such termination shall be without liability of
any party to any other party except as provided in Section 7.
SECTION 7. Payment of Expenses. The Company will pay all costs,
-------------------
expenses, fees and taxes incident to (i) the preparation by the Company,
including, printing, filing and distribution under the Act of the
Registration Statement (including financial statements and exhibits), of the
Prospectus, each Preliminary Prospectus and all amendments and supplements to
any of them prior to or during the period specified in Section 5(b), (ii) the
preparation, printing (including word processing and duplication costs) and
delivery of this Agreement, the Pooling Agreement, Preliminary and
Supplemental Blue Sky Memoranda and all other agreements, memoranda,
correspondence and other documents printed and delivered in connection with
the offering of the Offered Certificates, (iii) the registration with the
Commission, and the issuance by the Company of the Offered Certificates, (iv)
the registration or qualification of the Offered Certificates for offer and
sale under the securities or Blue Sky laws of the several states as described
in Section 5(d) (including the reasonable fees and disbursements of your
counsel relating to such registration or qualification), (v) the fees and
expenses of the Rating Agencies, (vi) filings and clearance with the National
Association of Securities Dealers, Inc. in connection with the offering, if
applicable, and (vii) the performance by the Company of its other obligations
under this Agreement.
If this Agreement is terminated by you in accordance with the provisions
of Section 6 or Section 10, the Company shall reimburse you for all of your
out-of-pocket expenses, including the reasonable fees and disbursements of
counsel for the Underwriter.
SECTION 8. Indemnification and Contribution.
--------------------------------
(a) The Seller and the Company jointly and severally agree to
indemnify and hold harmless the Underwriter and each person, if any, who
controls the Underwriter within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act, from and against any and all losses,
claims, damages, liabilities, judgments and expenses whatsoever, as
incurred, arising out of any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement or
the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements
therein not misleading or arising out of any untrue statement or alleged
untrue statement of a material fact contained in any Preliminary
Prospectus or the Prospectus or the omission or alleged omission to
state therein a material fact necessary to make the statements therein,
in light of the circumstances in which they were made, not misleading,
except insofar as such losses, claims, damages, liabilities, judgments
or expenses are caused by any such untrue statement or omission or
alleged untrue statement or omission based upon information furnished in
writing to the Company by the Underwriter expressly for use therein.
This indemnity agreement will be in addition to any liability which the
Company may otherwise have to the persons referred to above in this
Section 8(a).
(b) The Underwriter agrees to indemnify and hold harmless the
Company, the directors of the Company, the officers of the Company who
sign the Registration Statement and each person, if any, who controls
the Company within the meaning of either Section 15 of the Act or
Section 20 of the Exchange Act from and against any and all losses,
claims, damages, liabilities, judgments and expenses whatsoever, as
incurred, arising out of any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement, or
the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements
therein not misleading or arising out of any untrue statement or alleged
untrue statement of a material fact contained in any Preliminary
Prospectus or the Prospectus or the omission or the alleged omission to
state therein a material fact necessary to make the statements therein,
in light of the circumstances in which they were made, not misleading,
but in each case only to the extent that the untrue statement or alleged
untrue statement or omission or alleged omission was made in reliance
upon and in conformity with written information furnished to the Company
by the Underwriter expressly for use in the Registration Statement, the
Preliminary Prospectus, the Prospectus or any amendment or supplement
thereto. This indemnity agreement will be in addition to any liability
which the Underwriter may have to the persons referred to above in this
Section 8(b).
(c) In case any action or proceeding (including any governmental
or regulatory investigation or proceeding) shall be instituted involving
any person in respect of which indemnity may be sought pursuant to
either of the two preceding paragraphs or Section 8(h), such person
(hereinafter called the indemnified party) shall promptly notify the
person against whom such indemnity may be sought (hereinafter called the
indemnifying party) in writing and the indemnifying party, upon request
of the indemnified party, shall assume the defense thereof, including
the employment of counsel reasonably satisfactory to the indemnified
party to represent the indemnified party and any others the indemnifying
party may designate and shall pay the fees and disbursements of such
counsel related to such proceeding. In any such action or proceeding,
any indemnified party shall have the right to retain its own counsel,
but the fees and expenses of such counsel shall be at the expense of
such indemnified party unless (i) the indemnifying party and the
indemnified party shall have mutually agreed to the retention of such
counsel or (ii) the named parties to any such proceeding (including any
impleaded parties) include both the indemnifying party and the
indemnified party and representation of both parties by the same counsel
would be inappropriate due to actual or potential differing interests
between them. It is understood that the indemnifying party shall not,
in connection with any proceeding or related proceedings in the same
jurisdiction, be liable for (a) the reasonable fees and expenses of more
than one separate firm (in addition to any local counsel) for the
Underwriter and all persons, if any, who control the Underwriter within
the meaning of either Section 15 of the Securities Act or Section 20 of
the Exchange Act and (b) the reasonable fees and expenses of more than
one separate firm (in addition to any local counsel) for the Company,
its directors, its officers who sign the Registration Statement and each
person, if any, who controls the Company within the meaning of either
such Section and that all such fees and expenses shall be reimbursed as
they are incurred. In the case of any such separate firm for the
Underwriter and such control persons of the Underwriter, such firm shall
be designated in writing by the Underwriter. In the case of any such
separate firm for the Company, and such directors, officers and control
persons of the Company, such firm shall be designated in writing by the
Company. The indemnifying party shall not be liable for any settlement
of any proceeding effected without its written consent, but if settled
with such consent or if there be a final judgment for the plaintiff, the
indemnifying party agrees to indemnify the indemnified party from and
against any loss or liability by reason of such settlement or judgment.
No indemnifying party shall, without the prior written consent of the
indemnified party, effect any settlement of any pending or threatened
proceeding in respect of which any indemnified party is or could have
been a party and indemnity could have been sought hereunder by such
indemnified party, unless such settlement includes an unconditional
release of such indemnified party from all liability on claims that are
the subject matter of such proceeding.
(d) If the indemnification provided for in this Section 8(a), (b)
or (h) is unavailable to an indemnified party in respect of any losses,
claims, damages, liabilities, judgments or expenses referred to therein,
then each indemnifying party, in lieu of indemnifying such indemnified
party, shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages,
liabilities and expenses (i) in such proportion as is appropriate to
reflect the relative benefits received by the Seller and the Company on
the one hand and the Underwriter on the other from the offering of the
Offered Certificates or (ii) if the allocation provided by clause (i)
above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in
clause (i) above but also the relative fault of the Seller and the
Company on the one hand and the Underwriter on the other in connection
with the statements or omissions which resulted in such losses, claims,
damages, liabilities or expenses, as well as any other relevant
equitable considerations. The relative benefits received by the Seller
and the Company on the one hand and the Underwriter on the other shall
be deemed to be in such proportions that the Underwriter is responsible
for its pro rata portion of such losses, liabilities, claims, damages
and expenses determined in accordance with the ratio that the excess of
the aggregate resale price received by the Underwriter for the Offered
Certificates over the purchase price paid to the Company by the
Underwriter (before deducting expenses) bears to the aggregate resale
price received by the Underwriter for the Offered Certificates, and the
Company and the Seller shall be responsible for the balance. The
relative fault of the Seller and the Company on the one hand and the
Underwriter on the other shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a
material fact or the omission to state a material fact relates to
information supplied by the Seller and the Company, on the one hand, or
by the Underwriter, on the other hand, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent
such statement or omission.
(e) The Seller, the Company and the Underwriter agree that it
would not be just and equitable if contribution pursuant to Section 8(d)
were determined by pro rata allocation or by any other method of
allocation which does not take account of the equitable considerations
referred to in the immediately preceding paragraph. The amount paid or
payable by an indemnified party as a result of the losses, claims,
damages, liabilities, judgments or expenses referred to in the
immediately preceding paragraph shall be deemed to include, subject to
the limitations set forth above, any legal or other expenses reasonably
incurred by such indemnified party in connection with investigating or
defending any such action or claim. Notwithstanding the provisions of
Section 8(d), in no event shall the Underwriter be required to
contribute any amount in excess of the amount by which the total
underwriting commission received by such Underwriter for the sale of the
Offered Certificates underwritten by such Underwriter and distributed to
the public exceeds the amount of any damages which the Underwriter has
otherwise been required to pay by reason of such untrue or alleged
untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation.
((f) The Underwriter confirms that the information set forth (i) in
the last paragraph on the cover page and (ii) in the second paragraph
under the caption "Method of Distribution" in the Prospectus Supplement
is correct and constitutes the only information furnished in writing to
the Company by or on behalf of the Underwriter specifically for
inclusion in the Registration Statement and the Prospectus.)
(g) The Underwriter agrees to provide the Company (i) all
Collateral Term Sheets, immediately upon distribution to any potential
investor and (ii) any other Derived Information no later than two
Business Days prior to which the Prospectus Supplement is required to be
filed pursuant to Rule 424. For purposes of this Agreement, the term
"Derived Information" means such portion, if any, of the information
delivered to the Company by the Underwriter pursuant to this Section for
filing with the Commission on Form 8-K as:
(i) is not contained in the Prospectus without taking into
account information incorporated therein by reference;
(ii) does not constitute Seller-Provided Information; and
(iii) is of the type of information defined as Collateral Term
Sheets, Structural Term Sheets or Computational Materials (as such
terms are interpreted in the No-Action Letters (as defined below)).
"Seller-Provided Information" means the information contained on
any computer tape furnished to the Underwriter by the Seller or the Company
concerning the assets comprising the Trust.
The terms "Collateral Term Sheet" and "Structural Term Sheet" shall
have the respective meanings assigned to them in the February 13, 1995 letter
(the "PSA Letter") of Cleary, Gottlieb, Steen & Hamilton on behalf of the
Public Securities Association (which letter, and the SEC staff's response
thereto, were publicly available February 17, 1995). The term "Collateral
Term Sheet" as used herein includes any subsequent Collateral Term Sheet that
reflects a substantive change in the information presented. The term
"Computational Materials" has the meaning assigned to it in the May 17, 1994
letter (the "Kidder Letter" and together with the PSA Letter, the "No-Action
Letters") of Brown & Wood on behalf of Kidder, Peabody & Co., Inc. (which
letter, and the SEC staff's response thereto, were publicly available May 20,
1994).
(h) The Underwriter agrees, assuming all Seller-Provided Information
(as defined below) is accurate and complete in all material respects, to
indemnify and hold harmless the Company, each of the Company's officers and
directors and each person who controls the Company within the meaning of
Section 15 of the Act against any and all losses, claims, damages or
liabilities, joint or several, to which they may become subject under the Act
or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any untrue
statement of a material fact contained in the Derived Information provided by
the Underwriter, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, and agrees to reimburse each such
indemnified party for any legal or other expenses reasonably incurred by such
entity or person in connection with investigating or defending or preparing
to defend any such loss, claim, damage, liability or action as such expenses
are incurred. The obligations of the Underwriter under this Section 8(h)
shall be in addition to any liability which the Underwriter may otherwise
have. The procedures set forth in Section 8(c) shall be equally applicable
to this Section 8(h).
SECTION 9. Representations, Warranties and Agreements to Survive Delivery.
--------------------------------------------------------------
All
representations, warranties and agreements contained in this Agreement, or
contained in certificates of officers of the Company submitted hereto,
including indemnity and contribution agreements, shall remain operative and
in full force and effect, regardless of any termination of this Agreement, or
any investigation made by or on behalf of the Underwriter or any person
controlling the Underwriter by or on behalf of the Company, its officers or
directors, and shall survive acceptance and payment for the Offered
Certificates hereunder.
SECTION 10. Effectiveness of Agreement and Termination. This
------------------------------------------
Agreement shall become effective upon the execution and delivery hereof by
the parties hereto.
This Agreement may be terminated for any reason at any time prior
to the Closing Date by the Underwriter upon the giving of written notice of
such termination to the Company, if prior to the Closing Date (i) there has
been, since the respective dates as of which information is given in the
Registration Statement, any material adverse change in the condition,
financial or otherwise, earnings, business affairs or business prospects of
the Company, whether or not arising in the ordinary course of business, or
(ii) there has occurred any outbreak or escalation of hostilities or other
calamity or crisis or material change in existing financial, political,
economic or securities market conditions, the effect of which is such as to
make it, in the judgment of the Underwriter, impracticable or inadvisable to
market the Offered Certificates in the manner contemplated in the Prospectus
or enforce contracts for the sale of the Offered Certificates, or (iii)
trading generally on either the American Stock Exchange or the New York Stock
Exchange has been suspended, or minimum or maximum prices for trading have
been fixed, or maximum ranges for prices for securities have been required,
by either of said exchanges or by order of the Commission or any other
governmental authority, or if a banking moratorium has been declared by
either Federal, New York State or New York City authorities. In the event of
any such termination, the provisions of Section 7, the indemnity agreement
and contribution provisions set forth in Section 8, and the provisions of
Sections 9 and 13 shall remain in effect.
(SECTION 11. Default. If, on the Closing Date any one or more of
-------
the Underwriters shall fail or refuse to purchase Offered Certificates that
it or they have agreed to purchase hereunder on such date, and the aggregate
principal amount of Offered Certificates which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase is not more than
one-tenth of the aggregate principal amount of the Offered Certificates to be
purchased on such date, the other Underwriters shall be obligated severally
in the proportions that the principal amount of Offered Certificates set
forth opposite their respective names in Schedule I bears to the aggregate
principal amount of Offered Certificates set forth opposite the names of all
such non-defaulting Underwriters, or in such other proportions as you may
specify, to purchase the Offered Certificates which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase on such
date; provided that in no event shall the principal amount
--------
of Offered Certificates that any Underwriter has agreed to purchase pursuant
to Section 3 be increased pursuant to this Section 11 by an amount in excess
of one-ninth of such principal amount of Offered Certificates without the
written consent of such Underwriter. If, on the Closing Date any Underwriter
or Underwriters shall fail or refuse to purchase Offered Certificates and the
aggregate principal amount of Offered Certificates and the aggregate
principal amount of Offered Certificates with respect to which such default
occurs is more than one-tenth of the aggregate principal amount of Offered
Certificates to be purchased on such date, and arrangements satisfactory to
you and the Company for the purchase of such Offered Certificates are not
made within 36 hours after such default, this Agreement shall terminate
without liability on the part of any non-defaulting Underwriter or the
Company. In any such case either you or the Company shall have the right to
postpone the Closing Date but in no event for longer than seven days, in
order that the required changes, if any, in the Registration Statement and in
the Prospectus or in any other documents or arrangements may be effected.
Any action taken under this paragraph shall not relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter
under this Agreement.)
SECTION 12. Notices. All notices and other communications
-------
hereunder shall be in writing and shall be deemed to have been duly given if
mailed or transmitted by any standard form of telecommunication. Notices to
the Underwriter directed to ( ); notices to the Company shall be directed
to it at Headlands Mortgage Securities Inc., 700 Larkspur Landing Circle,
Suite 240, Larkspur, California 94939, attention: ( ).
SECTION 13. Parties. This Agreement shall inure to the benefit
-------
of and be binding upon the Seller and the Company, the Underwriter, any
controlling persons referred to herein and their respective successors and
assigns. Nothing expressed or mentioned in this Agreement is intended or
shall be construed to give any other person, firm or corporation any legal or
equitable right, remedy or claim under or in respect of this Agreement or any
provision herein contained. No purchaser of Offered Certificates from the
Underwriter shall be deemed to be a successor by reason merely of such
purchase.
SECTION 14. Governing Law. This Agreement shall be governed by
-------------
the laws of the State of New York.
SECTION 15. Counterparts. This Agreement may be signed in two or
------------
more counterparts each of which shall be an original, with the same effect as
if the signatures thereto and hereto were upon the same instrument.
If the foregoing is in accordance with your understanding of our
agreement, please sign this Agreement and return it to us.
Very truly yours,
HEADLANDS MORTGAGE COMPANY
By ________________________________
Name:
Title:
HEADLANDS MORTGAGE SECURITIES INC.
By ________________________________
Name:
Title:
Confirmed and Accepted, as of
the date first above written:
(UNDERWRITER)
By _______________________
SCHEDULE I
Offered Certificates: Home Equity Loan Asset Backed Certificates, Series
- - --------------------
199_-_, Class A-1, Class X and Class M-1.
Initial Principal Amount of Offered Certificates:
- - ------------------------------------------------
Class Initial Class Certificate Balance
Class A-1 $
Class X $
Class M-1 $
Purchase Price:
- - --------------
Class Purchase Price
- - -------------------------------------------------
Class A-1 %/*/
Class X %/*/
Class M-1 %/*/
//
//
_______________________
/*/Plus accrued interest
at the applicable Certificate
Rate from the Cut-off Date to,
but not including, the Closing
Date.
Classes of Book-Entry Certificates:
- - ----------------------------------
Description of Mortgage Loans: (Adjustable) rate home equity revolving
- - -----------------------------
credit line loans made under home equity revolving credit line loan
agreements and closed-end home equity loans secured by first and second deeds
of trust or mortgages on one- to four- family residential properties.
Denominations: The Offered Certificates will be issued
- - -------------
in book-entry form. Each such Class of Certificates will be evidenced by one
or more certificates registered in the name of CEDE & Co. ("CEDE") in the
aggregate amount equal to the Initial Class Certificate Balance of such
Class. Interests in such Classes of Offered Certificates issued in the name
of CEDE may be purchased by investors in minimum denominations of $( )
and integral multiples of $( ).
Cut-Off Date: (Date)
- - ------------
Certificate Rate:
- - ----------------
Class Rate
Class A-1 % per annum
Class X % per annum
Class M-1 % per annum
Exhibit 3.1
Certificate of Incorporation
CERTIFICATE OF INCORPORATION
OF
HEADLANDS MORTGAGE SECURITIES INC.
(A DELAWARE CORPORATION)
FIRST: Name. The name of the corporation (the "Corporation") is
----
Headlands Mortgage Securities Inc.
SECOND: Delaware Office and Registered Agent. The address of its
------------------------------------
registered office in the State of Delaware is The Corporation Trust Company,
1209 Orange Street, in the City of Wilmington, County of New Castle. The
name of its registered agent at such address is The Corporation Trust
Company.
THIRD: Purpose. The nature of the business to be conducted is limited
-------
solely to the following:
(a) to become a member of, and to make investments in, Headlands
Mortgage L.L.C., a Delaware limited liability company ("HMLLC"), and to enter
into and perform agreements relating to the operations of HMLLC or making
contributions to or purchases from HMLLC;
(b) to acquire mortgage loans and participation in interests in
mortgage loans and mortgage securities issued and/or guaranteed as to timely
payment of interest and/or principal by the Government National Mortgage
Association, Federal National Mortgage Association and Federal Home Loan
Mortgage Corporation (such mortgage loans, participation interests and
mortgage securities, collectively, "mortgage assets") by contribution or
purchase for the purpose of effecting the securitization thereof, either
directly or through other entities, and whether such securitization involves
securities ("Securities") backed by or evidencing an interest in, such
mortgage assets;
(c) to enter into agreements for the servicing of mortgage assets;
(d) to hold, sell, transfer or pledge ownership interests in mortgage
assets and the proceeds therefrom from time to time;
(e) to issue debt secured by mortgage assets; and
(f) to engage in any activity and to exercise any powers permitted to
corporations under the laws of the State of Delaware, provided that they are
incident to the foregoing and necessary or convenient to accomplish the
foregoing.
FOURTH: Capitalization. The total number of shares of stock which the
--------------
Corporation shall have authority to issue is one hundred (100) shares, all of
one class and designated Common Stock, and having a par value of one cent
($.01) per share.
FIFTH: Incorporator. The name and mailing address of the incorporator
------------
is as follows: Phillip R. Pollock, Esq., c/o Tobin & Tobin, One Montgomery
Street, 15th Floor, San Francisco, California 94104.
SIXTH: Indemnification. The Corporation shall, to the full extent
---------------
permitted by Section 145 of the General Corporation Law of the State of
Delaware, as amended from time to time (the "Delaware General Corporation
Law"), indemnify all persons whom it may indemnify pursuant thereto.
SEVENTH: Special Provisions. The following provisions are for the
------------------
management of the business and for the conduct of the affairs of the
Corporation and for the further creation, definition, limitation and
regulation of the powers of the Corporation and of its directors and
stockholders:
(a) Subject to the remainder of this subparagraph (a), the number of
directors of the Corporation shall be fixed by, or in the manner
provided in, the Bylaws of the Corporation. At all times, there
shall be not fewer than two (2) Independent Directors on the board
of directors of the Corporation. For purposes of this Certificate
of Incorporation, "Independent Director" shall mean an individual
who is not, and has not been during the preceding five years, a
direct, indirect or beneficial limited partner, officer, director,
general partner, employee, affiliate, associate, financier or
customer of, or supplier to, any of Headlands Mortgage Company, a
California corporation ("HMC"), any Subsidiary of HMC, or any
Affiliate of HMC (other than the Corporation) (each of HMC and each
such Subsidiary or Affiliate is herein referred to as an "HMC
Person"). As used herein, the term "Affiliate," when used with
respect to a Person, means any other Person controlling, controlled
by, or under common control with, such Person; the term "Person"
means an individual, partnership, corporation (including a business
trust), joint stock company, trust, unincorporated association,
joint venture, limited liability company, limited liability
partnership, government or any agency or political subdivision
thereof or any other entity; and the term "Subsidiary" means any
corporation with respect to which more than 50% of the outstanding
capital stock having ordinary voting power to elect a majority of
the board of directors of such corporation (irrespective of whether
at the time capital stock of any other class or classes of such
corporation shall or might have voting power upon the occurrence of
any contingency) is at the time directly or indirectly owned by
HMC.
(b) The directors of the Corporation may from time to time adopt, amend
or repeal any of the Bylaws of the Corporation, including Bylaws
adopted by the stockholders, but stockholders may from time to time
specify provisions of the Bylaws that may not be amended or
repealed by the directors.
(c) Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws provide.
(d) Notwithstanding any other provision of this Certificate of
Incorporation and any provision of law that otherwise so empowers
the Corporation, the Corporation shall not, without the prior
approval of the board of directors of the Corporation, which
approval shall include the affirmative vote of all the directors of
the Corporation (including each Independent Director) do any of the
following:
(1) amend or change this Certificate of Incorporation (including
adoption of any new provisions or the repeal of any existing
provisions hereto);
(2) enter into any transaction with any HMC Person;
(3) dissolve, liquidate, consolidate, merge or sell all or
substantially all of the Corporation's assets;
(4) commence a voluntary case or other proceeding with respect to
the Corporation under any applicable bankruptcy, insolvency,
reorganization, debt, arrangement, dissolution, or other
similar law, or permit or arrange for the appointment of, or
the taking of possession of any of the Corporation's property
by, a receiver, liquidator, assignee, trustee, custodian or
other similar official;
(5) approve a reduction in, or transfer to surplus of, any of the
capital of the Corporation pursuant to Section 244 of the
Delaware General Corporation Law;
(6) issue any debt securities or undertake any direct or indirect
debt obligations of any kind; provided, however, that the
-------- -------
Corporation shall not issue, assume or guarantee any liability
(regardless of unanimous board of directors approval) unless
such liability is approved in writing by each of the rating
agencies that have rated any Securities at the time
outstanding, except as permitted in Article THIRD and for
liabilities incurred in connection with the administration of
the Corporation;
(7) consent to any change in either the Certificate of Formation
of HMLLC or the Limited Liability Company Agreement of HMLLC;
(8) consent to the commencement by HMLLC of a voluntary case or
other proceeding under any applicable bankruptcy, insolvency,
reorganization, debt, arrangement, dissolution, or other
similar law, or permit or arrange for the appointment of, or
the taking of possession of any of HMLLC's property by, a
receiver, liquidator, assignee, trustee, custodian or similar
official;
(9) withdraw as a member from HMLLC; or
(10) approve (as a member of HMLLC) any action with respect to
HMLLC that requires a unanimous vote of HMLLC's members under
the Limited Liability Company Agreement of HMLLC.
(e) In approving any of the actions in clause (3), (4), (6), or (8),
clause (10) (to the extent such vote is required pursuant to
Section 7.07(3) or Section 7.07(4) or Section 7.07(6) (to the
extent such action would affect Section 7.07(3) or (4)), of HMLLC's
Limited Liability Company Agreement), or clause (1) (to the extent
the proposed action would affect such clause (3), (4), (6), (8), or
(10)) of subparagraph (d) above, the directors of the Corporation
shall, to the extent permitted by applicable law, take into account
the interests of the secured creditors of HMLLC. In approving any
of the actions in clause (3), (4), or (6) or clause (1) (to the
extent the proposed action would affect such clause (3), (4), or
(6)) or subparagraph (d) above, the directors of the Corporation
shall, to the extent permitted by applicable law, take into account
the interests of the secured creditors of the Corporation.
(f) An Independent Director of the Corporation shall not act as a
trustee in bankruptcy for any HMC Person.
(g) If an Independent Director resigns or otherwise ceases to be a
director of the Corporation, a replacement Independent Director of
the Corporation shall be selected pursuant to the provisions of the
Bylaws of the Corporation.
(h) Notwithstanding any provision set forth herein or in the Bylaws of
the Corporation which may be to the contrary, the board of
directors of the Corporation shall not vote at a meeting or by
unanimous consent without a meeting pursuant to Section 141 of the
Delaware General Corporation Law with respect to any of the actions
set forth in any of clauses (1) through (10) inclusive of
subparagraph (d) of this paragraph, or subparagraph (f) of this
paragraph unless, at the time of such vote, at least one
Independent Director is serving as a member of said board of
directors.
(i) The following provisions shall be applicable to the Corporation's
conduct of business:
(1) the Corporation's assets shall not be commingled with those of
any other entity, including any corporate parent or other
Affiliate of the Corporation, provided that such restriction
shall not preclude the Corporation from repaying indebtedness
or making distributions to any shareholder of the Corporation,
so long as all such transactions are properly reflected on the
books and records of the Corporation;
(2) the Corporation shall pay from its own funds all obligations
and indebtedness incurred by it, provided that the
organizational expenses of the Corporation may be initially
paid by Affiliates of the Corporation so long as they are
promptly reimbursed by the Corporation;
(3) if the Corporation maintains offices in the office of any
Affiliate of the Corporation, the Corporation shall pay fair
market rent for any such office space of such Affiliate;
(4) the Corporation shall conduct its own business in its own
name;
(5) the Corporation shall maintain separate bank accounts, books,
records and financial statements;
(6) the Corporation shall maintain its books, records, resolutions
and agreements as official records;
(7) the Corporation shall maintain adequate capital in light of
contemplated business operations;
(8) the Corporation shall observe all corporate and other
organizational formalities;
(9) the Corporation shall maintain an arm's-length relationship
with Affiliates;
(10) the Corporation shall not guarantee or become obligated for
the debts of any other entity or hold out its credit as being
available to satisfy the obligations of others;
(11) the Corporation shall not acquire obligations or securities of
Affiliates;
(12) the Corporation shall not make any loans to any other person
or entity;
(13) the Corporation shall use separate stationery, invoices and
checks;
(14) the Corporation shall not pledge its assets to secure the
obligations of any other entity;
(15) the Corporation shall hold itself out as a separate entity,
and not fail to correct any known misunderstanding regarding
its separate identity; and
(16) the Corporation shall not identify itself or any of its
Affiliates as a division or part of the other.
(j) In addition to the powers and authorities hereinabove or by law
expressly conferred upon them, the directors of the Corporation are
hereby empowered to exercise all such powers and to do all such
acts and things as may be exercised or done by the Corporation,
subject to the provisions of the Delaware General Corporation Law,
of this Certificate of Incorporation and of the Bylaws of the
Corporation; provided, however, that no bylaw, whether adopted by
the stockholders or by the directors of the Corporation, shall
invalidate any prior act of the directors which would have been
valid if such bylaw had not been adopted.
EIGHTH: Personal Liability of Directors. A director of this
-------------------------------
Corporation shall not be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability:
(a) for any breach of the director's duty of loyalty to the Corporation
or its stockholders,
(b) for acts or omissions not in good faith, or which involve
intentional misconduct or a knowing violation of law,
(c) under Section 174 of the Delaware General Corporation Law, or
(d) for any transaction from which the director derived an improper
personal benefit.
NINTH: Amendments. The Corporation reserves the right to amend, alter,
----------
change or repeal any provision contained in this Certificate of Incorporation
in the manner now or hereafter prescribed by law, subject to the restrictions
contained in subparagraphs (d) and (3) of paragraph SEVENTH hereof, and all
rights and powers conferred hereby on stockholders, directors and officers of
the Corporation are subject to this reservation; provided, however, that no
amendment to Article THIRD, SEVENTH or NINTH shall be effective without the
Corporation having received confirmation from each rating agency rating any
outstanding Securities that such amendment will not result in the termination
or lowering of the rating of such Securities.
IN WITNESS WHEREOF, the undersigned incorporator hereby formally
acknowledges under penalties of perjury that this is his act and deed and
that the facts stated herein are true, and accordingly has hereunto set his
hand this 15th day of November, 1996.
/s/ Phillip R. Pollock
-----------------------------------
Phillip R. Pollock, Incorporator
Exhibit 3.2
Bylaws
BYLAWS
OF
HEADLANDS MORTGAGE SECURITIES INC.
(HEREINAFTER CALLED THE "CORPORATION")
ARTICLE I
OFFICES
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Section 1. Registered Office. The registered office of the
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Corporation shall be in the City of Wilmington, County of New Castle, State
of Delaware.
Section 2. Other Offices. The Corporation may also have offices
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at such other places both within and without the State of Delaware as the
Board of Directors may from time to time determine.
ARTICLE II
MEETINGS OF STOCKHOLDERS
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Section 1. Place of Meetings. Meetings of the stockholders for
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the election of directors or for any other purpose shall be held at such time
and place, either within or without the State of Delaware, as shall be
designated from time to time by the Board of Directors and stated in the
notice of the meeting or in a duly executed waiver of notice thereof.
Section 2. Annual Meetings. The Annual Meetings of Stockholders
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shall be held on such date and at such time as shall be designated from time
to time by the Board of Directors and stated in the notice of the meeting, at
which meetings the stockholders shall elect by a plurality vote a Board of
Directors, and transact such other business as may properly be brought before
the meeting. Written notice of the Annual Meeting stating the place, date
and hour of the meeting shall be given to each stockholder entitled to vote
at such meeting not less than ten nor more than sixty days before the date of
the meeting.
Section 3. Special Meetings. Unless otherwise prescribed by law
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or by the Certificate of Incorporation, Special Meetings of Stockholders, for
any purpose or purposes, may be called by either (i) the Chairman, if there
be one, or (ii) the President, (iii) any Vice President, if there be one,
(iv) the Secretary or (v) any Assistant Secretary, if there be one, and shall
be called by any such officer at the request in writing of a majority of the
Board of Directors or at the request in writing of stockholders owning a
majority of the capital stock of the Corporation issued and outstanding and
entitled to vote. Such request shall state the purpose or purposes of the
proposed meeting. Written notice of a Special Meeting stating the place,
date and hour of the meeting and the purpose or purposes for which the
meeting is called shall be given not less than ten nor more than sixty days
before the date of the meeting to each stockholder entitled to vote at such
meeting.
Section 4. Quorum. Except as otherwise provided by law or by the
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Certificate of Incorporation, the holders of a majority of the capital stock
issued and outstanding and entitled to vote thereat, present in person or
represented by proxy, shall constitute a quorum at all meetings of the
stockholders for the transaction of business. If, however, such quorum shall
not be present or represented at any meeting of the stockholders, the
stockholders entitled to vote thereat, present in person or represented by
proxy, shall have power to adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum shall be
present or represented. At such adjourned meeting at which a quorum shall be
present or represented, any business may be transacted which might have been
transacted at the meeting as originally noticed. If the adjournment is for
more than thirty days, or if after the adjournment a new record date is fixed
for the adjourned meeting, a notice of the adjourned meeting shall be given
to each stockholder entitled to vote at the meeting.
Section 5. Voting. Unless otherwise required by law, the
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Certificate of Incorporation or these Bylaws, any question brought before any
meeting of stockholders shall be decided by the vote of the holders of a
majority of the stock represented and entitled to vote thereat. Each
stockholder represented at a meeting of stockholders shall be entitled to
cast one vote for each share of the capital stock entitled to vote thereat
held by such stockholder. Such votes may be cast in person or by proxy but
no proxy shall be voted on or after three years from its date, unless such
proxy provides for a longer period. The Board of Directors, in its
discretion, or the officer of the Corporation presiding at a meeting of
stockholders, in his or her discretion, may require that any votes cast at
such meeting shall be cast by written ballot.
Section 6. Consent of Stockholders in Lieu of Meeting. Unless
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otherwise provided in the Certificate of Incorporation, any action required
or permitted to be taken at any Annual or Special Meeting of Stockholders of
the Corporation, may be taken without a meeting, without prior notice and
without a vote, if a consent in writing, setting forth the action so taken,
shall be signed by the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to authorize or take such
action at a meeting at which all shares entitled to vote thereon were present
and voted. Prompt notice of the taking of the corporate action without a
meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing.
Section 7. List of Stockholders Entitled to Vote. The officer of
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the Corporation who has charge of the stock ledger of the Corporation shall
prepare and make, at least ten days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged
in alphabetical order, and showing the address of each stockholder and the
number of shares registered in the name of each stockholder. Such list shall
be open to the examination by any stockholder, for any purpose germane to the
meeting, during ordinary business hours, for a period of at least ten days
prior to the meeting, either at a place within the city where the meeting is
to be held, which place shall be specified in the notice of the meeting, or,
if not so specified, at the place where the meeting is to be held. The list
shall also be produced and kept at the time and place of the meeting during
the whole time thereof, and may be inspected by any stockholder of the
Corporation who is present.
Section 8. Stock Ledger. The stock ledger of the Corporation
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shall be the only evidence as to who are the stockholders entitled to examine
the stock ledger, the list required by Section 7 of this Article II or the
books of the Corporation, or to vote in person or by proxy at any meeting of
stockholders.
ARTICLE III
DIRECTORS
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Section 1. Number and Election of Directors. The Board of
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Directors shall consist of not less than two nor more than fifteen members,
the exact number of which shall initially be fixed by the Incorporator and
thereafter from time to time by the Board of Directors, subject to Section 11
of this Article. Except as provided in Section 2 of this Article, directors
shall be elected by a plurality of the votes cast at Annual Meetings of
Stockholders, and each director so elected shall hold office until the next
Annual Meeting and until his or her successor is duly elected and qualified,
or until his or her earlier resignation or removal. Any director may resign
at any time upon notice to the Corporation. Directors need not be
stockholders.
Section 2. Vacancies. Subject to Section 11 of this Article,
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vacancies and newly created directorships resulting from any increase in the
authorized number of directors may be filled by a majority of the directors
then in office, though less than a quorum, or by a sole remaining director,
and the directors so chosen shall hold office until the next annual election
and until their successors are duly elected and qualified, or until their
earlier resignation or removal.
Section 3. Duties and Powers. The business of the Corporation
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shall be managed by or under the direction of the Board of Directors which
may exercise all such powers of the Corporation, subject to the Certificate
of Incorporation, and do all such lawful acts and things as are not by
statute or by the Certificate of Incorporation or by these Bylaws directed or
required to be exercised or done by the stockholders.
Section 4. Meetings. The Board of Directors of the Corporation
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may hold meetings, both regular and special, either within or without the
State of Delaware. Regular meetings of the Board of Directors may be held
without notice at such time and at such place as may from time to time be
determined by the Board of Directors. Special meetings of the Board of
Directors may be called by the Chairman, if there be one, the President, or
any directors. Notice thereof stating the place, date and hour of the
meeting shall be given to each director either by mail not less than
forty-eight (48) hours before the date of the meeting, by telephone or
telegram on twenty-four (24) hours' notice, or on such shorter notice as the
person or persons calling such meeting may deem necessary or appropriate in
the circumstances.
Section 5. Quorum. Except as may be otherwise specifically
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provided by law, the Certificate of Incorporation or these Bylaws, at all
meetings of the Board of Directors, a majority of the entire Board of
Directors shall constitute a quorum for the transaction of business and the
act of a majority of the directors present at any meeting at which there is a
quorum shall be the act of the Board of Directors. If a quorum shall not be
present at any meeting of the Board of Directors, the directors present
thereat may adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present.
Section 6. Actions of Board. Unless otherwise provided by the
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Certificate of Incorporation or these Bylaws, any action required or
permitted to be taken at any meeting of the Board of Directors or of any
committee thereof may be taken without a meeting, if all the members of the
Board of Directors or committee, as the case may be, consent thereto in
writing, and the writing or writings are filed with the minutes of
proceedings of the Board of Directors or committee.
Section 7. Meetings by Means of Conference Telephone. Unless
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otherwise provided by the Certificate of Incorporation or these Bylaws,
members of the Board of Directors of the Corporation, or any committee
designated by the Board of Directors, may participate in a meeting of the
Board of Directors or such committee by means of a conference telephone or
similar communications equipment by means of which all persons participating
in the meeting can hear each other, and participation in a meeting pursuant
to this Section 7 shall constitute presence in person at such meeting.
Section 8. Committees. The Board of Directors may, by resolution
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passed by a majority of the entire Board of Directors, designate one or more
committees, each committee to consist of two or more of the directors of the
Corporation. The Board of Directors may designate one or more directors as
alternate members of any committee, who may replace any absent or
disqualified member at any meeting of any such committee. In the absence or
disqualification of a member of a committee, and in the absence of a
designation by the Board of Directors of an alternate member to replace the
absent or disqualified member, the member or members thereof present at any
meeting and not disqualified from voting, whether or not he, she or they
constitute a quorum, may unanimously appoint another member of the Board of
Directors to act at the meeting in the place of any absent or disqualified
member. Any committee, to the extent allowed by law and provided in the
resolution establishing such committee, shall have and may exercise all the
powers and authority of the Board of Directors in the management of the
business and affairs of the Corporation. Each committee shall keep regular
minutes and report to the Board of Directors when required.
Section 9. Compensation. The directors may be paid their
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expenses, if any, of attendance at each meeting of the Board of Directors and
may be paid a fixed sum for attendance at each meeting of the Board of
Directors or a stated salary as director. No such payment shall preclude any
director from serving the Corporation in any other capacity and receiving
compensation therefor. Members of special or standing committees may be
allowed like compensation for attending committee meetings.
Section 10. Interested Directors. No contract or transaction
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between the Corporation and one or more of its directors or officers, or
between the Corporation and any other corporation, partnership, association,
or other organization in which one or more of its directors or officers are
directors or officers, or have a financial interest, shall be void or
voidable solely for this reason, or solely because the director or officer is
present at or participates in the meeting of the Board of Directors or
committee thereof which authorizes the contract or transaction, or solely
because his, her or their votes are counted for such purpose if (i) the
material facts as to his, her or their relationship or interest and as to the
contract or transaction are disclosed or are known to the Board of Directors
or the committee, and the Board of Directors or committee in good faith
authorizes the contract or transaction by the affirmative votes of a majority
of the disinterested directors, even though the disinterested directors be
less than a quorum; or (ii) the material facts as to his, her or their
relationship or interest as to the contract or transaction are disclosed or
are known to the stockholders entitled to vote thereon, and the contract or
transaction is specifically approved in good faith by vote of the
stockholders; or (iii) the contract or transaction is fair as to the
Corporation as of the time it is authorized, approved or ratified, by the
Board of Directors, a committee thereof or the stockholders. Common or
interested directors may be counted in determining the presence of a quorum
at a meeting of the Board of Directors or of a committee which authorizes the
contract or transaction.
Section 11. Independent Directors.
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(a) At all times, there shall be not less than two (2) Independent
Directors (as such term is defined in Paragraph SEVENTH of the Certificate of
Incorporation).
(b) If at any time a director ceases to be an Independent Director
of the Corporation, such director who has ceased to be an Independent
Director shall immediately resign as a director and shall be replaced
pursuant to the terms of Section 5 of this Article III by an Independent
Director qualifying as such under this Section 11. The failure of any
director to resign upon such director's ceasing to be an Independent Director
under the circumstances set forth in the immediately preceding sentence
hereof shall be grounds for removal of such director for cause.
ARTICLE IV
OFFICERS
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Section 1. General. The officers of the Corporation shall be
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chosen by the Board of Directors and shall be a President, a Secretary and a
Treasurer. The Board of Directors, in its discretion, may also choose a
Chairman of the Board of Directors (who must be a director) and one or more
Vice Presidents, Assistant Secretaries, Assistant Treasurers and other
officers. Any number of offices may be held by the same person, unless
otherwise prohibited by law, the Certificate of Incorporation or these
Bylaws. The officers of the Corporation need not be stockholders of the
Corporation nor, except in the case of the Chairman of the Board of
Directors, need such officers be directors of the Corporation.
Section 2. Election. The Board of Directors at its first meeting
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held after each Annual Meeting of the Stockholders shall elect the officers
of the Corporation who shall hold their offices for such terms and shall
exercise such powers and perform such duties as shall be determined from time
to time by the Board of Directors; and all officers of the Corporation shall
hold office until their successors are chosen and qualified, or until their
earlier resignation or removal. Any officer elected by the Board of
Directors may be removed at any time by the affirmative vote of a majority of
the Board of Directors. Any vacancy occurring in any office of the
Corporation shall be filled by the Board of Directors. The salaries of all
officers of the Corporation shall be fixed by the Board of Directors.
Section 3. Voting Securities Owned by the Corporation. Powers of
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attorney, proxies, waivers of notice of meeting, consents and other
instruments relating to securities owned by the Corporation may be executed
in the name of and on behalf of the Corporation by the President or any Vice
President and any such officer may, in the name of and on behalf of the
Corporation, take all such action as any such officer may deem advisable to
vote in person or by proxy at any meeting of security holders of any
corporation in which the Corporation may own securities and at any such
meeting shall possess and may exercise any and all rights and power incident
to the ownership of such securities and which, as the owner thereof, the
Corporation might have exercised and possessed if present. The Board of
Directors may, by resolution, from time to time confer like powers upon any
other person or persons.
Section 4. Chairman of the Board of Directors. The Chairman of
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the Board of Directors, if there be one, shall preside at all meetings of the
stockholders and of the Board of Directors. He or she shall be the Chief
Executive Officer of the Corporation, and except where by law the signature
of the President is required, the Chairman of the Board of Directors shall
possess the same power as the President to sign all contracts, certificates
and other instruments of the Corporation which may be authorized by the Board
of Directors. During the absence or disability of the President, the
Chairman of the Board of Directors shall exercise all the powers and
discharge all the duties of the President. The Chairman of the Board of
Directors shall also perform such other duties and may exercise such other
powers as from time to time may be assigned to him or her by these Bylaws or
by the Board of Directors.
Section 5. President. The President shall, subject to the control
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of the Board of Directors and, if there be one, the Chairman of the Board of
Directors, have general supervision of the business of the Corporation and
shall see that all orders and resolutions of the Board of Directors are
carried into effect. He or she shall execute all bonds, mortgages, contracts
and other instruments of the Corporation requiring a seal, under the seal of
the Corporation, except where required or permitted by law to be otherwise
signed and executed and except that the other officers of the Corporation may
sign and execute documents when so authorized by these Bylaws, the Board of
Directors or the President. In the absence or disability of the Chairman of
the Board of Directors, or if there be none, the President shall preside at
all meetings of the stockholders and the Board of Directors. If there be no
Chairman of the Board of Directors, the President shall be the Chief
Executive Officer of the Corporation. The President shall also perform such
other duties and may exercise such other powers as from time to time may be
assigned to him or her by these Bylaws or by the Board of Directors.
Section 6. Vice Presidents. At the request of the President or
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in his or her absence or in the event of his or her inability or refusal to
act (and if there be no Chairman of the Board of Directors), the Vice
President or the Vice Presidents if there is more than one (in the order
designated by the Board of Directors) shall perform the duties of the
President, and when so acting, shall have all the powers of and be subject to
all the restrictions upon the President. Each Vice President shall perform
such other duties and have such other powers as the Board of Directors from
time to time may prescribe. If there be no Chairman of the Board of
Directors and no Vice President, the Board of Directors shall designate the
officer of the Corporation who, in the absence of the President or in the
event of the inability or refusal of the President to act, shall perform the
duties of the President, and when so acting, shall have all the powers of and
be subject to all the restrictions upon the President.
Section 7. Secretary. The Secretary shall attend all meetings of
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the Board of Directors and all meetings of stockholders and record all the
proceedings thereat in a book to be kept for that purpose; the Secretary
shall also perform like duties for the standing committees when required.
The Secretary shall give, or cause to be given, notice of all meetings of the
stockholders and special meetings of the Board of Directors, and shall
perform such other duties as may be prescribed by the Board of Directors or
President, under whose supervision he or she shall be. If the Secretary
shall be unable or shall refuse to cause to be given notice of all meetings
of the stockholders and special meetings of the Board of Directors, and if
there be no Assistant Secretary, then either the Board of Directors or the
President may choose another officer to cause such notice to be given. The
Secretary shall have custody of the seal of the Corporation and the Secretary
or any Assistant Secretary, if there be one, shall have authority to affix
the same to any instrument requiring it and when so affixed, it may be
attested by the signature of the Secretary or by the signature of any such
Assistant Secretary. The Board of Directors may give general authority to
any other officer to affix the seal of the Corporation and to attest the
affixing by his or her signature. The Secretary shall see that all books,
reports, statements, certificates and other documents and records required by
law to be kept or filed are properly kept or filed, as the case may be.
Section 8. Treasurer. The Treasurer shall have the custody of the
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corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Corporation and shall
deposit all moneys and other valuable effects in the name and to the credit
of the Corporation in such depositories as may be designated by the Board of
Directors. The Treasurer shall disburse the funds of the Corporation as may
be ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the President and the Board of Directors,
at its regular meetings, or when the Board of Directors so requires, an
account of all his or her transactions as Treasurer and of the financial
condition of the Corporation. If required by the Board of Directors, the
Treasurer shall give the Corporation a bond in such sum and with such surety
or sureties as shall be satisfactory to the Board of Directors for the
faithful performance of the duties of his or her office and for the
restoration to the Corporation, in case of his or her death, resignation,
retirement or removal from office, of all books, papers, vouchers, money and
other property of whatever kind in his or her possession or under his or her
control belonging to the Corporation.
Section 9. Assistant Secretaries. Except as may be otherwise
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provided in these Bylaws, Assistant Secretaries, if there be any, shall
perform such duties and have such powers as from time to time may be assigned
to them by the Board of Directors, the President, any Vice President, if
there be one, or the Secretary, and in the absence of the Secretary or in the
event of his or her disability or refusal to act, shall perform the duties of
the Secretary, and when so acting, shall have all the powers of and be
subject to all the restrictions upon the Secretary.
Section 10. Assistant Treasurers. Assistant Treasurers, if there
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be any, shall perform such duties and have such powers as from time to time
may be assigned to them by the Board of Directors, the President, any Vice
President, if there be one, or the Treasurer, and in the absence of the
Treasurer or in the event of his or her disability or refusal to act, shall
perform the duties of the Treasurer, and when so acting, shall have all the
powers of and be subject to all the restrictions upon the Treasurer. If
required by the Board of Directors, an Assistant Treasurer shall give the
Corporation a bond in such sum and with such surety or sureties as shall be
satisfactory to the Board of Directors for the faithful performance of the
duties of his or her office and for the restoration to the Corporation, in
case of his or her death, resignation, retirement or removal from office, of
all books, papers, vouchers, money and other property of whatever kind in his
or her possession or under his or her control belonging to the Corporation.
Section 11. Other Officers. Such other officers as the Board of
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Directors may choose shall perform such duties and have such powers as from
time to time may be assigned to them by the Board of Directors. The Board of
Directors may delegate to any other officer of the Corporation the power to
choose such other officers and to prescribe their respective duties and
powers.
ARTICLE V
STOCK
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Section 1. Form of Certificates. Every holder of stock in the
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Corporation shall be entitled to have a certificate signed in the name of the
Corporation (i) by the Chairman of the Board of Directors, the President or a
Vice President and (ii) by the Treasurer or an Assistant Treasurer, or the
Secretary or an Assistant Secretary of the Corporation, certifying the number
of shares owned by him or her in the Corporation.
Section 2. Signatures. Any or all of the signatures on a
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certificate may be a facsimile. In case any officer, transfer agent or
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent or registrar
before such certificate is issued, it may be issued by the Corporation with
the same effect as if he or she were such officer, transfer agent or
registrar at the date of issue.
Section 3. Lost Certificates. The Board of Directors may direct
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a new certificate to be issued in place of any certificate theretofore issued
by the Corporation alleged to have been lost, stolen or destroyed, upon the
making of an affidavit of that fact by the person claiming the certificate of
stock to be lost, stolen or destroyed. When authorizing such issue of a new
certificate, the Board of Directors may, in its discretion and as a condition
precedent to the issuance thereof, require the owner of such lost, stolen or
destroyed certificate, or his or her legal representative, to advertise the
same in such manner as the Board of Directors shall require and/or to give
the Corporation a bond in such sum as it may direct as indemnity against any
claim that may be made against the Corporation with respect to the
certificate alleged to have been lost, stolen or destroyed.
Section 4. Transfers. Stock of the Corporation shall be
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transferable in the manner prescribed by the law and in these Bylaws.
Transfers of stock shall be made on the books of the Corporation only by the
person named in the certificate or by his or her attorney lawfully
constituted in writing and upon the surrender of the certificate therefor,
which shall be canceled before a new certificate shall be issued.
Section 5. Record Date. In order that the Corporation may
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determine the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, or entitled to express consent to
corporate action in writing without a meeting, or entitled to receive payment
of any dividend or other distribution or allotment of any rights, or entitled
to exercise any rights in respect of any change, conversion or exchange of
stock, or for the purpose of any other lawful action, the Board of Directors
may fix, in advance, a record date, which shall not be more than sixty days
nor less than ten days before the date of such meeting, nor more than sixty
days prior to any other action. A determination of stockholders of record
entitled to notice of or to vote at a meeting of stockholders shall apply to
any adjournment of the meeting; provided, however, that the Board of
Directors may fix a new record date for the adjourned meeting.
Section 6. Beneficial Owners. The Corporation shall be entitled
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to recognize the exclusive right of a person registered on its books as the
owner of shares to receive dividends, and to vote as such owner, and to hold
liable for calls and assessments a person registered on its books as the
owner of shares, and shall not be bound to recognize any equitable or other
claim to or interest in such share or shares on the part of any other person,
whether or not it shall have express or other notice thereof, except as
otherwise provided by law.
ARTICLE VI
NOTICES
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Section 1. Notices. Whenever written notice is required by law,
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the Certificate of Incorporation or these Bylaws, to be given to any
director, member of a committee or stockholder, such notice may be given by
mail, addressed to such director, member of a committee or stockholder, at
his or her address as it appears on the records of the Corporation, with
postage thereon prepaid, and such notice shall be deemed to be given at the
time when the same shall be deposited in the United States mail. Written
notice may also be given personally or by telegram, telex or cable.
Section 2. Waivers of Notice. Whenever any notice is required by
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law, the Certificate of Incorporation or these Bylaws, to be given to any
director, member of a committee or stockholder, a waiver thereof in writing,
signed by the person or persons entitled to said notice, whether before or
after the time stated therein, shall be deemed equivalent thereto.
ARTICLE VII
GENERAL PROVISIONS
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Section 1. Dividends. Dividends upon the capital stock of the
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Corporation, subject to the provisions of the Certificate of Incorporation,
if any, may be declared by the Board of Directors at any regular or special
meeting, and may be paid in cash, in property or in shares of the capital
stock. Before payment of any dividend, there may be set aside out of any
funds of the Corporation available for dividends such sum or sums as the
Board of Directors from time to time, in its absolute discretion, deems
proper as a reserve or reserves to meet contingencies, or for equalizing
dividends, or for repairing or maintaining any property of the Corporation,
or for any proper purpose, and the Board of Directors may modify or abolish
any such reserve.
Section 2. Disbursements. All checks or demands for money and
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notes of the Corporation shall be signed by such officer or officers or such
other person or persons as the Board of Directors may from time to time
designate.
Section 3. Fiscal Year. The fiscal year of the Corporation shall
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be fixed by resolution of the Board of Directors.
Section 4. Corporate Seal. The corporate seal shall have
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inscribed thereon the name of the Corporation, the year of its organization
and the words "Corporate Seal, Delaware." The seal may be used by causing it
or a facsimile thereof to be impressed or affixed or reproduced or otherwise.
ARTICLE VIII
INDEMNIFICATION
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Section 1. Power to Indemnify in Actions, Suits or Proceedings
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Other Than Those by or in the Right of the Corporation. Subject to Section 3
of this Article VIII, the Corporation shall indemnify any person who was-----
- - --------------------------- or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action by or
in the right of the Corporation) by reason of the fact that he or she is or
was a director or officer of the Corporation, or is or was a director or
officer of the Corporation serving at the request of the Corporation as a
director or officer, employee or agent of another corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him or her in connection with
such action, suit or proceeding if he or she acted in good faith and in a
manner he or she reasonably believed to be in or not opposed to the best
interests of the Corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his or her conduct was
unlawful. The termination of any action, suit or proceeding by judgment
order, settlement, conviction, or upon a plea of nolo contendere or its
equivalent, shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which he or she reasonably believed to
be in or not opposed to the best interests of the Corporation, and, with
respect to any criminal action or proceeding, had reasonable cause to believe
that his or her conduct was unlawful.
Section 2. Power to Indemnify in Actions, Suits or Proceedings by
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or in the Right of the Corporation. Subject to Section 3 of this Article
VIII, the Corporation shall indemnify any person who was or is a party or is-
- - ----------- threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the Corporation to procure a
judgment in its favor by reason of the fact that he or she is or was a
director, or officer of the Corporation, or is or was a director or officer
of the Corporation serving at the request of the Corporation as a director,
officer, employee or agent of another corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise against expenses
(including attorneys' fees) actually and reasonably incurred by him or her in
connection with the defense or settlement of such action or suit if he or she
acted in good faith and in a manner he or she reasonably believed to be in or
not opposed to the best interests of the Corporation; except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the Corporation
unless and only to the extent that the Court of Chancery or the court in
which such action or suit was brought shall determine upon application that,
despite the adjudication of liability but in view of all the circumstances of
the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Court of Chancery or such other court shall deem proper.
Section 3. Authorization of Indemnification. Any indemnification
--------- --------------------------------
under this Article VIII (unless ordered by a court) shall be made by the
Corporation only as authorized in the specific case upon a determination that
indemnification of the director or officer is proper in the circumstances
because he or she has met the applicable standard of conduct set forth in
Section 1 or Section 2 of this Article VIII, as the case may be. Such
determination shall be made (i) by the Board of Directors by a majority vote
of a quorum consisting of directors who were not parties to such action, suit
or proceeding, or (ii) if such a quorum is not obtainable, or, even if
obtainable a quorum of disinterested directors so directs, by independent
legal counsel in a written opinion or (iii) by the stockholders. To the
extent, however, that a director or officer of the Corporation has been
successful on the merits or otherwise in defense of any action, suit or
proceeding described above, he or she shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him or her in
connectiontherewith, withoutthe necessityof authorizationin thespecific case.
Section 4. Good Faith Described. For purposes of any
--------- --------------------
determination under Section 3 of this Article VIII, a person shall be deemed
to have acted in good faith and in a manner he or she reasonably believed to
be in or not opposed to the best interests of the Corporation, or, with
respect to any criminal action or proceeding, to have had no reasonable cause
to believe his or her conduct was unlawful, if his or her action is based on
the records or books of account of the Corporation or another enterprise, or
on information supplied to him or her by the officers of the Corporation or
any other enterprise in the course of their duties, or on the advice of legal
counsel for the Corporation or another enterprise or on information or
records given or reports made to the Corporation or another enterprise by an
independent certified public accountant or by an appraiser or other expert
selected with reasonable care by the Corporation or another enterprise. The
term "another enterprise" as used in this Section 4 shall mean any other
corporation or any partnership, joint venture, trust, employee benefit plan
or other enterprise of which such person is or was serving at the request of
the Corporation as a director, officer, employee or agent. The provisions of
this Section 4 shall not be deemed to be exclusive or to limit in any way the
circumstances in which a person may be deemed to have met the applicable
standard of conduct set forth in Sections 1 and 2 of this Article VIII, as
the case may be.
Section 5. Indemnification by a Court. Notwith-standing any
--------- --------------------------
contrary determination in the specific case under Section 3 of this Article
VIII, and notwithstanding the absence of any determination thereunder, any
director or officer may apply to any court of competent jurisdiction in the
State of Delaware for indemnification to the extent otherwise permissible
under Sections 1 and 2 of this Article VIII. The basis of such
indemnification by a court shall be a determination by such court that
indemnification of the director or officer is proper in the circumstances
because he or she has met the applicable standards of conduct set forth in
Sections 1 or 2 of this Article VIII, as the case may be. Neither a contrary
determination in the specific case under Section 3 of this Article VIII nor
the absence of any determination thereunder shall be a defense to such
application or create a presumption that the director or officer seeking
indemnification has not met any applicable standard of conduct. Notice of
any application for indemnification pursuant to this Section 5 shall be given
to the Corporation promptly upon the filing of such application. If
successful, in whole or in part, the director or officer seeking
indemnification shall also be entitled to be paid the expense of prosecuting
such application.
Section 6. Expenses Payable in Advance. Expenses incurred by a
--------- ---------------------------
director or officer in defending or investigating a threatened or pending
action, suit or proceeding shall be paid by the Corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount
if it shall ultimately be determined that he or she is not entitled to be
indemnified by the Corporation as authorized in this Article VIII.
Section 7. Nonexclusivity of Indemnification and Advancement of
---------
Expenses. The indemnification and advancement of expenses provided by or
granted pursuant to this Article VIII shall not be deemed exclusive of any
other rights to which those seeking indemnification or advancement of
expenses may be entitled under any Bylaw, agreement, contract, vote of
stockholders or disinterested directors or pursuant to the direction
(howsoever embodied) of any court of competent jurisdiction or otherwise,
both as to action in his or her official capacity and as to action in another
capacity while holding such office, it being the policy of the Corporation
that indemnification of the persons specified in Sections 1 and 2 of this
Article VIII shall be made to the fullest extent permitted by law. The
provisions of this Article VIII shall not be deemed to preclude the
indemnification of any person who is not specified in Sections 1 or 2 of this
Article VIII but whom the Corporation has the power or obligation to
indemnify under the provisions of the General Corporation Law of the State of
Delaware, or otherwise.
Section 8. Insurance. The Corporation may purchase and maintain
--------- ---------
insurance on behalf of any person who is or was a director or officer of the
Corporation, or is or was a director or officer of the Corporation serving at
the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust, employee benefit plan
or other enterprise against any liability asserted against him or her and
incurred by him or her in any such capacity, or arising out of his or her
status as such, whether or not the Corporation would have the power or the
obligation to indemnify him or her against such liability under the
provisions of this Article VIII.
Section 9. Certain Definitions. For purposes of this Article
--------- -------------------
VIII, references to "the Corporation" shall include, in addition to the
resulting corporation, any constituent corporation (including any constituent
of a constituent) absorbed in a consolidation or merger which, if its
separate existence had continued, would have had power and authority to
indemnify its directors or officers, so that any person who is or was a
director or officer of such constituent corporation, or is or was a director
or officer of such constituent corporation serving at the request of such
constituent corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise, shall stand in the same position under the provisions of
this Article VIII with respect to the resulting or surviving corporation as
he or she would have with respect to such constituent corporation if its
separate existence had continued. For purposes of this Article VIII,
references to "fines" shall include any excise taxes assessed on a person
with respect to an employee benefit plan; and references to "serving at the
request of the Corporation" shall include any service as a director, officer,
employee or agent of the Corporation which imposes duties on, or involves
services by, such director or officer with respect to an employee benefit
plan, its participants or beneficiaries; and a person who acted in good faith
and in a manner he or she reasonably believed to be in the interests of the
participants and beneficiaries of an employee benefit plan shall be deemed to
have acted in a manner "not opposed to the best interests of the Corporation"
as referred to in this Article VIII.
Section 10. Survival of Indemnification and Advancement of
----------
Expenses. The indemnification and advancement of expenses provided by, or
granted pursuant to, this Article VIII shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a
director or officer and shall inure to the benefit of the heirs, executors
and administrators of such a person.
Section 11. Limitation on Indemnification. Notwithstanding
---------- -----------------------------
anything contained in this Article VIII to the contrary, except for
proceedings to enforce rights to indemnification (which shall be governed by
Section 5 hereof), the Corporation shall not be obligated to indemnify any
director or officer in connection with a proceeding (or part thereof)
initiated by such person unless such proceeding (or part thereof) was
authorized or consented to by the Board of Directors of the Corporation.
Section 12. Indemnification of Employees and Agents. The
---------- ---------------------------------------
Corporation may, to the extent authorized from time to time by the Board of
Directors, provide rights to indemnification and to the advancement of
expenses to employees and agents of the Corporation similar to those
conferred in this Article VIII to directors and officers of the Corporation.
ARTICLE IX
AMENDMENTS
----------
Section 1. These Bylaws may be altered, amended or repealed, in
---------
whole or in part, or new Bylaws may be adopted by the stockholders or by the
Board of Directors, provided, however, that notice of such alteration,
amendment, repeal or adoption of new Bylaws be contained in the notice of
such meeting of stockholders or Board of Directors, as the case may be. All
such amendments must be approved by either the holders of a majority of the
outstanding capital stock entitled to vote thereon or by a majority of the
entire Board of Directors, provided, however, that Section 11 of Article III
may only be amended by the unanimous vote of the entire Board of Directors.
Section 2. Entire Board of Directors. As used in this Article IX
--------- -------------------------
and in these Bylaws generally, the term "entire Board of Directors" means the
total number of directors which the Corporation would have if there were no
vacancies.
SECRETARY'S CERTIFICATE OF ADOPTION OF BYLAWS
OF
HEADLANDS MORTGAGE SECURITIES INC.
I, the undersigned, do hereby certify:
1. That I am the duly elected and acting Secretary of Headlands
Mortgage Securities Inc., a Delaware corporation.
2. That the foregoing Bylaws constitute the Bylaws of said
Corporation as adopted by the Board of Directors of said Corporation on
November 18, 1996.
IN WITNESS WHEREOF, I have hereunto subscribed my name this
18th day of November, 1996.
/s/ Gilbert J. MacQuarrie
------------------------------
Secretary
Exhibit 4.1
Form of Pooling and Servicing Agreement
HEADLANDS MORTGAGE SECURITIES INC.,
as Depositor,
( ),
as Seller and Servicer,
( ),
as Transferor,
and
(____________),
as Trustee
_______________________
POOLING AND SERVICING AGREEMENT
Dated as of ( )
______________________
Revolving Home Equity Loan Asset-Backed Certificates
Series 199_-_
TABLE OF CONTENTS
Page
----
ARTICLE I
Definitions
Section 1.01. Definitions . . . . . . . . . . . . . . . . . . . . . 1
Section 1.02. Interest Calculations . . . . . . . . . . . . . . . . 22
ARTICLE II
Conveyance of Mortgage Loans;
Original Issuance of Certificates;
Tax Treatment
Section 2.01. Conveyance of Mortgage Loans; Retention
of Obligation to Fund Advances Under
Credit Line Agreements . . . . . . . . . . . . . . . 23
Section 2.02. Acceptance by Trustee; Retransfer of
Mortgage Loans . . . . . . . . . . . . . . . . . . . 27
Section 2.03. Representations and Warranties Regarding
the Servicer and the Transferor . . . . . . . . . . 29
Section 2.04. Representations and Warranties of the
Transferor Regarding the Mortgage Loans;
Retransfer of Certain Mortgage Loans . . . . . . . . 31
Section 2.05. Covenants of the Depositor and the
Transferor . . . . . . . . . . . . . . . . . . . . . 38
Section 2.06. Retransfers of Mortgage Loans at
Election of Transferor . . . . . . . . . . . . . . . 39
Section 2.07. Execution and Authentication of
Certificates . . . . . . . . . . . . . . . . . . . . 40
Section 2.08. Tax Treatment . . . . . . . . . . . . . . . . . . . . 40
Section 2.09. Representations and Warranties of the
Depositor . . . . . . . . . . . . . . . . . . . . . 40
Section 2.10. Conveyance of the Subsequent Mortgage
Loans . . . . . . . . . . . . . . . . . . . . . . . 41
ARTICLE III
Administration and Servicing
of Mortgage Loans
Section 3.01. The Servicer . . . . . . . . . . . . . . . . . . . . 44
Section 3.02. Collection of Certain Mortgage Loan
Payments . . . . . . . . . . . . . . . . . . . . . . 45
Section 3.03. Withdrawals from the Collection Account . . . . . . . 47
Section 3.04. Maintenance of Hazard Insurance; Property
Protection Expenses . . . . . . . . . . . . . . . . 48
Section 3.05. Assumption and Modification Agreements . . . . . . . 49
Section 3.06. Realization Upon Defaulted Mortgage
Loans; Repurchase of Certain Mortgage
Loans . . . . . . . . . . . . . . . . . . . . . . . 49
Section 3.07. Trustee to Cooperate . . . . . . . . . . . . . . . . 50
Section 3.08. Servicing Compensation; Payment of
Certain Expenses by Servicer . . . . . . . . . . . . 51
Section 3.09. Annual Statement as to Compliance . . . . . . . . . . 51
Section 3.10. Annual Servicing Report . . . . . . . . . . . . . . . 52
Section 3.11. Annual Opinion of Counsel . . . . . . . . . . . . . . 52
Section 3.12. Access to Certain Documentation and
Information Regarding the Mortgage Loans . . . . . . 52
Section 3.13. Maintenance of Certain Servicing
Insurance Policies . . . . . . . . . . . . . . . . . 53
Section 3.14. Reports to the Securities and Exchange
Commission . . . . . . . . . . . . . . . . . . . . . 53
Section 3.15. Tax Returns . . . . . . . . . . . . . . . . . . . . . 53
Section 3.16. Information Required by the Internal
Revenue Service Generally and Reports
of Foreclosures and Abandonments of
Mortgaged Property . . . . . . . . . . . . . . . . . 54
ARTICLE IV
Servicing Certificate
Section 4.01. Servicing Certificate . . . . . . . . . . . . . . . . 55
Section 4.02. Claims upon the Policy . . . . . . . . . . . . . . . 58
Section 4.03. Spread Account . . . . . . . . . . . . . . . . . . . 59
Section 4.04. Effect of Payments by the Credit
Enhancer; Subrogation . . . . . . . . . . . . . . . 59
ARTICLE V
Payments and Statements to
Certificateholders; Rights of Certificateholders
Section 5.01. Distributions . . . . . . . . . . . . . . . . . . . . 61
Section 5.02. Calculation of the Class A Certificate
Rate . . . . . . . . . . . . . . . . . . . . . . . . 64
Section 5.03. Statements to Certificateholders . . . . . . . . . . 64
Section 5.04. Rights of Certificateholders . . . . . . . . . . . . 66
Section 5.05. Funding Account . . . . . . . . . . . . . . . . . . . 66
ARTICLE VI
The Certificates
Section 6.01. The Certificates . . . . . . . . . . . . . . . . . . 69
Section 6.02. Registration of Transfer and Exchange of
Investor Certificates; Appointment of
Registrar . . . . . . . . . . . . . . . . . . . . . 69
Section 6.03. Mutilated, Destroyed, Lost or Stolen
Certificates . . . . . . . . . . . . . . . . . . . . 72
Section 6.04. Persons Deemed Owners . . . . . . . . . . . . . . . . 72
Section 6.05. Restrictions on Transfer of Transferor
Certificates . . . . . . . . . . . . . . . . . . . . 72
Section 6.06. Appointment of Paying Agent . . . . . . . . . . . . . 74
Section 6.07. Acceptance of Obligations. . . . . . . . . . . . . . 75
ARTICLE VII
The Servicer, the Transferor and the Depositor
Section 7.01. Liability of the Transferor, the Servicer
and the Depositor . . . . . . . . . . . . . . . . . 76
Section 7.02. Merger or Consolidation of, or Assumption
of the Obligations of, the Servicer, the
Transferor or the Depositor . . . . . . . . . . . . 76
Section 7.03. Limitation on Liability of the Servicer
and Others . . . . . . . . . . . . . . . . . . . . . 76
Section 7.05. Delegation of Duties . . . . . . . . . . . . . . . . 78
Section 7.06. Indemnification of the Trust by the
Servicer . . . . . . . . . . . . . . . . . . . . . . 78
Section 7.07. Indemnification of the Trust by the
Transferor . . . . . . . . . . . . . . . . . . . . . 78
Section 7.08. Limitation on Liability of the Trans-
feror . . . . . . . . . . . . . . . . . . . . . . . 79
Section 7.09. Limitation on Liability of the
Depositor . . . . . . . . . . . . . . . . . . . . . 79
ARTICLE VIII
Servicing Termination
Section 8.01. Events of Servicing Termination . . . . . . . . . . . 80
Section 8.02. Trustee to Act; Appointment of
Successor . . . . . . . . . . . . . . . . . . . . . 82
Section 8.03. Notification to Certificateholders . . . . . . . . . 83
ARTICLE IX
The Trustee
Section 9.01. Duties of Trustee . . . . . . . . . . . . . . . . . . 84
Section 9.02. Certain Matters Affecting the Trustee . . . . . . . . 85
Section 9.03. Trustee Not Liable for Certificates or
Mortgage Loans . . . . . . . . . . . . . . . . . . . 87
Section 9.04. Trustee May Own Certificates . . . . . . . . . . . . 88
Section 9.05. Servicer to Pay Trustee's Fees and
Expenses . . . . . . . . . . . . . . . . . . . . . . 88
Section 9.06. Eligibility Requirements for Trustee . . . . . . . . 88
Section 9.07. Resignation or Removal of Trustee . . . . . . . . . . 89
Section 9.08. Successor Trustee . . . . . . . . . . . . . . . . . . 90
Section 9.09. Merger or Consolidation of Trustee . . . . . . . . . 90
Section 9.10. Appointment of Co-Trustee or Separate
Trustee . . . . . . . . . . . . . . . . . . . . . . 90
Section 9.11. Limitation of Liability . . . . . . . . . . . . . . . 92
Section 9.12. Trustee May Enforce Claims Without
Possession of Certificates . . . . . . . . . . . . . 92
Section 9.13. Suits for Enforcement . . . . . . . . . . . . . . . . 92
ARTICLE X
Termination
Section 10.01. Termination . . . . . . . . . . . . . . . . . . . . 94
ARTICLE XI
Rapid Amortization Events
Section 11.01. Rapid Amortization Events . . . . . . . . . . . . . 97
Section 11.02. Additional Rights Upon the Occurrence of
Certain Events . . . . . . . . . . . . . . . . . . 98
ARTICLE XII
Miscellaneous Provisions
Section 12.01. Amendment . . . . . . . . . . . . . . . . . . . . . 101
Section 12.02. Recordation of Agreement . . . . . . . . . . . . . . 103
Section 12.03. Limitation on Rights of Certificate-
holders . . . . . . . . . . . . . . . . . . . . . . 103
Section 12.04. Governing Law . . . . . . . . . . . . . . . . . . . 104
Section 12.05. Notices . . . . . . . . . . . . . . . . . . . . . . 104
Section 12.06. Severability of Provisions . . . . . . . . . . . . . 105
Section 12.07. Assignment . . . . . . . . . . . . . . . . . . . . . 105
Section 12.08. Certificates Nonassessable and Fully
Paid . . . . . . . . . . . . . . . . . . . . . . . 105
Section 12.09. Third-Party Beneficiaries . . . . . . . . . . . . . 105
Section 12.10. Counterparts . . . . . . . . . . . . . . . . . . . . 105
Section 12.11. Effect of Headings and Table of
Contents . . . . . . . . . . . . . . . . . . . . . 105
Section 12.12. Insurance Agreement . . . . . . . . . . . . . . . . 105
EXHIBIT
- - -------
EXHIBIT A - FORM OF CERTIFICATE . . . . . . . . . . . . . . . . . . . . . A-1
EXHIBIT B - FORM OF TRANSFEROR CERTIFICATE . . . . . . . . . . . . . . . B-1
EXHIBIT C - MORTGAGE LOAN SCHEDULE . . . . . . . . . . . . . . . . . . . C-1
EXHIBIT D - RESERVED . . . . . . . . . . . . . . . . . . . . . . . . . . D-1
EXHIBIT E - ANNUAL OPINION OF COUNSEL . . . . . . . . . . . . . . . . . . E-1
EXHIBIT F - FORM OF CREDIT LINE AGREEMENT . . . . . . . . . . . . . . . . F-1
EXHIBIT G - RESERVED . . . . . . . . . . . . . . . . . . . . . . . . . . G-1
EXHIBIT H - RESERVED . . . . . . . . . . . . . . . . . . . . . . . . . . H-1
EXHIBIT I - LETTER OF REPRESENTATIONS . . . . . . . . . . . . . . . . . . I-1
EXHIBIT J - RESERVED . . . . . . . . . . . . . . . . . . . . . . . . . . J-1
EXHIBIT K - FORM OF INVESTMENT LETTER . . . . . . . . . . . . . . . . . . K-1
EXHIBIT L - FORM OF REQUEST FOR RELEASE . . . . . . . . . . . . . . . . . L-1
This Pooling and Servicing Agreement, dated as of ( ), among
HEADLANDS MORTGAGE SECURITIES INC., as Depositor (the "Depositor"), (
), as Seller and Servicer (in such capacities, the "Seller" and
the "Servicer"), ( ), as Transferor (the "Transferor"), and
(_________________), as Trustee (the "Trustee"),
W I T N E S S E T H T H A T:
----------------------------
In consideration of the mutual agreements herein contained, the parties
hereto agree as follows:
ARTICLE I
Definitions
Section 1.01. Definitions. Whenever used in this Agreement, the
-----------
following words and phrases, unless the context otherwise requires, shall
have the meanings specified in this Article.
Accelerated Principal Distribution Amount: With respect to any
-----------------------------------------
Distribution Date, the amount, if any, required to reduce the Class A
Certificate Principal Balance (after giving effect to the distribution of all
other amounts actually distributed on the Class A Certificates on such
Distribution Date) so that the Invested Amount (immediately following such
Distribution Date) exceeds the Class A Certificate Principal Balance (as so
reduced) by the Required Overcollateralization Amount.
Additional Balance: As to any HELOC and day, the aggregate amount of
------------------
all Draws conveyed to the Trust pursuant to Section 2.01.
Adjustment Date: With respect to any HELOC and Interest Period, the
---------------
second LIBOR Business Day preceding the first day of such Interest Period.
Affiliate: With respect to any Person, any other Person controlling,
---------
controlled by or under common control with such Person. For purposes of
this definition, "control" means the power to direct the management and
policies of a Person, directly or indirectly, whether through ownership of
voting securities, by contract or otherwise and "controlling" and
"controlled" shall have meanings correlative to the foregoing.
Agreement: This Pooling and Servicing Agreement and all amendments
---------
hereof and supplements hereto.
Alternative Principal Payment: As to any Distribution Date, the greater
-----------------------------
of (x) ___% of the Class A Certificate Principal Balance immediately prior to
the Distribution Date or (y) the amount (but not less than zero) equal to
Principal Collections for such Distribution Date less the aggregate of Draws
under the Credit Line Agreements during the related Collection Period.
Appraised Value: As to any Mortgaged Property, the value established
---------------
by a drive by inspection of such Mortgaged Property made to establish compli-
ance with the underwriting criteria then in effect in connection with the
application for the Mortgage Loan secured by such Mortgaged Property.
Asset Balance: As to any Mortgage Loan, other than a Liquidated
-------------
Mortgage Loan, and day, the related Cut-Off Date Asset Balance, plus (i) with
----
respect to each HELOC, any Additional Balance in respect of such HELOC, minus
-----
(ii) with respect to each Mortgage Loan, all collections credited as
principal against the Asset Balance of any such Mortgage Loan in accordance
with the related Loan Agreement. For purposes of this definition, a
Liquidated Mortgage Loan shall be deemed to have an Asset Balance equal to
the Asset Balance of the related Mortgage Loan immediately prior to the final
recovery of related Liquidation Proceeds and an Asset Balance of zero
thereafter.
Assignment of Mortgage: With respect to any Mortgage, an assignment,
----------------------
notice of transfer or equivalent instrument, in recordable form, sufficient
under the laws of the jurisdiction in which the related Mortgaged Property is
located to reflect the sale of the Mortgage to the Trustee, which assignment,
notice of transfer or equivalent instrument may be in the form of one or more
blanket assignments covering the Mortgage Loans secured by Mortgaged Proper-
ties located in the same jurisdiction.
Authorized Newspaper: A newspaper of general circulation in the Borough
--------------------
of Manhattan, The City of New York, printed in the English language and
customarily published on each Business Day, whether or not published on
Saturdays, Sundays and holidays.
BIF: The Bank Insurance Fund, as from time to time constituted, created
---
under the Financial Institutions Reform, Recovery and Enhancement Act of
1989, or if at any time after the execution of this instrument the Bank
Insurance Fund is not existing and performing duties now assigned to it, the
body performing such duties on such date.
Billing Cycle: With respect to any Mortgage Loan and Collection Period,
-------------
the billing period specified in the related Loan Agreement and with respect
to which amounts billed are received during such Collection Period.
Book-Entry Certificate: Any Investor Certificate registered in the name
----------------------
of the Depository or its nominee, ownership of which is reflected on the
books of the Depository or on the books of a Person maintaining an account
with such Depository (directly or as an indirect participant in accordance
with the rules of such Depository).
Business Day: Any day other than (i) a Saturday or a Sunday or (ii) a
------------
day on which banking institutions in the State of New York, California or the
State in which the Corporate Trust Office is located are required or
authorized by law to be closed.
Certificate: A Class A Certificate, a Class S Certificate or a
-----------
Transferor Certificate.
Certificate Owner: The Person who is the beneficial owner of a
-----------------
Book-Entry Certificate.
Certificate Register and Certificate Registrar: The register maintained
----------------------------------------------
and the registrar appointed pursuant to Section 6.02.
Certificateholder or Holder: The Person in whose name a Certificate is
---------------------------
registered in the Certificate Register, except that, solely for the purpose
of giving any consent, direction, waiver or request pursuant to this Agree-
ment, (x) any Investor Certificate registered in the name of the Transferor,
or any Person known to a Responsible Officer to be an Affiliate of either the
Depositor or the Transferor and (y) any Investor Certificate for which the
Transferor, or any Person known to a Responsible Officer to be an Affiliate
of either such entity is the Certificate Owner shall be deemed not to be
outstanding (unless to the knowledge of a Responsible Officer (i) the Trans-
feror, or such Affiliate is acting as trustee or nominee for a Person who is
not an Affiliate of the Transferor and who makes the voting decision with
respect to such Investor Certificate or (ii) the Transferor, or such
Affiliate is the Certificate Owner of all the Investor Certificates) and the
Percentage Interest evidenced thereby shall not be taken into account in
determining whether the requisite amount of Percentage Interests necessary to
effect any such consent, direction, waiver or request has been obtained.
Class A Certificate: Any certificate executed and authenticated by the
-------------------
Trustee substantially in the form set forth in Exhibit A-1 hereto.
Class A Certificate Carry Forward Interest: As to any Distribution
------------------------------------------
Date, the amount, if any, by which interest accrued on the Class A
Certificates at the Class A Certificate Rate (without giving effect to the
proviso in the definition thereof) for the related Interest Period exceeds
the Class A Interest Payment Cap.
Class A Certificate Distribution Amount: As to any Distribution Date,
---------------------------------------
the sum of all amounts to be distributed to the Holders of Class A
Certificates pursuant to Article V and Article XI hereof.
Class A Certificate Interest: With respect to any Distribution Date,
----------------------------
interest for the related Interest Period at the applicable Class A
Certificate Rate on the Class A Certificate Principal Balance as of the first
day of such Interest Period (after giving effect to the distributions made on
the first day of such Interest Period).
Class A Certificate Principal Balance: With respect to any Distribution
-------------------------------------
Date, (a) the Original Class A Certificate Principal Balance less (b) the
----
aggregate of amounts actually distributed as principal on the Class A
Certificates.
Class A Certificate Rate: With respect to the first Interest Period,
------------------------
_____%, and for any subsequent Interest Period, the sum of (a) LIBOR as of
the second LIBOR Business Day prior to the first day of such Interest Period
and (b) ___%; provided, however, that in no event shall the Class A Certifi
-------- -------
cate Rate with respect to any Interest Period exceed the Maximum Rate for
such Interest Period.
Class A Certificateholder: The Holder of a Class A Certificate.
-------------------------
Class A Interest Payment Cap: With respect to any Distribution Date,
----------------------------
an amount equal to accrued interest on the Class A Certificate Principal
Balance for the related Interest Period at the Maximum Rate.
Class S Certificate: Any Certificate executed and authenticated by the
-------------------
Trustee substantially in the form set forth in Exhibit A-2.
Class S Certificate Interest: With respect to any Distribution Date,
----------------------------
interest for the related Interest Period at the Class S Certificate Rate on
the Class S Notional Amount as of the first day of such Interest Period
(after giving effect to distributions made on the first day of such Interest
Period).
Class S Certificateholder: The Holder of a Class S Certificate.
-------------------------
Class S Notional Amount: With respect to any Distribution Date, the
-----------------------
Class A Certificate Principal Balance for such Distribution Date (before
giving effect to distributions made on such Distribution Date).
Closed-End Loan: Each Mortgage Loan originated under a Loan Agreement
---------------
providing for a single advance of funds on the date of origination and no
additional advances during the term of such Mortgage Loan.
Closing Date: (date).
------------
Code: The Internal Revenue Code of 1986, as the same may be amended
----
from time to time (or any successor statute thereto).
Collection Account: The custodial account or accounts created and
------------------
maintained for the benefit of the Investor Certificateholders and the Credit
Enhancer pursuant to Section 3.02(b). The Collection Account shall be an
Eligible Account.
Collection Period: With respect to any Distribution Date and any
-----------------
Mortgage Loan, the calendar month preceding such Distribution Date.
Combined Loan-to-Value Ratio: With respect to any HELOC as of any date,
----------------------------
the percentage equivalent of the fraction, the numerator of which is the sum
of (i) the Credit Limit and (ii) the outstanding principal balance as of the
date of execution of the related original Credit Line Agreement (or any
subsequent date as of which such outstanding principal balance may be
determined in connection with an increase in the Credit Limit for such HELOC)
of any mortgage loan or mortgage loans that are senior or equal in priority
to the HELOC and that is or are secured by the same Mortgaged Property and
the denominator of which is the Valuation of the related Mortgaged Property.
With respect to any Closed-End Loan, the percentage equivalent of the
fraction, the numerator of which is 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 Mortgaged Property and the denominator
of which is the Valuation of the related Mortgaged Property.
Corporate Trust Office: The principal office of the Trustee at which
----------------------
at any particular time its corporate business shall be administered, which
office on the Closing Date is located at ________________________________,
Attention: ___________________.
Credit Enhancement Draw Amount: As to any Distribution Date, an amount
------------------------------
equal to the sum of (1) the amount by which (a) the amount to be distributed
to Investor Certificateholders pursuant to Sections 5.01(a)(iii) and
5.01(a)(iv) exceeds (b) the sum of (i) the amount of Investor Interest
Collections on deposit in the Collection Account on the Business Day
preceding such Distribution Date that is available to be applied therefor,
(ii) the amount, if any, deposited in the Collection Account in respect of
such Distribution Date pursuant to Section 4.05, (iii) the amount transferred
to the Collection Account from the Funding Account pursuant to Section
5.05(c)(iii) and (iv) any amount transferred from the Spread Account to the
Collection Account pursuant to Section 4.03, (2) the Guaranteed Principal
Distribution Amount and (3) any Preference Claim for such Distribution Date.
Credit Enhancer: ( ), a (New York monoline stock
---------------
insurance company), any successor thereto or any replacement credit enhancer
substituted pursuant to Section 4.03.
Credit Enhancer Default: The failure by the Credit Enhancer to make a
-----------------------
payment required under the Policy in accordance with the terms thereof.
Credit Limit: As to any HELOC, the maximum Asset Balance permitted
------------
under the terms of the related Credit Line Agreement.
Credit Limit Utilization Rate: As to any HELOC, the percentage
-----------------------------
equivalent of a fraction the numerator of which is the Cut-Off Date Asset
Balance for such Mortgage Loan and the denominator of which is the related
Credit Limit.
Credit Line Agreement: With respect to any HELOC, the related credit
---------------------
line account agreement executed by the related Mortgagor and any amendment or
modification thereof.
Custodial Agreement: Any Custodial Agreement between any Custodian and
-------------------
the Trustee, which is reasonably acceptable in form and substance to the
Credit Enhancer, relating to the custody of the Mortgage Loans and the
Related Documents.
Custodian: Any custodian appointed by the Trustee under a Custodial
---------
Agreement to maintain all or a portion of the Mortgage Files pursuant to
Section 2.01(b).
Cut-Off Date: With respect to each Initial Mortgage Loan, (date) and
------------
with respect to each Subsequent Mortgage Loan, the date on which such
Subsequent Mortgage Loan was transferred to the Trust.
Cut-Off Date Asset Balance: With respect to any Mortgage Loan, the
--------------------------
unpaid principal balance thereof as of the Cut-Off Date.
Cut-Off Date Pool Balance: The Pool Balance calculated as of the Cut
-------------------------
Off Date.
Defective Mortgage Loan: A Mortgage Loan subject to retransfer pursuant
-----------------------
to Section 2.02, 2.04 or 2.09.
Definitive Certificates: As defined in Section 6.02(c).
-----------------------
Delivery Event: As defined in Section 2.01.
--------------
Depositor: Headlands Mortgage Securities Inc. or its successor in
---------
interest.
Depository: The initial Depository shall be The Depository Trust
----------
Company, the nominee of which is Cede & Co., as the registered Holder of
Class A Certificates evidencing $__________ in initial aggregate principal
amount of the Class A Certificates and as the registered Holder of Class S
Certificates evidencing $______ in initial aggregate notional amount of the
Class S Certificates. The Depository shall at all times be a "clearing
corporation" as defined in Section 8-102(3) of the UCC of the State of New
York.
Depository Participant: A broker, dealer, bank or other financial
----------------------
institution or other Person for whom from time to time the Depository effects
book-entry transfers and pledges of securities deposited with the Depository.
Determination Date: With respect to any Distribution Date, the third
------------------
Business Day prior to such Distribution Date.
Distribution Date: The (fifteenth) day of each month, or if such day
-----------------
is not a Business Day, then the next Business Day, beginning in the month
immediately following the month of the initial issuance of the Certificates.
Draw: With respect to any HELOC, an additional borrowing by the
----
Mortgagor subsequent to the Cut-Off Date in accordance with the related
Mortgage Note.
Due Date: As to any Mortgage Loan, the twenty-fifth day of the month.
--------
Electronic Ledger: The electronic master record of home equity credit
-----------------
line mortgage loans maintained by the Servicer or by the (Transferor), as
appropriate.
Eligible Account: An account that is either (i) maintained with a
----------------
depository institution whose (a) short-term debt obligations throughout the
time of any deposit therein are rated in the highest short-term debt rating
category by Standard & Poor's and (b) short-term and long-term obligations
throughout the time of any deposit therein are rated at least P-1 and A2,
respectively by Moody's, (ii) an account or accounts maintained with a
depository institution with a minimum long term unsecured debt rating of Baa3
by Moody's provided that the deposits in such account or accounts are fully
insured by either the BIF or the SAIF, or (iii) a segregated trust account
maintained (A) with the corporate trust department of the Trustee in its
fiduciary capacity, or (B) with an institution with capital and surplus of
not less than $50,000,000 and with a minimum long-term unsecured debt rating
of at least Baa3 by Moody's and BBB- by Standard & Poor's or (iv) an account
otherwise acceptable to each Rating Agency and the Credit Enhancer, as
evidenced at closing by delivery of a rating letter by each Rating Agency and
thereafter by delivery of a letter from each Rating Agency and the Credit
Enhancer to the Trustee, within 30 days of receipt of notice of such deposit,
to reduce or withdraw its then-current rating of the Certificates without
regard to the Policy.
Eligible Investments: One or more of the following (excluding any
--------------------
callable investments purchased at a premium):
(i) direct obligations of, or obligations fully guaranteed as to
timely payment of principal and interest by, the United States or any
agency or instrumentality thereof, provided that such obligations are
backed by the full faith and credit of the United States;
(ii) repurchase agreements on obligations specified in clause (i)
maturing not more than three months from the date of acquisition
thereof, provided that the short-term unsecured debt obligations of the
party agreeing to repurchase such obligations are at the time rated by
each Rating Agency in its highest short-term rating category (which is
A-1+ for Standard & Poor's and P-1 for Moody's);
(iii) certificates of deposit, time deposits and bankers'
acceptances (which, if Moody's is a Rating Agency, shall each have an
original maturity of not more than 90 days and, in the case of bankers'
acceptances, shall in no event have an original maturity of more than
365 days) of any U.S. depository institution or trust company incorpo-
rated under the laws of the United States or any state thereof and
subject to supervision and examination by federal and/or state banking
authorities, provided that the unsecured short-term debt obligations of
such depository institution or trust company at the date of acquisition
thereof have been rated by each of Moody's and Standard & Poor's in its
highest unsecured short-term debt rating category;
(iv) commercial paper (having original maturities of not more
than 270 days) of any corporation incorporated under the laws of the
United States or any state thereof which on the date of acquisition has
been rated by Standard & Poor's and Moody's in their highest short-term
debt rating categories;
(v) short term investment funds ("STIFS") sponsored by any trust
company or national banking association incorporated under the laws of
the United States or any state thereof which on the date of acquisition
has been rated by Standard & Poor's and Moody's in their respective
highest applicable rating category; and
(vi) interests in any money market fund which at the date of
acquisition of the interests in such fund and throughout the time such
interests are held in such fund has a rating of Aaa by Moody's and
either AAAm or AAAm-G by Standard & Poor's or such lower rating as will
not result in the qualification, downgrading or withdrawal of the then-
current rating assigned to the Certificates by each Rating Agency
without regard to the Policy;
(vii) other obligations or securities that are acceptable to each
Rating Agency and the Credit Enhancer as an Eligible Investment
hereunder and will not result in a reduction in the then current rating
of the Certificates without regard to the Policy, as evidenced by a
letter to such effect from such Rating Agency and the Credit Enhancer
and with respect to which the Servicer has received confirmation that,
for tax purposes, the investment complies with the last clause of this
definition;
provided that no instrument described hereunder shall evidence either the
- - --------
right to receive (a) only interest with respect to the obligations underlying
such instrument or (b) both principal and interest payments derived from
obligations underlying such instrument and the interest and principal
payments with respect to such instrument provided a yield to maturity at par
greater than 120% of the yield to maturity at par of the underlying
obligations; and provided, further, that no instrument described hereunder
-------- -------
may be purchased at a price greater than par if such instrument may be
prepaid or called at a price less than its purchase price prior to its stated
maturity.
Eligible Substitute Mortgage Loan: A Mortgage Loan substituted by the
---------------------------------
Transferor for a Defective Mortgage Loan which must, on the date of such
substitution, (i) have an outstanding Asset Balance (or in the case of a
substitution of more than one Mortgage Loan for a Defective Mortgage Loan, an
aggregate Asset Balance), not (ten percent more or ten) percent less than the
Transfer Deficiency, if any, 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 (1)% in excess of the Loan Rate of such Defective Mortgage
Loan; (iii) with respect to each HELOC, 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) with respect to
each HELOC, have a Gross Margin that is (not less) than the Gross Margin of
the Defective Mortgage Loan and not more than (100) basis points higher than
the Gross 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 at the time such Mortgage was transferred to the Trust; (vi)
have a remaining term to maturity not more than (six) months earlier than the
remaining term to maturity of the Defective Mortgage Loan; (vii) comply with
each representation and warranty set forth in Section 2.04 (deemed to be made
as of the date of substitution); and (viii) have an original Combined Loan-
to-Value Ratio not greater than that of the Defective Mortgage Loan. More
than one Eligible Substitute Mortgage Loan may be substituted for a Defective
Mortgage Loan if such Eligible Substitute Mortgage Loans meet the foregoing
attributes in the aggregate and such substitution is approved in writing in
advance by the Credit Enhancer.
Endorsement: As defined in the Policy.
-----------
ERISA: Employee Retirement Income Security Act of 1974, as amended.
-----
Event of Servicing Termination: As defined in Section 8.01.
------------------------------
FDIC: The Federal Deposit Insurance Corporation or any successor
----
thereto.
Fiscal Agent: As defined in the Policy.
------------
Foreclosure Profit: With respect to a Liquidated Mortgage Loan, the
------------------
amount, if any, by which (i) the aggregate of its Net Liquidation Proceeds
exceeds (ii) the related Asset Balance (plus accrued and unpaid interest
thereon at the applicable Loan Rate from the date interest was last paid
through the last day in the related Collection Period) of such Liquidated
Mortgage Loan immediately prior to the final recovery of its Liquidation
Proceeds.
Funding Account: The custodial account or accounts established and
---------------
maintained with the Trustee for the benefit of the Investor
Certificateholders pursuant to Section 5.05. The Funding Account shall be an
Eligible Account.
Funding Period: The period commencing on the Closing Date and ending
--------------
on the earlier of (i) the close of business on the (________) Distribution
Date, and (ii) the commencement of the Rapid Amortization Period.
Gross Margin: As to any HELOC, the percentage set forth as the "Gross
------------
Margin" for such HELOC on Exhibit C hereto.
Guaranteed Distribution: With respect to any Distribution Date, the sum
-----------------------
of the (i) the Guaranteed Principal Distribution Amount and (ii) the amount
to be distributed to Certificateholders pursuant to Sections 5.01(a)(iii) and
5.01(a)(iv) for such Distribution Date.
Guaranteed Principal Distribution Amount: With respect to (i) any
----------------------------------------
Distribution Date on or after which the Transferor Subordinated Amount has
been reduced to zero, other than the Distribution Date in ______________, the
amount, if any, required to reduce the Class A Certificate Principal Balance
(after giving effect to the distributions of Interest Collections and
Principal Collections that are allocable to principal on the Class A Certifi-
cates on such Distribution Date) to the Invested Amount immediately following
such Distribution Date and (ii) the Distribution Date in ______________, the
amount by which the outstanding Class A Certificate Principal Balance (after
giving effect to Interest Collections allocable and distributable to prin-
cipal on the Class A Certificates on such Distribution Date) exceeds the sum
of the amounts on deposit in the Collection Account available to be
distributed to the Class A Certificateholders pursuant to Section 5.01(b)
hereof.
HELOC: Any Mortgage Loan originated pursuant to a Loan Agreement
-----
providing for Draws.
Index: With respect to each Interest Rate Adjustment Date for a HELOC,
-----
the highest "prime rate" as published in the "Money Rates" table of The Wall
--------
Street Journal as of the first business day of the calendar month.
- - --------------
Initial Closed-End Loan: Each Closed-End Loan transferred and assigned
-----------------------
to the Trustee on the Closing Date.
Initial Cut-Off Date Pool Balance: $______________.
----------------------------------
Initial HELOC: Each HELOC transferred and assigned to the Trustee on
-------------
the Closing Date.
Initial Mortgage Loan: Each Initial HELOC and Initial Closed-End Loan.
---------------------
Insolvency Event: As defined in Section 11.02.
----------------
Insurance Agreement: The insurance and reimbursement agreement dated
-------------------
as of (date) among the Depositor, the Transferor, the Servicer, the Trustee
and the Credit Enhancer, including any amendments and supplements thereto.
Insurance Proceeds: Proceeds paid by any insurer (other than the Credit
------------------
Enhancer) pursuant to any insurance policy covering a Mortgage Loan, or
amounts required to be paid by the Servicer pursuant to the last sentence of
Section 3.04, net of any component thereof (i) covering any expenses incurred
by or on behalf of the Servicer in connection with obtaining such proceeds,
(ii) that is applied to the restoration or repair of the related Mortgaged
Property, (iii) released to the Mortgagor in accordance with the Servicer's
normal servicing procedures or (iv) required to be paid to any holder of a
mortgage senior to such Mortgage Loan.
Interest Collections: As to any Distribution Date, the sum of all
--------------------
payments by or on behalf of Mortgagors and any other amounts constituting
interest (including without limitation such portion of Insurance Proceeds and
Net Liquidation Proceeds as is allocable to interest on the applicable
Mortgage Loan) collected by the Servicer under the Mortgage Loans (excluding
any fees (including annual fees) or late charges or similar administrative
fees paid by Mortgagors) during the related Collection Period minus the
Servicing Fee payable to the Servicer with respect to the related Collection
Period. The terms of the related Loan Agreement shall determine the portion
of each payment in respect of such Mortgage Loan that constitutes principal
or interest.
Interest Period: With respect to any Distribution Date other than the
---------------
first Distribution Date, the period beginning on the preceding Distribution
Date and ending on the day preceding such Distribution Date, and in the case
of the first Distribution Date, the period beginning on the Closing Date and
ending on the day preceding the first Distribution Date.
Interest Rate Adjustment Date: With respect to each HELOC, any date on
-----------------------------
which the Loan Rate is adjusted in accordance with the related Credit Line
Agreement.
Invested Amount: With respect to any Distribution Date, an amount equal
---------------
to the Original Invested Amount minus (i) the amount of Principal Collections
previously distributed to Class A Certificateholders (including amounts
previously distributed to Class A Certificateholders from Principal
Collections on deposit in the Funding Account) and minus (ii) the Investor
Loss Amounts for prior Distribution Dates.
Investor Certificate: Any Class A Certificate or Class S Certificate.
--------------------
Investor Certificateholder: The Holder of an Investor Certificate.
--------------------------
Investor Fixed Allocation Percentage: (98)%.
------------------------------------
Investor Floating Allocation Percentage: With respect to any
---------------------------------------
Distribution Date, the percentage equivalent of a fraction, the numerator of
which is 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) and the denominator of which is the sum of (a) the Pool
Balance, calculated as of the beginning of the related Collection Period and
(b) the amount of Principal Collections on deposit in the Funding Account as
of the close of business on the preceding Distribution Date.
Investor Interest Collections: As to any Distribution Date, the product
-----------------------------
of (i) the Interest Collections during the related Collection Period and (ii)
the Investor Floating Allocation Percentage for such Distribution Date.
Investor Loss Amount: With respect to any Distribution Date, the amount
--------------------
equal to the product of (i) the Investor Floating Allocation Percentage for
such Distribution Date and (ii) the aggregate of the Liquidation Loss Amounts
for such Distribution Date.
Investor Loss Reduction Amount: With respect to any Distribution Date,
------------------------------
the portion, if any, of the Investor Loss Amount for such Distribution Date
and all prior Distribution Dates that has not been (a) distributed to Class A
Certificateholders on such Distribution Date pursuant to Section 5.01(a)(iv)
or 5.01(a)(v) or by way of the Credit Enhancement Draw Amount or (b)
reallocated to the Transferor Principal Balance pursuant to Section 5.01(c).
LIBOR: As to any date, the rate for United States dollar deposits for
-----
one month which appear on the Telerate Screen LIBOR Page 3750 as of 11:00
A.M., London time. 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 reasonably selected by the Depositor after consultation with the
Trustee), the rate will be the Reference Bank Rate. If no such quotations
can be obtained and no Reference Bank Rate is available, LIBOR will be LIBOR
applicable to the preceding Distribution Date.
LIBOR Business Day: 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.
Lien: Any mortgage, deed of trust, pledge, conveyance, hypothecation,
----
assignment, participation, deposit arrangement, encumbrance, lien (statutory
or other), preference, priority right or interest or other security agreement
or preferential arrangement of any kind or nature whatsoever, including,
without limitation, any conditional sale or other title retention agreement,
any financing lease having substantially the same economic effect as any of
the foregoing and the filing of any financing statement under the UCC (other
than any such financing statement filed for informational purposes only) or
comparable law of any jurisdiction to evidence any of the foregoing;
provided, however, that any assignment pursuant to Section 7.02 hereof shall
- - -------- -------
not be deemed to constitute a Lien.
Lifetime Rate Cap: With respect to each HELOC with respect to which the
-----------------
related Mortgage Note provides for a lifetime rate cap, the maximum Loan Rate
permitted over the life of such HELOC under the terms of the related Credit
Line Agreement, as set forth on Exhibit C hereto.
Liquidated Mortgage Loan: As to any Distribution Date, any Mortgage
------------------------
Loan in respect of which the Servicer has determined, in accordance with the
servicing procedures specified herein, as of the end of the related
Collection Period, that all Liquidation Proceeds which it expects to recover
with respect to the disposition of such Mortgage Loan or the related REO have
been recovered.
Liquidation Expenses: Out-of-pocket expenses (exclusive of overhead)
--------------------
which are incurred by the Servicer in connection with the liquidation of any
Mortgage Loan and not recovered under any insurance policy, including,
without limitation, legal fees and expenses, any unreimbursed amount expended
pursuant to Section 3.06 (including, without limitation, amounts advanced to
correct defaults on any mortgage loan which is senior to such Mortgage Loan
and amounts advanced to keep current or pay off a mortgage loan that is
senior to such Mortgage Loan) respecting the related Mortgage Loan and any
related and unreimbursed expenditures with respect to real estate property
taxes, water or sewer taxes, condominium association dues, property
restoration or preservation or insurance against casualty, loss or damage.
Liquidation Loss Amount: With respect to any Distribution Date and any
-----------------------
Mortgage Loan that becomes a Liquidated Mortgage Loan during the related
Collection Period, the unrecovered Asset Balance thereof at the end of such
Collection Period, after giving effect to the Net Liquidation Proceeds
applied in reduction of such Asset Balance.
Liquidation Proceeds: Proceeds (including Insurance Proceeds but not
--------------------
including amounts drawn under the Policy) received in connection with the
liquidation of any Mortgage Loan or related REO, whether through trustee's
sale, foreclosure sale or otherwise.
Loan Agreement: With respect to any HELOC, the related Credit Line
--------------
Agreement. With respect to any Closed-End Loan, the related Mortgage Note.
Loan Rate: With respect to any HELOC and as of any day, the per annum
---------
rate of interest applicable under the related Credit Line Agreement to the
calculation of interest for such day on the Asset Balance of such Mortgage
Loan. With respect to any Closed-End Loan and as of any day, the fixed per
annum rate of interest payable under the related Mortgage Note.
Loan Rate Cap: With respect to each HELOC, the lesser of (i) the
-------------
Lifetime Rate Cap, if any, or (ii) the applicable state usury ceiling, if
any.
Managed Amortization Period: The period from the termination of the
---------------------------
Funding Period to the Rapid Amortization Commencement Date.
Maximum Principal Payment: With respect to any Distribution Date, the
-------------------------
Investor Fixed Allocation Percentage of the Principal Collections for such
Distribution Date.
Maximum Rate: As to any Interest Period, the Weighted Average Net Loan
------------
Rate for the Collection Period during which such Interest Period begins
(adjusted to an effective rate reflecting accrued interest calculated on the
basis of the actual number of days in the Collection Period commencing in the
month in which such Interest Period commences and a year assumed to consist
of 360 days).
Minimum Monthly Payment: With respect to any Mortgage Loan and any
-----------------------
month, the minimum amount required to be paid by the related Mortgagor in
that month.
Minimum Transferor Interest: With respect to any date, an amount equal
---------------------------
to the lesser of ((a) 5% of the Pool Balance on such date and (b) the
Transferor Principal Balance as of the Closing Date).
Moody's: Moody's Investors Service, Inc. or its successor in interest.
-------
Mortgage: The mortgage, deed of trust or other instrument creating a
--------
first or second lien on an estate in fee simple interest in real property
securing a Mortgage Loan.
Mortgage File: The mortgage documents listed in Section 2.01 pertaining
-------------
to a particular Mortgage Loan and any additional documents required to be
added to the Mortgage File pursuant to this Agreement.
Mortgage Loan Schedule: With respect to any date, the schedule of
----------------------
Mortgage Loans included in the Trust on such date. The schedule of Initial
Mortgage Loans as of the Cut-Off Date is the schedule set forth herein as
Exhibit C, which schedule sets forth as to each such Mortgage Loan, to the
extent applicable, (i) the Cut-Off Date Asset Balance, (ii) the Credit Limit,
(iii) the Gross Margin, (iv) the Lifetime Rate Cap, (v) the account number,
(vi) the current Loan Rate, (vii) the Combined Loan-to-Value Ratio, (viii) a
code specifying the property type, (ix) a code specifying documentation type
and (x) a code specifying lien position. The Mortgage Loan Schedule will be
deemed to be amended from time to time to reflect Additional Balances,
Eligible Substitute Mortgage Loans and Subsequent Mortgage Loans.
Mortgage Loans: The mortgage loans, including any Additional Balances
--------------
with respect thereto, that are transferred and assigned to the Trustee
pursuant to Section 2.01, together with the Related Documents, exclusive of
Mortgage Loans that are retransferred to the Depositor, the Servicer or the
Transferor from time to time pursuant to Section 2.02, 2.04, 2.05, 2.06, 2.09
or 3.01 as from time to time are held as a part of the Trust. The mortgage
loans originally so held are identified in the Mortgage Loan Schedule
delivered on the Closing Date. The Mortgage Loans shall also include any
Eligible Substitute Mortgage Loan substituted by the Transferor for a
Defective Mortgage Loan pursuant to Sections 2.02 and 2.04.
Mortgage Note: With respect to a HELOC, the Credit Line Agreement
-------------
pursuant to which the related mortgagor agrees to pay the indebtedness
evidenced thereby and secured by the related Mortgage. With respect to a
Closed-End Loan, the note pursuant to which the related Mortgagor agrees to
pay the indebtedness evidenced thereby which is secured by the related
Mortgage.
Mortgaged Property: The underlying property, including any real
------------------
property and improvements thereon, securing a Mortgage Loan.
Mortgagor: The obligor or obligors under a Loan Agreement.
---------
Net Liquidation Proceeds: With respect to any Liquidated Mortgage Loan,
------------------------
Liquidation Proceeds net of Liquidation Expenses.
Net Loan Rate: With respect to any Mortgage Loan and as to any day, the
-------------
Loan Rate less the Servicing Fee Rate, the Premium Fee Rate and the Trustee
Fee Rate.
Officer's Certificate: A certificate signed by the President, an
---------------------
Executive Vice President, a Senior Vice President, a Vice President, an
Assistant Vice President, the Treasurer, Assistant Treasurer, Controller or
Assistant Controller of the Depositor, the Servicer or the Transferor, as the
case may be, and delivered to the Trustee.
Opinion of Counsel: A written opinion of counsel acceptable to the
------------------
Trustee, who may be in-house counsel for the Depositor, the Servicer or the
Transferor (except that any opinion pursuant to Section 7.04 or relating to
taxation must be an opinion of independent outside counsel) and who, in the
case of opinions delivered to the Credit Enhancer and the Rating Agency, is
reasonably acceptable to it.
Original Class A Certificate Principal Balance: $__________.
----------------------------------------------
Original Invested Amount: $_________ (Same as Original Class A Certif
------------------------
icate Principal Balance.)
Overcollateralization Amount: At the time of reference thereto, the
----------------------------
amount, if any, by which the Invested Amount exceeds the Class A Certificate
Principal Balance.
Paying Agent: Any paying agent appointed pursuant to Section 6.06.
------------
Percentage Interest: As to any Investor Certificate, the percentage
-------------------
obtained by dividing the principal denomination (or notional amount) of such
Investor Certificate by the aggregate of the principal denominations (or
notional amounts) of all Investor Certificates of the same class.
Person: Any individual, corporation, partnership, joint venture,
------
association, joint-stock company, trust, unincorporated organization or
government or any agency or political subdivision thereof.
Policy: The financial guaranty insurance policy number _______, dated
------
as of the Closing Date, issued by the Credit Enhancer to the Trustee for the
benefit of the Investor Certificateholders.
Pool Balance: With respect to any date, the aggregate of the Asset
------------
Balances of all Mortgage Loans as of such date.
Pool Factor: With respect to any Distribution Date, the percentage,
-----------
carried to seven places, obtained by dividing the Class A Certificate
Principal Balance for such Distribution Date by the Original Class A
Certificate Principal Balance.
Preference Claim: As defined in Section 4.02.
----------------
Premium Fee Rate: As described in the Insurance Agreement.
----------------
Principal Collections: As to any Distribution Date, the sum of all
---------------------
payments by or on behalf of Mortgagors and any other amounts constituting
principal (including but not limited to any portion of Insurance Proceeds or
Net Liquidation Proceeds allocable to principal of the applicable Mortgage
Loan, and Transfer Deposit Amounts, but excluding Foreclosure Profits)
collected by the Servicer under the Mortgage Loans during the related Collec-
tion Period. The terms of the related Loan Agreement shall determine the
portion of each payment in respect of a Mortgage Loan that constitutes
principal or interest.
Purchase Agreement: The Mortgage Loan Purchase Agreement, dated as of
------------------
the Cut-off Date, between Headlands, as seller, and Headlands SPC, as
purchaser, with respect to the Mortgage Loans.
Rapid Amortization Commencement Date: The earlier of (i) the
------------------------------------
Distribution Date in ______________ and (ii) the Distribution Date next
succeeding the Collection Period in which a Rapid Amortization Event is
deemed to occur pursuant to Section 11.01.
Rapid Amortization Event: As defined in Section 11.01.
------------------------
Rapid Amortization Period: The period commencing on the Rapid
-------------------------
Amortization Date and continuing until the termination of the Trust pursuant
to Section 10.01.
Rating Agency: Any statistical credit rating agency, or its successor,
-------------
that rated the Investor Certificates at the request of the Depositor at the
time of the initial issuance of the Certificates. If such agency or a
successor is no longer in existence, "Rating Agency" shall be such
statistical credit rating agency, or other comparable Person, designated by
the Depositor and the Credit Enhancer, notice of which designation shall be
given to the Trustee. References herein to the highest short term unsecured
rating category of a Rating Agency shall mean A-1+ or better in the case of
Standard & Poor's and P-1 or better in the case of Moody's and in the case of
any other Rating Agency shall mean the ratings such other Rating Agency deems
equivalent to the foregoing ratings. References herein to the highest long-
term rating category of a Rating Agency shall mean "AAA" in the case of
Standard & Poor's and "Aaa" in the case of Moody's and in the case of any
other Rating Agency, the rating such other Rating Agency deems equivalent to
the foregoing ratings.
Record Date: The last day preceding the related Distribution Date;
-----------
provided, however, that following the date on which Definitive Certificates
- - -------- -------
are available pursuant to Section 6.02(c) the Record Date shall be the last
day of the calendar month preceding the month in which the related
Distribution Date occurs.
Reference Bank Rate: As to any Interest Period as follows: the
-------------------
arithmetic mean (rounded upwards, if necessary, to the nearest one sixteenth
of a percent) of the offered rates for United States dollar deposits for one
month which are offered by the Reference Banks as of 11:00 A.M., London time,
on the second LIBOR Business Day prior to the first day of such Interest
Period to prime banks in the London interbank market for a period of one
month in amounts approximately equal to the outstanding Class A Certificate
Principal Balance; provided that at least two such Reference Banks provide
--------
such rate. If fewer than two offered rates appear, the Reference Bank Rate
will be the arithmetic mean of the rates quoted by one or more major banks in
New York City, selected by the Depositor 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 outstanding Class A Certificate Principal Balance. If no such
quotations can be obtained, the Reference Bank Rate shall be LIBOR applicable
to the preceding Interest Period.
Reference Banks: Three major banks that are engaged in the London
---------------
interbank market, selected by the Depositor after consultation with the
Trustee.
Related Documents: As defined in Section 2.01.
-----------------
REO: A Mortgaged Property that is acquired by the Trust in foreclosure
---
or by deed in lieu of foreclosure.
Required Overcollateralization Amount: As defined in the Insurance
-------------------------------------
Agreement.
Responsible Officer: When used with respect to the Trustee, any officer
-------------------
of the Trustee with direct responsibility for the administration of this
Agreement and also, with respect to a particular matter, any other officer to
whom such matter is referred because of such officer's knowledge of and
familiarity with the particular subject.
Retransfer Date: As defined in Section 2.06.
---------------
Retransfer Notice Date: As defined in Section 2.06.
----------------------
SAIF: The Savings Association Insurance Fund, as from time to time
----
constituted, created under the Financial Institutions Reform, Recovery and
Enhancement Act of 1989, or if at any time after the execution of this
instrument the Savings Association Insurance Fund is not existing and
performing duties now assigned to it, the body performing such duties on such
date.
Scheduled Principal Collections Distribution Amount: With respect to
---------------------------------------------------
any Distribution Date during the Funding Period or the Managed Amortization
Period and the Class A Certificates, an amount equal to the lesser of (i) the
Maximum Principal Payment and (ii) the Alternative Principal Payment. With
respect to any Distribution Date in respect of the Rapid Amortization Period,
the Maximum Principal Payment.
Seller: ( ), a ( ) corporation and any
------
successor thereto.
Servicer: ( ), a ( ) corporation, any
--------
successor thereto and, after its termination as Servicer, any successor
hereunder.
Servicing Certificate: A certificate completed and executed by a
---------------------
Servicing Officer in accordance with Section 4.01.
Servicing Fee: With respect to any Distribution Date, the product of
-------------
(i) the Servicing Fee Rate divided by 12 and (ii) the aggregate Asset Balance
of the Mortgage Loans on the first day of the Collection Period preceding
such Distribution Date (or at the Cut-Off Date with respect to the first
Distribution Date).
Servicing Fee Rate: ____% per annum.
------------------
Servicing Officer: Any officer of the Servicer involved in, or
-----------------
responsible for, the administration and servicing of the Mortgage Loans whose
name and specimen signature appear on a list of servicing officers furnished
to the Trustee (with a copy to the Credit Enhancer) by the Servicer on the
Closing Date, as such list may be amended from time to time.
Spread Account: The account created pursuant to Section 4.03 and
--------------
maintained pursuant to the Insurance Agreement.
Spread Account Maximum: As defined in the Insurance Agreement.
----------------------
Standard & Poor's: Standard & Poor's Ratings Services, a division of
-----------------
The McGraw-Hill Companies, Inc., or its successor in interest.
Subsequent Mortgage Loan: Each HELOC acquired pursuant to Section 2.10
------------------------
with funds on deposit in the Funding Account during the Funding Period on the
related Subsequent Transfer Date.
Subsequent Transfer Date: With respect to Subsequent Mortgage Loans,
------------------------
any Distribution Date during the Funding Period.
Telerate Screen LIBOR Page 3750: 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 inter-bank offered rates of
major banks).
Transfer Date: With respect to each Subsequent Mortgage Loan, the
-------------
Subsequent Transfer Date, and with respect to each Eligible Substitute
Mortgage Loan, the date on which such Eligible Substitute Mortgage Loan shall
have been transferred to the Trust.
Transfer Deficiency: As defined in Section 2.02.
-------------------
Transfer Deposit Amount: As defined in Section 2.02.
-----------------------
Transferor or Transferor Certificateholders: The Holders of the Trans
-------------------------------------------
feror Certificates which shall initially be Headlands SPC.
Transferor Available Funds: As to any Distribution Date, Transferor
--------------------------
Collections up to but not exceeding the Transferor Subordinated Amount
immediately prior to such Distribution Date.
Transferor Certificates: The certificates executed and authenticated
-----------------------
by the Trustee substantially in the form set forth in Exhibit B hereto.
Transferor Collections: As to any period, the sum of Transferor
----------------------
Interest Collections and Transferor Principal Collections for such period.
Transferor Interest Collections: Interest Collections that are not
-------------------------------
Investor Interest Collections.
Transferor Principal Balance: As of any date of determination, the
----------------------------
amount equal to (i) the Pool Balance at the end of the day next preceding
such date of determination less (ii) the Invested Amount as of the close of
business on the preceding Distribution Date plus (iii) Principal Collections
on deposit in the Funding Account.
Transferor Principal Collections: On any Distribution Date, Principal
--------------------------------
Collections received during the related Collection Period minus the amount of
such Principal Collections required to be distributed to Class A
Certificateholders pursuant to Section 5.01(b) or required to be deposited to
the Funding Account pursuant to Section 5.05.
Transferor Subordinated Amount: At the time of reference thereto, the
------------------------------
lesser of (a) $_____________ less the sum of (i) the aggregate amount of
Transferor Collections previously applied pursuant to Section 5.01(c), (ii)
the aggregate amount of Investor Loss Amounts that have previously been
reallocated to the Transferor Principal Balance pursuant to the second
sentence of Section 5.01(c) and (iii) the amount by which the Overcollateral-
ization Amount exceeds $_______________ and (b) the Transferor Subordinated
Amount on the previous Distribution Date; provided that the Transferor
Subordinated Amount shall notbe less than zero.
Trust: The trust created by this Agreement, the corpus of which
-----
consists of the Mortgage Loans, such other assets as shall from time to time
be identified as deposited in the Collection Account in accordance with this
Agreement, property that secured a Mortgage Loan and that has become REO, the
interest of the Depositor in certain hazard insurance policies maintained by
the Mortgagors or the Servicer in respect of the Mortgage Loans, the Policy,
an assignment of the Transferor's rights under the Purchase Agreement, such
assets as may be deposited from time to time in the Spread Account and the
Funding Account, and all proceeds of each of the foregoing (exclusive of
payments of accrued interest on the Mortgage Loans which are due on or prior
to the Cut-Off Date).
Trustee: (_______________) or any successor Trustee appointed in
-------
accordance with this Agreement that has accepted such appointment in
accordance with this Agreement.
Trustee Fee: A fee which is separately agreed to between the Servicer
-----------
and the Trustee.
Trustee Fee Rate: The per annum rate at which the Trustee Fee is
----------------
calculated.
UCC: The Uniform Commercial Code, as amended from time to time, as in
---
effect in any specified jurisdiction.
Unpaid Class A Certificate Carry Forward Interest Amount: With respect
--------------------------------------------------------
to any Distribution Date, the aggregate amount, if any, of any Class A
Certificate Carry Forward Interest that was accrued in respect of prior
Distribution Dates and which has not been distributed to Class A Certificate-
holders.
Unpaid Class A Certificate Interest Shortfall: With respect to any
---------------------------------------------
Distribution Date, the aggregate amount, if any, of Class A Certificate
Interest that was accrued in respect of a prior Distribution Date and has not
been distributed to Class A Certificateholders.
Unpaid Class S Certificate Interest Shortfall: With respect to any
---------------------------------------------
Distribution Date, the aggregate amount, if any, of Class S Certificate
Interest that was accrued in respect of a prior Distribution Date and has not
been distributed to Class S Certificateholders.
Valuation: With respect to any Mortgaged Property and time referred to
---------
herein, the Appraised Value of the Mortgaged Property.
Voting Rights: The portion of the aggregate voting rights of all the
-------------
Certificates evidenced by a Class of Certificates. At all times during the
term of this Agreement, (98%) of all of the Voting Rights shall be allocated
among Holders of the Class A Certificates and the Holders of the Class S
Certificates shall be entitled to (2%) of all of the Voting Rights. Voting
Rights allocated to a Class of Certificates shall be allocated among the
Certificates of each such Class in accordance with their respective
Percentage Interests.
Weighted Average Net Loan Rate: As to any Collection Period, the
------------------------------
average of the daily Net Loan Rate for each Mortgage Loan for each day during
the related Billing Cycle, weighted on the basis of the daily average of the
related Asset Balances outstanding for each day in such Billing Cycle for
each Mortgage Loan as determined by the Servicer in accordance with the
Servicer's normal servicing procedures.
Section 1.02. Interest Calculations. All calculations of interest
---------------------
hereunder that are made in respect of the Asset Balance of a Mortgage Loan
shall be made on a daily basis using a 365-day year. All calculations of
interest on the Investor Certificates shall be made on the basis of the
actual number of days in an Interest Period and a year assumed to consist of
360 days. The calculation of the Servicing Fee shall be made on the basis of
a 360-day year consisting of twelve 30-day months. All dollar amounts
calculated hereunder shall be rounded to the nearest penny with one-half of
one penny being rounded down.
ARTICLE II
Conveyance of Mortgage Loans;
Original Issuance of Certificates;
Tax Treatment
Section 2.01. Conveyance of Mortgage Loans; Retention of Obligation to
--------------------------------------------------------
Fund Advances Under Credit Line Agreements. The Transferor hereby sells,
- - ------------------------------------------
transfers, assigns, sets over and otherwise conveys to the Depositor, without
recourse (subject to Section 2.02 and 2.04), all of its right, title and
interest in and to (i) each Initial Mortgage Loan, including its Asset
Balance and all collections in respect thereof received on or after the Cut-
Off Date (excluding payments in respect of accrued interest due prior to the
Cut-Off Date); (ii) property that secured an Initial Mortgage Loan that is
acquired by foreclosure or deed in lieu of foreclosure; (iii) the
Transferor's rights under the Purchase Agreement (including all
representations and warranties of the Seller contained therein); and (iv) the
Transferor's rights under the hazard insurance policies. The Transferor has
entered into this Agreement in consideration for the purchase of the Mortgage
Loans by the Depositor and has agreed to take the actions specified herein.
The Depositor, concurrently with the execution and delivery of this
Agreement, hereby sells, transfers, assigns, sets over and otherwise conveys
to the Trust, without recourse (subject to Sections 2.02 and 2.04), all of
its right, title and interest in and to (i) each Initial Mortgage Loan,
including its Asset Balance and all collections in respect thereof received
on or after the Cut-Off Date (excluding payments in respect of accrued
interest due prior to the Cut-off Date); (ii) property that secured an
Initial Mortgage Loan that is acquired by foreclosure or deed in lieu of
foreclosure; (iii) all rights under the Purchase Agreement assigned by the
Transferor to the Depositor (including all representations and warranties of
the Seller contained therein); (iv) the Depositor's rights under the hazard
insurance policies; (v) the Spread Account; (vi) the Policy; (vii) the
Funding Account; and (viii) all other assets included or to be included in
the Trust for the benefit of Certificateholders; provided, however, neither
-------- -------
the Trustee nor the Trust assumes the obligation under any Credit Line
Agreement that provides for the funding of future advances to the Mortgagor
thereunder, and neither the Trust nor the Trustee shall be obligated or
permitted to fund any such future advances. With respect to the HELOCs,
Additional Balances shall be part of the related Asset Balance and are hereby
transferred to the Trust on the Closing Date pursuant to this Section 2.01,
and therefore part of the Trust property. In addition, on or prior to the
Closing Date, the Depositor shall cause the Credit Enhancer to deliver the
Policy to the Trustee for the benefit of the Investor Certificateholders.
The foregoing transfer, assignment, set-over and conveyance to the Trust
shall be made to the Trustee, on behalf of the Trust, and each reference in
this Agreement to such transfer, assignment, set-over and conveyance shall be
construed accordingly.
Each of the Transferor and the Depositor agrees to take or cause to be
taken such actions and execute such documents (including without limitation
the filing of all necessary continuation statements for the UCC-1 financing
statements filed in the States of ( ) and ( ),
respectively, (which shall have been filed within 10 days of the Closing
Date) describing the Cut-Off Date Asset Balances and Additional Balances and
naming (i) the Transferor as debtor and the Depositor as secured party and
(ii) the Depositor as debtor and the Trustee as secured party and any amend-
ments to UCC-1 financing statements required to reflect a change in the name
or corporate structure of the Transferor or the Depositor or the filing of
any additional UCC-1 financing statements due to the change in the principal
office of the Depositor (within 10 days of any event necessitating such
filing) as are necessary to perfect and protect the Certificateholders' and
Credit Enhancer's interests in each Cut-Off Date Asset Balance and Additional
Balances and the proceeds thereof (other than maintaining possession by the
Trustee of the Mortgage Loans and the Mortgage Files).
In connection with such transfer and assignment, the Servicer shall
deliver to the Trustee the following documents or instruments (the "Related
Documents") with respect to each Initial Mortgage Loan on the Closing Date
and will deliver with respect to each Subsequent Mortgage Loan on the related
Subsequent Transfer Date:
(i) the original Mortgage Note endorsed in blank;
(ii) an original Assignment of Mortgage in blank in recordable
form;
(iii) the original recorded Mortgage or, if, in connection with
any Mortgage Loan, the original recorded Mortgage with evidence of
recording thereon cannot be delivered on or prior to the Closing Date
because of a delay caused by the public recording office where such
original Mortgage has been delivered for recordation or because such
original Mortgage has been lost, the Transferor, at the direction of the
Depositor, shall deliver or cause to be delivered to the Custodian, as
agent for the Trustee, a true and correct copy of such Mortgage,
together with (i) in the case of a delay caused by the public recording
office, an Officer's Certificate of the Depositor stating that such
original Mortgage has been dispatched to the appropriate public
recording official or (ii) in the case of an original Mortgage that has
been lost, a certificate by the appropriate county recording office
where such Mortgage is recorded;
(iv) if applicable, the original intervening assignments, if any
("Intervening Assignments"), with evidence of recording thereon, showing
a complete chain of title to the Mortgage from the originator to the
Depositor or, if any such original Intervening Assignment has not been
returned from the applicable recording office or has been lost, a true
and correct copy thereof, together with (i) in the case of a delay
caused by the public recording office, an Officer's Certificate of the
Transferor stating that such original Intervening Assignment has been
dispatched to the appropriate public recording official for recordation
or (ii) in the case of an original Intervening Assignment that has been
lost, a certificate by the appropriate county recording office where
such Mortgage is recorded;
(v) either a title policy, a title search or guaranty of title
with respect to the related Mortgaged Property;
(vi) the original of any guaranty executed in connection with the
Mortgage Note;
(vii) the original of each assumption, modification, consolidation
or substitution agreement, if any, relating to the Mortgage Loan; and
(viii) any security agreement, chattel mortgage or equivalent
instrument executed in connection with the Mortgage;
provided, however, that as to any Mortgage Loan, if (a) as evidenced by an
- - -------- -------
Opinion of Counsel delivered to and in form and substance satisfactory to the
Trustee and the Credit Enhancer, (x) an optical image or other representation
of the related documents specified in clauses (i) through (viii) above are
enforceable in the relevant jurisdictions to the same extent as the original
of such document and (y) such optical image or other representation does not
impair the ability of an owner of such Mortgage Loan to transfer its interest
in such Mortgage Loan, and (b) the retention of such documents in such format
will not result in a reduction in the then current rating of the Investor
Certificates, without regard to the Policy, such optical image or other
representation may be held by the Servicer, as custodian for the Trustee or
assignee in lieu of the physical documents specified above.
The Transferor hereby confirms to the Trustee that it has caused the
portions of the Electronic Ledgers relating to the Initial Mortgage Loans as
of the Closing Date, and that it will cause such Electronic Ledgers with
respect to each Subsequent Mortgage Loan as of the related Subsequent
Transfer Date, to be clearly and unambiguously marked, and has made, or will
make, the appropriate entries in its general accounting records to indicate
that such Mortgage Loans have been transferred to the Trust. The Servicer
hereby confirms to the Trustee that it has clearly and unambiguously made
appropriate entries in its general accounting records indicating that such
Mortgage Loans constitute part of the Trust and are serviced by it on behalf
of the Trust in accordance with the terms hereof. The Servicer hereby
confirms to the Trustee that it will clearly and unambiguously make appro-
priate entries in its general accounting records indicating that each
Subsequent Mortgage Loan constitutes part of the Trust and is serviced by it
on behalf of the Trust in accordance with the terms hereof as of the related
Subsequent Transfer Date.
Notwithstanding the characterization of the Class A Certificates as debt
for Federal, state and local income and franchise tax purposes, the parties
hereto intend to treat the transfer of the Mortgage Loans to the Trust as
provided herein as a sale, for certain non-tax purposes, of all the
Transferor's and Depositor's right, title and interest in and to the Mortgage
Loans, whether now existing or hereafter created, and the other property
described above and all proceeds thereof. In the event such transfer is
deemed not to be a sale for such purposes, the Transferor hereby grants to
the Depositor and the Depositor grants to the Trust, a security interest in
all of such party's right, title and interest in, to and under the Mortgage
Loans, whether now existing or hereafter created, and the other property
described above and all proceeds thereof; and this Agreement shall constitute
a security agreement under applicable law.
Within 90 days following delivery of the Mortgage Files to the Trustee
pursuant to this Section, the Trustee shall review each such Mortgage File to
ascertain that all required documents set forth in this Section 2.01 have
been executed and received, and that such documents relate to the Mortgage
Loans identified on the Mortgage Loan Schedule and in so doing the Trustee
may rely on the purported due execution and genuineness of any signature
thereon. If within such 90-day period the Trustee finds any document consti-
tuting a part of a Mortgage File not to have been executed or received or to
be unrelated to the Mortgage Loans identified in said Mortgage Loan Schedule
or, if in the course of its review, the Trustee determines that such Mortgage
File is otherwise defective in any material respect, the Trustee shall
promptly upon the conclusion of its review notify the Transferor, the
Depositor and the Credit Enhancer, and the Transferor shall have a period of
90 days after such notice within which to correct or cure any such defect.
The Trustee shall have no responsibility for reviewing any Mortgage File
except as expressly provided in this Section 2.01. In reviewing any Mortgage
File pursuant to this Section, the Trustee shall have no responsibility for
determining whether any document is valid and binding, whether the text of
any assignment or endorsement is in proper or recordable form (except, if
applicable, to determine if the Trustee is the assignee or endorsee), whether
any document has been recorded in accordance with the requirements of any
applicable jurisdiction, or whether a blanket assignment is permitted in any
applicable jurisdiction, whether any Person executing any document is
authorized to do so or whether any signature thereon is genuine, but shall
only be required to determine whether a document has been executed, that it
appears to be what it purports to be, and, where applicable, that it purports
to be recorded.
Section 2.02. Acceptance by Trustee; Retransfer of Mortgage Loans. (a)
---------------------------------------------------
The Trustee hereby acknowledges its receipt of the Policy and the Mortgage
Loans, and declares that the Trustee holds and will hold such instrument, and
to the extent that any documents are delivered to it pursuant to Section
2.01, will hold such documents, and all amounts received by it thereunder and
hereunder, in trust, upon the terms herein set forth, for the use and benefit
of all present and future Certificateholders and the Credit Enhancer. If the
time to cure any defect in respect of any Mortgage Loan of which the Trustee
has notified the Transferor and the Depositor following the review pursuant
to Section 2.01 has expired or if at any time any loss is suffered by the
Trustee on behalf of the Certificateholders or the Credit Enhancer, in
respect of any Mortgage Loan as a result of (i) a defect in any document
constituting a part of its Mortgage File or (ii) an Assignment of Mortgage to
the Trustee not having been recorded as required by Section 2.01, then on the
next succeeding Business Day upon the deposit to the Collection Account of
the Transfer Deposit Amount, if any, and upon satisfaction of the applicable
conditions described herein, all right, title and interest of the Trust in
and to such Mortgage Loan shall be deemed to be retransferred, reassigned and
otherwise reconveyed, without recourse, representation or warranty, to the
Transferor on such Business Day and the Asset Balance of such Mortgage Loan
shall be deducted from the Pool Balance; provided, how-
--------
ever, that interest accrued on the Asset Balance of such Mortgage Loan to the
end of the related Collection Period shall be the property of the Trust. The
Trustee shall determine if the reduction of such Asset Balance from the Pool
Balance in accordance with the preceding sentence would cause the Transferor
Principal Balance to be less than the Minimum Transferor Interest ("Transfer
Deficiency"), in which event the Trustee shall deliver written notice of such
deficiency to the Transferor, and within five Business Days after the
Business Day of such retransfer the Transferor shall either (i) substitute an
Eligible Substitute Mortgage Loan or (ii) deposit into the Collection Account
an amount (the "Transfer Deposit Amount") in immediately available funds
equal to the Transfer Deficiency or a combination of both (i) and (ii) above.
Such reduction or substitution and the actual payment of any Transfer Deposit
Amount, if any, shall be deemed to be payment in full for such Mortgage Loan.
Upon receipt of any Eligible Substitute Mortgage Loan or of written
notification signed by a Servicing Officer to the effect that the Transfer
Deposit Amount in respect of a Defective Mortgage Loan has been deposited
into the Collection Account or, if the Transferor Principal Balance is not
reduced below the Minimum Transferor Interest as a result of the deemed
retransfer of a Defective Mortgage Loan, then as promptly as practicable
following such deemed transfer, the Trustee shall execute such documents and
instruments of transfer presented by the Transferor, in each case without
recourse, representation or warranty, and take such other actions as shall
reasonably be requested by the Transferor to effect such transfer by the
Trust of such Defective Mortgage Loan pursuant to this Section. It is under-
stood and agreed that the obligation of the Transferor to accept a transfer
of a Defective Mortgage Loan and to either convey an Eligible Substitute
Mortgage Loan or to make a deposit of any related Transfer Deposit Amount
into the Collection Account shall constitute the sole remedy respecting such
defect available to Certificateholders, the Trustee and the Credit Enhancer
against the Transferor.
The Servicer, promptly following the transfer of a Defective Mortgage
Loan from or to the Trust pursuant to this Section, shall amend the Mortgage
Loan Schedule and make appropriate entries in its general account records to
reflect such transfer. The Servicer shall, following such retransfer,
appropriately mark its records to indicate that it is no longer servicing
such Mortgage Loan on behalf of the Trust. The Transferor, promptly
following such transfer, shall appropriately mark its Electronic Ledger and
make appropriate entries in its general account records to reflect such
transfer.
Notwithstanding any other provision of this Section, a retransfer of a
Defective Mortgage Loan to the Transferor pursuant to this Section that would
cause the Transferor Principal Balance to be less than the Minimum Transferor
Interest shall not occur if either the Transferor fails to convey an Eligible
Substitute Mortgage Loan or to deposit into the Collection Account any
related Transfer Deposit Amount required by this Section with respect to the
transfer of such Defective Mortgage Loan.
(b) As to any Eligible Substitute Mortgage Loan or Loans, the
Transferor shall deliver to the Trustee with respect to such Eligible
Substitute Mortgage Loan or Loans such documents and agreements as are
required to be held by the Trustee in accordance with Section 2.01. For any
Collection Period during which the Transferor substitutes one or more
Eligible Substitute Mortgage Loans, the Servicer shall determine the Transfer
Deposit Amount which amount shall be deposited by the Transferor in the
Collection Account at the time of substitution. All amounts received in
respect of the Eligible Substitute Mortgage Loan or Loans during the
Collection Period in which the circumstances giving rise to such substitution
occur shall not be a part of the Trust Fund and shall not be deposited by the
Servicer in the Collection Account. All amounts received by the Servicer
during the Collection Period in which the circumstances giving rise to such
substitution occur in respect of any Defective Mortgage Loan so removed by
the Trust Fund shall be deposited by the Servicer in the Collection Account.
Upon such substitution, the Eligible Substitute Mortgage Loan or Loans shall
be subject to the terms of this Agreement in all respects, and the Transferor
shall be deemed to have made with respect to such Eligible Substitute
Mortgage Loan or Loans, as of the date of substitution, the covenants,
representations and warranties set forth in Section 2.04. The procedures
applied by the Transferor in selecting each Eligible Substitute Mortgage Loan
shall not be materially adverse to the interests of the Trustee, the
Certificateholders and the Credit Enhancer.
Section 2.03. Representations and Warranties Regarding the Servicer and
---------------------------------------------------------
the Transferor. (a) The Servicer represents and warrants to the Trustee and
- - --------------
the Credit Enhancer that as of the Closing Date and as of the Subsequent
Transfer Date:
(i) The Servicer is a (state) corporation, validly existing and
in good standing under the laws of the State of ( ), and has the
corporate power to own its assets and to transact the business in which
it is currently engaged. The Servicer is duly qualified to do business
as a foreign corporation and is in good standing in each jurisdiction in
which the character of the business transacted by it or any properties
owned or leased by it requires such qualification and in which the
failure so to qualify would have a material adverse effect on the
business, properties, assets, or condition (financial or other) of the
Servicer;
(ii) The Servicer has the power and authority to make, execute,
deliver and perform this Agreement and all of the transactions
contemplated under the Agreement, and has taken all necessary corporate
action to authorize the execution, delivery and performance of this
Agreement. When executed and delivered, this Agreement will constitute
the legal, valid and binding obligation of the Servicer enforceable in
accordance with its terms, except as enforcement of such terms may be
limited by bankruptcy, insolvency, reorganization, moratorium or other
similar laws affecting the enforcement of creditors' rights generally
and by the availability of equitable remedies;
(iii) The Servicer is not required to obtain the consent of any
other party or any consent, license, approval or authorization from, or
registration or declaration with, any governmental authority, bureau or
agency in connection with the execution, delivery, performance, validity
or enforceability of this Agreement, except for such consent, license,
approval or authorization, or registration or declaration, as shall have
been obtained or filed, as the case may be, prior to the Closing Date;
(iv) The execution, delivery and performance of this Agreement by
the Servicer will not violate any provision of any existing law or
regulation or any order or decree of any court applicable to the
Servicer or any provision of the Certificate of Incorporation or Bylaws
of the Servicer, or constitute a material breach of any mortgage,
indenture, contract or other agreement to which the Servicer is a party
or by which the Servicer may be bound; and
(v) No litigation or administrative proceeding of or before any
court, tribunal or governmental body is currently pending, or to the
knowledge of the Servicer threatened, against the Servicer or any of its
properties or with respect to this Agreement or the Certificates which
in the opinion of the Servicer has a reasonable likelihood of resulting
in a material adverse effect on the transactions contemplated by this
Agreement.
The representations and warranties set forth in this Section 2.03(a) shall
survive the sale and assignment of the Mortgage Loans to the Trust. Upon
discovery of a breach of any representations and warranties which materially
and adversely affects the interests of the Certificateholders or the Credit
Enhancer, the person discovering such breach shall give prompt written notice
to the other parties and to the Credit Enhancer. Within 90 days of its dis-
covery or its receipt of notice of breach, or, with the prior written consent
of a Responsible Officer of the Trustee, such longer period specified in such
consent, the Servicer shall cure such breach in all material respects.
(b) The Transferor represents and warrants to the Trustee and the
Credit Enhancer that as of the Closing Date and as of each Subsequent
Transfer Date:
(i) The Transferor is a ( ) corporation, validly existing
and in good standing under the laws of the State of ( ), and
has the corporate power to own its assets and to transact the business
in which it is currently engaged. The Transferor is duly qualified to
do business as a foreign corporation and is in good standing in each
jurisdiction in which the character of the business transacted by it or
any properties owned or leased by it requires such qualification and in
which the failure so to qualify would have a material adverse effect on
the business, properties, assets, or condition (financial or other) of
the Transferor;
(ii) The Transferor has the power and authority to make, execute,
deliver and perform this Agreement and all of the transactions
contemplated under the Agreement, and has taken all necessary corporate
action to authorize the execution, delivery and performance of this
Agreement. When executed and delivered, this Agreement will constitute
the legal, valid and binding obligation of the Transferor enforceable in
accordance with its terms, except as enforcement of such terms may be
limited by bankruptcy, insolvency, reorganization, moratorium or other
similar laws affecting the enforcement of creditors' rights generally
and by the availability of equitable remedies;
(iii) The Transferor is not required to obtain the consent of any
other party or any consent, license, approval or authorization from, or
registration or declaration with, any governmental authority, bureau or
agency in connection with the execution, delivery, performance, validity
or enforceability of this Agreement, except for such consent, license,
approval or authorization, or registration or declaration, as shall have
been obtained or filed, as the case may be, prior to the Closing Date;
(iv) The execution, delivery and performance of this Agreement by
the Transferor will not violate any provision of any existing law or
regulation or any order or decree of any court applicable to the
Transferor or any provision of the Certificate of Incorporation or
Bylaws of the Transferor, or constitute a material breach of any
mortgage, indenture, contract or other agreement to which the Transferor
is a party or by which the Transferor may be bound; and
(v) No litigation or administrative proceeding of or before any
court, tribunal or governmental body is currently pending, or to the
knowledge of the Transferor threatened, against the Transferor or any of
its properties or with respect to this Agreement or the Certificates
which in the opinion of the Transferor has a reasonable likelihood of
resulting in a material adverse effect on the transactions contemplated
by this Agreement.
The representations and warranties set forth in this Section 2.03(b) shall
survive the sale and assignment of the Mortgage Loans to the Trust. Upon
discovery of a breach of any representations and warranties which materially
and adversely affects the interests of the Certificateholders or the Credit
Enhancer, the person discovering such breach shall give prompt written notice
to the other parties and to the Credit Enhancer. Within 90 days of its dis-
covery or its receipt of notice of breach, or, with the prior written consent
of a Responsible Officer of the Trustee, such longer period specified in such
consent, the Transferor shall cure such breach in all material respects.
Section 2.04. Representations and Warranties of the Transferor Regard
-------------------------------------------------------
ing the Mortgage Loans; Retransfer of Certain Mortgage Loans. (a) The
- - ------------------------------------------------------------
Transferor hereby represents and warrants to the Trustee, the Depositor and
the Credit Enhancer that as of the Closing Date with respect to the Mortgage
Loans and as of the applicable Transfer Date with respect to any Subsequent
Mortgage Loan and any Eligible Substitute Mortgage Loan,
(i) As of the Closing Date with respect to the Initial Mortgage
Loans and the applicable Transfer Date with respect to any Subsequent
Mortgage Loan and any Eligible Substitute Mortgage Loan and, with
respect to any HELOC, as of the date any Additional Balance is created,
the information set forth in the Mortgage Loan Schedule for such
Mortgage Loans is true and correct in all material respects;
(ii) The applicable Cut-Off Date Asset Balance has not been
assigned or pledged, and the Transferor is the sole owner and holder of
such Cut-Off Date Asset Balance free and clear of any and all liens,
claims, encumbrances, participation interests, equities, pledges,
charges or security interests of any nature, and has full right and
authority, under all governmental and regulatory bodies having
jurisdiction over the ownership of the applicable Mortgage Loan, to
sell, assign or transfer the same pursuant to the Purchase Agreement;
(iii) As of the Closing Date with respect to the Initial Mortgage
Loans and the applicable Transfer Date with respect to any Subsequent
Mortgage Loan and any Eligible Substitute Mortgage Loan, the related
Mortgage Note and the Mortgage with respect to each Mortgage Loan have
not been assigned or pledged, and the Transferor is the sole owner and
holder of the Mortgage Loan free and clear of any and all liens, claims,
encumbrances, participation interests, equities, pledges, charges or
security interests of any nature, and has full right and authority,
under all governmental and regulatory bodies having jurisdiction over
the ownership of the applicable Mortgage Loans, to sell and assign the
same pursuant to the Purchase Agreement;
(iv) As of the Closing Date with respect to the Initial Mortgage
Loans and the applicable Transfer Date with respect to any Subsequent
Mortgage Loan and any Eligible Substitute Mortgage Loan, the related
Mortgage is a valid and subsisting first or second lien, as set forth on
the Mortgage Loan Schedule with respect to each related Mortgage Loan,
on the property therein described, and as of the applicable Cut-Off Date
the related Mortgaged Property is free and clear of all encumbrances and
liens having priority over the first or second lien, as applicable, of
such Mortgage except for liens for (i) real estate taxes and special
assessments not yet delinquent; (ii) any first mortgage loan secured by
such Mortgaged Property and specified on the Mortgage Loan Schedule;
(iii) covenants, conditions and restrictions, rights of way, easements
and other matters of public record as of the date of recording that are
acceptable to mortgage lending institutions generally; and (iv) other
matters to which like properties are commonly subject which do not
materially interfere with the benefits of the security intended to be
provided by such Mortgage;
(v) As of the Closing Date with respect to the Initial Mortgage
Loans and the applicable Transfer Date with respect to any Subsequent
Mortgage Loan and any Eligible Substitute Mortgage Loan, there is no
valid offset, defense or counterclaim of any obligor under any Loan
Agreement or Mortgage;
(vi) To the best knowledge of the Transferor, as of the Closing
Date with respect to the Initial Mortgage Loans and the applicable
Transfer Date with respect to any Subsequent Mortgage Loan and any
Eligible Substitute Mortgage Loan, there is no delinquent recording or
other tax or fee or assessment lien against any related Mortgaged
Property;
(vii) As of the Closing Date with respect to the Initial Mortgage
Loans and the applicable Transfer Date with respect to any Subsequent
Mortgage Loan and any Eligible Substitute Mortgage Loan, there is no
proceeding pending or, to the best knowledge of the Transferor,
threatened for the total or partial condemnation of the related
Mortgaged Property, and such property is free of material damage;
(viii) To the best knowledge of the Transferor, as of the Closing
Date with respect to the Initial Mortgage Loans and the applicable
Transfer Date with respect to any Subsequent Mortgage Loan and any
Eligible Substitute Mortgage Loan, there are no mechanics' or similar
liens or claims which have been filed for work, labor or material
affecting the related Mortgaged Property which are, or may be, liens
prior or equal to the lien of the related Mortgage, except liens which
are fully insured against by the title insurance policy referred to in
clause (xiv);
(ix) No Minimum Monthly Payment is more than 89 days delinquent
(measured on a contractual basis); and with respect to the Mortgage
Loans no more than ___% (by Initial Cut-Off Date Pool Balance) were 30-
59 days delinquent (measured on a contractual basis) and no more than
____% (by Initial Cut-Off Date Pool Balance) were 60-89 days delinquent
(measured on a contractual basis);
(x) As of the Closing Date with respect to the Initial Mortgage
Loans and the applicable Transfer Date with respect to any Subsequent
Mortgage Loan and any Eligible Substitute Mortgage Loan, for each
Mortgage Loan, the related Mortgage File contains each of the documents
and instruments specified to be included therein;
(xi) The related Mortgage Note and the related Mortgage at
origination complied in all material respects with applicable state and
federal laws, including, without limitation, usury, truth-in-lending,
real estate settlement procedures, consumer credit protection, equal
credit opportunity or disclosure laws applicable to the Mortgage Loan;
(xii) Either a lender's title insurance policy or binder was
issued on the date of origination of the Mortgage Loan and each such
policy is valid and remains in full force and effect, or a title search
or guaranty of title customary in the relevant jurisdiction was obtained
with respect to a Mortgage Loan as to which no title insurance policy or
binder was issued;
(xiii) As of the Closing Date with respect to the Initial Mortgage
Loans and the applicable Transfer Date with respect to any Subsequent
Mortgage Loan and any Eligible Substitute Mortgage Loan, none of the
Mortgaged Properties is a mobile home or a manufactured housing unit
that is not considered or classified as part of the real estate under
the laws of the jurisdiction in which it is located;
(xiv) As of the Cut-Off Date for the Initial Mortgage Loans no
more than ____% of such Mortgage Loans (by Initial Cut-Off Date Pool
Balance), are secured by Mortgaged Properties located in one United
States postal zip code;
(xv) The Combined Loan-to-Value Ratio for each Mortgage Loan was
not in excess of ___%;
(xvi) No selection procedure reasonably believed by the Transferor
to be adverse to the interests of the Certificateholders or the Credit
Enhancer was utilized in selecting the Mortgage Loans;
(xvii) The Transferor has not transferred the Mortgage Loans to
the Transferor with any intent to hinder, delay or defraud any of its
creditors;
(xviii) The Minimum Monthly Payment with respect to any HELOC is
not less than the interest accrued at the applicable Loan Rate on the
average daily Asset Balance during the interest period relating to the
date on which such Minimum Monthly Payment is due;
(xix) Within 10 days of the Closing Date with respect to the
Initial Mortgage Loans and, to the extent not already included in such
filing, within 10 days of the applicable Transfer Date with respect to
any Subsequent Mortgage Loan and any Eligible Substitute Mortgage Loan,
the Transferor will file UCC-1 financing statements with respect to such
Mortgage Loans;
(xx) As of the Closing Date with respect to the Initial Mortgage
Loans and the applicable Transfer Date with respect to any Subsequent
Mortgage Loan and any Eligible Substitute Mortgage Loan, each Loan
Agreement and each Mortgage Loan is an enforceable obligation of the
related Mortgagor, except as the enforceability thereof may be limited
by the bankruptcy, insolvency or similar laws affecting creditors'
rights generally;
(xxi) As of the Closing Date with respect to the Initial Mortgage
Loans and the applicable Transfer Date with respect to any Subsequent
Mortgage Loan and any Eligible Substitute Mortgage Loan, the Transferor
has not received a notice of default of any senior mortgage loan related
to a Mortgaged Property that has not been cured by a party other than
the Servicer;
(xxii) The definition of "prime rate" in each Credit Line
Agreement relating to a HELOC does not differ materially from the
definition in the form of Credit Line Agreement in Exhibit F;
(xxiii) The weighted average remaining term to maturity of the
Initial Mortgage Loans on a contractual basis as of the Cut-Off Date is
approximately ___ months. On each date that the Loan Rates relating to
HELOCs have been adjusted, interest rate adjustments on the HELOCs were
made in compliance with the related Mortgages and Mortgage Notes and
applicable law. Over the term of each HELOC, the Loan Rate may not
exceed the related Loan Rate Cap, if any. With respect to the Initial
HELOCs, the Loan Rate Caps range between ____% and ___%. With respect
to the Initial HELOCs, the Margins range between ___% and ____% and the
weighted average Margin is approximately ____% as of the related Cut-Off
Date. The Loan Rates on the Initial Mortgage Loans range between ___%
and ____% and the weighted average Loan Rate is approximately ___%;
(xxiv) As of the Closing Date with respect to the Initial Mortgage
Loans and the applicable Transfer Date with respect to any Subsequent
Mortgage Loan and any Eligible Substitute Mortgage Loan, each Mortgaged
Property consists of a single parcel of real property with a one-to-four
unit single family residence erected thereon, or an individual condo-
minium unit, planned unit development unit or townhouse;
(xxv) No more than ____% (by Initial Cut-Off Date Pool Balance) of
the Initial Mortgage Loans are secured by real property improved by
individual condominium units, planned development units, townhouses or
two-to-four family residences erected thereon, and at least ____% (by
Initial Cut-Off Date Pool Balance) of the Initial Mortgage Loans are
secured by real property with a detached one-family residence erected
thereon;
(xxvi) The Credit Limits on the Initial HELOCs range between
$________ and $_________ with an average of $_______. As of the
applicable Cut-Off Date, no Initial Mortgage Loan had a principal
balance in excess of approximately $___________ and the average
principal balance of the Initial Mortgage Loans is equal to
approximately $_______;
(xxvii) Approximately ____% and ___% of the Initial Mortgage
Loans, by aggregate principal balance as of the applicable Cut-Off Date,
are first and second liens, respectively;
(xxviii) Each Closed-End Loan is payable in equal monthly
installments of principal and interest which would be sufficient, in the
absence of late payments, to fully amortize such loan on the maturity
thereof and bears a fixed interest rate for the term of such Closed-End
Loan; and
(xxix) Either (A) this Agreement constitutes a valid transfer and
assignment to the Depositor of all right, title and interest of the
Transferor in and to the Cut-Off Date Asset Balances with respect to the
applicable Mortgage Loans, all monies due or to become due with respect
thereto (excluding payments in respect of accrued interest due prior to
the Cut-Off Date), and all proceeds of such Cut-Off Date Asset Balances
with respect to the Mortgage Loans and such funds as are from time to
time deposited in the Collection Account (excluding any investment
earnings thereon) and all other property specified in the definition of
"Trust" as being part of the corpus of the Trust conveyed to the Trust,
and upon payment for the Additional Balances, will constitute a valid
transfer and assignment to the Trustee of all right, title and interest
of the Transferor in and to the Additional Balances, all monies due or
to become due with respect thereto, and all proceeds of such Additional
Balances and all other property specified in the definition of "Trust"
relating to the Additional Balances or (B) this Agreement constitutes a
grant of a security interest (as defined in the UCC as in effect in New
York) in such property to the Trustee on behalf of the Trust. If this
Agreement constitutes the grant of a security interest to the Trust in
such property, and if the Trustee obtains and maintains possession of
the Mortgage File for each Mortgage Loan, the Trust shall have a first
priority perfected security interest in such property, subject to the
effect of Section 9-306 of the UCC with respect to collections on the
Mortgage Loans that are deposited in the Collection Account in accor-
dance with the next to last paragraph of Section 3.02(b).
With respect to the representations and warranties set forth in this
Section 2.04 that are made to the best of the Transferor's knowledge or as to
which the Transferor has no knowledge, if it is discovered by the Transferor,
the Depositor, the Servicer or a Responsible Officer of the Trustee that the
substance of such representation and warranty is inaccurate and such
inaccuracy materially and adversely affects the value of the related Mortgage
Loan then, notwithstanding the Transferor's lack of knowledge with respect to
the substance of such representation and warranty being inaccurate at the
time the representation or warranty was made, such inaccuracy shall be deemed
a breach of the applicable representation or warranty.
(b) It is understood and agreed that the representations and warranties
set forth in this Section 2.04 shall survive delivery of the respective
Mortgage Files to the Trustee pursuant to Section 2.01 and the termination of
the rights and obligations of the Servicer pursuant to Section 7.04 or 8.02.
Upon discovery by the Transferor, the Depositor, the Servicer, the Credit
Enhancer or a Responsible Officer of the Trustee of a breach of any of the
foregoing representations and warranties, without regard to any limitation
set forth therein concerning the knowledge of the Transferor as to the facts
stated therein, which materially and adversely affects the interests of the
Trust or the Investor Certificateholders or the Credit Enhancer in the
related Mortgage Loan, the party discovering such breach shall give prompt
written notice to the other parties and the Credit Enhancer. Within 90 days
of its discovery or its receipt of notice of such breach, the Transferor
shall use all reasonable efforts to cure such breach in all material respects
or shall, not later than the Business Day next preceding the Distribution
Date in the month following the Collection Period in which any such cure
period expired (or such later date that is acceptable to the Trustee and the
Credit Enhancer as evidenced by their written consents), either (a) accept a
transfer of such Mortgage Loan from the Trust or (b) substitute an Eligible
Substitute Mortgage Loan in the same manner and subject to the same condi-
tions as set forth in Section 2.02; provided, how-
--------
ever, that the cure for any breach of a representation and warranty relating
to the characteristics of the Mortgage Loans in the aggregate shall be a
repurchase of or substitution for only the Mortgage Loans necessary to cause
such characteristics to be in compliance with the related representation and
warranty. Upon accepting such transfer and making any required deposit into
the Collection Account or substitution of an Eligible Substitute Mortgage
Loan, as the case may be, the Transferor shall be entitled to receive an
instrument of assignment or transfer from the Trustee to the same extent as
set forth in Section 2.02 with respect to the transfer of Mortgage Loans
under that Section.
It is understood and agreed that the obligation of the Transferor to
accept a retransfer of a Mortgage Loan as to which a breach has occurred and
is continuing and to make any required deposit in the Collection Account or
to substitute an Eligible Substitute Mortgage Loan, as the case may be, shall
constitute the sole remedy against the Transferor respecting such breach
available to Investor Certificateholders, the Trustee on behalf of Investor
Certificateholders and the Credit Enhancer; provided, however, that the
-------- -------
Transferor shall defend and indemnify the Trustee, the Credit Enhancer and
the Investor Certificateholders against all reasonable costs and expenses,
and all losses, damages, claims and liabilities, including reasonable fees
and expenses of counsel and the amount of any settlement entered into with
the consent of the Transferor (such consent not to be unreasonably withheld),
which may be asserted against or incurred by any of them as a result of any
third-party action arising out of any breach of any such representation and
warranty. Notwithstanding the foregoing, with regard to any breach of the
representation and warranty set forth in Section 2.04(a)(iv), the sale and
assignment of the affected Mortgage Loans to the Trust shall be deemed void
and the Transferor shall pay to the Trust the sum of (i) the amount of the
related Asset Balances, plus unpaid accrued interest on each such Asset
Balance at the applicable Loan Rate to the date of payment and (ii) the
amount of any loss suffered by Certificateholders or the Credit Enhancer with
respect to the affected Mortgage Loans.
Section 2.05. Covenants of the Depositor and the Transferor. Each of
---------------------------------------------
the Depositor and the Transferor hereby covenants that:
(a) Security Interests. Except for the transfer hereunder, neither the
------------------
Depositor nor the Transferor will sell, pledge, assign or transfer to any
other Person, or grant, create, incur, assume or suffer to exist any Lien on
any Mortgage Loan, whether now existing or hereafter created, or any interest
therein; each of the Depositor and the Transferor will notify the Trustee of
the existence of any Lien on any Mortgage Loan immediately upon discovery
thereof; and each of the Depositor and the Transferor will defend the right,
title and interest of the Trust in, to and under the Mortgage Loans, whether
now existing or hereafter created, against all claims of third parties
claiming through or under the Depositor or the Transferor, respectively;
provided, however, that nothing in this Section 2.05(a) shall prevent or be
- - -------- -------
deemed to prohibit the Depositor or the Transferor from suffering to exist
upon any of the Mortgage Loans any Liens for municipal or other local taxes
and other governmental charges if such taxes or governmental charges shall
not at the time be due and payable or if the Depositor or the Transferor
shall currently be contesting the validity thereof in good faith by
appropriate proceedings and shall have set aside on its books adequate
reserves with respect thereto.
(b) Negative Pledge. The Transferor hereby agrees not to transfer,
---------------
assign, exchange, pledge, finance, hypothecate, grant a security interest in
or otherwise convey the Transferor Certificates except in accordance with
Sections 6.05 and 7.02.
(c) Downgrading. Neither the Depositor nor the Transferor will engage
-----------
in any activity which would result in a downgrading of the Investor
Certificates.
(d) Amendment to Certificate of Incorporation. Neither the Depositor
-----------------------------------------
nor the Transferor will amend its Certificate of Incorporation without prior
written notice to the Rating Agencies and the Credit Enhancer.
(e) Principal Place of Business. The Depositor's principal place of
---------------------------
business is in California and the Transferor's principal place of business is
( ), and neither such party will change its principal place of
business without prior written notice to the Rating Agencies.
Section 2.06. Retransfers of Mortgage Loans at Election of Transferor.
-------------------------------------------------------
Subject to the conditions set forth below, the Transferor may, but shall not
be obligated to, require the retransfer of Mortgage Loans from the Trust to
the Transferor as of the close of business on a Distribution Date (each, a
"Retransfer Date"). On the fifth Business Day (the "Retransfer Notice Date")
prior to the Retransfer Date designated in such notice, the Transferor shall
give the Trustee and the Servicer a notice of the proposed retransfer that
contains a list of the Mortgage Loans to be retransferred. Such retransfers
of Mortgage Loans shall be permitted upon satisfaction of the following
conditions:
(i) The Rapid Amortization Period shall not have commenced;
(ii) On the Transfer Notice Date the Transferor Principal Balance
(after giving effect to the removal from the Trust of the Mortgage Loans
proposed to be retransferred) is at least equal to the Minimum
Transferor Interest;
(iii) The transfer of any Mortgage Loans on any Retransfer Date
during the Managed Amortization Period 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) On or before the Retransfer Date, the Transferor shall have
delivered to the Trustee a revised Mortgage Loan Schedule, reflecting
the proposed transfer and the Retransfer Date, and the Servicer shall
have marked the Electronic Ledger to show that the Mortgages Loans
retransferred to the Transferor are no longer owned by the Trust;
(v) The Transferor shall represent and warrant that no selection
procedures reasonably believed by the Transferor to be adverse to the
interests of the Investor Certificateholders or the Credit Enhancer were
utilized in selecting the Mortgage Loans to be removed from the Trust;
(vi) In connection with each such retransfer of Mortgage Loans
pursuant to this Section, each Rating Agency shall have received on or
prior to the related Retransfer Notice Date notice of such proposed
retransfer of Mortgage Loans and, prior to the Retransfer Date, shall
have notified the Trustee in writing that such retransfer of Mortgage
Loans would not result in a reduction or withdrawal of its then current
rating of the Investor Certificates without regard to the Policy; and
(vii) The Transferor shall have delivered to the Trustee and the
Credit Enhancer an Officer's Certificate certifying that the items set
forth in subparagraphs (i) through (vi), inclusive, have been performed
or are true and correct, as the case may be. The Trustee may conclu-
sively rely on such Officer's Certificate, shall have no duty to make
inquiries with regard to the matters set forth therein and shall incur
no liability in so relying.
Upon receiving the requisite information from the Transferor, the Servicer
shall perform in a timely manner those acts required of it, as specified
above. Upon satisfaction of the above conditions, on the Retransfer Date the
Trustee shall deliver, or cause to be delivered, to the Transferor the
Mortgage File for each Mortgage Loan being so transferred, and the Trustee
shall execute and deliver to the Transferor such other documents prepared by
the Transferor as shall be reasonably necessary to transfer such Mortgage
Loans to the Transferor. Any such retransfer of the Trust's right, title and
interest in and to Mortgage Loans shall be without recourse, representation
or warranty by or of the Trustee or the Trust to the Transferor.
Section 2.07. Execution and Authentication of Certificates. The
--------------------------------------------
Trustee, on behalf of the Trust, has caused to be executed, authenticated and
delivered to or upon the order of the Depositor, in exchange for the Trust,
concurrently with the sale, assignment and conveyance to the Trustee of the
Trust, Investor Certificates in authorized denominations and the Transferor
Certificates, together evidencing the ownership of the entire Trust.
Section 2.08. Tax Treatment. It is the intention of the Depositor, the
-------------
Transferor and the Class A Certificateholders that the Class A Certificates
will be indebtedness of the Transferor for federal, state and local income
and franchise tax purposes and for purposes of any other tax imposed on or
measured by income. The Transferor, the Depositor, the Trustee and each
Class A Certificateholder (or Certificate Owner) by acceptance of its Class A
Certificate (or, in the case of a Certificate Owner, by virtue of such
Certificate Owner's acquisition of a beneficial interest therein) agrees to
treat the Class A Certificates (or beneficial interest therein), for purposes
of federal, state and local income or franchise taxes and any other tax
imposed on or measured by income, as indebtedness of the Transferor secured
by the assets of the Trust and to report the transactions contemplated by
this Agreement on all applicable tax returns in a manner consistent with such
treatment. Each Class A Certificateholder agrees that it will cause any
Certificate Owner acquiring an interest in an Class A Certificate through it
to comply with this Agreement as to treatment of the Class A Certificates as
indebtedness for federal, state and local income and franchise tax purposes
and for purposes of any other tax imposed on or measured by income. The
Trustee will prepare and file all tax reports required hereunder.
Section 2.09. Representations and Warranties of the Depositor. The
-----------------------------------------------
Depositor represents and warrants to the Trustee on behalf of the
Certificateholders and the Credit Enhancer as follows:
(i) This Agreement constitutes a legal, valid and binding
obligation of the Depositor, enforceable against the Depositor in
accordance with its terms, except as enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other
similar laws now or hereafter in effect affecting the enforcement of
creditors' rights in general and except as such enforceability may be
limited by general principles of equity (whether considered in a
proceeding at law or in equity);
(ii) Immediately prior to the sale and assignment by the
Depositor to the Trustee of each Mortgage Loan, the Depositor was the
sole beneficial owner of each Mortgage Loan (insofar as such title was
conveyed to it by the Transferor) subject to no prior lien, claim,
participation interest, mortgage, security interest, pledge, charge or
other encumbrance or other interest of any nature;
(iii) As of the Closing Date, the Depositor has transferred all
right, title and interest in the Mortgage Loans to the Trustee; and
(iv) The Depositor has not transferred the Mortgage Loans to the
Trustee with any intent to hinder, delay or defraud any of its
creditors.
Section 2.10. Conveyance of the Subsequent Mortgage Loans.
-------------------------------------------
(a) Subject to the satisfaction of the conditions set forth in Section 2.01
and paragraph (b) below, in consideration of the Trustee's delivery on a
Subsequent Transfer Date to or upon the order of the Transferor of all or a
portion of the amount in respect of Principal Collections in the Funding
Account the Transferor shall, to the extent of the availability thereof, on
the related Subsequent Transfer Date transfer, assign, set over and otherwise
convey to the Trust without recourse (subject to Sections 2.02 and 2.04) all
of its right, title and interest in and to the Asset Balances of the
Subsequent Mortgage Loans and all Interest Collections and Principal
Collections in respect thereof received after the Cut-Off Date for the
Subsequent Mortgage Loans or, with respect to any Additional Balances with
respect thereto, on or after the date of transfer to the Trust. Future
advances made to a Mortgagor under a Loan Agreement relating to a Subsequent
Mortgage Loan shall be part of the related Asset Balance and transferred to
the Trust pursuant to this Section 2.10, and, therefore, part of the Trust
property upon the sale thereof to the Transferor under the Purchase
Agreement.
On each Subsequent Transfer Date, the Trustee shall acknowledge that the
Transferor has conveyed its right, title and interest in and to each
Subsequent Mortgage Loan and to the corresponding Related Documents and
certain other rights to the Trustee pursuant to this Agreement, and the
Trustee shall hold such documents hereunder for the benefit of the
Certificateholders.
(b) The obligation of the Trustee to accept the transfer of the
Subsequent Mortgage Loans and the other property and rights related thereto
described in paragraph (a) above is subject to the satisfaction of each of
the following conditions on or prior to the Subsequent Transfer Date:
(i) the Trustee shall have been provided with a letter from the
Credit Enhancer consenting to such transfer of the Subsequent Mortgage
Loans (which consent shall not be unreasonably withheld or delayed);
(ii) the Trustee shall have been provided with a revised Mortgage
Loan Schedule, listing the Subsequent Mortgage Loans;
(iii) the Transferor shall have deposited in the Collection
Account all Principal Collections and Interest Collections in respect of
such Subsequent Mortgage Loans received after the Cut-Off Date for the
Subsequent Mortgage Loans;
(iv) the representations and warranties of the Transferor in
Section 2.04 hereof, to the extent such representations and warranties
do not pertain exclusively to the Initial Mortgage Loans, are true and
correct with respect to the Subsequent Mortgage Loans as of the related
Subsequent Transfer Date;
(v) the Trustee shall have been provided with a letter from each
Rating Agency confirming that the transfer of the Subsequent Mortgage
Loans shall not result in a reduction or withdrawal of its then-current
rating of the Investor Certificates;
(vi) the Servicer shall acknowledge in writing that it has
delivered the related Mortgage Files to the Trustee and complied with
all other requirements with respect to the assignment of the related
Mortgages specified therein;
(vii) the Servicer shall represent and warrant that no
selection procedures reasonably believed by the Servicer to be adverse
to the interests of the Investor Certificateholders or the Credit
Enhancer were utilized in selecting the Subsequent Mortgage Loans; and
(viii) the Transferor shall have delivered to the Trustee an
Officer's Certificate confirming the satisfaction of each condition
precedent specified in this paragraph (b).
(c) The obligation of the Trust to purchase any Subsequent Mortgage
Loans on a Subsequent Transfer Date is subject to the following requirements:
(i) each such Subsequent Mortgage Loan is a HELOC and the remaining term to
maturity of each such Subsequent Mortgage Loan may not exceed ___ months;
(ii) the weighted average Margin of the Subsequent Mortgage Loans (by
aggregate Cut-Off Date Asset Balance with respect to such Subsequent Mortgage
Loans) plus any Subsequent Mortgage Loans previously transferred to the Trust
is at least ____%; (iii) the weighted average Combined Loan-to-Value Ratio of
the Subsequent Mortgage Loans (by aggregate Cut-Off Date Asset Balance with
respect to such Subsequent Mortgage Loans) plus any Subsequent Mortgage Loans
previously transferred to the Trust is not more than ___%; (iv) no such
Subsequent Mortgage Loan will have a Cut-Off Date Asset Balance in excess of
$________; (v) no less than ___% of the Subsequent Mortgage Loans plus any
Subsequent Mortgage Loans previously transferred to the Trust (by aggregate
Cut-Off Date Asset Balance with respect to such Subsequent Mortgage Loans)
are in a first lien position; (vi) at least ___% of such Subsequent Mortgage
Loans plus any Subsequent Mortgage Loans previously transferred to the Trust
(by aggregate Cut-Off Date Asset Balance with respect to such Subsequent
Mortgage Loans) are not more than 30 days delinquent (on a contractual basis)
in the payment of a Minimum Monthly Payment as of the Cut-Off Date for such
Subsequent Mortgage Loans; and (vii) any Subsequent HELOC more than 30 days
delinquent that is so purchased by the Trust shall not have had its Credit
Limit terminated or suspended prior to the Subsequent Transfer Date with
respect to such Mortgage Loan. On the last Distribution Date of the Funding
Period, the Transferor shall have provided the Trustee, the Rating Agencies
and the Credit Enhancer with an opinion of counsel to the effect that such
transfer constitutes a sale of the Trust Balances of the Subsequent Mortgage
Loans to the Transferor and a sale of or grant of a security interest in the
Subsequent Mortgage Loans to the Trustee; provided, however, that in the
event of a change of law during the Funding Period that materially affects
the method of perfecting the security interest in the Subsequent Mortgage
Loans, the Transferor shall either (i) provide the Trustee, the Rating
Agencies and the Credit Enhancer with an opinion of counsel to the effect
that such transfer constitutes a sale of the Asset Balances of the Subsequent
Mortgage Loans to the Transferor and a sale of or grant of a security
interest in the Subsequent Mortgage Loans to the Trustee, or (ii) take
such action as is necessary to perfect the interests of the Trust in the
Subsequent Mortgage Loans.
ARTICLE III
Administration and Servicing
of Mortgage Loans
Section 3.01. The Servicer. (a) The Servicer shall service and
------------
administer the Mortgage Loans in a manner consistent with the terms of this
Agreement and with general industry practice and shall have full power and
authority, acting alone or through a subservicer, to do any and all things in
connection with such servicing and administration which it may deem necessary
or desirable, it being understood, however, that the Servicer shall at all
times remain responsible to the Trustee, the Certificateholders and the
Credit Enhancer for the performance of its duties and obligations hereunder
in accordance with the terms hereof. Any amounts received by any subservicer
in respect of a Mortgage Loan shall be deemed to have been received by the
Servicer whether or not actually received by it. Without limiting the
generality of the foregoing, the Servicer shall continue, and is hereby
authorized and empowered by the Trustee, to execute and deliver, on behalf of
itself, the Certificateholders and the Trustee, or any of them, any and all
instruments of satisfaction or cancellation, or of partial or full release or
discharge and all other comparable instruments, with respect to the Mortgage
Loans and with respect to the Mortgaged Properties. The Trustee shall, upon
the written request of a Servicing Officer, furnish the Servicer with any
powers of attorney and other documents necessary or appropriate to enable the
Servicer to carry out its servicing and administrative duties hereunder. The
Servicer in such capacity may also consent to the placing of a lien senior to
that of any Mortgage on the related Mortgaged Property, provided that
(x) such Mortgage succeeded to a first lien position after
the related Mortgage Loan was conveyed to the Trust and,
immediately following the placement of such senior lien, such
Mortgage is in a second lien position and the outstanding principal
amount of the mortgage loan secured by such subsequent senior lien
is no greater than the outstanding principal amount of the senior
mortgage loan secured by the Mortgaged Property as of the date the
related Mortgage Loan was originated; or
(y) the Mortgage relating to such Mortgage Loan was in a
second lien position as of the Cut-Off Date and the new senior lien
secures a mortgage loan that refinances an existing first mortgage
loan and the outstanding principal amount of the replacement first
mortgage loan immediately following such refinancing is not greater
than the outstanding principal amount of such existing first
mortgage loan at the date of origination of such Mortgage Loan;
provided, further, that such senior lien does not secure a note that provides
- - -------- -------
for negative amortization.
The Servicer may also, without prior approval from the Rating Agencies
or the Credit Enhancer, increase the Credit Limits on HELOCs provided that
(i) new appraisals are obtained and the Combined Loan-to-Value Ratios of the
Mortgage Loans after giving effect to such increase are less than or equal to
the Combined Loan-to-Value Ratios or the Mortgage Loans as of the Cut-Off
Date and (ii) such increases are consistent with the Servicer's underwriting
policies.
In addition, the Servicer may agree to changes in the terms of a
Mortgage Loan at the request of the Mortgagor provided that such changes (i)
--------
do not materially and adversely affect the interests of Certificateholders or
the Credit Enhancer and (ii) are consistent with prudent and customary busi-
ness practice as evidenced by a certificate signed by a Servicing Officer
delivered to the Trustee and the Credit Enhancer.
In addition to the foregoing, the Servicer may solicit Mortgagors to
change any other terms of the related Mortgage Loans, provided that such
--------
changes (i) do not materially and adversely affect the interest of
Certificateholders or the Credit Enhancer and (ii) are consistent with
prudent and customary business practice as evidenced by a certificate signed
by a Servicing Officer delivered to the Trustee and the Credit Enhancer.
Nothing herein shall limit the right of the Servicer to solicit Mortgagors
with respect to new loans (including mortgage loans) that are not Mortgage
Loans.
The relationship of the Servicer (and of any successor to the Servicer
as servicer under this Agreement) to the Trustee under this Agreement is
intended by the parties to be that of an independent contractor and not that
of a joint venturer, partner or agent.
(b) In the event that the rights, duties and obligations of the
Servicer are terminated hereunder, any successor to the Servicer in its sole
discretion may, to the extent permitted by applicable law, terminate the
existing subservicer arrangements with any subservicer or assume the
terminated Servicer's rights under such subservicing arrangements which
termination or assumption will not violate the terms of such arrangements.
Section 3.02. Collection of Certain Mortgage Loan Payments. (a) The
--------------------------------------------
Servicer shall make reasonable efforts to collect all payments called for
under the terms and provisions of the Mortgage Loans, and shall, to the
extent such procedures shall be consistent with this Agreement, follow such
collection procedures as it follows with respect to mortgage loans in its
servicing portfolio comparable to the Mortgage Loans. Consistent with the
foregoing, and without limiting the generality of the foregoing, the Servicer
may in its discretion (i) waive any late payment charge or any
assumption fees or other fees which may be collected in the ordinary course
of servicing such Mortgage Loan and (ii) arrange with a Mortgagor a schedule
for the payment of interest due and unpaid; provided that such arrangement
--------
is consistent with the Servicer's policies with respect to the mortgage loans
it owns or services; provided, further, that notwithstanding such arrangement
-------- -------
such Mortgage Loans will be included in the information regarding delinquent
Mortgage Loans set forth in the Servicing Certificate and monthly statement
to Certificateholders pursuant to Section 5.03.
(b) The Servicer shall establish and maintain a trust account (the
"Collection Account") titled "(___________________), as Trustee, in trust for
the registered holders of Home Equity Loan Asset-Backed Certificates, Series
199_-_." The Collection Account shall be an Eligible Account. The Servicer
shall on the Closing Date deposit any amounts representing payments on, and
any collections in respect of, the Initial Mortgage Loans received after the
applicable Cut-Off Date and prior to the Closing Date (exclusive of payments
in respect of accrued interest due on or prior to such Cut-Off Date), and
thereafter the Servicer, or the Transferor, as the case may be, shall deposit
within two Business Days following receipt thereof the following payments and
collections received or made by it (without duplication):
(i) all collections on and in respect of the Mortgage Loans;
(ii) the amounts, if any, deposited to the Collection Account
pursuant to Section 4.05;
(iii) Net Liquidation Proceeds net of any related Foreclosure
Profit;
(iv) Insurance Proceeds (including, for this purpose, any amount
required to be credited by the Servicer pursuant to the last sentence of
Section 3.04 and excluding the portion thereof, if any, that has been
applied to the restoration or repair of the related Mortgaged Property
or released to the related Mortgagor in accordance with the normal
servicing procedures of the Servicer); and
(v) any amounts required to be deposited therein pursuant to
Section 10.01;
provided, however, that with respect to each Collection Period, the Servicer
- - -------- -------
shall be permitted to retain from payments in respect of interest on the
Mortgage Loans, the Servicing Fee for such Collection Period. The foregoing
requirements respecting deposits to the Collection Account are exclusive, it
being understood that, without limiting the generality of the foregoing, the
Servicer need not deposit in the Collection Account amounts representing
Foreclosure Profits, fees (including annual fees) or late charge penalties
payable by Mortgagors, or amounts received by the Servicer for the accounts
of Mortgagors for application towards the payment of taxes, insurance
premiums, assessments, excess pay off amounts and similar items. The
Servicer shall remit all Foreclosure Profits to the Transferor.
The Trustee shall hold amounts deposited in the Collection Account as
trustee for the Certificateholders and for the Credit Enhancer. In addition,
the Servicer shall notify the Trustee and the Credit Enhancer in writing on
each Determination Date of the amount of payments and collections in the
Collection Account allocable to Interest Collections and Principal
Collections for the related Distribution Date. Following such notification,
the Servicer shall be entitled to withdraw from the Collection Account and
retain any amounts that constitute income and gain realized from the invest-
ment of such payments and collections.
All income and gain realized from any investment in Eligible Investments
of funds in the Collection Account shall be for the benefit of the Servicer
and shall be subject to its withdrawal from time to time. The amount of any
losses incurred in respect of the principal amount of any such investments
shall be deposited in the Collection Account by the Servicer out of its own
funds immediately as realized.
Section 3.03. Withdrawals from the Collection Account. From time to
---------------------------------------
time, withdrawals may be made from the Collection Account by the Servicer for
the following purposes:
(i) To the Servicer as payment for its Servicing Fee pursuant to
Section 3.08;
(ii) To pay to the Servicer amounts on deposit in the Collection
Account that are not to be included in the distributions and payments
pursuant to Section 5.01 to the extent provided by the second to the
last and the last paragraph of Section 3.02(b);
(iii) To make or to permit the Paying Agent to make distributions
and payments pursuant to Section 5.01;
(iv) Prior to the Collection Period preceding the Rapid
Amortization Commencement Date, to pay to the Transferor, the amount of
any Additional Balances as and when created during the related
Collection Period, provided, that the aggregate amount so paid to the
Transferor in respect of Additional Balances at any time during any
Collection Period shall not exceed the amount of Principal Collections
theretofore received for such Collection Period minus the amount deter-
mined pursuant to clause (x) of the definition of "Alternative Principal
Payment"; and
(v) To make deposits to the Funding Account pursuant to Section
5.05 hereof.
If the Servicer deposits in the Collection Account any amount not
required to be deposited therein or any amount in respect of payments by
Mortgagors made by checks subsequently returned for insufficient funds or
other reason for non-payment it may at any time withdraw such amount from the
Collection Account, and any such amounts shall not be included in the amounts
to be deposited in the Collection Account pursuant to Section 3.02(b), any
provision herein to the contrary notwithstanding.
Section 3.04. Maintenance of Hazard Insurance; Property Protection
----------------------------------------------------
Expenses. The Servicer shall cause to be maintained for each Mortgage Loan
- - --------
hazard insurance naming the 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 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
plus accrued interest and the good-faith estimate of the Servicer of related
Liquidation Expenses to be incurred in connection therewith. Amounts
collected by the Servicer under any such policies shall be deposited in the
Collection Account to the extent called for by Section 3.02. 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 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 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 as set forth in the first sentence of this Section 3.04 and
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 such deductible clause.
Section 3.05. Assumption and Modification Agreements. In any case in
--------------------------------------
which a Mortgaged Property has been or is about to be conveyed by the
Mortgagor, the Servicer shall exercise its right to accelerate the maturity
of such Mortgage Loan consistent with the then current practice of the
Servicer and without regard to the inclusion of such Mortgage Loan in the
Trust. If it elects not to enforce its right to accelerate or if it is
prevented from doing so by applicable law, the Servicer (so long as such
action conforms with the underwriting standards generally acceptable in the
industry at the time for new origination) is authorized to take or enter into
an assumption and modification agreement from or with the Person to whom such
Mortgaged Property has been or is about to be conveyed, pursuant to which
such Person becomes liable under the Loan Agreement and, to the extent
permitted by applicable law, the Mortgagor remains liable thereon. The
Servicer shall notify the Trustee that any assumption and modification
agreement has been completed by delivering to the Trustee an Officer's
Certificate certifying that such agreement is in compliance with this Section
3.05 and by forwarding to the applicable Custodian, as agent for the Trustee,
the original copy of such assumption and modification agreement. Any such
assumption and modification agreement shall, for all purposes, be considered
a part of the related Mortgage File to the same extent as all other documents
and instruments constituting a part thereof. No change in the terms of the
related Loan Agreement may be made by the Servicer in connection with any
such assumption to the extent that such change would not be permitted to be
made in respect of the original Loan Agreement pursuant to the fourth
paragraph of Section 3.01(a). Any fee collected by the Servicer for entering
into any such agreement will be retained by the Servicer as additional
servicing compensation.
Section 3.06. Realization Upon Defaulted Mortgage Loans; Repurchase of
--------------------------------------------------------
Certain Mortgage Loans. The Servicer shall foreclose upon or otherwise
- - ----------------------
comparably convert to ownership Mortgaged Properties securing such of the
Mortgage Loans as come into and continue in default when, in the opinion of
the Servicer based upon the practices and procedures referred to in the
following sentence, no satisfactory arrangements can be made for collection
of delinquent payments pursuant to Section 3.02; provided that if the
--------
Servicer has actual knowledge or reasonably believes that any Mortgaged
Property is affected by hazardous or toxic wastes or substances and that the
acquisition of such Mortgaged Property would not be commercially reasonable,
then the Servicer will not cause the Trust to acquire title to such Mortgaged
Property in a foreclosure or similar proceeding. In connection with such
foreclosure or other conversion, the Servicer shall follow such practices
(including, in the case of any default on a related senior mortgage loan, the
advancing of funds to correct such default) and procedures as it shall deem
necessary or advisable and as shall be normal and usual in its general
mortgage servicing activities. The foregoing is subject to the proviso that
the Servicer shall not be required to expend its own funds in connection with
any foreclosure or towards the correction of any default on a related senior
mortgage loan or restoration of any property unless it shall determine that
such expenditure will increase Net Liquidation Proceeds.
In the event that title to any Mortgaged Property is acquired in
foreclosure or by deed in lieu of foreclosure, the deed or certificate of
sale shall be issued to the Trustee, or to its nominee on behalf of Certifi-
cateholders.
The Servicer, in its sole discretion, shall have the right to purchase
for its own account from the Trust any Mortgage Loan which is 91 days or more
delinquent at a price equal to the purchase price described below. The price
for any Mortgage Loan purchased hereunder (which shall be calculated in the
same manner set forth in Section 2.02) shall be deposited in the Collection
Account and the Trustee, upon receipt of a certificate from the Servicer in
the form of Exhibit L hereto, shall release or cause to be released to the
Servicer the related Mortgage File and shall execute and deliver such
instruments of transfer or assignment prepared by the Servicer, in each case
without recourse, as shall be necessary to vest in the purchaser of such
Mortgage Loan any Mortgage Loan released pursuant hereto and the Servicer
shall succeed to all the Trustee's right, title and interest in and to such
Mortgage Loan and all security and documents related thereto. Such
assignment shall be an assignment outright and not for security. The
Servicer shall thereupon own such Mortgage Loan, and all security and docu-
ments, free of any further obligation to the Trustee, the Credit Enhancer or
the Certificateholders with respect thereto.
Section 3.07. Trustee to Cooperate. On or before each Distribution
--------------------
Date, the Servicer will notify the Trustee of the payment in full of the
Asset Balance of any Mortgage Loan during the preceding Collection Period,
which notification shall be by a certification (which certification shall
include a statement to the effect that all amounts received in connection
with such payment which are required to be deposited in the Collection
Account pursuant to Section 3.02 have been so deposited or credited) of a
Servicing Officer. Upon any such payment in full, the Servicer is authorized
to execute, pursuant to the authorization contained in Section 3.01, if the
assignments of Mortgage have been recorded as required hereunder, an
instrument of satisfaction regarding the related Mortgage, which instrument
of satisfaction shall be recorded by the Servicer if required by applicable
law and be delivered to the Person entitled thereto. It is understood and
agreed that no expenses incurred in connection with such instrument of satis-
faction or transfer shall be reimbursed from amounts deposited in the
Collection Account. If the Trustee is holding the Mortgage Files, from time
to time and as appropriate for the servicing or foreclosure of any Mortgage
Loan, or in connection with the payment in full of the Asset Balance of any
Mortgage Loan, the Trustee shall, upon request of the Servicer and delivery
to the Trustee of a Request for Release substantially in the form attached
hereto as Exhibit J signed by a Servicing Officer, release the related Mort-
gage File to the Servicer and the Trustee shall execute such documents, in
the forms provided by the Servicer, as shall be necessary to the prosecution
of any such proceedings or the taking of other servicing actions. Such trust
receipt shall obligate the Servicer to return the Mortgage File to the
Trustee when the need therefor by the Servicer no longer unless the Mortgage
Loan shall be liquidated, in which case, upon receipt of a certificate of a
Servicing Officer similar to that hereinabove specified, the trust receipt
shall be released by the Trustee or such Custodian to the Servicer.
In order to facilitate the foreclosure of the Mortgage securing any
Mortgage Loan that is in default following recordation of the assignments of
Mortgage in accordance with the provisions hereof, the Trustee shall, if so
requested in writing by the Servicer, execute an appropriate assignment in
the form provided to the Trustee by the Servicer to assign such Mortgage Loan
for the purpose of collection to the Servicer or to the related subservicer
(any such assignment shall unambiguously indicate that the assignment is for
the purpose of collection only), and, upon such assignment, the Servicer will
thereupon bring all required actions in its own name and otherwise enforce
the terms of the Mortgage Loan and deposit the Net Liquidation Proceeds,
exclusive of Foreclosure Profits, received with respect thereto in the
Collection Account. In the event that all delinquent payments due under any
such Mortgage Loan are paid by the Mortgagor and any other defaults are
cured, then the Servicer shall promptly reassign such Mortgage Loan to the
Trustee and return the related Mortgage File to the place where it was being
maintained.
Section 3.08. Servicing Compensation; Payment of Certain Expenses by
------------------------------------------------------
Servicer. The Servicer shall be entitled to receive the Servicing Fee
- - --------
pursuant to Section 3.03 as compensation for its services in connection with
servicing the Mortgage Loans. Moreover, additional servicing compensation in
the form of late payment charges or other receipts not required to be
deposited in the Collection Account (other than Foreclosure Profits) shall be
retained by the Servicer. The Servicer shall be required to pay all expenses
incurred by it in connection with its activities hereunder (including payment
of all other fees and expenses not expressly stated hereunder to be for the
account of the Certificateholders) and shall not be entitled to reimbursement
therefor except as specifically provided herein. Liquidation Expenses are
reimbursable to the Servicer solely from related Liquidation Proceeds.
(a) The Servicer shall deliver to the Trustee, the Credit Enhancer and
each of the Rating Agencies, promptly after having obtained knowledge
thereof, but in no event later than five Business Days thereafter, written
notice by means of an Officer's Certificate of any event which with the
giving of notice or the lapse of time or both, would become an Event of
Servicing Termination.
Section 3.09. Annual Statement as to Compliance. (a) The Servicer
---------------------------------
will deliver to the Trustee, the Credit Enhancer and the Rating Agencies, on
or before [month/day] of each year, beginning [date], an Officer's
Certificate stating that (i) a review of the activities of the Servicer
during the preceding fiscal year (or such shorter period as is applicable in
the case of the first report) and of its performance under this Agreement has
been made under such officer's supervision and (ii) to the best of such
officer's knowledge, based on such review, the Servicer has fulfilled all of
its material obligations under this Agreement throughout such fiscal year,
or, if there has been a default in the fulfillment of any such obligation,
specifying each such default known to such officer and the nature and status
thereof.
Section 3.10. Annual Servicing Report. On or before (month/day) of each
-----------------------
year, beginning (date), the Servicer, at its expense, shall cause a firm of
nationally recognized independent public accountants (who may also render
other services to the Servicer) to furnish a report to the Trustee, the
Credit Enhancer and each Rating Agency to the effect that such firm has
examined certain documents and records relating to the servicing of mortgage
loans during the most recent fiscal year then ended under pooling and
servicing agreements (substantially similar to this Agreement, including this
Agreement) that such examination, was conducted substantially in compliance
with the audit guide for audits of non-supervised mortgagees approved by the
Department of Housing and Urban Development for use by independent public
accountants (to the extent that the procedures in such audit guide are
applicable to the servicing obligations set forth in such agreements) and
that such examination has disclosed no items of noncompliance with the
provisions of this Agreement which, in the opinion of such firm, are
material, except for such items of noncompliance as shall be set forth in
such report.
Section 3.11. Annual Opinion of Counsel. On or before (month/day) of
-------------------------
each year, beginning (date), each of the Transferor and the Depositor, at its
expense, shall deliver to the Trustee and the Credit Enhancer the applicable
Opinion of Counsel specified in Exhibit E hereto.
Section 3.12. Access to Certain Documentation and Information Regarding
---------------------------------------------------------
the Mortgage Loans. (a) The Servicer shall provide to the Trustee, the
- - ------------------
Credit Enhancer, any Investor Certificateholders that are federally insured
savings and loan associations, the Office of Thrift Supervision, successor to
the Federal Home Loan Bank Board, the FDIC and the supervisory agents and
examiners of the Office of Thrift Supervision access to the documentation
regarding the Mortgage Loans required by applicable regulations of the Office
of Thrift Supervision and the FDIC (acting as operator of the SAIF or the
BIF), such access being afforded without charge but only upon reasonable
request and during normal business hours at the offices of the Servicer.
Nothing in this Section 3.12 shall derogate from the obligation of the
Servicer to observe any applicable law prohibiting disclosure of information
regarding the Mortgagors and the failure of the Servicer to provide access as
provided in this Section 3.12 as a result of such obligation shall not
constitute a breach of this Section 3.12.
(b) The Servicer shall supply information in such form as the Trustee
shall reasonably request to the Trustee and the Paying Agent, on or before
the start of the Determination Date preceding the related Distribution Date,
as is required in the Trustee's reasonable judgment to enable the Paying
Agent or the Trustee, as the case may be, to make required distributions and
to furnish the required reports to Certificateholders and to make any claim
under the Policy.
Section 3.13. Maintenance of Certain Servicing Insurance Policies. The
---------------------------------------------------
Servicer shall during the term of its service as servicer maintain in force
(i) a policy or policies of insurance covering errors and omissions in the
performance of its obligations as master servicer hereunder and (ii) a
fidelity bond in respect of its officers, employees or agents. Each such
policy or policies and bond together shall comply with the requirements from
time to time of the Federal National Mortgage Association for persons
performing servicing for mortgage loans purchased by such Association.
Section 3.14. Reports to the Securities and Exchange Commission. The
-------------------------------------------------
Trustee shall, on behalf of the Trust, cause to be filed with the Securities
and Exchange Commission any periodic reports required to be filed under the
provisions of the Securities Exchange Act of 1934, as amended, and the rules
and regulations of the Securities and Exchange Commission thereunder. Upon
the request of the Trustee, each of the Servicer, the Depositor and the
Transferor shall cooperate with the Trustee in the preparation of any such
report and shall provide to the Trustee in a timely manner all such
information or documentation as the Trustee may reasonably request in
connection with the performance of its duties and obligations under this
Section.
Section 3.15. Tax Returns. In accordance with Section 2.08 hereof, the
-----------
Trustee shall prepare and file any Federal, State or local income and
franchise tax return for the Trust as well as any other applicable return and
apply for a taxpayer identification number on behalf of the Trust. The
Transferor shall treat the Mortgage Loans as its property for all Federal,
State or local tax purposes and shall report all income earned thereon
(including amounts payable as fees to the Servicer) as its income for income
tax purposes. In the event the Trust shall be required pursuant to an audit
or administrative proceeding or change in applicable regulations to file
Federal, State or local tax returns, the Trustee shall prepare and file or
shall cause to be prepared and filed any tax returns required to be filed by
the Trust; the Trustee shall promptly sign such returns and deliver such
returns after signature to the Servicer and such returns shall be filed by
the Servicer. The Trustee shall also prepare or shall cause to be prepared
all tax information required by law to be distributed to Investor Certif-
icateholders. In no event shall the Trustee or the Servicer be liable for
any liabilities, costs or expenses of the Trust, the Investor
Certificateholders, the Transferor Certificateholders or the Certificate
Owners arising under any tax law, including without limitation Federal, state
or local income and franchise or excise taxes or any other tax imposed on or
measured by income (or any interest or penalty with respect thereto or
arising from a failure to comply therewith).
Section 3.16. Information Required by the Internal Revenue Service
----------------------------------------------------
Generally and Reports of Foreclosures and Abandonments of
- - ----------------------------------------------------------
Mortgaged Property. The Servicer shall prepare and deliver all federal and
- - ------------------
state information reports when and as required by all applicable state and
federal income tax laws. In particular, with respect to the requirement
under Section 6050J of the Code to the effect that the Servicer shall make
reports of foreclosures and abandonments of any mortgaged property for each
year beginning in 199_, the Servicer shall file reports relating to each
instance occurring during the previous calendar year in which the Servicer
(i) on behalf of the Trustee acquires an interest in any Mortgaged Property
through foreclosure or other comparable conversion in full or partial
satisfaction of a Mortgage Loan, or (ii) knows or has reason to know that any
Mortgaged Property has been abandoned. The reports from the Servicer shall
be in form and substance sufficient to meet the reporting requirements
imposed by Section 6050J.
ARTICLE IV
Servicing Certificate
Section 4.01. Servicing Certificate. Not later than each Determination
---------------------
Date, the Servicer shall deliver (a) to the Trustee, the Statement to
Certificateholders required to be prepared pursuant to Section 5.03 and (b)
to the Trustee, the Transferor, the Depositor, the Paying Agent, the Credit
Enhancer and each Rating Agency a Servicing Certificate (in written form or
the form of computer readable media or such other form as may be agreed to by
the Trustee and the Servicer), together with an Officer's Certificate to the
effect that such Servicing Certificate is true and correct in all material
respects, stating the related Collection Period, Distribution Date, the
series number of the Certificates, the date of this Agreement, and:
(i) the aggregate amount of collections received on the Mortgage
Loans on or prior to the Determination Date in respect of such
Collection Period;
(ii) the aggregate amount of (a) Interest Collections and (b)
Principal Collections for such Collection Period;
(iii) the Investor Floating Allocation Percentage and the Investor
Fixed Allocation Percentage for such Collection Period;
(iv) the Investor Interest Collections and Principal Collections
allocated to the Investor Certificates for such Collection Period;
(v) the Transferor Interest Collections and Transferor Principal
Collections for such Collection Period;
(vi) Class A Certificate Interest, the Class A Certificate Rate
and the Class S Certificate Interest for the related Interest Period;
(vii) the amount, if any, of such Class A Certificate Interest or
Class S Certificate Interest that is not payable on account of
insufficient Investor Interest Collections;
(viii) the portion of the Unpaid Class A Certificate Interest
Shortfall and the portion of the Unpaid Class S Certificate Interest
Shortfall, if any, the amount of interest on such shortfall at the
Certificate Rate applicable from time to time (separately stated) to be
distributed on such Distribution Date;
(ix) the Unpaid Class A Certificate Interest Shortfall and the
Unpaid Class S Certificate Interest Shortfall, if any, to remain after
the distribution on such Distribution Date;
(x) the Accelerated Principal Distribution Amount and the
portion thereof that will be distributed pursuant to Section
5.01(a)(viii);
(xi) the Scheduled Principal Collections Distribution Amount,
separately stating the components thereof;
(xii) the amount of any Transfer Deposit Amount paid by the
Transferor or the Depositor pursuant to Section 2.02 or 2.04;
(xiii) any accrued and unpaid Servicing Fees for previous
Collection Periods and the Servicing Fee for such Collection Period;
(xiv) the Investor Loss Amount for such Collection Period;
(xv) the aggregate amount, if any, of Investor Loss Reduction
Amounts for previous Distribution Dates that have not been previously
reimbursed to Class A Certificateholders pursuant to 5.01(a)(vi);
(xvi) the Pool Balance as of the end of the preceding Collection
Period and as of the end of the second preceding Collection Period;
(xvii) the Invested Amount as of the end of the preceding Collec-
tion Period;
(xviii) the Class A Certificate Principal Balance, the Class S
Notional Amount and Pool Factor after giving effect to the distribution
on such Distribution Date and to any reduction on account of the
Investor Loss Amount;
(xix) the Transferor Principal Balance after giving effect to the
distribution on such Distribution Date;
(xx) the aggregate amount of Additional Balances created during
the previous Collection Period;
(xxi) the number and aggregate Asset Balances of Mortgage Loans
(x) as to which the Minimum Monthly Payment is delinquent for 30-59
days, 60-89 days and 90 or more days, respectively and (y) that have
become REO, in each case as of the end of the preceding Collection
Period;
(xxii) whether a Rapid Amortization Event has occurred since the
prior Determination Date, specifying each such Rapid Amortization Event
if one has occurred;
(xxiii) whether an Event of Servicing Termination has occurred since
the prior Determination Date, specifying each such Event of Servicing
Termination if one has occurred;
(xxiv) the amount to be distributed to the Credit Enhancer pursuant
to Section 5.01(a)(vii) and Section 5.01(a)(ix)(ii), stated separately;
(xxv) the amount to be distributed to the Spread Account pursuant
to Section 5.01(a)(ix)(i);
(xxvi) the Guaranteed Principal Distribution Amount for such
Distribution Date;
(xxvii) the Credit Enhancement Draw Amount, if any, for such
Distribution Date;
(xxviii) the amount to be distributed to the Transferor pursuant to
Section 5.01(a)(xi);
(xxix) the amount to be paid to the Servicer pursuant to Section
5.01(a)(x);
(xxx) the Maximum Rate for the related Collection Period and the
Weighted Average Net Loan Rate;
(xxxi) the total amount of funds on deposit in the Spread Account
and the applicable Spread Account Maximum;
(xxxii) the Overcollateralization Amount after giving effect to the
distribution to be made on such Distribution;
(xxxiii) the number and principal balances of any Mortgage Loans
retransferred to the Transferor pursuant to Section 2.06;
(xxxiv) the amount of Principal Collections to be deposited in the
Funding Account in respect of such Distribution Date;
(xxxv) the amount on deposit in the Funding Account as of such
Distribution Date; and
(xxxvi) the aggregate of the Asset Balances of the Subsequent
Mortgage Loans purchased on the related Subsequent Transfer Dates.
The Trustee shall conclusively rely upon the information contained in a
Servicing Certificate for purposes of making distributions pursuant to
Section 5.01, shall have no duty to inquire into such information and shall
have no liability in so relying. The format and content of the Servicing
Certificate may be modified by the mutual agreement of the Servicer, the
Trustee and the Credit Enhancer. The Servicer shall give notice of any such
change to the Rating Agencies.
Section 4.02. Claims upon the Policy. (a) If, by the close of
----------------------
business on the third Business Day prior to a Distribution Date, the sum of
the funds then on deposit in the Collection Account for the related
Collection Period which are payable to the Investor Certificateholders
pursuant to Sections 5.01(a), (b) and (g) (after giving effect to the distri-
bution of the Trustee Fee and the Premium), the amounts on deposit in the
Spread Account, amounts transferred from the Funding Account to the
Collection Account pursuant to Sections 5.05(c)(ii) and 5.05(c)(iii)(B) and
the amount, if any, deposited into the Collection Account pursuant to Section
4.05 are insufficient to pay the Guaranteed Distribution on such Distribution
Date, then the Trustee shall give notice to the Credit Enhancer by telephone
or telecopy of the amount equal to the Credit Enhancement Draw Amount. Such
notice of such sum shall be confirmed in writing to the Credit Enhancer at or
before 10:00 a.m., New York City time, on the second Business Day prior to
such Distribution Date. Following receipt by the Credit Enhancer of such
notice in such form, the Credit Enhancer will pay any amount payable under
the Policy on the later to occur of (i) 12:00 noon, New York City time, on
the Business Day following such receipt and (ii) 12:00 noon, New York City
time, on the Distribution Date to which such deficiency relates.
(b) The Trustee shall keep a complete and accurate record of the amount
of interest and principal paid in respect of any Investor Certificate from
moneys received under the Policy. The Credit Enhancer shall have the right
to inspect such records at reasonable times during normal business hours upon
one Business Day's prior notice to the Trustee.
(c) The Trustee shall promptly notify the Credit Enhancer of any
proceeding or the institution of any action, of which a Responsible Officer
of the Trustee has actual knowledge, seeking the avoidance as a preferential
transfer under applicable bankruptcy, insolvency, receivership or similar law
(a "Preference Claim") of any distribution made with respect to the Investor
Certificates. Each Investor Certificateholder by its purchase of such
Certificates, the Servicer and the Trustee hereby agree that, the Credit
Enhancer (so long as no Credit Enhancer Default exists) may at any time
during the continuation of any proceeding relating to a Preference Claim
direct all matters relating to such Preference Claim, including, without
limitation, (i) the direction of any appeal of any order relating to such
Preference Claim and (ii) the posting of any surety, supersedeas or
performance bond pending any such appeal. In addition and without limitation
of the foregoing, the Credit Enhancer shall be subrogated to the rights of
the Servicer, the Trustee, each Investor Certificateholder in the conduct of
any such Preference Claim, including, without limitation, all rights of any
party to an adversary proceeding action with respect to any court order
issued in connection with any such Preference Claim.
Section 4.03. Spread Account. (a) The Trustee shall establish and
--------------
maintain a separate trust account (the "Spread Account") titled
"(__________________), as Trustee, in trust for the registered holders of
Home Equity Loan Asset Backed Certificates, Series 199_-_." The Spread
Account shall be an Eligible Account. Amounts on deposit in the Spread
Account will, at the direction of the Transferor, be invested in Eligible
Investments maturing no later than the day before the next Distribution Date.
All income and gain realized from any investment of funds in the Spread
Account shall be for the benefit of the Transferor and shall be subject to
its withdrawal from time to time. The amount of any losses incurred in
respect of the principal amount of any such investments shall be deposited in
the Spread Account by the Transferor out of its own funds immediately as
realized.
(b) On each Determination Date the Trustee shall determine (i) the
extent to which Investor Interest Collections and the amounts, if any,
deposited into the Collection Account pursuant to Section 4.05 applied in the
order specified in Section 5.01(a) are insufficient to make distributions as
provided in clauses (iii), (iv) and (v) of Section 5.01(a) and (ii) the
Guaranteed Principal Distribution Amount for the related Distribution Date.
On each Distribution Date the Trustee shall withdraw from the Spread Account
and deposit into the Collection Account the lesser of the amount on deposit
in the Spread Account and an amount equal to the sum of the amounts, if any,
determined in clauses (i) and (ii) of the preceding sentence.
(c) Following the termination of the Trust pursuant to Section 10.01 or
11.02 hereof, the Trustee shall withdraw all amounts then on deposit in the
Spread Account and distribute such amounts first to any amounts due and owing
to the Credit Enhancer and then to the Transferor. If on any Distribution
Date the amount on deposit in the Spread Account exceeds the Spread Account
Maximum, the Trustee shall withdraw such excess and distribute it to the
Transferor.
Section 4.04. Effect of Payments by the Credit Enhancer; Subrogation.
------------------------------------------------------
Anything herein to the contrary notwithstanding, any payment with respect to
principal of or interest on any of the Investor Certificates which is made
with moneys received pursuant to the terms of the Policy shall not be
considered payment of such Investor Certificates from the Trust and shall not
result in the payment of or the provision for the payment of the principal of
or interest on such Investor Certificates within the meaning of Section 5.01.
The Depositor, the Servicer and the Trustee acknowledge, and each Holder by
its acceptance of an Investor Certificate agrees, that without the need for
any further action on the part of the Credit Enhancer, the Depositor, the
Servicer, the Trustee or the Certificate Registrar (a) to the extent the
Credit Enhancer makes payments, directly or indirectly, on account of
principal of or interest on any Investor Certificates to the Holders of such
Certificates, the Credit Enhancer will be fully subrogated to the rights of
such Holders to receive such principal and interest from the Trust and (b)
the Credit Enhancer shall be paid such principal and interest but only from
the sources and in the manner provided herein for the payment of such
principal and interest.
The Trustee and the Servicer shall cooperate in all respects with any
reasonable request by the Credit Enhancer for action to preserve or enforce
the Credit Enhancer's rights or interests under this Agreement without
limiting the rights or affecting the interests of the Holders as otherwise
set forth herein.
ARTICLE V
Payments and Statements to
Certificateholders; Rights of Certificateholders
Section 5.01. Distributions.
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(a) Distributions of Investor Interest Collections and Investment
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Proceeds. Subject to Section 11.02(b), on each Distribution Date, the
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Trustee or the Paying Agent, as the case may be, shall distribute out of the
Collection Account to the extent of (x) Investor Interest Collections
collected during the related Collection Period, (y) the amounts transferred
from the Funding Account pursuant to Section 5.05(c)(i) and (z) the amounts
transferred from the Spread Account as determined pursuant to Section
4.03(b), the following amounts and in the following order of priority to the
following Persons (based on the information set forth in the Servicing
Certificate):
(i) the Trustee Fee for such Distribution Date to the Trustee;
(ii) the premium pursuant to the Insurance Agreement to the
Credit Enhancer;
(iii) the Class A Certificate Interest for such Distribution Date
to the Class A Certificateholders and the Unpaid Class A Certificate
Interest Shortfall, if any, for such Distribution Date to the Class A
Certificateholders plus, to the extent legally permissible, interest
thereon at the Class A Certificate Rate;
(iv) the Class S Certificate Interest for such Distribution Date
to the Class S Certificateholders and the Unpaid Class S Certificate
Interest Shortfall, if any, for such Distribution Date plus, to the
extent legally permissible, interest thereon at the Class S Certificate
Rate;
(v) the Investor Loss Amount for such Collection Period to the
Class A Certificateholders as principal in reduction of the Class A
Certificate Principal Balance;
(vi) to Class A Certificateholders as principal in reduction of
the Class A Certificate Principal Balance the aggregate amount of the
Investor Loss Reduction Amounts, if any, for previous Distribution Dates
that have not been previously reimbursed to Class A Certificateholders
pursuant to this clause (vi);
(vii) to reimburse the Credit Enhancer for previously unreimbursed
Credit Enhancement Draw Amounts together with interest thereon at the
applicable rate set forth in the Insurance Agreement;
(viii) the Accelerated Principal Distribution Amount, if any, to
the Class A Certificateholders;
(ix) (i) to the Trustee to deposit to the Spread Account up to
the Spread Account Maximum and (ii) to the Credit Enhancer for any
amounts owed to the Credit Enhancer pursuant to the Insurance Agreement;
(x) the amount, if any, of any Unpaid Class A Certificate Carry
Forward Interest Amount to the Class A Certificates;
(xi) any amount required to be paid to the Servicer pursuant to
Section 7.03 which has not been previously paid to the Servicer; and
(xii) any remaining amount to the Transferor.
(b) Distribution of Principal Collections. On each Distribution Date
-------------------------------------
during the Funding Period, the Scheduled Principal Collections Distribution
Amount shall be deposited into the Funding Account and shall not be
distributed to the Class A Certificateholders. On each Distribution Date
following the termination of the Funding Period, the Trustee shall, subject
to Section 11.02(b) and except on the Distribution Date in (______________),
distribute out of the Collection Account to the Class a Certificateholders
the Scheduled Principal Collections Distribution Amount (together with
amounts transferred to the Collection Account from the Spread Account
pursuant to Section 4.03(b) relating to principal up to but not in excess of
the Class A Certificate Principal Balance. In addition, on the first
Distribution Date following the end of the Funding Period, the Trustee shall
distribute out of the Collection Account the amount required to be so
distributed pursuant to Section 5.05(c)(iii)(C). On the Distribution Date in
(_________), the Trustee shall distribute to Class A Certificateholders Prin-
cipal Collections up to the Class A Certificate Principal Balance.
(c) Application of Transferor Subordinated Amount. If, after applying
---------------------------------------------
Class a Interest Collections as provided in Section 5.01(a) above, any
amounts specified in clauses (i) through (vi) remain unpaid, the Trustee
shall, based on information set forth in the Servicing Certificate for such
Distribution Date, apply Transferor Available Funds to make such payments and
the Transferor Subordinated Amount shall be reduced in accordance with clause
(i) of the definition thereof to the extent of such application. If
Transferor Available Funds applied in the order specified in Section 5.01(a)
are insufficient to cover the aggregate Investor Loss Amount for such
Distribution Date, then the remaining aggregate Investor Loss Amount (but
only to the extent of the remaining Transferor Subordinated Amount) shall be
reallocated to the Transferor Principal Balance (after giving effect to the
Transferor's portion of the Investor Loss Amount) and shall not be allocated
to the Class A Certificates and the Transferor Subordinated Amount shall be
reduced, as described in clause (ii) of the definition thereof, by the amount
so reallocated.
(d) Distribution of the Credit Enhancement Draw Amount. With respect
--------------------------------------------------
to any Distribution Date, to the extent that Investor Interest Collections
and amounts transferred from the Spread Account on the related Distribution
Date in respect of the amount determined pursuant to Section 4.03(b)(i) and
any amounts, if any, deposited to the Collection Account pursuant to Section
4.05 applied in the order specified in Section 5.01(a) are insufficient to
make distributions as provided in clauses (iii) and (iv) of Section 5.01(a)
above, the Trustee will make such payments (the "Deficiency Amount") from the
amount drawn under the Policy for such Distribution Date pursuant to Section
4.02. For any Distribution Date as to which there is a Guaranteed Principal
Distribution Amount, the Trustee shall distribute the Guaranteed Principal
Distribution Amount to Certificateholders from the amount drawn under the
Policy for such Distribution Date pursuant to Section 4.02.
The aggregate amount of principal distributed to the Class A Certifi-
cateholders under this Agreement shall not exceed the Original Class A
Certificate Principal Balance.
(e) Method of Distribution. The Trustee shall make distributions in
----------------------
respect of a Distribution Date to each Investor Certificateholder of record
on the related Record Date (other than as provided in Section 10.01
respecting the final distribution) by check or money order mailed to such
Investor Certificateholder at the address appearing in the Certificate
Register, or upon written request by an Investor Certificateholder delivered
to the Trustee at least five Business Days prior to such Record Date, by wire
transfer (but only if such Certificateholder is the Depository or such Certi-
ficateholder owns of record one or more Investor Certificates having
principal denominations aggregating at least $1,000,000), or by such other
means of payment as such Investor Certificateholder and the Trustee shall
agree. Distributions among Investor Certificateholders shall be made in
proportion to the Percentage Interests evidenced by the Investor Certificates
held by such Investor Certificateholders.
(f) Distributions on Book-Entry Certificates. Each distribution with
----------------------------------------
respect to a Book-Entry Certificate shall be paid to the Depository, which
shall credit the amount of such distribution to the accounts of its
Depository Participants in accordance with its normal procedures. Each
Depository Participant shall be responsible for disbursing such distribution
to the Certificate Owners that it represents and to each indirect
participating brokerage firm (a "brokerage firm" or "indirect participating
firm") for which it acts as agent. Each brokerage firm shall be responsible
for disbursing funds to the Certificate Owners that it represents. All such
credits and disbursements with respect to a Book-Entry Certificate are to be
made by the Depository and the Depository Participants in accordance with the
provisions of the Investor Certificates. None of the Trustee, the Paying
Agent, the Certificate Registrar, the Depositor, the Credit Enhancer or the
Servicer shall have any responsibility therefor except as otherwise provided
by applicable law.
(g) Distributions to Holders of Transferor Certificates. On each
---------------------------------------------------
Distribution Date, the Trustee shall, based upon the information set forth in
the Servicing Certificate for such Distribution Date, distribute to the
Transferor (i) the Transferor Interest Collections for the related Collection
Period and (ii) the portion, if any, of Transferor Principal Collections for
the related Collection Period in excess of Additional Balances created during
such Collection Period to the extent such amounts are not required to be
distributed to the Class A Certificateholders pursuant to Section 5.01(c);
provided that collections allocable to the Transferor Certificates will be
- - --------
distributed to the Transferor only to the extent that such distribution will
not reduce the amount of the Transferor Principal Balance 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 Principal Balance 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 Class A Certificateholders as a reduction of the Class A
Certificate Principal Balance.
Section 5.02. Calculation of the Class A Certificate Rate. On the
-------------------------------------------
second LIBOR Business Day immediately preceding each Distribution Date, the
Trustee shall determine LIBOR for the Interest Period commencing on such
Distribution Date and inform the Servicer (at the facsimile number given to
the Trustee in writing) of such rates. On each Determination Date, the
Trustee shall determine the applicable Class A Certificate Rate for the
related Distribution Date.
Section 5.03. Statements to Certificateholders. Concurrently with each
--------------------------------
distribution to Investor Certificateholders, the Trustee shall forward to
each Investor Certificateholder, the Servicer and each Rating Agency a
statement prepared by the Servicer pursuant to Section 4.01 with respect to
such distribution setting forth:
(i) the Investor Floating Allocation Percentage for the
preceding Collection Period;
(ii) the Class A Certificate Distribution Amount;
(iii) the amount of Class A Certificate Interest in such
distribution, the related Class A Certificate Rate and the Class S
Certificate Interest;
(iv) the amount, if any, of any Unpaid Class A Certificate
Interest Shortfall or any Unpaid Class S Certificate Interest Shortfall
in such distribution;
(v) the amount, if any, of the remaining Unpaid Class A
Certificate Interest Shortfall after giving effect to such distribution;
(vi) the amount, if any, of principal in such distribution,
separately stating the components thereof;
(vii) the amount, if any, of the reimbursement of previous
Investor Loss Reduction Amounts in such distribution;
(viii) the amount, if any, of the aggregate of unreimbursed
Investor Loss Reduction Amounts after giving effect to such
distribution;
(ix) the Servicing Fee for such Distribution Date;
(x) the Invested Amount, the Class A Certificate Principal
Balance and the Pool Factor, each after giving effect to such
distribution;
(xi) the Pool Balance as of the end of the preceding Collection
Period and the aggregate of the Asset Balances of the Mortgage Loans at
the close of business on the last day of the related Collection Period;
(xii) the Credit Enhancement Draw Amount, if any;
(xiii) the number and aggregate Asset Balances of 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;
(xiv) the book value (within the meaning of 12 C.F.R.
Section 571.13 or comparable provision) of any real estate acquired
through foreclosure or grant of a deed in lieu of foreclosure;
(xv) the Class A Certificate Rate applicable to the distribution
on the following Distribution Date;
(xvi) the number and principal balances of any Mortgage Loans
retransferred to the Transferor pursuant to (a) Section 2.04 and (b)
Section 2.06;
(xvii) the amount of Transferor Available Funds, if any, included
in such distribution; and
(xviii) the Transferor Subordinated Amount for the following
Distribution Date.
In the case of information furnished pursuant to clauses (ii), (iii) in
respect of Class A Certificate Interest, (iv) and (viii) above, the amounts
shall be expressed as a dollar amount per Investor Certificate with a $1,000
denomination.
Within 60 days after the end of each calendar year, the Servicer shall
prepare or cause to be prepared and shall forward to the Trustee the
information set forth in clauses (iii) and (vi) above aggregated for such
calendar year. Such obligation of the Servicer shall be deemed to have been
satisfied to the extent that substantially comparable information shall be
provided by the Servicer or a Paying Agent pursuant to any requirements of
the Code.
The Trustee shall prepare or cause to be prepared (in a manner
consistent with the treatment of the Class A Certificates as indebtedness of
the Transferor, or as may be otherwise required by Section 3.15) Internal
Revenue Service Form 1099 (or any successor form) and any other tax forms
required to be filed or furnished to Certificateholders in respect of
distributions by the Trustee (or the Paying Agent) on the Class A Certifi-
cates and shall file and distribute such forms as required by law.
Section 5.04. Rights of Certificateholders. The Investor Certificates
----------------------------
shall represent fractional undivided interests in the Trust, including the
benefits of the Collection Account and the right to receive Investor Interest
Collections, Principal Collections, if any, and other amounts at the times
and in the amounts specified in this Agreement; the Transferor Certificates
shall represent the remaining interest in the Trust (other than the Spread
Account, the Policy and the Funding Account).
Section 5.05. Funding Account. (a) The Trustee shall establish and
---------------
maintain with itself a separate trust account (the "Funding Account")
entitled "(________________________) as Trustee, in trust for the registered
holders of Home Equity Loan Asset Backed Certificates, Series 199_-_ Funding
Account." The Funding Account shall be an Eligible Account. On each Distri-
bution Date during the Funding Period, the Trustee shall withdraw from the
Collection Account and deposit to the Funding Account the Scheduled Principal
Collections Distribution Amount for such Distribution Date.
(b) The Servicer may cause the institution maintaining the Funding
Account to invest any funds in the Funding Account in Eligible Investments
which shall mature or otherwise be available not later than the Business Day
next preceding the Distribution Date or, with the approval of the Credit
Enhancer and the Rating Agencies, on the Distribution Date next following the
date of such investment (except that any investment in an obligation of the
institution with which the Funding Account is maintained may mature on or
before 12:00 noon, New York time, on such Distribution Date) and shall not be
sold or disposed of prior to its maturity. At any time when the Trustee is
maintaining the Funding Account, any request by the Servicer to invest funds
on deposit in the Funding Account shall be in writing, shall be delivered to
the Trustee at or before 10:30 a.m., New York time, if such investment is to
be made on such day, and shall certify that the requested investment is an
Eligible Investment which matures at or prior to the time required hereby.
Any such investment shall be registered in the name of the Trustee as trustee
hereunder or in the name of its nominee, and to the extent such investments
are certificated they shall be maintained in the possession of the Trustee in
the state of its Corporate Trust Office. All income and gain realized from
any such investment shall be for the benefit of the Investor
Certificateholders and shall be subject to withdrawal by the Trustee for
distribution to the Investor Certificateholders as provided in subsection
(c)(i) below. The amount of any losses incurred in respect of the principal
amount of any such investment shall be deposited in the Funding Account by
the Servicer out of its own funds immediately as realized. Any investment
earnings on the Funding Account shall be treated as owned by the Transferor
for federal and state income tax purposes.
(c) From time to time withdrawals shall be made from the Funding
Account by the Trustee as follows:
(i) on each Distribution Date during the Funding Period, to
deposit to the Collection Account all income realized from Eligible
Investments during the related Interest Period on Principal Collections
on deposit in the Funding Account for distribution as Investor Interest
Collections in accordance with Section 5.01(a);
(ii) on each Distribution Date prior to the last Distribution Date
during the Funding Period, any amounts in respect of Principal
Collections on deposit in the Funding Account shall be withdrawn and
applied to purchase the Subsequent Mortgage Loans, if any, transferred
to the Trust pursuant to Section 2.10; and
(iii) on the last Distribution Date of the Funding Period, any
amounts in respect of Principal Collections on deposit in the Funding
Account shall be withdrawn and applied in the following order:
(A) to purchase the Subsequent Mortgage Loans, if any,
transferred to the Trust pursuant to Section 2.10;
(B) to the Transferor, in payment for Additional
Balances, in a maximum amount equal to the excess, if any, of the
aggregate of Draws during the related Collection Period over
Principal Collections received during such Collection Period; and
(C) to the Collection Account, any remaining amounts on
deposit in the Funding Account in respect of Principal Collections,
for distribution to the Class A Certificateholders pursuant to
Section 5.01(b).
ARTICLE VI
The Certificates
Section 6.01. The Certificates. The Class A Certificates, Class S and
----------------
Transferor Certificates shall be substantially in the forms set forth in
Exhibits A-1, A-2 and B, respectively, and shall, on original issue, be
executed, authenticated and delivered by the Trustee to or upon the order of
the Depositor concurrently with the sale and assignment to the Trustee of the
Trust. The Class A Certificates shall be initially evidenced by one or more
certificates representing the entire Original Class A Certificate Principal
Balance and shall be held in minimum dollar denominations of $1,000 and mul-
tiples of one dollar in excess thereof, except that one Class A Certificate
may be in a denomination of less than $1,000 so that the sum of the
denominations of all outstanding Class A Certificates shall equal the
Original Class A Certificate Principal Balance. The Class S Certificates
shall be initially evidenced by one or more certificates representing the
entire original Class S Notional Amount and shall be held in minimum notional
amounts of $1,000 and multiples of one dollar in excess thereof, except that
one Class S Certificate may be in a notional amount of less than $1,000 so
that the sum of the denominations of all outstanding Class S Certificates
shall equal the Class S Notional Amount on the Closing Date. The Transferor
Certificates shall be issuable as one or more certificates representing the
entire interest in the assets of the Trust other than that represented by the
Investor Certificates and shall initially be issued to the Transferor.
The Certificates shall be executed by manual or facsimile signature on
behalf of the Trustee by an authorized officer under its seal imprinted
thereon. Certificates bearing the manual or facsimile signatures of
individuals who were, at the time when such signatures were affixed,
authorized to sign on behalf of the Trustee shall bind the Trust,
notwithstanding that such individuals or any of them have ceased to be so
authorized prior to the authentication and delivery of such Transferor Certi-
ficates or did not hold such offices at the date of such Transferor Certif-
icate. No Certificate shall be entitled to any benefit under this Agreement,
or be valid for any purpose, unless such Certificate shall have been manually
authenticated by the Trustee substantially in the form provided for herein,
and such authentication upon any Certificate shall be conclusive evidence,
and the only evidence, that such Certificate has been duly authenticated and
delivered hereunder. All Certificates shall be dated the date of their
authentication. Subject to Section 6.02(c), the Investor Certificates shall
be Book-Entry Certificates. The Transferor Certificates shall not be
Book-Entry Certificates.
Section 6.02. Registration of Transfer and Exchange of Investor Certi
-------------------------------------------------------
ficates; Appointment of Registrar. (a) The Certificate
- - ---------------------------------
Registrar shall cause to be kept at the Corporate Trust Office a Certificate
Register in which, subject to such reasonable regulations as it may
prescribe, the Certificate Registrar shall provide for the registration of
Investor Certificates and of transfers and exchanges of Investor Certificates
as herein provided. The Trustee shall initially serve as Certificate
Registrar for the purpose of registering Investor Certificates and transfers
and exchanges of Investor Certificates as herein provided.
Upon surrender for registration of transfer of any Investor Certificate
at any office or agency of the Certificate Registrar maintained for such
purpose pursuant to the foregoing paragraph, the Trustee on behalf of the
Trust shall execute, authenticate and deliver, in the name of the designated
transferee or transferees, one or more new Investor Certificates of the same
aggregate Percentage Interest.
At the option of the Investor Certificateholders, Investor Certificates
may be exchanged for other Investor Certificates in authorized denominations
and the same aggregate Percentage Interests, upon surrender of the Investor
Certificates to be exchanged at any such office or agency. Whenever any
Investor Certificates are so surrendered for exchange, the Trustee shall
execute and authenticate and deliver the Investor Certificates which the
Investor Certificateholder making the exchange is entitled to receive. Every
Investor Certificate presented or surrendered for transfer or exchange shall
(if so required by the Trustee or the Certificate Registrar) be duly endorsed
by, or be accompanied by a written instrument of transfer in form satisfac-
tory to the Trustee and the Certificate Registrar duly executed by, the
Holder thereof or his attorney duly authorized in writing.
(b) Except as provided in paragraph (c) below, the Book-Entry Certifi-
cates shall at all times remain registered in the name of the Depository or
its nominee and at all times: (i) registration of the Investor Certificates
may not be transferred by the Trustee except to another Depository; (ii) the
Depository shall maintain book-entry records with respect to the Certificate
Owners and with respect to ownership and transfers of such Investor Certifi-
cates; (iii) ownership and transfers of registration of the Investor Certifi-
cates on the books of the Depository shall be governed by applicable rules
established by the Depository; (iv) the Depository may collect its usual and
customary fees, charges and expenses from its Depository Participants; (v)
the Trustee shall deal with the Depository as representative of the Certifi-
cate Owners of the Investor Certificates for purposes of exercising the
rights of Holders under this Agreement, and requests and directions for and
votes of such representative shall not be deemed to be inconsistent if they
are made with respect to different Certificate Owners; and (vi) the Trustee
may rely and shall be fully protected in relying upon information furnished
by the Depository with respect to its Depository Participants and furnished
by the Depository Participants with respect to indirect participating firms
and Persons shown on the books of such indirect participating firms as direct
or indirect Certificate Owners.
All transfers by Certificate Owners of Book-Entry Certificates shall be
made in accordance with the procedures established by the Depository
Participant or brokerage firm representing such Certificate Owners. Each
Depository Participant shall only transfer Book-Entry Certificates of Certi-
ficate Owners that it represents or of brokerage firms for which it acts as
agent in accordance with the Depository's normal procedures. The parties
hereto are hereby authorized to execute a Letter of Representations with the
Depository or take such other action as may be necessary or desirable to
register a Book-Entry Certificate to the Depository. In the event of any
conflict between the terms of any such Letter of Representation and this
Agreement the terms of this Agreement shall control.
(c) If (i)(x) the Depository or the Depositor advises the Trustee in
writing that the Depository is no longer willing or able to discharge
properly its responsibilities as Depository, and (y) the Trustee or the
Depositor is unable to locate a qualified successor, (ii) the Depositor, at
its sole option, with the consent of the Trustee, elects to terminate the
book-entry system through the Depository or (iii) after the occurrence of an
Event of Servicing Termination, the Depository, at the direction of Certifi-
cate Owners representing Percentage Interests aggregating not less than 51%
advises the Trustee in writing that the continuation of a book-entry system
through the Depository to the exclusion of definitive, fully registered
Investor Certificates (the "Definitive Certificates") to Certificate Owners
is no longer in the best interests of the Certificate Owners. Upon surrender
to the Certificate Registrar of the Investor Certificates by the Depository,
accompanied by registration instructions from the Depository for registra-
tion, the Trustee shall execute and authenticate the Definitive Certificates.
Neither the Depositor nor the Trustee shall be liable for any delay in
delivery of such instructions and may conclusively rely on, and shall be
protected in relying on, such instructions. Upon the issuance of Definitive
Certificates, all references herein to obligations imposed upon or to be
performed by the Depository shall be deemed to be imposed upon and performed
by the Trustee, to the extent applicable with respect to such Definitive
Certificates, and the Trustee, the Certificate Registrar, the Servicer and
the Depositor shall recognize the Holders of the Definitive Certificates as
Certificateholders hereunder.
No service charge shall be made for any registration of transfer or
exchange of Investor Certificates, but the Certificate Registrar may require
payment of a sum sufficient to cover any tax or governmental charge that may
be imposed in connection with any transfer or exchange of Certificates.
All Investor Certificates surrendered for registration of transfer or
exchange shall be cancelled by the Certificate Registrar and disposed of
pursuant to its standard procedures.
Section 6.03. Mutilated, Destroyed, Lost or Stolen Certificates. If
-------------------------------------------------
(i) any mutilated Certificate is surrendered to the Certificate Registrar or
the Certificate Registrar receives evidence to its satisfaction of the
destruction, loss or theft of any Certificate, and (ii) there is delivered to
the Trustee, the Depositor and the Certificate Registrar such security or
indemnity as may be required by them to save each of them harmless, then, in
the absence of notice to the Trustee or the Certificate Registrar that such
Certificate has been acquired by a bona fide purchaser, the Trustee shall
execute, authenticate and deliver, in exchange for or in lieu of any such
mutilated, destroyed, lost or stolen Certificate, a new Certificate of like
tenor and Percentage Interest. Upon the issuance of any new Certificate
under this Section 6.03, the Trustee or the Certificate Registrar may require
the payment of a sum sufficient to cover any tax or other governmental charge
that may be imposed in relation thereto and any other expenses (including the
fees and expenses of the Trustee and the Certificate Registrar) connected
therewith. Any duplicate Certificate issued pursuant to this Section 6.03,
shall constitute complete and indefeasible evidence of ownership in the
Trust, as if originally issued, whether or not the lost, stolen or destroyed
Certificate shall be found at any time.
Section 6.04. Persons Deemed Owners. Prior to due presentation of a
---------------------
Certificate for registration of transfer, the Servicer, the Depositor, the
Trustee, the Certificate Registrar, any Paying Agent and any agent of the
Servicer, the Depositor, the Trustee, any Paying Agent or the Certificate
Registrar may treat the Person, including a Depository, in whose name any
Certificate is registered as the owner of such Certificate for the purpose of
receiving distributions pursuant to Section 5.01 and for all other purposes
whatsoever, and none of the Servicer, the Depositor, the Trustee, the Certi-
ficate Registrar, any Paying Agent or any agent of any of them shall be
affected by notice to the contrary.
Section 6.05. Restrictions on Transfer of Transferor Certificates. (a)
---------------------------------------------------
The Transferor Certificates shall be assigned, transferred, exchanged,
pledged, financed, hypothecated or otherwise conveyed (collectively, for
purposes of this Section 6.05 and any other Section referring to the
Transferor Certificates, "transferred" or a "transfer") only in accordance
with this Section 6.05.
(b) No transfer of a Transferor Certificate shall be made unless such
transfer is exempt from the registration requirements of the Securities Act
of 1933, as amended, and any applicable state securities laws or is made in
accordance with said Act and laws. Except for the initial issuance of the
Transferor Certificate to the Transferor, the Trustee shall require (i) the
transferee to execute an investment letter acceptable to and in form and sub-
stance satisfactory to the Trustee certifying to the Trustee the facts
surrounding such transfer, which investment letter shall not be an expense of
the Trustee or (ii) if the investment letter is not delivered, a written
Opinion of Counsel acceptable to and in form and substance satisfactory to
the Trustee and the Depositor that such transfer may be made pursuant to an
exemption, describing the applicable exemption and the basis therefor, from
said Act or is being made pursuant to said Act, which Opinion of Counsel
shall not be an expense of the Trustee or the Depositor. The Holder of a
Transferor Certificate desiring to effect such transfer shall, and does
hereby agree to, indemnify the Transferor against any liability that may
result if the transfer is not so exempt or is not made in accordance with
such federal and state laws.
(c) The Transferor Certificates and any interest therein shall not be
transferred except upon satisfaction of the following conditions precedent:
(i) the Person that acquires a Transferor Certificate shall (A) be organized
and existing under the laws of the United States of America or any state or
the District of Columbia thereof, (B) expressly assume, by an agreement
supplemental hereto, executed and delivered to the Trustee, the performance
of every covenant and obligation of the Transferor hereunder and (C) as part
of its acquisition of a Transferor Certificate, acquire all rights of the
Transferor or any transferee under this Section 6.05(c) to amounts payable to
such Transferor or such transferee under Sections 5.01(a)(xii) and 5.01(g);
(ii) the Holder of the Transferor Certificates shall deliver to the Trustee
an Officer's Certificate stating that such transfer and such supplemental
agreement comply with this Section 6.05(c) and that all conditions precedent
provided by this subsection 6.05(c) have been complied with and an Opinion of
Counsel stating that all conditions precedent provided by this subsection
6.05(c) have been complied with, and the Trustee may conclusively rely on
such Officer's Certificate, shall have no duty to make inquiries with regard
to the matters set forth therein and shall incur no liability in so relying;
(iii) the Holder of the Transferor Certificates shall deliver to the Trustee
a letter from each Rating Agency confirming that its rating of the Investor
Certificates, after giving effect to such transfer, will not be reduced or
withdrawn without regard to the Policy; (iv) the transferee of the Transferor
Certificates shall deliver to the Trustee an Opinion of Counsel to the effect
that (a) such transfer will not adversely affect the treatment of the
Investor Certificates after such transfer as debt for federal and applicable
state income tax purposes, (b) such transfer will not result in the Trust
being subject to tax at the entity level for federal or applicable state tax
purposes, (c) such transfer will not have any material adverse impact on the
federal or applicable state income taxation of an Investor Certificateholder
or any Certificate Owner and (d) such transfer will not result in the
arrangement created by this Agreement or any "portion" of the Trust, being
treated as a taxable mortgage pool as defined in Section 7701(i) of the Code;
(v) all filings and other actions necessary to continue the perfection of the
interest of the Trust in the Mortgage Loans and the other property conveyed
hereunder shall have been taken or made and (vi) the transferee shall have
assumed the obligations of the Transferor pursuant to Section 7.07 hereof.
Notwithstanding the foregoing, the requirement set forth in subclause (i)(A)
of this Section 6.05(c) shall not apply in the event the Trustee shall have
received a letter from each Rating Agency confirming that its rating of the
Investor Certificates, after giving effect to a proposed transfer to a Person
that does not meet the requirement set forth in subclause (i)(A), shall not
be reduced or withdrawn. Notwithstanding the foregoing, the requirements set
forth in this paragraph (c) shall not apply to the initial issuance of the
Transferor Certificates to the Transferor.
(d) Except for the initial issuance of the Transferor Certificate to
the Transferor, no transfer of a Transferor Certificate shall be made unless
the Trustee shall have received either (i) a representation letter from the
transferee of such Certificate, acceptable to and in form and substance
satisfactory to the Trustee, to the effect that such transferee is not an
employee benefit plan subject to Section 406 of ERISA, nor a Person acting on
behalf of any such plan, which representation letter shall not be an expense
of the Trustee, (ii) if the purchaser is an insurance company, a
representation that the purchaser is an insurance company which is purchasing
such Certificates with funds contained in an "insurance company general
account" (as such term is defined in Section V(e) of Prohibited Transaction
Class Exemption 95-60 ("PTCE 95-60")) and that the purchase and holding of
such Certificates are covered under PTCE 95-60, or (iii) in the case of any
Transferor Certificate presented for registration in the name of an employee
benefit plan subject to ERISA, and Section 4975 of the Code (or comparable
provisions of any subsequent enactments), or a trustee of any such plan, an
Opinion of Counsel to the effect that the purchase or holding of such
Certificate will not result in the assets of the Trust being deemed to be
"plan assets" and subject to the prohibited transaction provisions of ERISA
and the Code and will not subject the Trustee to any obligation in addition
to those undertaken in this Agreement, which Opinion of Counsel shall not be
an expense of the Trustee or the Depositor.
Section 6.06. Appointment of Paying Agent. (a) The Paying Agent shall
---------------------------
make distributions to Investor Certificateholders from the Collection Account
pursuant to Section 5.01 and shall report the amounts of such distributions
to the Trustee. The duties of the Paying Agent may include the obligation
(i) to withdraw funds from the Collection Account pursuant to Section 3.03
and for the purpose of making the distributions referred to above and (ii) to
distribute statements and provide information to Certificateholders as
required hereunder. The Paying Agent hereunder shall at all times be a
corporation duly incorporated and validly existing under the laws of the
United States of America or any state thereof, authorized under such laws to
exercise corporate trust powers and subject to supervision or examination by
federal or state authorities. The Paying Agent shall initially be the
Trustee. The Trustee may appoint a successor to act as Paying Agent, which
appointment shall be reasonably satisfactory to the Depositor.
(b) The Trustee shall cause the Paying Agent (if other than the
Trustee) to execute and deliver to the Trustee an instrument in which such
Paying Agent shall agree with the Trustee that such Paying Agent shall hold
all sums, if any, held by it for payment to the Investor Certificateholders
in trust for the benefit of the Investor Certificateholders entitled thereto
until such sums shall be paid to such Certificateholders and shall agree that
it shall comply with all requirements of the Code regarding the withholding
of payments in respect of Federal income taxes due from Certificate Owners
and otherwise comply with the provisions of this Agreement applicable to it.
Section 6.07. Acceptance of Obligations. The Transferor, by its
-------------------------
acceptance of the Transferor Certificates, agrees to be bound by and to
perform all the duties of the Transferor set forth in this Agreement.
ARTICLE VII
The Servicer, the Transferor and the Depositor
Section 7.01. Liability of the Transferor, the Servicer and the
-------------------------------------------------
Depositor. The Transferor and the Servicer shall be liable in accordance
- - ---------
herewith only to the extent of the obligations specifically imposed upon and
undertaken by the Transferor or Servicer, as the case may be, herein. The
Depositor shall be liable in accordance herewith only to the extent of the
obligations specifically imposed upon and undertaken by the Depositor.
Section 7.02. Merger or Consolidation of, or Assumption of the
------------------------------------------------
Obligations of, the Servicer, the Transferor or the Depositor. Any corpora
- - -------------------------------------------------------------
tion into which the Servicer, the Transferor or the Depositor may be merged
or consolidated, or any corporation resulting from any merger, conversion or
consolidation to which the Servicer, the Transferor or the Depositor shall be
a party, or any corporation succeeding to the business of the Servicer, the
Transferor or the Depositor, shall be the successor of the Servicer, the
Transferor or the Depositor, as the case may be, hereunder, without the
execution or filing of any paper or any further act on the part of any of the
parties hereto, anything herein to the contrary notwithstanding.
Section 7.03. Limitation on Liability of the Servicer and Others.
--------------------------------------------------
Neither the Servicer nor any of the directors or officers or employees or
agents of the Servicer shall be under any liability to the Trust or the
Certificateholders for any action taken or for refraining from the taking of
any action by the Servicer in good faith pursuant to this Agreement, or for
errors in judgment; provided, however, that this provision shall not protect
-------- -------
the Servicer or any such Person against any liability which would otherwise
be imposed by reason of willful misfeasance, bad faith or gross negligence in
the performance of duties of the Servicer or by reason of reckless disregard
of obligations and duties of the Servicer hereunder. The Servicer and any
director or officer or employee or agent of the Servicer may rely in good
faith on any document of any kind prima facie properly executed and
----- -----
submitted by any Person respecting any matters arising hereunder. The
Servicer and any director or officer or employee or agent of the Servicer
shall be indemnified by the Trust and held harmless against any loss,
liability or expense incurred in connection with any legal action relating to
this Agreement or the Certificates, other than any loss, liability or expense
related to any specific Mortgage Loan or Mortgage Loans (except as any such
loss, liability or expense shall be otherwise reimbursable pursuant to this
Agreement) and any loss, liability or expense incurred by reason of its
willful misfeasance, bad faith or gross negligence in the performance of
duties hereunder or by reason of its reckless disregard of obligations and
duties hereunder. The Servicer shall not be under any obligation to appear
in, prosecute or defend any legal action which is not incidental to duties to
service the Mortgage Loans in accordance with this Agreement, and which in
its opinion may involve it in any expense or liability; provided, however,
that the Servicer may in its sole discretion undertake any such action which
it may deem necessary or desirable in respect of this Agreement, and the
rights and duties of the parties hereto and the interests of the Certificate-
holders hereunder. In such event, the reasonable legal expenses and costs of
such action and any liability resulting therefrom shall be expenses, costs
and liabilities of the Trust and the Servicer shall only be entitled to be
reimbursed therefor pursuant to Section 5.01(a)(xi). The Servicer's right to
indemnity or reimbursement pursuant to this Section 7.03 shall survive any
resignation or termination of the Servicer pursuant to Section 7.04 or 8.01
with respect to any losses, expenses, costs or liabilities arising prior to
such resignation or termination (or arising from events that occurred prior
to such resignation or termination).
Section 7.04. Servicer Not to Resign. Subject to the provisions of
----------------------
Section 7.02, the Servicer shall not resign from the obligations and duties
hereby imposed on it except (i) upon determination that the performance of
its obligations or duties hereunder are no longer permissible under
applicable law or are in material conflict by reason of applicable law with
any other activities carried on by it or its subsidiaries or Affiliates, the
other activities of the Servicer so causing such a conflict being of a type
and nature carried on by the Servicer or its subsidiaries or Affiliates at
the date of this Agreement or (ii) upon satisfaction of the following
conditions: (a) the Servicer has proposed a successor servicer to the
Trustee in writing and such proposed successor servicer is reasonably
acceptable to the Trustee; (b) each Rating Agency shall have delivered a
letter to the Trustee prior to the appointment of the successor servicer
stating that the proposed appointment of such successor servicer as Servicer
hereunder will not result in the reduction or withdrawal of the then current
rating of the Investor Certificates without regard to the Policy; and (c)
such proposed successor servicer is reasonably acceptable to the Credit
Enhancer, as evidenced by a letter to the Trustee; provided, however, that
-------- -------
no such resignation by the Servicer shall become effective until the Trustee
or successor servicer designated by the Servicer as provided above shall have
assumed the Servicer's responsibilities and obligations hereunder or the
Trustee shall have designated a successor servicer in accordance with Section
8.02. Any such resignation shall not relieve the Servicer of responsibility
for any of the obligations specified in Sections 8.01 and 8.02 as obligations
that survive the resignation or termination of the Servicer. Any such
determination permitting the resignation of the Servicer pursuant to clause
(i) above shall be evidenced by an Opinion of Counsel to such effect de-
livered to the Trustee and the Credit Enhancer. The Servicer shall have no
claim (whether by subrogation or otherwise) or other action against any
Certificateholder for any amounts paid by the Servicer pursuant to any
provision of this Agreement.
Section 7.05. Delegation of Duties. In the ordinary course of
--------------------
business, the Servicer at any time may delegate any of its duties hereunder
to any Person, including any of its Affiliates, or any subservicer referred
to in Section 3.01, who agrees to conduct such duties in accordance with
standards comparable to those with which the Servicer complies pursuant to
Section 3.01. Such delegation shall not relieve the Servicer of its
liabilities and responsibilities with respect to such duties and shall not
constitute a resignation within the meaning of Section 7.04.
Section 7.06. Indemnification of the Trust by the Servicer. The
--------------------------------------------
Servicer shall indemnify and hold harmless the Trust and the Trustee from and
against any loss, liability, expense, damage or injury suffered or sustained
by reason of the Servicer's activities or omissions in servicing or
administering the Mortgage Loans that are not in accordance with this
Agreement, including, but not limited to, any judgment, award, settlement,
reasonable attorneys' fees and other costs or expenses incurred in connection
with the defense of any actual or threatened action, proceeding or claim.
Any such indemnification shall not be payable from the assets of the Trust.
The provisions of this indemnity shall run directly to and be enforceable by
an injured party subject to the limitations hereof. The provisions of this
Section 7.06 shall survive termination of this Agreement.
Section 7.07. Indemnification of the Trust by the Transferor.
----------------------------------------------
Notwithstanding anything to the contrary contained herein, the Transferor (i)
agrees to be liable directly to the injured party for the entire amount of
any losses, claims, damages, liabilities and expenses of the Trust (other
than those attributable to an Investor Certificateholder in the capacity as
an investor in the Investor Certificates as a result of defaults on the
Mortgage Loans) to the extent that the Transferor would be liable if the
Trust were a partnership under the Delaware Revised Uniform Limited
Partnership Act in which the Transferor was a general partner and (ii) shall
indemnify and hold harmless the Trust and the Trustee from and against any
loss, liability, expense, damage, claim or injury (other than those
attributable to an Investor Certificateholder in the capacity as an investor
in the Investor Certificates as a result of defaults on the Mortgage Loans)
arising out of or based on this Agreement by reason of any acts, omissions,
or alleged acts or omissions arising out of activities of the Trust or the
Trustee, or the actions of the Servicer including, but not limited to,
amounts payable to the Servicer pursuant to Section 7.03, any judgment,
award, settlement, reasonable attorneys' fees and other costs or expenses
incurred in connection with the defense of any actual or threatened action,
proceeding or claim; provided that the Transferor shall not indemnify the
--------
Trustee (but shall indemnify any other injured party) if such loss,
liability, expense, damage or injury is due to the Trustee's willful malfeas-
ance, bad faith or gross negligence or by reason of the Trustee's reckless
disregard of its obligations hereunder. The provisions of this indemnity
shall run directly to and be enforceable by an injured party subject to the
limitations hereof.
Section 7.08. Limitation on Liability of the Transferor. None of the
-----------------------------------------
directors or officers or employees or agents of the Transferor shall be under
any liability to the Trust, the Trustee or the Certificateholders, it being
expressly understood that all such liability is expressly waived and released
as a condition of, and as consideration for, the execution of this Agreement
and the issuance of the Certificates; provided, however, that this provision
-------- -------
shall not protect any such Person against any liability which would otherwise
be imposed by reason of willful misfeasance, bad faith or gross negligence in
the performance of the duties hereunder. Except as provided in Section 7.07,
the Transferor shall not be under any liability to the Trust, the Trustee or
the Certificateholders for any action taken or for refraining from the taking
of any action in its capacity as Transferor pursuant to this Agreement
whether arising from express or implied duties under this Agreement;
provided, however, that this provision shall not protect the
- - -------- -------
Transferor against any liability which would otherwise be imposed by reason
of willful misfeasance, bad faith or gross negligence in the performance of
its duties or by reason of reckless disregard of its obligations and duties
hereunder. The Transferor and any director or officer or employee or agent
of the Transferor may rely in good faith on any document of any kind prima
-----
facie properly executed and submitted by any Person respecting any matters
- - -----
arising hereunder.
Section 7.09. Limitation on Liability of the Depositor. None of the
----------------------------------------
directors or officers or employees or agents of the Depositor shall be under
any liability to the Trust, the Trustee or the Certificateholders, it being
expressly understood that all such liability is expressly waived and released
as a condition of, and as consideration for, the execution of this Agreement
and the issuance of the Certificates; provided, however, that this provision
-------- -------
shall not protect any such Person against any liability which would otherwise
be imposed by reason of willful misfeasance, bad faith or gross negligence in
the performance of the duties hereunder. The Transferor and any director or
officer or employee or agent of the Transferor may rely in good faith on any
document of any kind prima facie properly executed and submitted by any
----- -----
Person respecting any matters arising hereunder.
ARTICLE VIII
Servicing Termination
Section 8.01. Events of Servicing Termination. If any one of the
-------------------------------
following events ("Events of Servicing Termination") shall occur and be con-
tinuing:
(i) Any failure by the Servicer to deposit in the Collection
Account any deposit required to be made under the terms of this
Agreement which continues unremedied for a period of five Business Days
after the date upon which written notice of such failure shall have been
given to the Servicer by the Trustee or to the Servicer and the Trustee
by the Credit Enhancer or Holders of Investor Certificates evidencing
Percentage Interests aggregating not less than 25%; or
(ii) Failure on the part of the Servicer duly to observe or
perform in any material respect any other covenants or agreements of the
Servicer set forth in the Certificates or in this Agreement, which
failure continues unremedied for a period of 60 days after the date on
which written notice of such failure, requiring the same to be remedied,
and stating that such notice is a "Notice of Default" hereunder, shall
have been given to the Servicer by the Trustee or to the Servicer and
the Trustee by the Credit Enhancer or the Holders of Investor Certifi-
cates evidencing Percentage Interests aggregating not less than 25%; or
(iii) The entry against the Servicer of a decree or order by a
court or agency or supervisory authority having jurisdiction in the
premises for the appointment of a trustee, conservator, receiver or
liquidator in any insolvency, conservatorship, receivership,
readjustment of debt, marshalling of assets and liabilities or similar
proceedings, or for the winding up or liquidation of its affairs, and
the continuance of any such decree or order unstayed and in effect for a
period of 60 consecutive days; or
(iv) The consent by the Servicer to the appointment of a trustee,
conservator, receiver or liquidator in any insolvency, conservatorship,
receivership, readjustment of debt, marshalling of assets and
liabilities or similar proceedings of or relating to the Servicer or of
or relating to substantially all of its property; or the Servicer shall
admit in writing its inability to pay its debts generally as they become
due, file a petition to take advantage of any applicable insolvency or
reorganization statute, make an assignment for the benefit of its
creditors, or voluntarily suspend payment of its obligations;
then, and in each and every such case, so long as an Event of Servicing
Termination shall not have been remedied by the Servicer, with respect to an
Event of Servicing Termination specified in (i) - (iv), above, either the
Trustee, the Credit Enhancer or the Holders of Investor Certificates
evidencing Voting Rights aggregating not less than 51%, by notice then given
in writing to the Servicer (and to the Trustee if given by the Credit
Enhancer or the Holders of Investor Certificates) may terminate all of the
rights and obligations of the Servicer as servicer under this Agreement. Any
such notice to the Servicer shall also be given to each Rating Agency and the
Credit Enhancer. On or after the receipt by the Servicer of such written
notice, all authority and power of the Servicer under this Agreement, whether
with respect to the Certificates or the Mortgage Loans or otherwise, shall
pass to and be vested in the Trustee pursuant to and under this Section 8.01;
and, without limitation, the Trustee is hereby authorized and empowered to
execute and deliver, on behalf of the Servicer, as attorney-in-fact or
otherwise, any and all documents and other instruments, and to do or
accomplish all other acts or things necessary or appropriate to effect the
purposes of such notice of termination, whether to complete the transfer and
endorsement of each Mortgage Loan and related documents, or otherwise. The
Servicer agrees to cooperate with the Trustee in effecting the termination of
the responsibilities and rights of the Servicer hereunder, including, without
limitation, the transfer to the Trustee for the administration by it of all
cash amounts that shall at the time be held by the Servicer and to be
deposited by it in the Collection Account, or that have been deposited by the
Servicer in the Collection Account or thereafter received by the Servicer
with respect to the Mortgage Loans. All reasonable costs and expenses
(including attorneys' fees) incurred in connection with transferring the
Mortgage Files to the successor Servicer and amending this Agreement to
reflect such succession as Servicer pursuant to this Section 8.01 shall be
paid by the predecessor Servicer (or if the predecessor Servicer is the
Trustee, the initial Servicer) upon presentation of reasonable documentation
of such costs and expenses.
Notwithstanding the foregoing, a delay in or failure of performance
under Section 8.01(i) for a period of ten Business Days or under Section
8.01(ii) 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 Servicer and such delay or failure
was caused by an act of God or the public enemy, acts of declared or
undeclared war, public disorder, rebellion or sabotage, epidemics,
landslides, lightning, fire, hurricanes, earthquakes, floods or similar
causes. The preceding sentence shall not relieve the Servicer from using its
best efforts to perform its respective obligations in a timely manner in
accordance with the terms of this Agreement and the Servicer shall provide
the Trustee, the Transferor, the Credit Enhancer and the Investor Certificat-
eholders with an Officers' Certificate giving prompt notice of such failure
or delay by it, together with a description of its efforts to so perform its
obligations. The Servicer shall immediately notify the Trustee in writing of
any Events of Servicing Termination.
Section 8.02. Trustee to Act; Appointment of Successor. (a) On and
----------------------------------------
after the time the Servicer receives a notice of termination pursuant to
Section 8.01 or 7.04, the Trustee shall be the successor in all respects to
the Servicer in its capacity as servicer under this Agreement and the
transactions set forth or provided for herein and shall be subject to all the
responsibilities, duties and liabilities relating thereto placed on the
Servicer by the terms and provisions hereof. Notwithstanding the above, if
the Trustee becomes the Servicer hereunder, it shall have no responsibility
or obligation (i) of repurchase or substitution with respect to any Mortgage
Loan, (ii) with respect to any representation or warranty of the Servicer,
and (iii) for any act or omission of either a predecessor or successor
Servicer other than the Trustee. As compensation therefor, the Trustee shall
be entitled to such compensation as the Servicer would have been entitled to
hereunder if no such notice of termination had been given. In addition, the
Trustee will be entitled to compensation with respect to its expenses in
connection with conversion of certain information, documents and record
keeping, as provided in Section 7.04(b). Notwithstanding the above, (i) if
the Trustee is unwilling to act as successor Servicer, or (ii) if the Trustee
is legally unable so to act, the Trustee may (in the situation described in
clause (i)) or shall (in the situation described in clause (ii)) appoint or
petition a court of competent jurisdiction to appoint, any established hous-
ing and home finance institution, bank or other mortgage loan or home equity
loan servicer having a net worth of not less than $15,000,000 as the succes-
sor to the Servicer hereunder in the assumption of all or any part of the
responsibilities, duties or liabilities of the Servicer hereunder; provided
--------
that any such successor Servicer shall be acceptable to the Credit Enhancer,
as evidenced by the Credit Enhancer's prior written consent, which consent
shall not be unreasonably withheld; and provided further that the appointment
-------- -------
of any such successor Servicer will not result in the qualification,
reduction or withdrawal of the ratings assigned to the Certificates by the
Rating Agencies without regard to the Policy. Pending appointment of a suc-
cessor to the Servicer hereunder, unless the Trustee is prohibited by law
from so acting, the Trustee shall act in such capacity as hereinabove pro-
vided. In connection with such appointment and assumption, the successor
shall be entitled to receive compensation out of payments on Mortgage Loans
in an amount equal to the compensation which the Servicer would otherwise
have received pursuant to Section 3.08 (or such lesser compensation as the
Trustee and such successor shall agree). The Trustee and such successor
shall take such action, consistent with this Agreement, as shall be necessary
to effectuate any such succession.
(b) Any successor, including the Trustee, to the Servicer as servicer
shall during the term of its service as servicer (i) continue to service and
administer the Mortgage Loans for the benefit of Certificateholders and the
Credit Enhancer and (ii) maintain in force a policy or policies of insurance
covering errors and omissions in the performance of its obligations as
Servicer hereunder and a fidelity bond in respect of its officers, employees
and agents to the same extent as the Servicer is so required pursuant to
Section 3.12. The appointment of a successor Servicer shall not affect any
liability of the predecessor Servicer which may have arisen under this
Agreement prior to its termination as Servicer (including, without
limitation, any deductible under an insurance policy pursuant to Section
3.04), nor shall any successor Servicer be liable for any acts or omissions
of the predecessor Servicer or for any breach by such Servicer of any of
their representations or warranties contained herein.
Section 8.03. Notification to Certificateholders. Upon any termination
----------------------------------
or appointment of a successor to the Servicer pursuant to this Article VIII
or Section 7.04, the Trustee shall give prompt written notice thereof to the
Certificateholders at their respective addresses appearing in the Certificate
Register, the Credit Enhancer and each Rating Agency.
ARTICLE IX
The Trustee
Section 9.01. Duties of Trustee. The Trustee, prior to the occurrence
-----------------
of an Event of Servicing Termination and after the curing or waiver of all
Events of Servicing Termination which may have occurred, undertakes to
perform such duties and only such duties as are specifically set forth in
this Agreement. If an Event of Servicing Termination has occurred (which has
not been cured or waived) of which a Responsible Officer has knowledge, the
Trustee shall exercise such of the rights and powers vested in it by this
Agreement, and use the same degree of care and skill in their exercise, as a
prudent man would exercise or use under the circumstances in the conduct of
his own affairs; provided, however, that if the Trustee is acting as
-------- -------
Servicer it shall use the same degree of care and skill as is required of the
Servicer under this Agreement.
The Trustee, upon receipt of all resolutions, certificates, statements,
opinions, reports, documents, orders or other instruments furnished to the
Trustee which are specifically required to be furnished pursuant to any
provision of this Agreement, shall examine them to determine whether they
conform to the requirements of this Agreement.
No provision of this Agreement shall be construed to relieve the Trustee
from liability for its own negligent action, its own negligent failure to act
or its own willful misconduct; provided, however, that:
-------- -------
(i) prior to the occurrence of an Event of Servicing Termination
of which a Responsible Officer of the Trustee has knowledge, and after
the curing or waiver of all such Events of Servicing Termination which
may have occurred, the duties and obligations of the Trustee shall be
determined solely by the express provisions of this Agreement, the
Trustee shall not be liable except for the performance of such duties
and obligations as are specifically set forth in this Agreement, no
implied covenants or obligations shall be read into this Agreement
against the Trustee and, in the absence of bad faith on the part of the
Trustee, the Trustee may conclusively rely, as to the truth of the
statements and the correctness of the opinions expressed therein, upon
any certificates or opinions furnished to the Trustee and conforming to
the requirements of this Agreement;
(ii) the Trustee shall not be personally liable for an error of
judgment made in good faith by a Responsible Officer of the Trustee,
unless it shall be proved that the Trustee was negligent in ascertaining
or investigating the facts related thereto;
(iii) the Trustee shall not be personally liable with respect to
any action taken, suffered or omitted to be taken by it in good faith in
accordance with the consent or direction of the Credit Enhancer or in
accordance with the direction of the Holders of Investor Certificates
evidencing Voting Rights aggregating not less than 51% relating to the
time, method and place of conducting any proceeding for any remedy
available to the Trustee, or exercising any trust or power conferred
upon the Trustee, under this Agreement; and
(iv) the Trustee shall not be charged with knowledge of any
failure by the Servicer to comply with the obligations of the Servicer
referred to in clauses (i) and (ii) of Section 8.01 or of the occurrence
of a Rapid Amortization Event unless a Responsible Officer of the
Trustee at the Corporate Trust Office obtains actual knowledge of such
failure or the Trustee receives written notice of such failure from the
Servicer, the Credit Enhancer or the Holders of Investor Certificates
evidencing Voting Rights aggregating not less than 51%.
The Trustee shall not be required to expend or risk its own funds or
otherwise incur financial liability in the performance of any of its duties
hereunder, or in the exercise of any of its rights or powers, if there is
reasonable ground for believing that the repayment of such funds or adequate
indemnity against such risk or liability is not reasonably assured to it.
None of the provisions contained in this Agreement shall in any event require
the Trustee to perform, or be responsible for the manner of performance of,
any of the obligations of the Servicer under this Agreement, except during
such time, if any, as the Trustee shall be the successor to, and be vested
with the rights, duties, powers and privileges of, the Servicer in accordance
with the terms of this Agreement and in no event shall it be required to
perform or accept responsibility for the obligations of the Depositor or the
Transferor.
Section 9.02. Certain Matters Affecting the Trustee. Except as
-------------------------------------
otherwise provided in Section 9.01:
(i) the Trustee may request and rely upon, and shall be
protected in acting or refraining from acting upon, any resolution,
Officer's Certificate, certificate of auditors or any other certificate,
statement, instrument, opinion, report, notice, request, consent, order,
appraisal, bond or other paper or document reasonably believed by it to
be genuine and to have been signed or presented by the proper party or
parties;
(ii) the Trustee may consult with counsel and any written advice
of such counsel or any Opinion of Counsel shall be full and complete
authorization and protection in respect of any action taken or suffered
or omitted by it hereunder in good faith and in accordance with such
advice or Opinion of Counsel;
(iii) the Trustee shall be under no obligation to exercise any of
the rights or powers vested in it by this Agreement, or to institute,
conduct or defend any litigation hereunder or in relation hereto, at the
request, order or direction of any of the Certificateholders or the
Credit Enhancer, pursuant to the provisions of this Agreement, unless
such Certificateholders or the Credit Enhancer shall have offered to the
Trustee reasonable security or indemnity against the costs, expenses and
liabilities which may be incurred therein or thereby; the right of the
Trustee to perform any discretionary act enumerated in this Agreement
shall not be construed as a duty, and the Trustee shall not be
answerable for other than its negligence or wilful misconduct in the
performance of any such act; nothing contained herein shall, however,
relieve the Trustee of the obligations, upon the occurrence of an Event
of Servicing Termination (which has not been cured or waived) of which a
Responsible Officer has knowledge, to exercise such of the rights and
powers vested in it by this Agreement, and to use the same degree of
care and skill in their exercise as a prudent man would exercise or use
under the circumstances in the conduct of his own affairs, unless it is
acting as Servicer;
(iv) the Trustee shall not be personally liable for any action
taken, suffered or omitted by it in good faith and believed by it to be
authorized or within the discretion or rights or powers conferred upon
it by this Agreement;
(v) prior to the occurrence of an Event of Servicing Termination
and after the curing or waiver of all Events of Servicing Termination
which may have occurred, the Trustee shall not be bound to make any
investigation into the facts or matters stated in any resolution,
certificate, statement, instrument, opinion, report, notice, request,
consent, order, approval, bond or other paper or documents, unless
requested in writing to do so by Holders of Investor Certificates
evidencing Voting Rights aggregating not less than 51%; provided,
--------
however, that if the payment within a reasonable time to the Trustee of the
- - -------
costs, expenses or liabilities likely to be incurred by it in the making of
such investigation is, in the opinion of the Trustee, not reasonably assured
to the Trustee by the security afforded to it by the terms of this Agreement,
the Trustee may require reasonable indemnity against such cost, expense or
liability as a condition to such proceeding. The reasonable expense of every
such examination shall be paid by the Servicer or, if paid by the Trustee,
shall be reimbursed by the Servicer upon demand. Nothing in this clause (v)
shall derogate from the obligation of the Servicer to observe any applicable
law prohibiting disclosure of information regarding the Mortgagors;
(vi) the Trustee shall not be accountable, shall have no
liability and makes no representation as to any acts or omissions
hereunder of the Servicer until such time as the Trustee may be required
to act as Servicer pursuant to Section 8.02; and
(vii) the Trustee may execute any of the trusts or powers
hereunder or perform any duties hereunder either directly or by or
through an Affiliate, agents or attorneys or a custodian.
Section 9.03. Trustee Not Liable for Certificates or Mortgage Loans.
-----------------------------------------------------
The recitals contained herein and in the Certificates (other than the
authentication of the Trustee on the Certificates) shall be taken as the
statements of the Depositor, and the Trustee assumes no responsibility for
the correctness of the same. The Trustee makes no representations as to the
validity or sufficiency of this Agreement or of the Certificates (other than
the signature and authentication of the Trustee on the Certificates) or of
any Mortgage Loan or Related Document. The Trustee shall not be accountable
for the use or application by the Depositor of any of the Certificates or of
the proceeds of such Certificates, or for the use or application of any funds
paid to the Depositor or the Servicer in respect of the Mortgage Loans or
deposited in or withdrawn from the Collection Account by the Servicer. The
Trustee shall at no time have any responsibility or liability for or with
respect to the legality, validity and enforceability of any Mortgage or any
Mortgage Loan, or the perfection and priority of any Mortgage or the
maintenance of any such perfection and priority, or for or with respect to
the sufficiency of the Trust or its ability to generate the payments to be
distributed to Certificateholders under this Agreement, including, without
limitation: the existence, condition and ownership of any Mortgaged
Property; the existence and enforceability of any hazard insurance thereon
(other than if the Trustee shall assume the duties of the Servicer pursuant
to Section 8.02); the validity of the assignment of any Mortgage Loan to the
Trustee or of any intervening assignment; the completeness of any Mortgage
Loan; the performance or enforcement of any Mortgage Loan (other than if the
Trustee shall assume the duties of the Servicer pursuant to Section 8.02);
the compliance by the Depositor, the Transferor or the Servicer with any
warranty or representation made under this Agreement or in any related docu-
ment or the accuracy of any such warranty or representation prior to the
Trustee's receipt of notice or other discovery of any non-compliance
therewith or any breach thereof; any investment of monies by or at the
direction of the Servicer or any loss resulting therefrom, it being
understood that the Trustee shall remain responsible for any Trust property
that it may hold in its individual capacity; the acts or omissions of any of
the Depositor, the Servicer (other than if the Trustee shall assume the
duties of the Servicer pursuant to Section 8.02), any subservicer or any
Mortgagor; any action of the Servicer (other than if the Trustee shall assume
the duties of the Servicer pursuant to Section 8.02), or any subservicer
taken in the name of the Trustee; the failure of the Servicer or any
subservicer to act or perform any duties required of it as agent of the
Trustee hereunder; or any action by the Trustee taken at the instruction of
the Servicer (other than if the Trustee shall assume the duties of the
Servicer pursuant to Section 8.02); provided, however, that the foregoing
shall not relieve theTrustee of its obligation to perform its duties under
this Agreement. The Trustee shall have no responsibility for filing any
financing or continuation statement in any public office at any time or to
otherwise perfect or maintain the perfection of any security interest or lien
granted to it hereunder (unless the Trustee shall have become the successor
Servicer) or to prepare or file any Securities and Exchange Commission filing
for the Trust or to record this Agreement.
Section 9.04. Trustee May Own Certificates. The Trustee in its
----------------------------
individual or any other capacity may become the owner or pledgee of Certifi-
cates with the same rights as it would have if it were not Trustee and may
transact any banking and trust business with the Transferor, the Servicer,
the Credit Enhancer or the Depositor.
Section 9.05. Servicer to Pay Trustee's Fees and Expenses; Servicer to
--------------------------------------------------------
Indemnify. The Servicer covenants and agrees to pay to the Trustee from time
- - ---------
to time, and the Trustee shall be entitled to, reasonable compensation (which
shall not be limited by any provision of law in regard to the compensation of
a trustee of an express trust) for all services rendered by it in the
execution of the trusts hereby created and in the exercise and performance of
any of the powers and duties hereunder of the Trustee, and the Servicer will
pay or reimburse the Trustee upon its request for all reasonable expenses,
disbursements and advances incurred or made by the Trustee in accordance with
any of the provisions of this Agreement (including the reasonable
compensation and the expenses and disbursements of its counsel and of all
Persons not regularly in its employ) except any such expense, disbursement or
advance as may arise from its negligence or bad faith or which is the respon-
sibility of Certificateholders hereunder. The Servicer covenants and agrees
to indemnify the Trustee from, and hold it harmless against, any and all
losses, liabilities, damages, claims or expenses other than those resulting
from the negligence or bad faith of the Trustee. This section shall survive
termination of this Agreement or the resignation or removal of any Trustee
hereunder.
Section 9.06. Eligibility Requirements for Trustee. The Trustee
------------------------------------
hereunder shall at all times be a corporation duly incorporated and validly
existing under the laws of the United States of America or any state thereof,
authorized under such laws to exercise corporate trust powers, having a
combined capital and surplus of at least $50,000,000, subject to supervision
or examination by federal or state authority. If such corporation publishes
reports of condition at least annually, pursuant to law or to the require-
ments of the aforesaid supervising or examining authority, then for the
purposes of this Section 9.06, the combined capital and surplus of such
corporation shall be deemed to be its combined capital and surplus as set
forth in its most recent report of condition so published. The principal
office of the Trustee (other than the initial Trustee) shall be in a state
with respect to which an Opinion of Counsel has been delivered to such
Trustee at the time such Trustee is appointed Trustee to the effect that the
Trust will not be a taxable entity under the laws of such state. In case at
any time the Trustee shall cease to be eligible in accordance with the
provisions of this Section 9.06, the Trustee shall resign immediately in the
manner and with the effect specified in Section 9.07.
Section 9.07. Resignation or Removal of Trustee. The Trustee may at
---------------------------------
any time resign and be discharged from the trusts hereby created by giving
written notice thereof to the Transferor, the Depositor, the Servicer, the
Credit Enhancer and each Rating Agency. Upon receiving such notice of
resignation, the Transferor shall promptly appoint a successor Trustee
(approved in writing by the Credit Enhancer, so long as such approval is not
unreasonably withheld) by written instrument, in duplicate, one copy of which
instrument shall be delivered to the resigning Trustee (who shall deliver a
copy to the Servicer) and one copy to the successor Trustee; provided,
--------
however, that any such successor Trustee shall be subject to the prior
- - -------
written approval of the Transferor. If no successor Trustee shall have been
so appointed and have accepted appointment within 30 days after the giving of
such notice of resignation, the resigning Trustee may petition any court of
competent jurisdiction for the appointment of a successor Trustee.
If at any time the Trustee shall cease to be eligible in accordance with
the provisions of Section 9.06 and shall fail to resign after written request
therefor by the Transferor or the Credit Enhancer, or if at any time the
Trustee shall be legally unable to act, or shall be adjudged a bankrupt or
insolvent, or a receiver of the Trustee or of its property shall be
appointed, or any public officer shall take charge or control of the Trustee
or of its property or affairs for the purpose of rehabilitation, conservation
or liquidation, or if a tax is imposed or threatened with respect to the
Trust Fund by any state in which the Trustee or the Trust Fund is located
(which tax cannot be vacated by the appointment of a co-Trustee or separate
trustee pursuant to Section 9.10), then the Transferor or the Credit Enhancer
may remove the Trustee. If the Transferor or the Credit Enhancer removes the
Trustee under the authority of the immediately preceding sentence, the Trans-
feror shall promptly appoint a successor Trustee (approved in writing by the
Credit Enhancer, which approval shall not be unreasonably withheld) by
written instrument, in duplicate, one copy of which instrument shall be
delivered to the Trustee so removed and one copy to the successor trustee.
The Holders of Investor Certificates evidencing Percentage Interests
aggregating over 50% of all Investor Certificates may at any time remove the
Trustee by written instrument or instruments delivered to the Servicer, the
Transferor and the Trustee; the Transferor shall thereupon use its best
efforts to appoint a successor trustee in accordance with this Section.
Any resignation or removal of the Trustee and appointment of a successor
Trustee pursuant to any of the provisions of this Section 9.07 shall not
become effective until acceptance of appointment by the successor Trustee as
provided in Section 9.08.
Section 9.08. Successor Trustee. Any successor Trustee appointed as
-----------------
provided in Section 9.07 shall execute, acknowledge and deliver to the Trans-
feror, the Depositor, the Servicer, the Credit Enhancer and to its
predecessor Trustee an instrument accepting such appointment hereunder, and
thereupon the resignation or removal of the predecessor Trustee shall become
effective and such successor Trustee, without any further act, deed or
conveyance, shall become fully vested with all the rights, powers, duties and
obligations of its predecessor hereunder, with like effect as if originally
named as Trustee. The Transferor, the Depositor, the Servicer and the
predecessor Trustee shall execute and deliver such instruments and do such
other things as may reasonably be required for fully and certainly vesting
and confirming in the successor Trustee all such rights, powers, duties and
obligations.
No successor Trustee shall accept appointment as provided in this
Section 9.08 unless at the time of such acceptance such successor Trustee
shall be eligible under the provisions of Section 9.06.
Upon acceptance of appointment by a successor Trustee as provided in
this Section 9.08, the successor Trustee shall mail notice of the succession
of such Trustee hereunder to all Holders of Certificates at their addresses
as shown in the Certificate Register and to each Rating Agency. If the
Servicer fails to mail such notice within 30 days after acceptance of
appointment by the successor Trustee, the successor Trustee shall cause such
notice to be mailed at the expense of the Servicer.
Section 9.09. Merger or Consolidation of Trustee. Any Person into
----------------------------------
which the Trustee may be merged or converted or with which it may be
consolidated, or any Person resulting from any merger, conversion or
consolidation to which the Trustee shall be a party, or any Person succeeding
to all or substantially all of the business of the Trustee, shall be the
successor of the Trustee hereunder, provided such Person shall be eligible
under the provisions of Section 9.06, without the execution or filing of any
paper or any further act on the part of any of the parties hereto, anything
herein to the contrary notwithstanding.
Section 9.10. Appointment of Co-Trustee or Separate Trustee.
---------------------------------------------
Notwithstanding any other provisions of this Agreement, at any time, for the
purpose of meeting any legal requirements of any jurisdiction in which any
part of the Trust or any Mortgaged Property may at the time be located, the
Transferor and the Trustee acting jointly shall have the power and shall
execute and deliver all instruments necessary to appoint one or more Persons
approved by the Credit Enhancer to act as co-trustee or co-trustees, jointly
with the Trustee, or separate trustee or separate trustees, of all or any
part of the Trust, and to vest in such Person or Persons, in such capacity
and for the benefit of the Certificateholders, such title to the Trust, or
any part thereof, and, subject to the other provisions of this Section 9.10,
such powers, duties, obligations, rights and trusts as the Transferor and the
Trustee may consider necessary or desirable. Any such co-trustee or separate
trustee shall be subject to the written approval of the Servicer. If the
Transferor shall not have joined in such appointment within 15 days after the
receipt by it of a request so to do, or in the case an Event of Servicing
Termination shall have occurred and be continuing, the Trustee alone shall
have the power to make such appointment. No co-trustee or separate trustee
hereunder shall be required to meet the terms of eligibility as a successor
trustee under Section 9.06 and no notice to Certificateholders of the
appointment of any co-trustee or separate trustee shall be required under
Section 9.08. The Servicer shall be responsible for the fees of any co-
trustee or separate trustee appointed hereunder.
Every separate trustee and co-trustee shall, to the extent permitted by
law, be appointed and act subject to the following provisions and conditions:
(i) all rights, powers, duties and obligations conferred or
imposed upon the Trustee shall be conferred or imposed upon and
exercised or performed by the Trustee and such separate trustee or
co-trustee jointly (it being understood that such separate trustee or
co-trustee is not authorized to act separately without the Trustee
joining in such act), except to the extent that under any law of any
jurisdiction in which any particular act or acts are to be performed
(whether as Trustee hereunder or as successor to the Servicer
hereunder), the Trustee shall be incompetent or unqualified to perform
such act or acts, in which event such rights, powers, duties and
obligations (including the holding of title to the Trust or any portion
thereof in any such jurisdiction) shall be exercised and performed
singly by such separate trustee or co-trustee, but solely at the direc-
tion of the Trustee;
(ii) no trustee hereunder shall be held personally liable by
reason of any act or omission of any other trustee hereunder; and
(iii) the Servicer and the Trustee acting jointly may at any time
accept the resignation of or remove any separate trustee or co-trustee
except that following the occurrence of an Event of Servicing
Termination, the Trustee acting alone may accept the resignation or
remove any separate trustee or co-trustee.
Any notice, request or other writing given to the Trustee shall be
deemed to have been given to each of the then separate trustees and
co-trustees, as effectively as if given to each of them. Every instrument
appointing any separate trustee or co-trustee shall refer to this Agreement
and the conditions of this Article IX. Each separate trustee and co-trustee,
upon its acceptance of the trusts conferred, shall be vested with the estates
or property specified in its instrument of appointment, either jointly with
the Trustee or separately, as may be provided therein, subject to all the
provisions of this Agreement, specifically including every provision of this
Agreement relating to the conduct of, affecting the liability of, or
affording protection to, the Trustee. Every such instrument shall be filed
with the Trustee and a copy thereof given to the Transferor and the Servicer.
Any separate trustee or co-trustee may, at any time, constitute the
Trustee, its agent or attorney-in-fact, with full power and authority, to the
extent not prohibited by law, to do any lawful act under or in respect of
this Agreement on its behalf and in its name. If any separate trustee or
co-trustee shall die, become incapable of acting, resign or be removed, all
of its estates, properties, rights, remedies and trusts shall vest in and be
exercised by the Trustee, to the extent permitted by law, without the
appointment of a new or successor Trustee.
Section 9.11. Limitation of Liability. The Certificates are executed
-----------------------
by the Trustee, not in its individual capacity but solely as Trustee of the
Trust, in the exercise of the powers and authority conferred and vested in it
by the Trust Agreement. Each of the undertakings and agreements made on the
part of the Trustee in the Certificates is made and intended not as a
personal undertaking or agreement by the Trustee but is made and intended for
the purpose of binding only the Trust.
Section 9.12. Trustee May Enforce Claims Without Possession of
------------------------------------------------
Certificates. All rights of action and claims under this Agreement or the
- - ------------
Certificates may be prosecuted and enforced by the Trustee without the
possession of any of the Certificates or the production thereof in any
proceeding relating thereto, and such proceeding instituted by the Trustee
shall be brought in its own name or in its capacity as Trustee. Any recovery
of judgment shall, after provision for the payment of the reasonable compen-
sation, expenses, disbursement and advances of the Trustee, its agents and
counsel, be for the ratable benefit or the Certificateholders in respect of
which such judgment has been recovered.
Section 9.13. Suits for Enforcement. In case an Event of Servicing
---------------------
Termination or other default by the Servicer, the Transferor, the Depositor
or the Transferor hereunder shall occur and be continuing, the Trustee, in
its discretion, may proceed to protect and enforce its rights and the rights
of the Investor Certificateholders under this Agreement by a suit, action or
proceeding in equity or at law or otherwise, whether for the specific perfor-
mance of any covenant or agreement contained in this Agreement or in aid of
the execution of any power granted in this Agreement or for the enforcement
of any other legal, equitable or other remedy, as the Trustee, being advised
by counsel, shall deem most effectual to protect and enforce any of the
rights of the Trustee and the Certificateholders.
ARTICLE X
Termination
Section 10.01. Termination. (a) The respective obligations and
-----------
responsibilities of the Servicer, the Depositor, the Transferor and the Trus-
tee created hereby (other than the obligation of the Trustee to make certain
payments to Certificateholders after the final Distribution Date and the
obligation of the Servicer to send certain notices as hereinafter set forth)
shall terminate upon the last action required to be taken by the Trustee on
the final Distribution Date pursuant to this Article X following the later of
(A) payment in full of all amounts owing to the Credit Enhancer and (B) the
earliest of (i) the transfer, under the conditions specified in Section
10.01(b), to the Transferor of the Investor Certificateholders' interest in
each Mortgage Loan and all property acquired in respect of any Mortgage Loan
remaining in the Trust for an amount equal to the sum of (w) the Class A
Certificate Principal Balance, (x) the sum of accrued and unpaid Class A
Certificate Interest and Class S Certificate Interest through the day
preceding the final Distribution Date, and (y) interest accrued on any Unpaid
Class A Certificate Interest Shortfall or Class S Certificate Interest
Shortfall, to the extent legally permissible, (ii) the day following the
Distribution Date on which the distribution made to Class A Certificate-
holders has reduced the Class A Certificate Principal Balance to zero, (iii)
the final payment or other liquidation of the last Mortgage Loan remaining in
the Trust (including without limitation the disposition of the Mortgage Loans
pursuant to Section 10.02) or the disposition of all property acquired upon
foreclosure or deed in lieu of foreclosure of any Mortgage Loan (iv) the
Distribution Date in ______________; provided, however, that in no event
-------- -------
shall the trust created hereby continue beyond the expiration of 21 years
from the date of the last survivor descendants of Joseph P. Kennedy, the late
ambassador of the United States to the Court of St. James, living on the date
hereof. Upon termination in accordance with clause (i) or (ii) of this
Section 10.01, the Trustee shall execute such documents and instruments of
transfer presented by the Transferor, in each case without recourse,
representation or warranty, and take such other actions as the Transferor may
reasonably request to effect the transfer of the Mortgage Loans to the
Transferor.
(b) The Transferor shall have the right to exercise the option to
effect the transfer to the Transferor of each Mortgage Loan pursuant to
Section 10.01(a) above on any Distribution Date on or after the Distribution
Date immediately prior to which the Class A Certificate Principal Balance is
less than ten percent (10%) of the Original Class A Certificate Principal
Balance and all amounts due and owing to the Credit Enhancer for unpaid
premiums and unreimbursed draws on the Policy and all other amounts due and
owing to the Credit Enhancer pursuant to the Insurance Agreement, together
with interest thereon as provided under the Insurance Agreement, have been
paid.
(c) Notice of any termination, specifying the Distribution Date (which
shall be a date that would otherwise be a Distribution Date) upon which the
Investor Certificateholders may surrender their Investor Certificates to the
Trustee for payment of the final distribution and cancellation, shall be
given promptly by the Trustee (upon receipt of written directions from the
Transferor, if the Transferor is exercising its right to transfer of the
Mortgage Loans, given not later than the first day of the month preceding the
month of such final distribution) to the Credit Enhancer and to the Servicer
by letter to Investor Certificateholders mailed not earlier than the 15th day
and not later than the 25th day of the month next preceding the month of such
final distribution specifying (i) the Distribution Date upon which final
distribution of the Investor Certificates will be made upon presentation and
surrender of Investor Certificates at the office or agency of the Trustee
therein designated, (ii) the amount of any such final distribution and (iii)
that the Record Date otherwise applicable to such Distribution Date is not
applicable, distributions being made only upon presentation and surrender of
the Investor Certificates at the office or agency of the Trustee therein
specified. In the event written directions are delivered by the Transferor
to the Trustee as described in the preceding sentence, the Transferor shall
deposit in the Collection Account on or before the Distribution Date for such
final distribution in immediately available funds an amount which, when added
to the funds on deposit in the Collection Account that are payable to the
Investor Certificateholders, will be equal to the retransfer amount for the
Mortgage Loans computed as above provided, together with all amounts due and
owing to the Credit Enhancer for unpaid premiums and unreimbursed draws on
the Policy and all other amounts due and owing to the Credit Enhancer
pursuant to the Insurance Agreement, together with interest thereon as
provided under the Insurance Agreement.
(d) Upon presentation and surrender of the Investor Certificates, the
Trustee shall cause to be distributed to the Holders of Investor Certificates
on the Distribution Date for such final distribution, in proportion to the
Percentage Interests of their respective Investor Certificates and to the
extent that funds are available for such purpose, an amount equal to (i) if
such final distribution is not being made pursuant to the transfer to the
Transferor pursuant to Section 10.01(a)(i), the amount required to be
distributed to Investor Certificateholders pursuant to Section 5.01 for such
Distribution Date and (ii) if such final distribution is being made pursuant
to such retransfer, the amount specified in Section 10.01(a)(i). The
distribution on such final Distribution Date pursuant to a retransfer
pursuant to Section 10.01(a)(i) shall be in lieu of the distribution other-
wise required to be made on such Distribution Date in respect of the Certifi-
cates. On the final Distribution Date prior to having made the distributions
called for above, the Trustee shall, based upon the information set forth in
the Servicing Certificate for such Distribution Date, withdraw from the
Collection Account and remit to the Credit Enhancer the lesser of (x) the
amount available for distribution on such final Distribution Date, net of any
portion thereof necessary to pay the amounts described in clauses (d)(i) and
(ii) above and (y) the unpaid amounts due and owing to the Credit Enhancer
for unpaid premiums and unreimbursed draws on the Policy and all other
amounts due and owing to the Credit Enhancer pursuant to the Insurance
Agreement, together with interest thereon as provided under the Insurance
Agreement.
(e) In the event that all of the Investor Certificateholders shall not
surrender their Investor Certificates for final payment and cancellation on
or before such final Distribution Date, the Trustee shall on such date cause
all funds in the Collection Account not distributed in final distribution to
Investor Certificateholders to be withdrawn therefrom and credited to the
remaining Investor Certificateholders by depositing such funds in a separate
escrow account for the benefit of such Investor Certificateholders and the
Transferor (if the Transferor has exercised its right to transfer the
Mortgage Loans) or the Trustee (in any other case) shall give a second
written notice to the remaining Investor Certificateholders to surrender
their Investor Certificates for cancellation and receive the final
distribution with respect thereto. If within one year after the second
notice all the Investor Certificates shall not have been surrendered for
cancellation, the Trustee may take appropriate steps, or may appoint an agent
to take appropriate steps, to contact the remaining Investor Certificateho-
lders concerning surrender of their Investor Certificates, and the cost
thereof shall be paid out of the funds on deposit in such escrow account.
ARTICLE XI
Rapid Amortization Events
Section 11.01. Rapid Amortization Events. If any one of the following
-------------------------
events shall occur during the Managed Amortization Period:
(a) failure on the part of the Transferor (i) to make any payment
or deposit required by the terms of this Agreement, on or before the
date occurring three Business Days after the date such payment or
deposit is required to be made herein, or (ii) duly to observe or
perform in any material respect the covenants of the Transferor set
forth in Section 2.04(a) or (iii) duly to observe or perform in any
material respect any other covenants or agreements of the Transferor set
forth in this Agreement, which failure, in each case, materially and
adversely affects the interests of the Certificateholders or the Credit
Enhancer and which, in the case of clause (iii), continues unremedied
and continues to affect materially and adversely the interests of the
Certificateholders for a period of 60 days after the date on which
written notice of such failure, requiring the same to be remedied, shall
have been given to the Transferor by the Trustee, or to the Transferor
and the Trustee by the Holders of Investor Certificates evidencing
Voting Rights aggregating not less than 51%;
(b) any representation or warranty made by the Transferor or the
Depositor in this Agreement shall prove to have been incorrect in any
material respect when made, as a result of which the interests of the
Investor Certificateholders or the Credit Enhancer are materially and
adversely affected and which continues to be incorrect in any material
respect and continues to affect materially and adversely the interests
of the Certificateholders or the Credit Enhancer for a period of 60 days
after the date on which written notice of such failure, requiring the
same to be remedied, shall have been given to the Transferor or the
Depositor, as the case may be, by the Trustee, or to the Transferor, the
Depositor and the Trustee by either the Credit Enhancer or the Holders
of Investor Certificates evidencing Voting Rights aggregating not less
than 51%; provided, however, that a Rapid Amortization Event pursuant
to this subparagraph (b) shall not be deemed to have occurred hereunder
if the Transferor has accepted retransfer of the related Mortgage Loan
or Mortgage Loans during such period (or such longer period (not to
exceed an additional 60 days) as the Trustee may specify) in accordance
with the provisions hereof;
(c) the Transferor or the Depositor shall voluntarily go into
liquidation, consent to the appointment of a conservator or receiver or
liquidator or similar person in any insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings of or
relating to the Transferor or the Depositor, or of or relating to all or
substantially all of such Person's property, or a decree or order of a
court or agency or supervisory authority having jurisdiction in the
premises for the appointment of a conservator, receiver, liquidator or
similar person in any insolvency, readjustment of debt, marshalling of
assets and liabilities or similar proceedings, or for the winding-up or
liquidation of its affairs, shall have been entered against the Trans-
feror or the Depositor and such decree or order shall have remained in
force undischarged or unstayed for a period of 30 days; or the Trans-
feror or the Depositor shall admit in writing its inability to pay its
debts generally as they become due, file a petition to take advantage of
any applicable insolvency or reorganization statute, make an assignment
for the benefit of its creditors or voluntarily suspend payment of its
obligations;
(d) the Trust shall become subject to registration as an
"investment company" under the Investment Company Act of 1940, as
amended; or
(e) the aggregate of all draws under the Policy exceeds _% of the
Initial Cut-Off Date Pool Balance;
then, in the case of any event described in subparagraph (a) or (b) after the
applicable grace period, if any, set forth in such subparagraphs, either the
Trustee, the Credit Enhancer or the Holders of Investor Certificates
evidencing Voting Rights aggregating more than 51%, by notice given in
writing to the Transferor, the Depositor and the Servicer (and to the Trustee
if given by either the Credit Enhancer or the Investor Certificateholders)
may declare that an early amortization event (a "Rapid Amortization Event")
has occurred as of the date of such notice, and in the case of any event
described in subparagraph (c), (d) or (e), a Rapid Amortization Event shall
occur without any notice or other action on the part of the Trustee, the
Credit Enhancer or the Investor Certificateholders, immediately upon the
occurrence of such event.
Section 11.02. Additional Rights Upon the Occurrence of Certain Events.
-------------------------------------------------------
(a) If the Transferor voluntarily goes into liquidation or consents to the
appointment of a conservator or receiver or liquidator or similar person in
any insolvency, readjustment of debt, marshalling of assets and liabilities
or similar proceedings of or relating to the Transferor or of or relating to
all or substantially all its property, or a decree or order of a court or
agency or supervisory authority having jurisdiction in the premises for the
appointment of a conservator or receiver or liquidator or similar person in
any insolvency, readjustment of debt, marshalling of assets and liabilities
or similar proceedings, or for the winding-up or liquidation of its affairs,
shall have been entered against the Transferor and such decree shall have
remained in force undischarged or unstayed for a period of 30 days; or the
Transferor shall admit in writing its inability to pay its debts generally as
they become due, file a petition to take advantage of any applicable
insolvency or reorganization statute, make an assignment for the benefit of
its creditors or voluntarily suspend payment of its obligations (such
voluntary liquidation, appointment, entering of such decree, admission,
filing, making, suspension or violation or other event described above, an
"Insolvency Event"), the Transferor shall on the day of such appointment,
voluntary liquidation, entering of such decree, admission, filing, making,
suspension or inability, as the case may be (the "Appointment Day"), promptly
give notice to the Trustee, the Servicer and the Credit Enhancer of such
Insolvency Event. Within 15 days of the receipt by the Trustee of the Trans-
feror's notice of an Insolvency Event, the Trustee shall (i) publish a notice
in Authorized Newspapers that an Insolvency Event has occurred and that the
Trustee intends to direct the Servicer to sell, dispose of or otherwise
liquidate the Mortgage Loans in a commercially reasonable manner and (ii)
send written notice to the Investor Certificateholders describing the provi-
sions of this Section 11.02, which notice shall inform Investor Certificate-
holders that unless (Holders of Investor Certificates evidencing Voting
Rights aggregating not less than 51%) advise the Trustee in writing that they
wish the Trustee to instruct the Servicer not to sell, dispose of or
otherwise liquidate the Mortgage Loans within 90 days from the day notice
pursuant to clause (i) above is first published (the "Publication Date"), the
Trustee shall instruct the Servicer to proceed to sell, dispose of, or other-
wise liquidate the Mortgage Loans in a commercially reasonable manner and on
commercially reasonable terms, which shall include the solicitation of
competitive bids, and shall proceed to consummate the sale, liquidation or
disposition of the Mortgage Loans as provided above with the highest bidder
for the Mortgage Loans. The Transferor shall be permitted to bid for the
Mortgage Loans. The Trustee may obtain a prior determination from such
conservator or receiver that the terms and manner of any proposed sale,
disposition or liquidation are commercially reasonable. The provisions of
Sections 11.01 and 11.02 shall not be deemed to be mutually exclusive.
(b) The proceeds from the sale, disposition or liquidation of the
Mortgage Loans pursuant to Section 11.02(a) above shall be treated as
collections on the Mortgage Loans received during the Rapid Amortization
Period; provided, however, that such proceeds will, based on amounts
-------- -------
specified in writing by the Servicer to the Trustee, first be paid to the
Credit Enhancer to reimburse the Credit Enhancer for previously unreimbursed
Credit Enhancement Draw Amounts and other amounts owing under the Insurance
Agreement; and provided, further, that the Investor Fixed Allocation
-------- -------
Percentage of such remaining proceeds shall be paid to Investor
Certificateholders in the following amounts and order of priority:
(i) all accrued and unpaid interest on the Class A Certificate
Principal Balance through the Interest Period immediately preceding the
Distribution Date on which such proceeds are distributed to the Investor
Certificateholders;
(ii) all accrued and unpaid interest on the Class S Notional
Amount through the Interest Period immediately preceding the
Distribution Date on which such proceeds are distributed to the Investor
Certificateholders; and
(iii) an amount of principal up to the Class A Certificate
Principal Balance.
The Policy shall cover any shortfall in the event such proceeds are
insufficient to make the distributions to Investor Certificateholders
pursuant to Section 11.02(b). On the day following the Distribution Date on
which such proceeds are distributed to the Investor Certificateholders, the
Trust shall terminate.
ARTICLE XII
Miscellaneous Provisions
Section 12.01. Amendment. This Agreement may be amended from time to
---------
time by the Transferor, the Servicer, the Depositor and the Trustee, in each
case without the consent of any of the Certificateholders, but only with the
consent of the Credit Enhancer (which consent shall not be unreasonably
withheld), (i) to cure any ambiguity, (ii) to correct any defective
provisions or to correct or supplement any provisions herein that may be
inconsistent with any other provisions herein, (iii) to add to the duties of
the Transferor or the Servicer, (iv) to add any other provisions with respect
to matters or questions arising under this Agreement or the Policy, as the
case may be, which shall not be inconsistent with the provisions of this
Agreement, (v) to add or amend any provisions of this Agreement as required
by any Rating Agency or any other nationally recognized statistical rating
organization in order to maintain or improve any rating of the Investor
Certificates (it being understood that, after obtaining the ratings in effect
on the Closing Date, neither the Trustee, the Transferor, the Depositor nor
the Servicer is obligated to obtain, maintain or improve any such rating),
(vi) to add or amend any provisions of this Agreement to correct or cure any
defective provision or ambiguity as a result of a transfer of the Transferor
Certificates pursuant to Section 6.05 or (vii) to comply with any requirement
imposed by the Code; provided, however, that such action shall not, as
-------- -------
evidenced by an Opinion of Counsel, materially and adversely affect the
interests of any Certificateholder or the Credit Enhancer; and provided,
--------
further, that the amendment shall not be deemed to adversely affect in any
- - -------
material respect the interests of the Certificateholders and no opinion
referred to in the preceding proviso shall be required to be delivered if the
Person requesting the amendment obtains a letter from each Rating Agency
stating that the amendment would not result in the downgrading or withdrawal
of the respective ratings then assigned to the Investor Certificates without
regard to the Policy. Notwithstanding the foregoing, any amendment pursuant
to clause (viii) above shall be permissible only upon receipt of a letter
from each Rating Agency stating that the amendment would not result in the
downgrading or withdrawal of the respective ratings then assigned to the
Investor Certificateholders without regard to the Policy.
This Agreement also may be amended from time to time by the Servicer,
the Transferor, the Depositor and the Trustee, and the Servicer and the
Credit Enhancer, may from time to time consent to the amendment of the Policy
with the consent of the Holders of the Investor Certificates evidencing
Voting Rights aggregating not less than 51%, and in the case of an amendment
to this Agreement, with the consent of the Credit Enhancer for the purpose of
adding any provisions to or changing in any manner or eliminating any of the
provisions of this Agreement or of modifying in any manner the rights of the
Certificateholders; provided, however, that no such amendment shall (i)
reduce in any manner the amount of, or delay the timing 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 or (iii) adversely effect in any material respect the
interests of the Credit Enhancer.
Notwithstanding the foregoing, the Agreement may not be amended unless,
in connection with such amendment, an Opinion of Counsel is furnished to the
Trustee that such amendment will not (i) adversely affect the status of the
Investor Certificates as debt; (ii) result in the Trust being taxable at the
entity level; or (iii) result in the Trust being classified as a taxable
mortgage pool (as defined in Section 7701(i) of the Code).
Following the execution and delivery of any such amendment hereto or to
the Policy to which the Credit Enhancer was required to consent, either the
Transferor, if the Transferor requested the amendment, or the Servicer, if
the Servicer requested the amendment, shall reimburse the Credit Enhancer for
the reasonable out-of-pocket costs and expenses incurred by the Credit
Enhancer in connection with such amendment.
Prior to the execution of any such amendment, the party hereto
requesting any such amendment shall furnish written notification of the
substance of such amendment to each Rating Agency. In addition, promptly
after the execution of any such amendment made with the consent of the
Investor Certificateholders, the Trustee shall furnish written notification
of the substance of such amendment to each Investor Certificateholder and
fully executed original counterparts of the instruments effecting such
amendment to the Credit Enhancer.
It shall not be necessary for the consent of Investor Certificateholders
under this Section 12.01 to approve the particular form of any proposed
amendment or consent, but it shall be sufficient if such consent shall
approve the substance thereof. The manner of obtaining such consents and of
evidencing the authorization of the execution thereof by Certificateholders
shall be subject to such reasonable requirements as the Trustee may
prescribe.
In executing any amendment permitted by this Section 12.01, the Trustee
shall be entitled to receive, and shall be fully protected in relying upon,
an Opinion of Counsel stating that such amendment is authorized or permitted
hereby and that all conditions precedent to the execution and delivery of
such amendment have been satisfied. The Trustee may, but shall not be
obligated to, enter into any such amendment which affects the Trustee's own
rights, duties or immunities under this Agreement or otherwise.
Section 12.02. Recordation of Agreement. This Agreement is subject to
------------------------
recordation in all appropriate public offices for real property records in
all the counties or other comparable jurisdictions in which any or all of the
properties subject to the Mortgages are situated, and in any other
appropriate public recording office or elsewhere, such recordation to be
effected by the Trustee, but only upon direction of Investor Certificate-
holders accompanied by an Opinion of Counsel to the effect that such
recordation materially and beneficially affects the interests of Investor
Certificateholders. The Investor Certificateholders requesting such
recordation shall bear all costs and expenses of such recordation. The
Trustee shall have no obligation to ascertain whether such recordation so
affects the interests of the Certificateholders.
For the purpose of facilitating the recordation of this Agreement as
herein provided and for other purposes, this Agreement may be executed
simultaneously in any number of counterparts, each of which counterparts
shall be deemed to be an original, and such counterparts shall constitute but
one and the same instrument.
Section 12.03. Limitation on Rights of Certificateholders. The death
------------------------------------------
or incapacity of any Investor Certificateholder shall not operate to
terminate this Agreement or the Trust, nor entitle such Investor
Certificateholder's legal representatives or heirs to claim an accounting or
to take any action or commence any proceeding in any court for a partition or
winding up of the Trust, nor otherwise affect the rights, obligations and
liabilities of the parties hereto or any of them.
No Certificateholder shall have any right to vote (except as provided in
Sections 8.01, 9.01, 9.02, 11.01 and 12.01) or in any manner otherwise
control the operation and management of the Trust, or the obligations of the
parties hereto, nor shall anything herein set forth, or contained in the
terms of the Certificates, be construed so as to constitute the Certificate-
holders from time to time as partners or members of an association; nor shall
any Investor Certificateholder be under any liability to any third person by
reason of any action taken by the parties to this Agreement pursuant to any
provision hereof.
No Certificateholder shall have any right by virtue or by availing
itself of any provisions of this Agreement to institute any suit, action or
proceeding in equity or at law upon or under or with respect to this
Agreement, unless such Holder previously shall have given to the Trustee a
written notice of default and of the continuance thereof, as hereinbefore
provided, and unless also the Holders of Investor Certificates evidencing
Voting Rights aggregating not less than 51% shall have made written request
upon the Trustee to institute such action, suit or proceeding in its own name
as Trustee hereunder and shall have offered to the Trustee such reasonable
indemnity as it may require against the costs, expenses and liabilities to be
incurred therein or thereby, and the Trustee, for 60 days after its receipt
of such notice, request and offer of indemnity, shall have neglected or
refused to institute any such action, suit or proceeding; it being understood
and intended, and being expressly covenanted by each Certificateholder with
every other Certificateholder and the Trustee, that no one or more Holders of
Certificates shall have any right in any manner whatever by virtue or by
availing itself or themselves of any provisions of this Agreement to affect,
disturb or prejudice the rights of the Holders of any other of the Certifi-
cates, or to obtain or seek to obtain priority over or preference to any
other such Holder, or to enforce any right under this Agreement, except in
the manner herein provided and for the equal, ratable and common benefit of
all Certificateholders. For the protection and enforcement of the provisions
of this Section 12.03, each and every Certificateholder and the Trustee shall
be entitled to such relief as can be given either at law or in equity.
By accepting its Investor Certificate, each Investor Certificateholder
agrees that unless a Credit Enhancer Default exists, the Credit Enhancer
shall have the right to exercise all rights of the Investor
Certificateholders under this Agreement without any further consent of the
Investor Certificateholders.
Section 12.04. Governing Law. THIS AGREEMENT SHALL BE CONSTRUED IN
-------------
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK AND THE OBLIGATIONS, RIGHTS
AND REMEDIES OF THE PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH
SUCH LAWS.
Section 12.05. Notices. All demands, notices and communications
-------
hereunder shall be in writing and shall be deemed to have been duly given if
personally delivered at or mailed by certified mail, return receipt
requested, to (a) in the case of the Depositor, Headlands Mortgage Securities
Inc., 700 Larkspur Landing Circle, Suite 240, Larkspur, California 94939,
Attention: _________________, (b) in the case of the Servicer, (
), _____________, Attention: _____________, (c) in the case of the Trustee,
at the Corporate Trust Office, (d) in the case of the Credit Enhancer,
_______________, __________________ _____, Attention: _____________
(telecopy number (___) ________ or (___) ________), (e) in the case of the
Transferor, __________, Attention: ________________ (telecopy number (___)
________), (f) in the case of Moody's, Residential Loan Monitoring Group, 4th
Floor, 99 Church Street, New York, New York 10007, and (g) in the case of
Standard & Poor's, 26 Broadway, New York, New York 10004, or, as to each
party, at such other address as shall be designated by such party in a
written notice to each other party. Any notice required or permitted to be
mailed to a Certificateholder shall be given by first class mail, postage
prepaid, at the address of such Holder as shown in the Certificate Register.
Any notice so mailed within the time prescribed in this Agreement shall be
conclusively presumed to have been duly given, whether or not the
Certificateholder receives such notice. Any notice or other document
required to be delivered or mailed by the Trustee to any Rating Agency shall
be given on a best efforts basis and only as a matter of courtesy and
accommodation and the Trustee shall have no liability for failure to deliver
such notice or document to any Rating Agency.
Section 12.06. Severability of Provisions. If any one or more of the
--------------------------
covenants, agreements, provisions or terms of this Agreement shall be for any
reason whatsoever held invalid, then such covenants, agreements, provisions
or terms shall be deemed severable from the remaining covenants, agreements,
provisions or terms of this Agreement and shall in no way affect the validity
or enforceability of the other provisions of this Agreement or of the Certi-
ficates or the rights of the Holders thereof.
Section 12.07. Assignment. Notwithstanding anything to the contrary
----------
contained herein, except as provided in Sections 6.05, 7.02 and 7.04, this
Agreement may not be assigned by the Depositor or the Servicer without the
prior written consent of the Credit Enhancer and Holders of the Investor
Certificates evidencing Percentage Interests aggregating not less than 66%.
Section 12.08. Certificates Nonassessable and Fully Paid. The parties
-----------------------------------------
agree that the Investor Certificateholders shall not be personally liable for
obligations of the Trust, that the beneficial ownership interests represented
by the Certificates shall be nonassessable for any losses or expenses of the
Trust or for any reason whatsoever, and that the Certificates upon execution,
authentication and delivery thereof by the Trustee pursuant to Section 2.08
or 6.02 are and shall be deemed fully paid.
Section 12.09. Third-Party Beneficiaries. This Agreement will inure
-------------------------
to the benefit of and be binding upon the parties hereto, the Certificate-
holders, the Certificate Owners, the Credit Enhancer and their respective
successors and permitted assigns. Except as otherwise provided in this
Agreement, no other Person will have any right or obligation hereunder.
Section 12.10. Counterparts. This instrument may be executed in any
------------
number of counterparts, each of which so executed shall be deemed to be an
original, but all such counterparts shall together constitute but one and the
same instrument.
Section 12.11. Effect of Headings and Table of Contents. The Article
----------------------------------------
and Section headings herein and the Table of Contents are for convenience
only and shall not affect the construction hereof.
Section 12.12. Insurance Agreement. The Trustee is authorized and
-------------------
directed to execute and deliver the Insurance Agreement and to perform the
obligations of the Trustee thereunder.
IN WITNESS WHEREOF, the Depositor, the Transferor, the Seller, the
Servicer and the Trustee have caused this Agreement to be duly executed by
their respective officers all as of the day and year first above written.
HEADLANDS MORTGAGE SECURITIES INC.,
as Depositor
By ___________________________________
Title:
( ),
as Seller and Servicer
By ___________________________________
Title:
( ),
as Transferor
By ___________________________________
Title:
(_________________________)
as Trustee
By_________________________________
Title:
State of ________ )
) ss.:
County of ________ )
On the ____ day of ________, 199_ before me, a notary public in and
for the State of ________, personally appeared _________________, known to me
who, being by me duly sworn, did depose and say that he resides at
______________________; that he is the _____________________ of Headlands
Mortgage Securities Inc., a Delaware corporation, one of the parties that
executed the foregoing instrument; that he knows the seal of said
corporation; that the seal affixed to said instrument is such corporate seal;
that it was so affixed by order of the Board of Directors of said corpora-
tion; and that he signed his name thereto by like order.
----------------------
Notary Public
(Notarial Seal)
State of )
) ss.:
County of )
On the ____ day of __________, 199_ before me, a notary public in
and for the State of ________, personally appeared _____________________,
known to me who, being by me duly sworn, did depose and say that he resides
at _________________, ____________, ________ _____; that he is the
______________ of (Seller/Servicer), a ( ) corporation, one of the
parties that executed the foregoing instrument; that he knows the seal of
said corporation; that the seal affixed to said instrument is such corporate
seal; that it was so affixed by order of the Board of Directors of said
corporation; and that he signed his name thereto by like order.
----------------------
Notary Public
(Notarial Seal)
State of )
) ss.:
County of )
On the ____ day of ______________, 199_ before me, a notary public
in and for the State of ________, personally appeared _________________,
known to me who, being by me duly sworn, did depose and say that he resides
at _______________, _______________ _____; that he is the _____________ of
________ ____, a __________, one of the parties that executed the foregoing
instrument; and that he signed his name thereto by order of the Board of
Directors of said corporation.
--------------------------------
Notary Public
(Notarial Seal)
EXHIBIT A
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE TRUSTEE OR
ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY
CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER
NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT
IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHO-
RIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR
VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED
OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
SOLELY FOR U.S. FEDERAL INCOME TAX PURPOSES, THIS CERTIFICATE IS A "REGULAR
INTEREST" IN A "REAL ESTATE MORTGAGE INVESTMENT CONDUIT," AS THOSE TERMS ARE
DEFINED, RESPECTIVELY, IN SECTIONS 860G AND 860D OF THE INTERNAL REVENUE CODE
OF 1986, AS AMENDED (THE "CODE").
Certificate No. :
Cut-Off Date :
First Distribution Date :
Initial Class Principal Balance
of this Certificate
("Denomination") : $
Initial Class Principal
Balance : $
Pass-Through Rate : %
CUSIP :
Class : (A-__)(S)
HEADLANDS HOME EQUITY LOAN TRUST 199_-_
Home Equity Loan Asset-Backed Certificates, Series 199_-_
Class ( )
evidencing a percentage interest in the distributions allocable to
the Certificates of the above-referenced Class with respect to a
trust (the "Trust") consisting of (closed-end fixed) and
(adjustable rate) home equity loans (the "Mortgage Loans")
HEADLANDS MORTGAGE SECURITIES INC., as Depositor
Principal in respect of this Certificate is distributable monthly as set
forth herein. Accordingly, the Class Principal Balance of this Class
(A-_)(S) Certificate at any time may be less than the Initial Class Principal
Balance set forth on the face hereof, as described herein. This Class
(A-_)(S) Certificate does not evidence an obligation of, or an interest in,
and is not guaranteed by the Seller or the Trustee referred to below or any
of their respective affiliates. Neither this Class (A-_)(S) Certificate nor
the Mortgage Loans are guaranteed or insured by any governmental agency or
instrumentality.
This certifies that ____________ is the registered owner of the
Percentage Interest evidenced by this Class (A-_)(S) Certificate (obtained by
dividing the Denomination of this Class (A-_)(S) Certificate by the Class
Principal Balance) in certain monthly distributions with respect to a Trust
consisting primarily of the Mortgage Loans sold to the Trust by ___________
(the "Seller"). The Trust was created pursuant to a Pooling and Servicing
Agreement dated as of the Cut-Off Date specified above (the "Agreement")
between the Depositor, the Seller, as seller and master servicer (in such
capacities, the "Seller" or the "Master Servicer," respectively),
______________, as transferor (the "Transferor") and _______________, as
trustee (the "Trustee"). To the extent not defined herein, the capitalized
terms used herein have the meanings assigned in the Agreement. This Class
(A-_)(S) Certificate is issued under and is subject to the terms, provisions
and conditions of the Agreement, to which Agreement the Holder of this Class
(A-_)(S) Certificate by virtue of the acceptance hereof assents and by which
such Holder is bound.
Reference is hereby made to the further provisions of this Class
(A-_)(S) Certificate set forth on the reverse hereof, which further pro-
visions shall for all purposes have the same effect as if set forth at this
place.
This Class (A-_)(S) Certificate shall not be entitled to any benefit
under the Agreement or be valid for any purpose unless manually countersigned
by an authorized signatory of the Trustee.
* * *
IN WITNESS WHEREOF, the Trustee has caused this Certificate to be duly
executed.
Dated:
( ), as Trustee
By ______________________
This is one of the Class (A-_)(S) Certificates
referenced in the within mentioned Agreement
By ___________________________
Authorized Signatory
HEADLANDS HOME EQUITY LOAN TRUST 199_-_
Home Equity Loan Asset-Backed Certificates,
Series 199_-_
This Certificate is one of a duly authorized issue of Certificates
designated as Headlands Home Equity Loan Trust 199_-_, Home Equity Loan
Asset-Backed Certificates, Series 199_-_ (herein collectively called the
"Certificates"), and representing a beneficial ownership interest in the
Trust created by the Agreement.
The Certificateholder, by its acceptance of this Certificate, agrees
that it will look solely to the funds on deposit in the Distribution Account
for payment hereunder and that the Trustee is not liable to the Certificate-
holders for any amount payable under this Certificate or the Agreement or,
except as expressly provided in the Agreement, subject to any liability under
the Agreement.
This Certificate will have the benefit of an irrevocable and
unconditional certificate guaranty insurance policy issued by ( )
(the "Certificate Insurer").
This Certificate does not purport to summarize the Agreement and
reference is made to the Agreement for the interests, rights and limitations
of rights, benefits, obligations and duties evidenced thereby, and the
rights, duties and immunities of the Trustee.
Pursuant to the terms of the Agreement, a distribution will be made on
the 25th day of each month or, if such 25th day is not a Business Day then
the first Business Day following such Distribution Date (the "Distribution
Date"), commencing on the first Distribution Date specified on the face
hereof, to the Person in whose name this Certificate is registered at the
close of business on the applicable Record Date in an amount equal to the
product of the Percentage Interest evidenced by this Certificate and the
amount required to be distributed to Holders of Certificates of the Class to
which this Certificate belongs on such Distribution Date pursuant to the
Agreement. The Record Date applicable to each Distribution Date is the last
Business Day of the month preceding the month of such Distribution Date.
Distributions on this Certificate shall be made by check or money order
mailed to the address of the person entitled thereto as it appears on the
Certificate Register or, upon the request of a Certificateholder owning
Certificates having the requisite aggregate denominations or Percentage
Interests specified in the Agreement, by wire transfer or otherwise, as set
forth in the Agreement. The final distribution on each Certificate will be
made in like manner, but only upon presentment and surrender of such
Certificate at the office or agency of the Trustee specified in the notice to
Certificateholders of such final distribution.
The Agreement permits, with certain exceptions therein provided, the
amendment thereof and the modification of the rights and obligations of the
Trustee and the rights of the Certificateholders under the Agreement at any
time by the Seller and the Trustee with the consent of the Certificate
Insurer and of Holders of the requisite percentage of the Percentage
Interests of each Class of Certificates affected by such amendment, as
specified in the Agreement. Any such consent by the Holder of this
Certificate shall be conclusive and binding on such Holder and upon all
future Holders of this Certificate and of any Certificate issued upon the
transfer hereof or in exchange therefor or in lieu hereof whether or not
notation of such consent is made upon this Certificate. The Agreement also
permits the amendment thereof, in certain limited circumstances, without the
consent of the Holders of any of the Certificates.
As provided in the Agreement and subject to certain limitations therein
set forth, the transfer of this Certificate is registrable in the Certificate
Register of the Trustee upon surrender of this Certificate for registration
of transfer at the office or agency maintained by the Trustee in New York,
New York, accompanied by a written instrument of transfer in form
satisfactory to the Trustee and the Certificate Registrar duly executed by
the holder hereof or such holder's attorney duly authorized in writing, and
thereupon one or more new Certificates of the same Class in authorized
denominations and evidencing the same aggregate Percentage Interest in the
Trust will be issued to the designated transferee or transferees.
The Certificates are issuable only as registered Certificates without
coupons in denominations specified in the Agreement. As provided in the
Agreement and subject to certain limitations therein set forth, Certificates
are exchangeable for new Certificates of the same Class in authorized
denominations and evidencing the same aggregate Percentage Interest, as
requested by the Holder surrendering the same.
No service charge will be made for any such registration of transfer or
exchange, but the Trustee may require payment of a sum sufficient to cover
any tax or other governmental charge payable in connection therewith.
The Seller and the Trustee and any agent of the Seller or the Trustee
may treat the Person in whose name this Certificate is registered as the
owner hereof for all purposes, and neither the Seller, the Trustee nor any
such agent shall be affected by any notice to the contrary.
On any Distribution Date on which the Pool Principal Balance is less
than ( )% of the Cut-Off Date Pool Principal Balance, the Seller will have
the option to repurchase, in whole, from the Trust the Mortgage Loans at a
purchase price determined as provided in the Agreement. In the event that no
such optional termination occurs, the obligations and responsibilities
created by the Agreement will terminate upon the later of (A) payment in full
of all amounts owing to the Certificate Insurer unless the Certificate
Insurer shall otherwise consent and (B) the earliest of (i) the day following
the Distribution Date on which the Aggregate Class A Principal Balance has
been reduced to zero, (ii) the final payment or other liquidation of the last
Mortgage Loan in the Trust and (iii) the Distribution Date in ( ).
In no event, however, will the trust created by the Agreement continue beyond
the expiration of 21 years from the death of the last survivor of the
descendants living at the date of the Agreement of a certain person named in
the Agreement.
Capitalized terms used herein that are defined in the Agreement shall
have the meanings ascribed to them in the Agreement, and nothing herein shall
be deemed inconsistent with that meaning.
ASSIGNMENT
----------
FOR VALUE RECEIVED, the undersigned hereby sell(s), assign(s) and
t r a n s f e r ( s ) u n t o
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
______________________________________________________________
(Please print or typewrite name and address including postal zip code of
assignee)
the Percentage Interest evidenced by the within Certificate and hereby
authorizes the transfer of registration of such Percentage Interest to
assignee on the Certificate Register of the Trust.
I (We) further direct the Trustee to issue a new Certificate of a like
denomination and Class, to the above named assignee and deliver such
Certificate to the following address:
___________________________________________________________________.
Dated:
---------------------------------------
Signature by or on behalf of assignor
DISTRIBUTION INSTRUCTIONS
The assignee should include the following for purposes of distribution:
Distributions shall be made, by wire transfer or otherwise, in
immediately available funds to ____________________________________
___________________________________________________________________,
___________________________________________________________________,
___________________________________________________________________,
for the account of ________________________________________________,
account number ___________________, or, if mailed by check, to
_________________________________________________________. Applicable
statements should be mailed to _____________________________________
____________________________________________________________________
____________________________________________________________________.
This information is provided by _______________________________,
the assignee named above, or _______________________________________,
as its agent.
EXHIBITS B THROUGH L ARE RESERVED
Exhibit 4.2
Form of Trust Agreement
TRUST AGREEMENT
among
HEADLANDS MORTGAGE SECURITIES INC.,
as Depositor,
( )
------------------------------
and
( ),
------------------------------
as Owner Trustee
Dated as of ___________, 199_
Table of Contents
-----------------
Page
----
ARTICLE I
Definitions
SECTION 1.01. Capitalized Terms . . . . . . . . . . . . . . . . . . 1
SECTION 1.02. Other Definitional Provisions . . . . . . . . . . . . 4
ARTICLE II
Organization
SECTION 2.01. Name . . . . . . . . . . . . . . . . . . . . . . . . 5
SECTION 2.02. Office . . . . . . . . . . . . . . . . . . . . . . . 5
SECTION 2.03. Purposes and Powers . . . . . . . . . . . . . . . . . 5
SECTION 2.04. Appointment of Owner Trustee . . . . . . . . . . . . 6
SECTION 2.05. Initial Capital Contribution of Owner Trust
Estate . . . . . . . . . . . . . . . . . . . . . . . 6
SECTION 2.06. Declaration of Trust . . . . . . . . . . . . . . . . 6
SECTION 2.07. Liability of the Owners . . . . . . . . . . . . . . . 6
SECTION 2.08. Title to Trust Property . . . . . . . . . . . . . . . 7
SECTION 2.09. Situs of Trust . . . . . . . . . . . . . . . . . . . 7
SECTION 2.10. Representations and Warranties of the Depositor and
the Company . . . . . . . . . . . . . . . . . . . . . 7
SECTION 2.11. Federal Income Tax Allocations . . . . . . . . . . . 9
ARTICLE III
Trust Certificates and Transfer of Interests
SECTION 3.01. Initial Ownership . . . . . . . . . . . . . . . . . . 10
SECTION 3.02. The Trust Certificates . . . . . . . . . . . . . . . 10
SECTION 3.03. Authentication of Trust Certificates . . . . . . . . 10
SECTION 3.04. Registration of Transfer and Exchange of Trust
Certificates . . . . . . . . . . . . . . . . . . . . 10
SECTION 3.05. Mutilated, Destroyed, Lost or Stolen Trust
Certificates . . . . . . . . . . . . . . . . . . . . 11
SECTION 3.06. Persons Deemed Owners . . . . . . . . . . . . . . . . 11
SECTION 3.07. Access to List of Certificateholders' Names and
Addresses . . . . . . . . . . . . . . . . . . . . . . 12
SECTION 3.08. Maintenance of Office or Agency . . . . . . . . . . . 12
SECTION 3.09. Appointment of Paying Agent . . . . . . . . . . . . . 12
SECTION 3.10. Ownership by Company of Trust Certificates . . . . . 13
SECTION 3.11. Book-Entry Trust Certificates . . . . . . . . . . . . 13
SECTION 3.12. Notices to Clearing Agency . . . . . . . . . . . . . 14
SECTION 3.13. Definitive Trust Certificates . . . . . . . . . . . . 14
ARTICLE IV
Actions by Owner Trustee
SECTION 4.01. Prior Notice to Owners with Respect to Certain
Matters . . . . . . . . . . . . . . . . . . . . . . . 14
SECTION 4.02. Action by Owners with Respect to Certain Matters . . 15
SECTION 4.03. Action by Owners with Respect to Bankruptcy . . . . . 15
SECTION 4.04. Restrictions on Owners' Power . . . . . . . . . . . . 15
SECTION 4.05. Majority Control . . . . . . . . . . . . . . . . . . 16
ARTICLE V
Application of Trust Funds; Certain Duties
SECTION 5.01. Establishment of Trust Account . . . . . . . . . . . 16
SECTION 5.02. Application of Trust Funds . . . . . . . . . . . . . 16
SECTION 5.03. Method of Payment . . . . . . . . . . . . . . . . . . 17
SECTION 5.04. No Segregation of Moneys; No Interest . . . . . . . . 17
SECTION 5.05. Accounting and Reports to the Noteholders, Owners,
the Internal Revenue Service and Others . . . . . . . . . 17
SECTION 5.06. Signature on Returns; Tax Matters Partner . . . . . . 17
ARTICLE VI
Authority and Duties of Owner Trustee
SECTION 6.01. General Authority . . . . . . . . . . . . . . . . . . 18
SECTION 6.02. General Duties . . . . . . . . . . . . . . . . . . . 18
SECTION 6.03. Action upon Instruction . . . . . . . . . . . . . . . 18
SECTION 6.04. No Duties Except as Specified in this Agreement or
in Instructions . . . . . . . . . . . . . . . . . . . 19
SECTION 6.05. No Action Except Under Specified Documents or
Instructions . . . . . . . . . . . . . . . . . . . . 19
SECTION 6.06. Restrictions . . . . . . . . . . . . . . . . . . . . 19
ARTICLE VII
Concerning the Owner Trustee
SECTION 7.01. Acceptance of Trusts and Duties . . . . . . . . . . . 20
SECTION 7.02. Furnishing of Documents . . . . . . . . . . . . . . . 21
SECTION 7.03. Representations and Warranties . . . . . . . . . . . 21
SECTION 7.04. Reliance; Advice of Counsel . . . . . . . . . . . . 21
SECTION 7.05. Not Acting in Individual Capacity . . . . . . . . . . 22
SECTION 7.06. Owner Trustee Not Liable for Trust Certificates or
Mortgage Loans. . . . . . . . . . . . . . . . . . . 22
SECTION 7.07. Owner Trustee May Own Trust Certificates and
Notes . . . . . . . . . . . . . . . . . . . . . . . . 22
ARTICLE VIII
Compensation of Owner Trustee
SECTION 8.01. Owner Trustee's Fees and Expenses . . . . . . . . . . 23
SECTION 8.02. Indemnification . . . . . . . . . . . . . . . . . . . 23
SECTION 8.03. Payments to the Owner Trustee . . . . . . . . . . . . 23
ARTICLE IX
Termination of Trust Agreement
SECTION 9.01. Termination of Trust Agreement . . . . . . . . . . . 23
SECTION 9.02. Dissolution upon Bankruptcy of the Company . . . . . 24
ARTICLE X
Successor Owner Trustees and Additional Owner Trustees
SECTION 10.01. Eligibility Requirements for Owner Trustee . . . 25
SECTION 10.02. Resignation or Removal of Owner Trustee . . . . 25
SECTION 10.03. Successor Owner Trustee . . . . . . . . . . . . 26
SECTION 10.04. Merger or Consolidation of Owner Trustee . . . . 26
SECTION 10.05. Appointment of Co-Trustee or Separate
Trustee . . . . . . . . . . . . . . . . . . . . 26
ARTICLE XI
Miscellaneous
SECTION 11.01. Supplements and Amendments . . . . . . . . . . . 28
SECTION 11.02. No Legal Title to Owner Trust Estate in
Owners . . . . . . . . . . . . . . . . . . . . . 29
SECTION 11.03. Limitations on Rights of Others . . . . . . . . 29
SECTION 11.04. Notices . . . . . . . . . . . . . . . . . . . . 29
SECTION 11.05. Severability . . . . . . . . . . . . . . . . . . 29
SECTION 11.06. Separate Counterparts . . . . . . . . . . . . . 29
SECTION 11.07. Successors and Assigns . . . . . . . . . . . . . 30
SECTION 11.08. Covenants of the Company . . . . . . . . . . . . 30
SECTION 11.09. No Petition . . . . . . . . . . . . . . . . . . 30
SECTION 11.10. No Recourse . . . . . . . . . . . . . . . . . . 30
SECTION 11.11. Headings . . . . . . . . . . . . . . . . . . . . 30
SECTION 11.12. GOVERNING LAW . . . . . . . . . . . . . . . . . 30
SECTION 11.13. Depositor Payment Obligation . . . . . . . . . . 30
EXHIBIT A Form of Trust Certificate
EXHIBIT B Form of Certificate of Trust
EXHIBIT C Form of Certificate Depository Agreement
TRUST AGREEMENT (the "Trust Agreement") dated as of ________, 199_,
among HEADLANDS MORTGAGE SECURITIES INC., a Delaware corporation, as
depositor (the "Depositor"), (_______________________), a (_______)
corporation (the "Company"), and (____________), a (__________________),
as owner trustee (the "Owner Trustee").
WHEREAS, the Depositor and the Company have entered into a Mortgage Loan
Purchase Agreement dated as of ________, 199_ (the "Mortgage Loan Purchase
Agreement"), pursuant to which the Company will assign to the Depositor any
and all of the Company's rights and interests with respect to the Mortgage
Loans; and
WHEREAS, in connection therewith, the Company is willing to assume
certain obligations pursuant hereto;
NOW, THEREFORE, the Depositor, the Company and the Owner Trustee hereby
agree as follows:
ARTICLE I
Definitions
-----------
SECTION 1.01. Capitalized Terms. For all purposes of this Agreement,
-----------------
the following terms shall have the meanings set forth below:
"Administration Agreement" shall mean the Administration Agreement dated
------------------------
as of ________, 199_, among the Trust, the Indenture Trustee and
(_________________________), as Administrator.
"Agreement" shall mean this Trust Agreement, as the same may be amended
---------
and supplemented from time to time.
"Assignment" shall mean the assignment of right, title and interest of
----------
the Depositor in the Mortgage Loans to the Trust.
"Basic Documents" shall mean the Mortgage Loan Purchase Agreement,
---------------
Servicing Agreement, the Indenture, the Administration Agreement and the
other documents and certificates delivered in connection therewith.
"Benefit Plan" shall have the meaning assigned to such term in
------------
Section 11.13.
"Book-Entry Trust Certificate" shall mean a beneficial interest in the
----------------------------
Trust Certificates, ownership and transfers of which shall be made through
book entries by a Clearing Agency as described in Section 3.11.
"Business Trust Statute" shall mean Chapter 38 of Title 12 of the
----------------------
Delaware Code, 12 Del. Code Section 3801 et seq., as the same may be amended
---- ----
from time to time.
"Certificate" shall mean any of the Book-Entry Trust Certificates or
-----------
Definitive Trust Certificates.
"Certificate Distribution Account" shall have the meaning assigned to
--------------------------------
such term in Section 5.01.
"Certificate of Trust" shall mean the Certificate of Trust in the form
--------------------
of Exhibit B filed for the Trust pursuant to Section 3810(a) of the Business
Trust Statute.
"Certificate Owner" shall mean, with respect to a Book-Entry Trust
-----------------
Certificate, a Person who is the beneficial owner of such Book-Entry Trust
Certificate, as reflected on the books of the Clearing Agency, or on the
books of a Person maintaining an account with such Clearing Agency (directly
as a Clearing Agency Participant or as an indirect participant, in each case
in accordance with the rules of such Clearing Agency).
"Certificate Register" and "Certificate Registrar" shall mean the
-------------------- ---------------------
register mentioned in and the registrar appointed pursuant to Section 3.04.
"Certificateholder" or "Holder" shall mean a Person in whose name a
----------------- ------
Trust Certificate is registered.
"Clearing Agency" shall mean an organization registered as a "clearing
---------------
agency" pursuant to Section 17A of the Exchange Act.
"Clearing Agency Participant" shall mean a broker, dealer, bank, other
---------------------------
financial institution or other Person for whom from time to time a Clearing
Agency effects book-entry transfers and pledges of securities deposited with
the Clearing Agency.
"Code" shall mean the Internal Revenue Code of 1986, as amended, and
----
Treasury Regulations promulgated thereunder.
"Corporate Trust Office" shall mean, with respect to the Owner Trustee,
----------------------
the principal corporate trust office of the Owner Trustee located at
(____________________________), or at such other address as the Owner Trustee
may designate by notice to the Owners, the Depositor and the Company, or the
principal corporate trust office of any successor Owner Trustee at the
address designated by such successor Owner Trustee by notice to the Owners,
the Depositor and the Company.
"Definitive Trust Certificates" shall have the meaning set forth in
-----------------------------
Section 3.11.
"Depositor" shall mean Headlands Mortgage Securities Inc. in its
---------
capacity as depositor hereunder.
"Eligible Distribution Account" shall mean an account that is (i)
-----------------------------
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 which
accounts are fully insured by either the Savings Association Insurance Fund
or the Bank Insurance Fund of the Federal Deposit Insurance Corporation
established by such fund, (iii) a segregated trust account maintained with
the Owner Trustee or an affiliate of the Owner Trustee in its fiduciary
capacity or (iv) otherwise acceptable to each Rating Agency as evidenced by a
letter from each Rating Agency to the Owner Trustee, without reduction or
withdrawal of their then currently ratings of the Certificates.
"ERISA" shall have the meaning assigned thereto in Section 11.13.
-----
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
------------
amended.
"Expenses" shall have the meaning assigned to such term in Section 8.02.
--------
"Indemnified Parties" shall have the meaning assigned to such term in
-------------------
Section 8.02.
"Indenture" shall mean the Indenture dated as of ________, 199_ between
---------
the Trust and (_____________________________), as Indenture Trustee.
"Initial Certificate Balance" shall mean $__________.
---------------------------
"Mortgage Loan Purchase Agreement" shall mean the agreement between
--------------------------------
(_______________), as seller, and Headlands Mortgage Securities Inc., as
purchaser, providing for the sale of the Mortgage Loans by the Seller to the
purchaser.
"Mortgage Loans" shall mean a pool of (adjustable) (fixed) rate home
--------------
equity revolving credit line loans made or to be made in the future.
"Owner" shall mean each Holder of a Trust Certificate.
-----
"Owner Trust Estate" shall mean all right, title and interest of the
------------------
Trust in and to the property and rights assigned to the Trust pursuant to the
Assignment, all funds on deposit from time to time in the Trust Accounts and
the Certificate Distribution Account and all other property of the Trust from
time to time, including any rights of the Owner Trustee and the Trust
pursuant to the Servicing Agreement and the Administration Agreement.
"Owner Trustee" shall mean (____________________), a (_________) banking
-------------
corporation, not in its individual capacity but solely as owner trustee under
this Agreement, and any successor Owner Trustee hereunder.
"Paying Agent" shall mean any paying agent or co-paying agent appointed
------------
pursuant to Section 3.09 and shall initially be (_____________).
"Rating Agency" shall mean any nationally recognized statistical rating
-------------
organization asked to rate the Certificates.
"Record Date" shall mean, with respect to any Distribution Date, the
-----------
close of business on the day prior to such Distribution Date occurs or, if
Definitive Trust Certificates are issued pursuant to Section 3.14, the last
day of the month preceding such Distribution Date.
"Secretary of State" shall mean the Secretary of State of the State of
------------------
Delaware.
"Servicing Agreement" shall mean the Servicing Agreement dated as of
-------------------
________, 199_, among the Trust, as issuer, the Depositor and (________), as
servicer, as the same may be amended or supplemented from time to time.
"Treasury Regulations" shall mean regulations, including proposed or
--------------------
temporary Regulations, promulgated under the Code. References herein to
specific provisions of proposed or temporary regulations shall include
analogous provisions of final Treasury Regulations or other successor
Treasury Regulations.
"Trust" shall mean the trust established by this Agreement.
-----
"Trust Account" shall mean any account set up by the Owner Trustee
-------------
pursuant to the provisions of Section 5.01.
"Trust Certificate" shall mean a certificate evidencing the beneficial
-----------------
interest of an Owner in the Trust, substantially in the form attached hereto
as Exhibit A.
"Underwriters" shall mean those underwriters named in and parties to the
------------
Certificate Underwriting Agreement dated ________, 199_, with the Depositor,
pursuant to which the Trust Certificates will be offered publicly.
SECTION 1.02. Other Definitional Provisions. (a) Capitalized terms
-----------------------------
used and not otherwise defined herein have the meanings assigned to them in
the Servicing Agreement or, if not defined therein, in the Indenture.
(b) All terms defined in this Agreement shall have the defined meanings
when used in any certificate or other document made or delivered pursuant
hereto unless otherwise defined therein.
(c) As used in this Agreement and in any certificate or other document
made or delivered pursuant hereto or thereto, accounting terms not defined in
this Agreement or in any such certificate or other document, and accounting
terms partly defined in this Agreement or in any such certificate or other
document to the extent not defined, shall have the respective meanings given
to them under generally accepted accounting principles. To the extent that
the definitions of accounting terms in this Agreement or in any such
certificate or other document are inconsistent with the meanings of such
terms under generally accepted accounting principles, the definitions
contained in this Agreement or in any such certificate or other document
shall control.
(d) The words "hereof," "herein," "hereunder" and words of similar
import when used in this Agreement shall refer to this Agreement as a whole
and not to any particular provision of this Agreement; Section and Exhibit
references contained in this Agreement are references to Sections and
Exhibits in or to this Agreement unless otherwise specified; and the term
"including" shall mean "including without limitation".
(e) The definitions contained in this Agreement are applicable to the
singular as well as the plural forms of such terms and to the masculine as
well as to the feminine and neuter genders of such terms.
(f) Any agreement, instrument or statute defined or referred to herein
or in any instrument or certificate delivered in connection herewith means
such agreement, instrument or statute as from time to time amended, modified
or supplemented and includes (in the case of agreements or instruments)
references to all attachments thereto and instruments incorporated therein;
references to a Person are also to its permitted successors and assigns.
ARTICLE II
Organization
------------
SECTION 2.01. Name. The Trust created hereby shall be known as
----
"Headlands Home Equity Loan Trust 19 - ," in which name the Owner
-- ----
Trustee may conduct the business of the Trust, make and execute contracts and
other instruments on behalf of the Trust and sue and be sued.
SECTION 2.02. Office. The office of the Trust shall be in care of the
------
Owner Trustee at the Corporate Trust Office or at such other address in
Delaware as the Owner Trustee may designate by written notice to the Owners,
the Depositor and the Company.
SECTION 2.03. Purposes and Powers. (a) The purpose of the Trust is
-------------------
to engage in the following activities:
(i) to issue the Notes pursuant to the Indenture and the Trust
Certificates pursuant to this Agreement and to sell the Notes and the
Trust Certificates;
(ii) with the proceeds of the sale of the Notes and the Trust
Certificates, to purchase the Mortgage Loans, and to pay the
organizational, start-up and transactional expenses of the Trust and to
pay the balance to the Depositor pursuant to the Servicing Agreement;
(iii) to assign, grant, transfer, pledge, mortgage and convey
the Trust Estate pursuant to the Indenture and to hold, manage and
distribute to the Owners pursuant to the terms of the Servicing
Agreement any portion of the Trust Estate released from the Lien of, and
remitted to the Trust pursuant to, the Indenture;
(iv) to enter into and perform its obligations under the Basic
Documents to which it is to be a party;
(v) to engage in those activities, including entering into
agreements, that are necessary, suitable or convenient to accomplish the
foregoing or are incidental thereto or connected therewith; and
(vi) subject to compliance with the Basic Documents, to engage in
such other activities as may be required in connection with conservation
of the Owner Trust Estate and the making of distributions to the Owners
and the Noteholders.
The Trust is hereby authorized to engage in the foregoing activities. The
Trust shall not engage in any activity other than in connection with the
foregoing or other than as required or authorized by the terms of this
Agreement or the Basic Documents.
SECTION 2.04. Appointment of Owner Trustee. The Depositor hereby
----------------------------
appoints the Owner Trustee as trustee of the Trust effective as of the date
hereof, to have all the rights, powers and duties set forth herein.
SECTION 2.05. Initial Capital Contribution of Owner Trust Estate. The
--------------------------------------------------
Depositor hereby sells, assigns, transfers, conveys and sets over to the
Owner Trustee, as of the date hereof, the sum of $(__). The Owner Trustee
hereby acknowledges receipt in trust from the Depositor, as of the date
hereof, of the foregoing contribution, which shall constitute the initial
Owner Trust Estate and shall be deposited in the Certificate Distribution
Account. The Depositor shall pay organizational expenses of the Trust as
they may arise or shall, upon the request of the Owner Trustee, promptly
reimburse the Owner Trustee for any such expenses paid by the Owner Trustee.
SECTION 2.06. Declaration of Trust. The Owner Trustee hereby declares
--------------------
that it will hold the Owner Trust Estate in trust upon and subject to the
conditions set forth herein for the use and benefit of the Owners, subject to
the obligations of the Trust under the Basic Documents. It is the intention
of the parties hereto that the Trust constitute a business trust under the
Business Trust Statute and that this Agreement constitute the governing
instrument of such business trust. It is the intention of the parties hereto
that, solely for income and franchise tax purposes, the Trust shall be
treated as a partnership, with the assets of the partnership being the
Mortgage Loans and other assets held by the Trust, the partners of the
partnership being the Certificateholders, and the Notes being debt of the
partnership. The parties agree that, unless otherwise required by
appropriate tax authorities, the Trust will file or cause to be filed annual
or other necessary returns, reports and other forms consistent with the
characterization of the Trust as a partnership for such tax purposes.
Effective as of the date hereof, the Owner Trustee shall have all rights,
powers and duties set forth herein and in the Business Trust Statute with
respect to accomplishing the purposes of the Trust.
SECTION 2.07. Liability of the Owners. (a) The Company shall be
-----------------------
liable directly to and will indemnify any injured party for all losses,
claims, damages, liabilities and expenses of the Trust (including Expenses,
to the extent not paid out of the Owner Trust Estate) to the extent that the
Company would be liable if the Trust were a partnership under the Delaware
Revised Uniform Limited Partnership Act in which the Company were a general
partner; provided, however, that the Company shall not be liable for any
losses incurred by a Certificateholder in the capacity of an investor in the
Trust Certificates, a Noteholder in the capacity of an investor in the Notes.
In addition, any third party creditors of the Trust (other than in connection
with the obligations described in the preceding sentence for which the
Company shall not be liable) shall be deemed third party beneficiaries of
this paragraph and paragraph (c) below. The obligations of the Company under
this paragraph shall be evidenced by the Trust Certificates described in
Section 3.10, which for purposes of the Business Trust Statute shall be
deemed to be a separate class of Trust Certificates from all other Trust
Certificates issued by the Trust; provided that the rights and obligations
evidenced by all Trust Certificates, regardless of class, shall, except as
provided in this Section, be identical.
(b) No Owner, other than to the extent set forth in paragraph (a),
shall have any personal liability for any liability or obligation of the
Trust.
SECTION 2.08. Title to Trust Property. Legal title to all the Owner
-----------------------
Trust Estate shall be vested at all times in the Trust as a separate legal
entity except where applicable law in any jurisdiction requires title to any
part of the Owner Trust Estate to be vested in a trustee or trustees, in
which case title shall be deemed to be vested in the Owner Trustee, a co-
trustee and/or a separate trustee, as the case may be.
SECTION 2.09. Situs of Trust. The Trust will be located and
--------------
administered in the State of Delaware. All bank accounts maintained by the
Owner Trustee on behalf of the Trust shall be located in the State of
Delaware or the State of New York. The Trust shall not have any employees in
any state other than Delaware; provided, however, that nothing herein shall
restrict or prohibit the Owner Trustee from having employees within or
without the State of Delaware. Payments will be received by the Trust only
in Delaware or New York, and payments will be made by the Trust only from
Delaware or New York. The only office of the Trust will be at the Corporate
Trust Office in Delaware.
SECTION 2.10. Representations and Warranties of the Depositor and the
-------------------------------------------------------
Company. (a) The Depositor hereby represents and warrants to the Owner
- - -------
Trustee that:
(i) The Depositor is duly organized and validly existing as a
corporation in good standing under the laws of the State of Delaware,
with power and authority to own its properties and to conduct its
business as such properties are currently owned and such business is
presently conducted.
(ii) The Depositor is duly qualified to do business as a foreign
corporation in good standing and has obtained all necessary licenses and
approvals in all jurisdictions in which the ownership or lease of its
property or the conduct of its business shall require such
qualifications.
(iii) The Depositor has the power and authority to execute and
deliver this Agreement and to carry out its terms; the Depositor has
full power and authority to sell and assign the property to be sold and
assigned to and deposited with the Trust and the Depositor has duly
authorized such sale and assignment and deposit to the Trust by all
necessary corporate action; and the execution, delivery and performance
of this Agreement have been duly authorized by the Depositor by all
necessary corporate action.
(iv) The consummation of the transactions contemplated by this
Agreement and the fulfillment of the terms hereof do not conflict with,
result in any breach of any of the terms and provisions of, or
constitute (with or without notice or lapse of time) a default under,
the certificate of incorporation or bylaws of the Depositor, or any
indenture, agreement or other instrument to which the Depositor is a
party or by which it is bound; nor result in the creation or imposition
of any Lien upon any of its properties pursuant to the terms of any such
indenture, agreement or other instrument (other than pursuant to the
Basic Documents); nor violate any law or, to the best of the Depositor's
knowledge, any order, rule or regulation applicable to the Depositor of
any court or of any federal or state regulatory body, administrative
agency or other governmental instrumentality having jurisdiction over
the Depositor or its properties.
(v) To the Depositor's best knowledge, there are no proceedings or
investigations pending or threatened before any court, regulatory body,
administrative agency or other governmental instrumentality having
jurisdiction over the Depositor or its properties: (A) asserting the
invalidity of this Agreement, (B) seeking to prevent the consummation
of any of the transactions contemplated by this Agreement or (C) seeking
any determination or ruling that might materially and adversely affect
the performance by the Depositor of its obligations under, or the
validity or enforceability of, this Agreement.
(vi) The representations and warranties of the Depositor in
Sections (___________) of the Mortgage Loan Purchase Agreement are true
and correct.
(b) The Company hereby represents and warrants to the Owner Trustee
that:
(i) The Company has been duly organized and is validly existing as
a corporation in good standing under the laws of the State of
(_________), with the power and authority to own its properties and to
conduct its business as such properties are currently owned and such
business is presently conducted.
(ii) The Company is duly qualified to do business as a foreign
corporation in good standing and has obtained all necessary licenses and
approvals in all jurisdictions in which the ownership or lease of its
property or the conduct of its business shall require such
qualifications.
(iii) The Company has the power and authority to execute and
deliver this Agreement and to carry out its terms; the Company has full
power and authority to purchase the Trust Certificates that the Company
has agreed to purchase pursuant to Section 3.10; and the execution,
delivery and performance of this Agreement has been duly authorized by
the Company by all necessary corporate action.
(iv) The consummation of the transactions contemplated by this
Agreement and the fulfillment of the terms hereof do not conflict with,
result in any breach of any of the terms and provisions of, or
constitute (with or without notice or lapse of time) a default under,
the (articles of incorporation) (certificate of incorporation) or bylaws
of the Company, or any indenture, agreement or other instrument to which
the Company is a party or by which it is bound; nor result in the
creation or imposition of any Lien upon any of its properties pursuant
to the terms of any such indenture, agreement or other instrument (other
than pursuant to the Basic Documents); nor violate any law or, to the
best of the Company's knowledge, any order, rule or regulation
applicable to the Company of any court or of any federal or state
regulatory body, administrative agency or other governmental
instrumentality having jurisdiction over the Company or its properties.
(v) There are no proceedings or investigations pending or, to the
Company's best knowledge, threatened before any court, regulatory body,
administrative agency or other governmental instrumentality having
jurisdiction over the Company or its properties: (A) asserting the
invalidity of this Agreement, (B) seeking to prevent the consummation of
any of the transactions contemplated by this Agreement or (C) seeking
any determination or ruling that might materially and adversely affect
the performance by the Company of its obligations under, or the validity
or enforceability of, this Agreement.
(vi) The representatives and warranties of the Company in Sections
(_______) of the Mortgage Loan Purchase Agreement are true and correct.
SECTION 2.11. Federal Income Tax Allocations. Net income of the Trust
------------------------------
for any month as determined for federal income tax purposes (and each item of
income, gain, loss and deduction entering into the computation thereof) shall
be allocated:
(a) among the Certificate Owners as of the first Record Date following
the end of such month, in proportion to their ownership of principal amount
of Trust Certificates on such date, net income in an amount up to the sum of
(i) the Certificateholders' Monthly Interest Distributable Amount for such
month, (ii) interest on the excess, if any, of the Certificateholders'
Interest Distributable Amount for the preceding Distribution Date over the
amount in respect of interest that is actually deposited in the Certificate
Distribution Account on such preceding Distribution Date, to the extent
permitted by law, at the Pass-Through Rate from such preceding Distribution
Date through the current Distribution Date, (iii) the portion of the market
discount on the Mortgage Loans accrued during such month that is allocable to
the excess, if any, of the initial aggregate principal amount of the Trust
Certificates over their initial aggregate issue price, (iv) any amount
expected to be distributed to the Certificateholders pursuant to the
Servicing Agreement (to the extent not previously allocated pursuant to this
clause), (v) any Certificateholders' Prepayment Premium distributable to the
Certificateholders with respect to such month and (vi) any other amounts of
income payable to the Certificateholders for such month; such sum to be
reduced by any amortization by the Trust of premium on Mortgage Loans that
corresponds to any excess of the issue price of Certificates over their
principal amount; and
(b) to the Company, to the extent of any remaining net income.
If the net income of the Trust for any month is insufficient for the
allocations described in clause (a) above, subsequent net income shall first
be allocated to make up such shortfall before being allocated as provided in
the preceding sentence. Net losses of the Trust, if any, for any month as
determined for federal income tax purposes (and each item of income, gain,
loss and deduction entering into the computation thereof) shall be allocated
to the Company to the extent the Company is reasonably expected to bear the
economic burden of such net losses, and any remaining net losses shall be
allocated among the Certificate Owners as of the first Record Date following
the end of such month in proportion to their ownership of principal amount of
Trust Certificates on such Record Date. The Company is authorized to modify
the allocations in this paragraph if necessary or appropriate, in its sole
discretion, for the allocations to fairly reflect the economic income, gain
or loss to the Company or to the Certificate Owners, or as otherwise required
by the Code.
ARTICLE III
Trust Certificates and Transfer of Interests
--------------------------------------------
SECTION 3.01. Initial Ownership. Upon the formation of the Trust by
-----------------
the contribution by the Depositor pursuant to Section 2.05 and until the
issuance of the Trust Certificates, the Depositor shall be the sole
beneficiary of the Trust.
SECTION 3.02. The Trust Certificates. The Trust Certificates shall be
----------------------
issued in minimum denominations of $(_______) and in integral multiples of
$1,000 in excess thereof; provided, however, that the Trust Certificates
issued to the Company pursuant to Section 3.10 may be issued in such
denomination as required to include any residual amount. The Trust
Certificates shall be executed on behalf of the Trust by manual or facsimile
signature of an authorized officer of the Owner Trustee. Trust Certificates
bearing the manual or facsimile signatures of individuals who were, at the
time when such signatures shall have been affixed, authorized to sign on
behalf of the Trust, shall be validly issued and entitled to the benefit of
this Agreement, notwithstanding that such individuals or any of them shall
have ceased to be so authorized prior to the authentication and delivery of
such Trust Certificates or did not hold such offices at the date of
authentication and delivery of such Trust Certificates.
A transferee of a Trust Certificate shall become a Certificateholder and
shall be entitled to the rights and subject to the obligations of a
Certificateholder hereunder upon such transferee's acceptance of a Trust
Certificate duly registered in such transferee's name pursuant to Section
3.04.
SECTION 3.03. Authentication of Trust Certificates. Concurrently with
------------------------------------
the initial sale of the Mortgage Loans to the Trust pursuant to the Servicing
Agreement, the Owner Trustee shall cause the Trust Certificates in an
aggregate principal amount equal to the Initial Certificate Balance to be
executed on behalf of the Trust, authenticated and delivered to or upon the
written order of the Depositor, signed by its chairman of the board, its
president, any vice president, secretary or any assistant treasurer, without
further corporate action by the Depositor, in authorized denominations. No
Trust Certificate shall entitle its Holder to any benefit under this
Agreement or be valid for any purpose unless there shall appear on such Trust
Certificate a certificate of authentication substantially in the form set
forth in Exhibit A, executed by the Owner Trustee or (____________), as the
Owner Trustee's authenticating agent, by manual signature; such
authentication shall constitute conclusive evidence that such Trust
Certificate shall have been duly authenticated and delivered hereunder. All
Trust Certificates shall be dated the date of their authentication.
SECTION 3.04. Registration of Transfer and Exchange of Trust
----------------------------------------------
Certificates. The Certificate Registrar shall keep or cause to be kept, at
- - ------------
the office or agency maintained pursuant to Section 3.08, a Certificate
Register in which, subject to such reasonable regulations as it may
prescribe, the Owner Trustee shall provide for the registration of Trust
Certificates and of transfers and exchanges of Trust Certificates as herein
provided. (___________) shall be the initial Certificate Registrar.
Upon surrender for registration of transfer of any Trust Certificate at
the office or agency maintained pursuant to Section 3.08, the Owner Trustee
shall execute, authenticate and deliver (or shall cause ( ) as its
----
authenticating agent to authenticate and deliver), in the name of the
designated transferee or transferees, one or more new Trust Certificates in
authorized denominations of a like aggregate amount dated the date of
authentication by the Owner Trustee or any authenticating agent. At the
option of a Holder, Trust Certificates may be exchanged for other Trust
Certificates of authorized denominations of a like aggregate amount upon
surrender of the Trust Certificates to be exchanged at the office or agency
maintained pursuant to Section 3.08.
Every Trust Certificate presented or surrendered for registration of
transfer or exchange shall be accompanied by a written instrument of transfer
in form satisfactory to the Owner Trustee and the Certificate Registrar duly
executed by the Holder or such Holder's attorney duly authorized in writing.
Each Trust Certificate surrendered for registration of transfer or exchange
shall be cancelled and subsequently disposed of by the Owner Trustee in
accordance with its customary practice.
No service charge shall be made for any registration of transfer or
exchange of Trust Certificates, but the Owner Trustee or the Certificate
Registrar may require payment of a sum sufficient to cover any tax or
governmental charge that may be imposed in connection with any transfer or
exchange of Trust Certificates.
The preceding provisions of this Section notwithstanding, the Owner
Trustee shall not make, and the Certificate Registrar shall not register
transfers or exchanges of, Trust Certificates for a period of 15 days
preceding the due date for any payment with respect to the Trust
Certificates.
SECTION 3.05. Mutilated, Destroyed, Lost or Stolen Trust Certificates.
-------------------------------------------------------
If (a) any mutilated Trust Certificate shall be surrendered to the
Certificate Registrar, or if the Certificate Registrar shall receive evidence
to its satisfaction of the destruction, loss or theft of any Trust
Certificate and (b) there shall be delivered to the Certificate Registrar and
the Owner Trustee such security or indemnity as may be required by them to
save each of them harmless, then in the absence of notice that such Trust
Certificate has been acquired by a bona fide purchaser, the Owner Trustee on
behalf of the Trust shall execute and the Owner Trustee or ( ), as the
----
Owner Trustee's authenticating agent, shall authenticate and deliver, in
exchange for or in lieu of any such mutilated, destroyed, lost or stolen
Trust Certificate, a new Trust Certificate of like tenor and denomination.
In connection with the issuance of any new Trust Certificate under this
Section, the Owner Trustee or the Certificate Registrar may require the
payment of a sum sufficient to cover any tax or other governmental charge
that may be imposed in connection therewith. Any duplicate Trust Certificate
issued pursuant to this Section shall constitute conclusive evidence of
ownership in the Trust, as if originally issued, whether or not the lost,
stolen or destroyed Trust Certificate shall be found at any time.
SECTION 3.06. Persons Deemed Owners. Prior to due presentation of a
---------------------
Trust Certificate for registration of transfer, the Owner Trustee, the
Certificate Registrar or any Paying Agent may treat the Person in whose name
any Trust Certificate is registered in the Certificate Register as the owner
of such Trust Certificate for the purpose of receiving distributions pursuant
to Section 5.02 and for all other purposes whatsoever, and none of the Owner
Trustee, the Certificate Registrar or any Paying Agent shall be bound by any
notice to the contrary.
SECTION 3.07. Access to List of Certificateholders' Names and
-----------------------------------------------
Addresses. The Owner Trustee shall furnish or cause to be furnished to the
- - ---------
Servicer and the Depositor, within 15 days after receipt by the Owner Trustee
of a written request therefor from the Servicer or the Depositor, a list, in
such form as the Servicer or the Depositor may reasonably require, of the
names and addresses of the Certificateholders as of the most recent Record
Date. If three or more Certificateholders or one or more Holders of Trust
Certificates evidencing not less than 25% of the Certificate Balance apply in
writing to the Owner Trustee, and such application states that the applicants
desire to communicate with other Certificateholders with respect to their
rights under this Agreement or under the Trust Certificates and such
application is accompanied by a copy of the communication that such
applicants propose to transmit, then the Owner Trustee shall, within five
Business Days after the receipt of such application, afford such applicants
access during normal business hours to the current list of
Certificateholders. Each Holder, by receiving and holding a Trust
Certificate, shall be deemed to have agreed not to hold any of the Depositor,
the Company, the Certificate Registrar or the Owner Trustee accountable by
reason of the disclosure of its name and address, regardless of the source
from which such information was derived.
SECTION 3.08. Maintenance of Office or Agency. The Owner Trustee shall
-------------------------------
maintain in the Borough of Manhattan, The City of New York, an office or
offices or agency or agencies where Trust Certificates may be surrendered for
registration of transfer or exchange and where notices and demands to or upon
the Owner Trustee in respect of the Trust Certificates and the Basic
Documents may be served. The Owner Trustee initially designates
(_______________________________) as its office for such purposes. The Owner
Trustee shall give prompt written notice to the Company and to the
Certificateholders of any change in the location of the Certificate Register
or any such office or agency.
SECTION 3.09. Appointment of Paying Agent. The Paying Agent shall make
---------------------------
distributions to Certificateholders from the Certificate Distribution Account
pursuant to Section 5.02 and shall report the amounts of such distributions
to the Owner Trustee. Any Paying Agent shall have the revocable power to
withdraw funds from the Certificate Distribution Account for the purpose of
making the distributions referred to above. The Owner Trustee may revoke
such power and remove the Paying Agent if the Owner Trustee determines in its
sole discretion that the Paying Agent shall have failed to perform its
obligations under this Agreement in any material respect. The Paying Agent
initially shall be (___________), and any co-paying agent chosen by
(___________) and acceptable to the Owner Trustee. ( ) shall be
-----
permitted to resign as Paying Agent upon 30 days' written notice to the Owner
Trustee. In the event that (___________) shall no longer be the Paying
Agent, the Owner Trustee shall appoint a successor to act as Paying Agent
(which shall be a bank or trust company). The Owner Trustee shall cause such
successor Paying Agent or any additional Paying Agent appointed by the Owner
Trustee to execute and deliver to the Owner Trustee an instrument in which
such successor Paying Agent or additional Paying Agent shall agree with the
Owner Trustee that, as Paying Agent, such successor Paying Agent or
additional Paying Agent will hold all sums, if any, held by it for payment to
the Certificateholders in trust for the benefit of the Certificateholders
entitled thereto until such sums shall be paid to such Certificateholders.
The Paying Agent shall return all unclaimed funds to the Owner Trustee and
upon removal of a Paying Agent such Paying Agent shall also return all funds
in its possession to the Owner Trustee. The provisions of Sections 7.01,
7.03, 7.04 and 8.01 shall apply to the Owner Trustee also in its role as
Paying Agent, for so long as the Owner Trustee shall act as Paying Agent and,
to the extent applicable, to any other paying agent appointed hereunder. Any
reference in this Agreement to the Paying Agent shall include any co-paying
agent unless the context requires otherwise.
SECTION 3.10. Ownership by Company of Trust Certificates. The Company
------------------------------------------
shall on the Closing Date purchase from the Underwriters Trust Certificates
representing at least __% of the Initial Certificate Balance and shall
thereafter retain beneficial and record ownership of Trust Certificates
representing at least __% of the Certificate Balance. Any attempted transfer
of any Trust Certificate that would reduce such interest of the Company below
__% of the Certificate Balance shall be void. The Owner Trustee shall cause
any Trust Certificate issued to the Company to contain a legend stating "THIS
CERTIFICATE IS NON-TRANSFERABLE".
SECTION 3.11. Book-Entry Trust Certificates. The Trust Certificates,
-----------------------------
upon original issuance, will be issued in the form of a typewritten Trust
Certificate or Trust Certificates representing Book-Entry Trust Certificates,
to be delivered to The Depository Trust Company, the initial Clearing Agency,
by, or on behalf of, the Trust; provided, however, that one Definitive Trust
Certificate may be issued to the Company pursuant to Section 3.10. Such
Trust Certificate or Trust Certificates shall initially be registered on the
Certificate Register in the name of Cede & Co., the nominee of the initial
Clearing Agency, and no Certificate Owner will receive a definitive Trust
Certificate representing such Certificate Owner's interest in such Trust
Certificate, except as provided in Section 3.13. Unless and until
definitive, fully registered Trust Certificates (the "Definitive Trust
Certificates") have been issued to Certificate Owners pursuant to
Section 3.13:
(a) The provisions of this Section shall be in full force and effect;
(b) The Certificate Registrar and the Owner Trustee shall be entitled
to deal with the Clearing Agency for all purposes of this Agreement
(including the payment of principal of and interest on the Trust Certificates
and the giving of instructions or directions hereunder) as the sole Holder of
the Trust Certificates and shall have no obligation to the Certificate
Owners;
(c) To the extent that the provisions of this Section conflict with any
other provisions of this Agreement, the provisions of this Section shall
control;
(d) The rights of Certificate Owners shall be exercised only through
the Clearing Agency and shall be limited to those established by law and
agreements between such Certificate Owners and the Clearing Agency and/or the
Clearing Agency Participants. Pursuant to the Certificate Depository
Agreement, unless and until Definitive Trust Certificates are issued pursuant
to Section 3.13, the initial Clearing Agency will make book-entry transfers
among the Clearing Agency Participants and receive and transmit payments of
principal of and interest on the Trust Certificates to such Clearing Agency
Participants; and
(e) Whenever this Agreement requires or permits actions to be taken
based upon instructions or directions of Holders of Trust Certificates
evidencing a specified percentage of the Certificate Balance, the Clearing
Agency shall be deemed to represent such percentage only to the extent that
it has received instructions to such effect from Certificate Owners and/or
Clearing Agency Participants owning or representing, respectively, such
required percentage of the beneficial interest in the Trust Certificates and
has delivered such instructions to the Owner Trustee.
SECTION 3.12. Notices to Clearing Agency. Whenever a notice or other
--------------------------
communication to the Certificateholders is required under this Agreement,
unless and until Definitive Trust Certificates shall have been issued to
Certificate Owners pursuant to Section 3.13, the Owner Trustee shall give all
such notices and communications specified herein to be given to
Certificateholders to the Clearing Agency, and shall have no obligations to
the Certificate Owners.
SECTION 3.13. Definitive Trust Certificates. If (i) the Administrator
------------------------------
advises the Owner Trustee in writing that the Clearing Agency is no longer
willing or able to properly discharge its responsibilities with respect to
the Trust Certificates and the Administrator is unable to locate a qualified
successor, (ii) the Administrator at its option advises the Owner Trustee in
writing that it elects to terminate the book-entry system through the
Clearing Agency or (iii) after the occurrence of an Event of Default or a
Servicer Default, Certificate Owners representing beneficial interests
aggregating at least a majority of the Certificate Balance advise the
Clearing Agency in writing that the continuation of a book-entry system
through the Clearing Agency is no longer in the best interest of the
Certificate Owners, then the Clearing Agency shall notify all Certificate
Owners and the Owner Trustee of the occurrence of any such event and of the
availability of the Definitive Trust Certificates to Certificate Owners
requesting the same. Upon surrender to the Owner Trustee of the typewritten
Trust Certificate or Trust Certificates representing the Book-Entry Trust
Certificates by the Clearing Agency, accompanied by registration
instructions, the Owner Trustee shall execute and authenticate the Definitive
Trust Certificates in accordance with the instructions of the Clearing
Agency. Neither the Certificate Registrar nor the Owner Trustee shall be
liable for any delay in delivery of such instructions and may conclusively
rely on, and shall be protected in relying on, such instructions. Upon the
issuance of Definitive Trust Certificates, the Owner Trustee shall recognize
the Holders of the Definitive Trust Certificates as Certificateholders. The
Definitive Trust Certificates shall be printed, lithographed or engraved or
may be produced in any other manner as is reasonably acceptable to the Owner
Trustee, as evidenced by its execution thereof.
ARTICLE IV
Actions by Owner Trustee
------------------------
SECTION 4.01. Prior Notice to Owners with Respect to Certain Matters.
------------------------------------------------------
With respect to the following matters, the Owner Trustee shall not take
action unless at least 30 days before the taking of such action, the Owner
Trustee shall have notified the Certificateholders in writing of the proposed
action and the Owners shall not have notified the Owner Trustee in writing
prior to the 30th day after such notice is given that such Owners have
withheld consent or provided alternative direction:
(a) the initiation of any claim or lawsuit by the Trust (except claims
or lawsuits brought in connection with the collection of the Mortgage Loans)
and the compromise of any action, claim or lawsuit brought by or against the
Trust (except with respect to the aforementioned claims or lawsuits for
collection of the Mortgage Loans;
(b) the election by the Trust to file an amendment to the Certificate
of Trust (unless such amendment is required to be filed under the Business
Trust Statute);
(c) the amendment of the Indenture by a supplemental indenture in
circumstances where the consent of any Noteholder is required;
(d) the amendment of the Indenture by a supplemental indenture in
circumstances where the consent of any Noteholder is not required and such
amendment materially adversely affects the interest of the Owners;
(e) the amendment, change or modification of the Administration
Agreement, except to cure any ambiguity or to amend or supplement any
provision in a manner or add any provision that would not materially
adversely affect the interests of the Owners; or
(f) the appointment pursuant to the Indenture of a successor Note
Registrar, Paying Agent or Indenture Trustee or pursuant to this Agreement of
a successor Certificate Registrar, or the consent to the assignment by the
Note Registrar, Paying Agent or Indenture Trustee or Certificate Registrar of
its obligations under the Indenture or this Agreement, as applicable.
SECTION 4.02. Action by Owners with Respect to Certain Matters. The
------------------------------------------------
Owner Trustee shall not have the power, except upon the direction of the
Owners, to (a) remove the Administrator under the Administration Agreement
pursuant to Section ( ) thereof, (b) appoint a successor Administrator
pursuant to Section ( ) of the Administration Agreement, (c) remove the
Servicer under the Servicing Agreement pursuant to Section ( ) thereof or
(d) except as expressly provided in the Basic Documents, sell the Mortgage
Loans after the termination of the Indenture. The Owner Trustee shall take
the actions referred to in the preceding sentence only upon written
instructions signed by the Owners.
SECTION 4.03. Action by Owners with Respect to Bankruptcy. The Owner
-------------------------------------------
Trustee shall not have the power to commence a voluntary proceeding in
bankruptcy relating to the Trust without the unanimous prior approval of all
Owners and the delivery to the Owner Trustee by each such Owner of a
certificate certifying that such Owner reasonably believes that the Trust is
insolvent.
SECTION 4.04. Restrictions on Owners' Power. The Owners shall not
-----------------------------
direct the Owner Trustee to take or to refrain from taking any action if such
action or inaction would be contrary to any obligation of the Trust or the
Owner Trustee under this Agreement or any of the Basic Documents or would be
contrary to Section 2.03, nor shall the Owner Trustee be obligated to follow
any such direction, if given.
SECTION 4.05. Majority Control. Except as expressly provided herein,
----------------
any action that may be taken by the Owners under this Agreement may be taken
by the Holders of Trust Certificates evidencing not less than a majority of
the Certificate Balance. Except as expressly provided herein, any written
notice of the Owners delivered pursuant to this Agreement shall be effective
if signed by Holders of Trust Certificates evidencing not less than a
majority of the Certificate Balance at the time of the delivery of such
notice.
ARTICLE V
Application of Trust Funds; Certain Duties
------------------------------------------
SECTION 5.01. Establishment of Trust Account. The Owner Trustee, for
------------------------------
the benefit of the Certificateholders, shall establish and maintain in the
name of the Trust an Eligible Deposit Account (the "Certificate Distribution
Account"), bearing a designation clearly indicating that the funds deposited
therein are held for the benefit of the Certificateholders.
The Owner Trustee shall possess all right, title and interest in all
funds on deposit from time to time in the Certificate Distribution Account
and in all proceeds thereof. Except as otherwise expressly provided herein,
the Certificate Distribution Account shall be under the sole dominion and
control of the Owner Trustee for the benefit of the Certificateholders. If,
at any time, the Certificate Distribution Account ceases to be an Eligible
Deposit Account, the Owner Trustee (or the Depositor on behalf of the Owner
Trustee, if the Certificate Distribution Account is not then held by the
Owner Trustee or an affiliate thereof) shall within 10 Business Days (or such
longer period, not to exceed 30 calendar days, as to which each Rating Agency
may consent) establish a new Certificate Distribution Account as an Eligible
Deposit Account and shall transfer any cash and/or any investments to such
new Certificate Distribution Account.
SECTION 5.02. Application of Trust Funds. (a) On each Distribution
--------------------------
Date, the Owner Trustee will distribute to Certificateholders, on a pro rata
basis, amounts deposited in the Certificate Distribution Account.
(b) On each Distribution Date, the Owner Trustee shall send to each
Certificateholder the statement or statements provided to the Owner Trustee
by the Servicer pursuant to Section (____) of the Servicing Agreement with
respect to such Distribution Date.
(c) In the event that any withholding tax is imposed on the Trust's
payment (or allocations of income) to an Owner, such tax shall reduce the
amount otherwise distributable to the Owner in accordance with this Section.
The Owner Trustee is hereby authorized and directed to retain from amounts
otherwise distributable to the Owners sufficient funds for the payment of any
tax that is legally owed by the Trust (but such authorization shall not
prevent the Owner Trustee from contesting any such tax in appropriate
proceedings, and withholding payment of such tax, if permitted by law,
pending the outcome of such proceedings). The amount of any withholding tax
imposed with respect to an Owner shall be treated as cash distributed to such
Owner at the time it is withheld by the Trust and remitted to the appropriate
taxing authority. If there is a possibility that withholding tax is payable
with respect to a distribution (such as a distribution to a non-U.S. Owner),
the Owner Trustee may in its sole discretion withhold such amounts in
accordance with this paragraph (c).
SECTION 5.03. Method of Payment. Subject to Section 9.01(c),
-----------------
distributions required to be made to Certificateholders on any Distribution
Date shall be made to each Certificateholder of record on the preceding
Record Date either by wire transfer, in immediately available funds, to the
account of such Holder at a bank or other entity having appropriate
facilities therefor, if such Certificateholder shall have provided to the
Certificate Registrar appropriate written instructions at least five Business
Days prior to such Distribution Date and such Holder's Trust Certificates in
the aggregate evidence a denomination of not less than $(____________), or,
if not, by check mailed to such Certificateholder at the address of such
holder appearing in the Certificate Register.
SECTION 5.04. No Segregation of Moneys; No Interest. Subject to
-------------------------------------
Sections 5.01 and 5.02, moneys received by the Owner Trustee hereunder need
not be segregated in any manner except to the extent required by law or the
Servicing Agreement and may be deposited under such general conditions as may
be prescribed by law, and the Owner Trustee shall not be liable for any
interest thereon.
SECTION 5.05. Accounting and Reports to the Noteholders, Owners, the
------------------------------------------------------
Internal Revenue Service and Others. The Owner Trustee shall (a) maintain
- - -----------------------------------
(or cause to be maintained) the books of the Trust on a calendar year basis
and the accrual method of accounting, (b) deliver to each Owner, as may be
required by the Code and applicable Treasury Regulations, such information as
may be required (including Schedule K-1) to enable each Owner to prepare its
federal and state income tax returns, (c) file such tax returns relating to
the Trust (including a partnership information return, IRS Form 1065) and
make such elections as from time to time may be required or appropriate under
any applicable state or federal statute or any rule or regulation thereunder
so as to maintain the Trust's characterization as a partnership for federal
income tax purposes, (d) cause such tax returns to be signed in the manner
required by law and (e) collect or cause to be collected any withholding tax
as described in and in accordance with Section 5.02(c) with respect to income
or distributions to Owners. The Owner Trustee shall elect under Section 1278
of the Code to include in income currently any market discount that accrues
with respect to the Mortgage Loans. The Owner Trustee shall not make the
election provided under Section 754 of the Code.
SECTION 5.06. Signature on Returns; Tax Matters Partner. (a) The
-----------------------------------------
Owner Trustee shall sign on behalf of the Trust the tax returns of the Trust,
unless applicable law requires an Owner to sign such documents, in which case
such documents shall be signed by the Company.
(b) The Company shall be designated the "tax matters partner" of the
Trust pursuant to Section 6231(a)(7)(A) of the Code and applicable Treasury
Regulations.
ARTICLE VI
Authority and Duties of Owner Trustee
-------------------------------------
SECTION 6.01. General Authority. The Owner Trustee is authorized and
-----------------
directed to execute and deliver the Basic Documents to which the Trust is to
be a party and each certificate or other document attached as an exhibit to
or contemplated by the Basic Documents to which the Trust is to be a party
and any amendment or other agreement or instrument, in each case, in such
form as the Company shall approve, as evidenced conclusively by the Owner
Trustee's execution thereof. In addition to the foregoing, the Owner Trustee
is authorized, but shall not be obligated, to take all actions required of
the Trust pursuant to the Basic Documents. The Owner Trustee is further
authorized from time to time to take such action as the Administrator
recommends with respect to the Basic Documents.
SECTION 6.02. General Duties. It shall be the duty of the Owner
--------------
Trustee to discharge (or cause to be discharged) all of its responsibilities
pursuant to the terms of this Agreement and the Basic Documents to which the
Trust is a party and to administer the Trust in the interest of the Owners,
subject to the Basic Documents and in accordance with the provisions of this
Agreement. Notwithstanding the foregoing, the Owner Trustee shall be deemed
to have discharged its duties and responsibilities hereunder and under the
Basic Documents to the extent the Administrator has agreed in the
Administration Agreement to perform any act or to discharge any duty of the
Owner Trustee hereunder or under any Basic Document, and the Owner Trustee
shall not be held liable for the default or failure of the Administrator to
carry out its obligations under the Administration Agreement.
SECTION 6.03. Action upon Instruction. (a) Subject to Article IV and
-----------------------
in accordance with the terms of the Basic Documents, the Owners may by
written instruction direct the Owner Trustee in the management of the Trust.
Such direction may be exercised at any time by written instruction of the
Owners pursuant to Article IV.
(b) The Owner Trustee shall not be required to take any action
hereunder or under any Basic Document if the Owner Trustee shall have
reasonably determined, or shall have been advised by counsel, that such
action is likely to result in liability on the part of the Owner Trustee or
is contrary to the terms hereof or of any Basic Document or is otherwise
contrary to law.
(c) Whenever the Owner Trustee is unable to decide between alternative
courses of action permitted or required by the terms of this Agreement or
under any Basic Document, the Owner Trustee shall promptly give notice (in
such form as shall be appropriate under the circumstances) to the Owners
requesting instruction as to the course of action to be adopted, and to the
extent the Owner Trustee acts in good faith in accordance with any written
instruction of the Owners received, the Owner Trustee shall not be liable on
account of such action to any Person. If the Owner Trustee shall not have
received appropriate instruction within 10 days of such notice (or within
such shorter period of time as reasonably may be specified in such notice or
may be necessary under the circumstances) it may, but shall be under no duty
to, take or refrain from taking such action not inconsistent with this
Agreement or the Basic Documents, as it shall deem to be in the best
interests of the Owners, and shall have no liability to any Person for such
action or inaction.
(d) In the event that the Owner Trustee is unsure as to the application
of any provision of this Agreement or any Basic Document or any such
provision is ambiguous as to its application, or is, or appears to be, in
conflict with any other applicable provision, or in the event that this
Agreement permits any determination by the Owner Trustee or is silent or is
incomplete as to the course of action that the Owner Trustee is required to
take with respect to a particular set of facts, the Owner Trustee may give
notice (in such form as shall be appropriate under the circumstances) to the
Owners requesting instruction and, to the extent that the Owner Trustee acts
or refrains from acting in good faith in accordance with any such instruction
received, the Owner Trustee shall not be liable, on account of such action or
inaction, to any Person. If the Owner Trustee shall not have received
appropriate instruction within 10 days of such notice (or within such shorter
period of time as reasonably may be specified in such notice or may be
necessary under the circumstances) it may, but shall be under no duty to,
take or refrain from taking such action not inconsistent with this Agreement
or the Basic Documents, as it shall deem to be in the best interests of the
Owners, and shall have no liability to any Person for such action or
inaction.
SECTION 6.04. No Duties Except as Specified in this Agreement or in
-----------------------------------------------------
Instructions. The Owner Trustee shall not have any duty or obligation to
- - ------------
manage, make any payment with respect to, register, record, sell, dispose of,
or otherwise deal with the Owner Trust Estate, or to otherwise take or
refrain from taking any action under, or in connection with, any document
contemplated hereby to which the Owner Trustee is a party, except as
expressly provided by the terms of this Agreement or in any document or
written instruction received by the Owner Trustee pursuant to Section 6.03;
and no implied duties or obligations shall be read into this Agreement or any
Basic Document against the Owner Trustee. The Owner Trustee shall have no
responsibility for filing any financing or continuation statement in any
public office at any time or to otherwise perfect or maintain the perfection
of any security interest or lien granted to it hereunder or to prepare or
file any Securities and Exchange Commission filing for the Trust or to record
this Agreement or any Basic Document. The Owner Trustee nevertheless agrees
that it will, at its own cost and expense, promptly take all action as may be
necessary to discharge any liens on any part of the Owner Trust Estate that
result from actions by, or claims against, the Owner Trustee that are not
related to the ownership or the administration of the Owner Trust Estate.
SECTION 6.05. No Action Except Under Specified Documents or
---------------------------------------------
Instructions. The Owner Trustee shall not manage, control, use, sell,
- - ------------
dispose of or otherwise deal with any part of the Owner Trust Estate except
(i) in accordance with the powers granted to and the authority conferred upon
the Owner Trustee pursuant to this Agreement, (ii) in accordance with the
Basic Documents and (iii) in accordance with any document or instruction
delivered to the Owner Trustee pursuant to Section 6.03.
SECTION 6.06. Restrictions. The Owner Trustee shall not take any
------------
action (a) that is inconsistent with the purposes of the Trust set forth in
Section 2.03 or (b) that, to the actual knowledge of the Owner Trustee, would
result in the Trust's becoming taxable as a corporation for federal income
tax purposes. The Owners shall not direct the Owner Trustee to take action
that would violate the provisions of this Section.
ARTICLE VII
Concerning the Owner Trustee
----------------------------
SECTION 7.01. Acceptance of Trusts and Duties. The Owner Trustee
-------------------------------
accepts the trusts hereby created and agrees to perform its duties hereunder
with respect to such trusts but only upon the terms of this Agreement. The
Owner Trustee also agrees to disburse all moneys actually received by it
constituting part of the Owner Trust Estate upon the terms of the Basic
Documents and this Agreement. The Owner Trustee shall not be answerable or
accountable hereunder or under any Basic Document under any circumstances,
except (i) for its own willful misconduct or negligence or (ii) in the case
of the inaccuracy of any representation or warranty contained in Section 7.03
expressly made by the Owner Trustee. In particular, but not by way of
limitation (and subject to the exceptions set forth in the preceding
sentence):
(a) The Owner Trustee shall not be liable for any error of judgment
made by a Trust Officer of the Owner Trustee;
(b) The Owner Trustee shall not be liable with respect to any action
taken or omitted to be taken by it in accordance with the instructions of the
Administrator or any Owner;
(c) No provision of this Agreement or any Basic Document shall require
the Owner Trustee to expend or risk funds or otherwise incur any financial
liability in the performance of any of its rights or powers hereunder or
under any Basic Document if the Owner Trustee shall have reasonable grounds
for believing that repayment of such funds or adequate indemnity against such
risk or liability is not reasonably assured or provided to it;
(d) Under no circumstances shall the Owner Trustee be liable for
indebtedness evidenced by or arising under any of the Basic Documents,
including the principal of and interest on the Notes;
(e) The Owner Trustee shall not be responsible for or in respect of the
validity or sufficiency of this Agreement or for the due execution hereof by
the Depositor or the Company or for the form, character, genuineness,
sufficiency, value or validity of any of the Owner Trust Estate, or for or in
respect of the validity or sufficiency of the Basic Documents, other than the
certificate of authentication on the Trust Certificates, and the Owner
Trustee shall in no event assume or incur any liability, duty, or obligation
to any Noteholder or to any Owner, other than as expressly provided for
herein or expressly agreed to in the Basic Documents;
(f) The Owner Trustee shall not be liable for the default or misconduct
of the Administrator, the Seller or Depositor, the Company, the Indenture
Trustee or the Servicer under any of the Basic Documents or otherwise and the
Owner Trustee shall have no obligation or liability to perform the
obligations of the Trust under this Agreement or the Basic Documents that are
required to be performed by the Administrator under the Administration
Agreement, the Indenture Trustee under the Indenture or the Servicer or the
Seller or Depositor under the Servicing Agreement; and
(g) The Owner Trustee shall be under no obligation to exercise any of
the rights or powers vested in it by this Agreement, or to institute, conduct
or defend any litigation under this Agreement or otherwise or in relation to
this Agreement or any Basic Document, at the request, order or direction of
any of the Owners, unless such Owners have offered to the Owner Trustee
security or indemnity satisfactory to it against the costs, expenses and
liabilities that may be incurred by the Owner Trustee therein or thereby.
The right of the Owner Trustee to perform any discretionary act enumerated in
this Agreement or in any Basic Document shall not be construed as a duty, and
the Owner Trustee shall not be answerable for other than its negligence or
willful misconduct in the performance of any such act.
SECTION 7.02. Furnishing of Documents. The Owner Trustee shall furnish
-----------------------
to the Owners promptly upon receipt of a written request therefor, duplicates
or copies of all reports, notices, requests, demands, certificates, financial
statements and any other instruments furnished to the Owner Trustee under the
Basic Documents.
SECTION 7.03. Representations and Warranties. The Owner Trustee hereby
------------------------------
represents and warrants to the Company, for the benefit of the Owners, that:
(a) It is a banking corporation duly organized and validly existing in
good standing under the laws of the State of Delaware. It has all requisite
corporate power and authority to execute, deliver and perform its obligations
under this Agreement.
(b) It has taken all corporate action necessary to authorize the
execution and delivery by it of this Agreement, and this Agreement will be
executed and delivered by one of its officers who is duly authorized to
execute and deliver this Agreement on its behalf.
(c) Neither the execution nor the delivery by it of this Agreement, nor
the consummation by it of the transactions contemplated hereby nor compliance
by it with any of the terms or provisions hereof will contravene any federal
or Delaware law, governmental rule or regulation governing the banking or
trust powers of the Owner Trustee or any judgment or order binding on it, or
constitute any default under its charter documents or bylaws or any
indenture, mortgage, contract, agreement or instrument to which it is a party
or by which any of its properties may be bound.
SECTION 7.04. Reliance; Advice of Counsel. (a) The Owner Trustee
----------------------------
shall incur no liability to anyone in acting upon any signature, instrument,
notice, resolution, request, consent, order, certificate, report, opinion,
bond, or other document or paper believed by it to be genuine and believed by
it to be signed by the proper party or parties. The Owner Trustee may accept
a certified copy of a resolution of the board of directors or other governing
body of any corporate party as conclusive evidence that such resolution has
been duly adopted by such body and that the same is in full force and effect.
As to any fact or matter the method of determination of which is not
specifically prescribed herein, the Owner Trustee may for all purposes hereof
rely on a certificate, signed by the president or any vice president or by
the treasurer or other authorized officers of the relevant party, as to such
fact or matter and such certificate shall constitute full protection to the
Owner Trustee for any action taken or omitted to be taken by it in good faith
in reliance thereon.
(b) In the exercise or administration of the trusts hereunder and in
the performance of its duties and obligations under this Agreement or the
Basic Documents, the Owner Trustee (i) may act directly or through its agents
or attorneys pursuant to agreements entered into with any of them, and the
Owner Trustee shall not be liable for the conduct or misconduct of such
agents or attorneys if such agents or attorneys shall have been selected by
the Owner Trustee with reasonable care, and (ii) may consult with counsel,
accountants and other skilled Persons to be selected with reasonable care and
employed by it. The Owner Trustee shall not be liable for anything done,
suffered or omitted in good faith by it in accordance with the written
opinion or advice of any such counsel, accountants or other such Persons and
not contrary to this Agreement or any Basic Document.
SECTION 7.05. Not Acting in Individual Capacity. Except as provided
---------------------------------
in this Article VII, in accepting the trusts hereby created
(_____________________) acts solely as Owner Trustee hereunder and not in its
individual capacity, and all Persons having any claim against the Owner
Trustee by reason of the transactions contemplated by this Agreement or any
Basic Document shall look only to the Owner Trust Estate for payment or
satisfaction thereof.
SECTION 7.06. Owner Trustee Not Liable for Trust Certificates or
--------------------------------------------------
Mortgage Loans. The recitals contained herein and in the Certificates (other
- - ----------------
than the signature and countersignature of the Owner Trustee on the Trust
Certificates) shall be taken as the statements of the Depositor and the
Company, and the Owner Trustee assumes no responsibility for the correctness
thereof. The Owner Trustee makes no representations as to the validity or
sufficiency of this Agreement, of any Basic Document or of the Trust
Certificates (other than the signature and countersignature of the Owner
Trustee on the Trust Certificates) or the Notes, or of any Mortgage Loan or
related documents. The Owner Trustee shall at no time have any
responsibility or liability for or with respect to the legality, validity and
enforceability of any Mortgage Loan, or for or with respect to the
sufficiency of the Owner Trust Estate or its ability to generate the payments
to be distributed to Certificateholders under this Agreement or the
Noteholders under the Indenture, including, without limitation: the
existence, condition and ownership of any property securing a Mortgage Loan;
the existence and enforceability of any insurance thereon; the validity of
the assignment of any Mortgage Loan to the Trust or of any intervening
assignment; the performance or enforcement of any Mortgage Loan; the
compliance by the Depositor, the Company or the Servicer with any warranty or
representation made under any Basic Document or in any related document or
the accuracy of any such warranty or representation, or any action of the
Administrator, the Indenture Trustee or the Servicer or any subservicer taken
in the name of the Owner Trustee.
SECTION 7.07. Owner Trustee May Own Trust Certificates and Notes. The
--------------------------------------------------
Owner Trustee in its individual or any other capacity may become the owner or
pledgee of Trust Certificates or Notes and may deal with the Depositor, the
Company, the Administrator, the Indenture Trustee and the Servicer in banking
transactions with the same rights as it would have if it were not Owner
Trustee.
ARTICLE VIII
Compensation of Owner Trustee
-----------------------------
SECTION 8.01. Owner Trustee's Fees and Expenses. The Owner Trustee
---------------------------------
shall receive as compensation for its services hereunder such fees as have
been separately agreed upon before the date hereof between the Depositor and
the Owner Trustee, and the Owner Trustee shall be entitled to be reimbursed
by the Depositor for its other reasonable expenses hereunder, including the
reasonable compensation, expenses and disbursements of such agents,
representatives, experts and counsel as the Owner Trustee may employ in
connection with the exercise and performance of its rights and its duties
hereunder.
SECTION 8.02. Indemnification. The Depositor shall be liable as
---------------
primary obligor for, and shall indemnify the Owner Trustee and its
successors, assigns, agents and servants (collectively, the "Indemnified
Parties") from and against, any and all liabilities, obligations, losses,
damages, taxes, claims, actions and suits, and any and all reasonable costs,
expenses and disbursements (including reasonable legal fees and expenses) of
any kind and nature whatsoever (collectively, "Expenses") which may at any
time be imposed on, incurred by, or asserted against the Owner Trustee or any
Indemnified Party in any way relating to or arising out of this Agreement,
the Basic Documents, the Owner Trust Estate, the administration of the Owner
Trust Estate or the action or inaction of the Owner Trustee hereunder, except
only that the Depositor shall not be liable for or required to indemnify an
Indemnified Party from and against Expenses arising or resulting from any of
the matters described in the third sentence of Section 7.01. The indemnities
contained in this Section shall survive the resignation or termination of the
Owner Trustee or the termination of this Agreement. In any event of any
claim, action or proceeding for which indemnity will be sought pursuant to
this Section, the Owner Trustee's choice of legal counsel shall be subject to
the approval of the Depositor, which approval shall not be unreasonably
withheld.
SECTION 8.03. Payments to the Owner Trustee. Any amounts paid to the
-----------------------------
Owner Trustee pursuant to this Article VIII shall be deemed not to be a part
of the Owner Trust Estate immediately after such payment.
ARTICLE IX
Termination of Trust Agreement
------------------------------
SECTION 9.01. Termination of Trust Agreement. (a) This Agreement
------------------------------
(other than Article VIII) and the Trust shall terminate and be of no further
force or effect (i) upon the final distribution by the Owner Trustee of all
moneys or other property or proceeds of the Owner Trust Estate in accordance
with the terms of the Indenture, the Servicing Agreement and Article V or
(ii) at the time provided in Section 9.02. The bankruptcy, liquidation,
dissolution, death or incapacity of any Owner, other than the Company as
described in Section 9.02, shall not (x) operate to terminate this Agreement
or the Trust or (y) entitle such Owner's legal representatives or heirs to
claim an accounting or to take any action or proceeding in any court for a
partition or winding up of all or any part of the Trust or Owner Trust Estate
or (z) otherwise affect the rights, obligations and liabilities of the
parties hereto.
(b) Except as provided in Section 9.01(a), none of the Depositor, the
Company or any Owner shall be entitled to revoke or terminate the Trust.
(c) Notice of any termination of the Trust, specifying the Distribution
Date upon which Certificateholders shall surrender their Trust Certificates
to the Paying Agent for payment of the final distribution and cancellation,
shall be given by the Owner Trustee by letter to Certificateholders mailed
within five Business Days of receipt of notice of such termination from the
Servicer stating (i) the Distribution Date upon or with respect to which
final payment of the Trust Certificates shall be made upon presentation and
surrender of the Trust Certificates at the office of the Paying Agent therein
designated, (ii) the amount of any such final payment and (iii) that the
Record Date otherwise applicable to such Distribution Date is not applicable,
payments being made only upon presentation and surrender of the Trust
Certificates at the office of the Paying Agent therein specified. The Owner
Trustee shall give such notice to the Certificate Registrar (if other than
the Owner Trustee) and the Paying Agent at the time such notice is given to
Certificateholders. Upon presentation and surrender of the Trust
Certificates, the Paying Agent shall cause to be distributed to
Certificateholders amounts distributable on such Distribution Date pursuant
to Section 5.02.
In the event that all of the Certificateholders shall not surrender
their Trust Certificates for cancellation within six months after the date
specified in the above mentioned written notice, the Owner Trustee shall give
a second written notice to the remaining Certificateholders to surrender
their Trust Certificates for cancellation and receive the final distribution
with respect thereto. If within one year after the second notice all the
Trust Certificates shall not have been surrendered for cancellation, the
Owner Trustee may take appropriate steps, or may appoint an agent to take
appropriate steps, to contact the remaining Certificateholders concerning
surrender of their Trust Certificates, and the cost thereof shall be paid out
of the funds and other assets that shall remain subject to this Agreement.
Any funds remaining in the Trust after exhaustion of such remedies shall be
distributed by the Owner Trustee to the Company.
(d) Upon the winding up of the Trust and its termination, the Owner
Trustee shall cause the Certificate of Trust to be cancelled by filing a
certificate of cancellation with the Secretary of State in accordance with
the provisions of Section 3810 of the Business Trust Statute.
SECTION 9.02. Dissolution upon Bankruptcy of the Company. In the event
------------------------------------------
that an Insolvency Event shall occur with respect to the Company, this
Agreement shall be terminated in accordance with Section 9.01 90 days after
the date of such Insolvency Event, unless, before the end of such 90-day
period, the Owner Trustee shall have received written instructions from
Holders of Certificates (other than the Company) representing more than 50%
of the Certificate Balance (not including the Certificate Balance of the
Trust Certificates held by the Company), to the effect that each such party
disapproves of the liquidation of the Mortgage Loans and of the Trust.
Promptly after the occurrence of any Insolvency Event with respect to the
Company, (A) the Company shall give the Indenture Trustee and the Owner
Trustee written notice of such Insolvency Event, (B) the Owner Trustee shall,
upon the receipt of such written notice from the Company, give prompt written
notice to the Certificateholders and the Indenture Trustee, of the occurrence
of such event and (C) the Indenture Trustee shall, upon receipt of written
notice of such Insolvency Event from the Owner Trustee or the Company, give
prompt written notice to the Noteholders of the occurrence of such event;
provided, however, that any failure to give a notice required by this
sentence shall not prevent or delay, in any manner, a termination of the
Trust pursuant to the first sentence of this Section 9.02. Upon a
termination pursuant to this Section, the Owner Trustee shall direct the
Indenture Trustee promptly to sell the assets of the Trust (other than the
Trust Accounts and the Certificate Distribution Account) and, on behalf of
the Company, in a commercially reasonable manner and on commercially
reasonable terms. The proceeds of such a sale of the assets of the Trust
shall be treated as collections under the Servicing Agreement.
ARTICLE X
Successor Owner Trustees and Additional Owner Trustees
------------------------------------------------------
SECTION 10.01. Eligibility Requirements for Owner Trustee. The
------------------------------------------
Owner Trustee shall at all times be a corporation satisfying the provisions
of Section 3807(a) of the Business Trust Statute; authorized to exercise
corporate trust powers; having a combined capital and surplus of at least
$50,000,000 and subject to supervision or examination by federal or state
authorities; and having (or having a parent that has) a rating of at least
(____) by (__________). If such corporation shall publish reports of
condition at least annually pursuant to law or to the requirements of the
aforesaid supervising or examining authority, then for the purpose of this
Section, the combined capital and surplus of such corporation shall be deemed
to be its combined capital and surplus as set forth in its most recent report
of condition so published. In case at any time the Owner Trustee shall cease
to be eligible in accordance with the provisions of this Section, the Owner
Trustee shall resign immediately in the manner and with the effect specified
in Section 10.02.
SECTION 10.02. Resignation or Removal of Owner Trustee. The Owner
---------------------------------------
Trustee may at any time resign and be discharged from the trusts hereby
created by giving written notice thereof to the Administrator. Upon
receiving such notice of resignation, the Administrator shall promptly
appoint a successor Owner Trustee by written instrument, in duplicate, one
copy of which instrument shall be delivered to the resigning Owner Trustee
and one copy to the successor Owner Trustee. If no successor Owner Trustee
shall have been so appointed and have accepted appointment within 30 days
after the giving of such notice of resignation, the resigning Owner Trustee
may petition any court of competent jurisdiction for the appointment of a
successor Owner Trustee.
If at any time the Owner Trustee shall cease to be eligible in
accordance with the provisions of Section 10.01 and shall fail to resign
after written request therefor by the Administrator, or if at any time the
Owner Trustee shall be legally unable to act, or shall be adjudged bankrupt
or insolvent, or a receiver of the Owner Trustee or of its property shall be
appointed, or any public officer shall take charge or control of the Owner
Trustee or of its property or affairs for the purpose of rehabilitation,
conservation or liquidation, then the Administrator may remove the Owner
Trustee. If the Administrator shall remove the Owner Trustee under the
authority of the immediately preceding sentence, the Administrator shall
promptly appoint a successor Owner Trustee by written instrument, in
duplicate, one copy of which instrument shall be delivered to the outgoing
Owner Trustee so removed and one copy to the successor Owner Trustee, and
shall pay all fees owed to the outgoing Owner Trustee.
Any resignation or removal of the Owner Trustee and appointment of a
successor Owner Trustee pursuant to any of the provisions of this Section
shall not become effective until acceptance of appointment by the successor
Owner Trustee pursuant to Section 10.03 and payment of all fees and expenses
owed to the outgoing Owner Trustee. The Administrator shall provide notice
of such resignation or removal of the Owner Trustee to each of the Rating
Agencies.
SECTION 10.03. Successor Owner Trustee. Any successor Owner
-----------------------
Trustee appointed pursuant to Section 10.02 shall execute, acknowledge and
deliver to the Administrator and to its predecessor Owner Trustee an
instrument accepting such appointment under this Agreement, and thereupon the
resignation or removal of the predecessor Owner Trustee shall become
effective, and such successor Owner Trustee, without any further act, deed or
conveyance, shall become fully vested with all the rights, powers, duties and
obligations of its predecessor under this Agreement, with like effect as if
originally named as Owner Trustee. The predecessor Owner Trustee shall upon
payment of its fees and expenses deliver to the successor Owner Trustee all
documents and statements and monies held by it under this Agreement; and the
Administrator and the predecessor Owner Trustee shall execute and deliver
such instruments and do such other things as may reasonably be required for
fully and certainly vesting and confirming in the successor Owner Trustee all
such rights, powers, duties and obligations.
No successor Owner Trustee shall accept appointment as provided in this
Section unless at the time of such acceptance such successor Owner Trustee
shall be eligible pursuant to Section 10.01.
Upon acceptance of appointment by a successor Owner Trustee pursuant to
this Section, the Administrator shall mail notice thereof to all
Certificateholders, the Indenture Trustee, the Noteholders and the Rating
Agencies. If the Administrator shall fail to mail such notice within 10 days
after acceptance of such appointment by the successor Owner Trustee, the
successor Owner Trustee shall cause such notice to be mailed at the expense
of the Administrator.
SECTION 10.04. Merger or Consolidation of Owner Trustee. Any
----------------------------------------
corporation into which the Owner Trustee may be merged or converted or with
which it may be consolidated, or any corporation resulting from any merger,
conversion or consolidation to which the Owner Trustee shall be a party, or
any corporation succeeding to all or substantially all of the corporate trust
business of the Owner Trustee, shall be the successor of the Owner Trustee
hereunder, without the execution or filing of any instrument or any further
act on the part of any of the parties hereto, anything herein to the contrary
notwithstanding; provided, that such corporation shall be eligible pursuant
to Section 10.01 and, provided, further, that the Owner Trustee shall mail
notice of such merger or consolidation to the Rating Agencies.
SECTION 10.05. Appointment of Co-Trustee or Separate Trustee.
---------------------------------------------
Notwithstanding any other provisions of this Agreement, at any time, for the
purpose of meeting any legal requirements of any jurisdiction in which any
part of the Owner Trust Estate may at the time be located, the Administrator
and the Owner Trustee acting jointly shall have the power and shall execute
and deliver all instruments to appoint one or more Persons approved by the
Administrator and Owner Trustee to act as co-trustee, jointly with the Owner
Trustee, or as separate trustee or separate trustees, of all or any part of
the Owner Trust Estate, and to vest in such Person, in such capacity, such
title to the Trust or any part thereof and, subject to the other provisions
of this Section, such powers, duties, obligations, rights and trusts as the
Administrator and the Owner Trustee may consider necessary or desirable. If
the Administrator shall not have joined in such appointment within 15 days
after the receipt by it of a request so to do, the Owner Trustee alone shall
have the power to make such appointment. No co-trustee or separate trustee
under this Agreement shall be required to meet the terms of eligibility as a
successor Owner Trustee pursuant to Section 10.01 and no notice of the
appointment of any co-trustee or separate trustee shall be required pursuant
to Section 10.03.
Each separate trustee and co-trustee shall, to the extent permitted by
law, be appointed and act subject to the following provisions and conditions:
(a) All rights, powers, duties and obligations conferred or imposed
upon the Owner Trustee shall be conferred upon and exercised or performed by
the Owner Trustee and such separate trustee or co-trustee jointly (it being
understood that such separate trustee or co-trustee is not authorized to act
separately without the Owner Trustee joining in such act), except to the
extent that under any law of any jurisdiction in which any particular act or
acts are to be performed, the Owner Trustee shall be incompetent or
unqualified to perform such act or acts, in which event such rights, powers,
duties and obligations (including the holding of title to the Owner Trust
Estate or any portion thereof in any such jurisdiction) shall be exercised
and performed singly by such separate trustee or co-trustee, but solely at
the direction of the Owner Trustee;
(b) No trustee under this Agreement shall be personally liable by
reason of any act or omission of any other trustee under this Agreement; and
(c) The Administrator and the Owner Trustee acting jointly may at any
time accept the resignation of or remove any separate trustee or co-trustee.
Any notice, request or other writing given to the Owner Trustee shall be
deemed to have been given to each of the then separate trustees and co-
trustees, as effectively as if given to each of them. Every instrument
appointing any separate trustee or co-trustee shall refer to this Agreement
and the conditions of this Article. Each separate trustee and co-trustee,
upon its acceptance of the trusts conferred, shall be vested with the estates
or property specified in its instrument of appointment, either jointly with
the Owner Trustee or separately, as may be provided therein, subject to all
the provisions of this Agreement, specifically including every provision of
this Agreement relating to the conduct of, affecting the liability of, or
affording protection to, the Owner Trustee. Each such instrument shall be
filed with the Owner Trustee and a copy thereof given to the Administrator.
Any separate trustee or co-trustee may at any time appoint the Owner
Trustee as its agent or attorney-in-fact with full power and authority, to
the extent not prohibited by law, to do any lawful act under or in respect of
this Agreement on its behalf and in its name. If any separate trustee or co-
trustee shall die, become incapable of acting, resign or be removed, all of
its estates, properties, rights, remedies and trusts shall vest in and be
exercised by the Owner Trustee, to the extent permitted by law, without the
appointment of a new or successor co-trustee or separate trustee.
ARTICLE XI
Miscellaneous
-------------
SECTION 11.01. Supplements and Amendments. This Agreement may be
--------------------------
amended by the Depositor, the Company and the Owner Trustee, with prior
written notice to the Rating Agencies, without the consent of any of the
Noteholders or the Certificateholders, to cure any ambiguity, to correct or
supplement any provisions in this Agreement or for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions
in this Agreement or of modifying in any manner the rights of the Noteholders
or the Certificateholders; provided, however, that such action shall not, as
evidenced by an Opinion of Counsel, adversely affect in any material respect
the interests of any Noteholder or Certificateholder.
This Agreement may also be amended from time to time by the Depositor,
the Company and the Owner Trustee, with prior written notice to the Rating
Agencies, with the consent of the Holders (as defined in the Indenture) of
Notes evidencing not less than a majority of the Principal Balance of the
Notes and the consent of the Holders of Certificates evidencing not less than
a majority of the Certificate Balance, for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions
of this Agreement or of modifying in any manner the rights of the Noteholders
or the Certificateholders; provided, however, that no such amendment shall
(a) increase or reduce in any manner the amount of, or accelerate or delay
the timing of, collections of payments on Mortgage Loans or distributions
that shall be required to be made for the benefit of the Noteholders or the
Certificateholders or (b) reduce the aforesaid percentage of the Principal
Balance of the Notes and the Certificate Balance required to consent to any
such amendment, without the consent of the holders of all the outstanding
Notes and Certificates.
Promptly after the execution of any such amendment or consent, the Owner
Trustee shall furnish written notification of the substance of such amendment
or consent to each Certificateholder, the Indenture Trustee and each of the
Rating Agencies.
It shall not be necessary for the consent of Certificateholders,
Noteholders or the Indenture Trustee pursuant to this Section to approve the
particular form of any proposed amendment or consent, but it shall be
sufficient if such consent shall approve the substance thereof. The manner
of obtaining such consents (and any other consents of Certificateholders
provided for in this Agreement or in any other Basic Document) and of
evidencing the authorization of the execution thereof by Certificateholders
shall be subject to such reasonable requirements as the Owner Trustee may
prescribe.
Promptly after the execution of any amendment to the Certificate of
Trust, the Owner Trustee shall cause the filing of such amendment with the
Secretary of State.
Prior to the execution of any amendment to this Agreement or the
Certificate of Trust, the Owner Trustee shall be entitled to receive and rely
upon an Opinion of Counsel stating that the execution of such amendment is
authorized or permitted by this Agreement. The Owner Trustee may, but shall
not be obligated to, enter into any such amendment that affects the Owner
Trustee's own rights, duties or immunities under this Agreement or otherwise.
SECTION 11.02. No Legal Title to Owner Trust Estate in Owners. The
----------------------------------------------
Owners shall not have legal title to any part of the Owner Trust Estate. The
Owners shall be entitled to receive distributions with respect to their
undivided ownership interest therein only in accordance with Articles V and
IX. No transfer, by operation of law or otherwise, of any right, title or
interest of the Owners to and in their ownership interest in the Owner Trust
Estate shall operate to terminate this Agreement or the trusts hereunder or
entitle any transferee to an accounting or to the transfer to it of legal
title to any part of the Owner Trust Estate.
SECTION 11.03. Limitations on Rights of Others. Except for
-------------------------------
Section 2.07, the provisions of this Agreement are solely for the benefit of
the Owner Trustee, the Depositor, the Company, the Owners, the Administrator
and, to the extent expressly provided herein, the Indenture Trustee and the
Noteholders, and nothing in this Agreement (other than Section 2.07), whether
express or implied, shall be construed to give to any other Person any legal
or equitable right, remedy or claim in the Owner Trust Estate or under or in
respect of this Agreement or any covenants, conditions or provisions
contained herein.
SECTION 11.04. Notices. (a) Unless otherwise expressly specified
-------
or permitted by the terms hereof, all notices shall be in writing and shall
be deemed given upon receipt by the intended recipient or three Business Days
after mailing if mailed by certified mail, postage prepaid (except that
notice to the Owner Trustee shall be deemed given only upon actual receipt by
the Owner Trustee), if to the Owner Trustee, addressed to the Corporate Trust
Office; if to the Depositor, addressed to Headlands Mortgage Securities Inc.,
700 Larkspur Landing Circle, Suite 240, Larkspur, California 94939,
Attention: (______________); if to the Company, addressed to
(_____________________________), Attention: (____________); or, as to each
party, at such other address as shall be designated by such party in a
written notice to each other party.
(b) Any notice required or permitted to be given to a Certificateholder
shall be given by first-class mail, postage prepaid, at the address of such
Holder as shown in the Certificate Register. Any notice so mailed within the
time prescribed in this Agreement shall be conclusively presumed to have been
duly given, whether or not the Certificateholder receives such notice.
SECTION 11.05. Severability. Any provision of this Agreement that
------------
is prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof, and
any such prohibition or unenforceability in any jurisdiction shall not
invalidate or render unenforceable such provision in any other jurisdiction.
SECTION 11.06. Separate Counterparts. This Agreement may be
---------------------
executed by the parties hereto in separate counterparts, each of which when
so executed and delivered shall be an original, but all such counterparts
shall together constitute but one and the same instrument.
SECTION 11.07. Successors and Assigns. All covenants and
----------------------
agreements contained herein shall be binding upon, and inure to the benefit
of, each of the Depositor, the Company, the Owner Trustee and its successors
and each Owner and its successors and permitted assigns, all as herein
provided. Any request, notice, direction, consent, waiver or other
instrument or action by an Owner shall bind the successors and assigns of
such Owner.
SECTION 11.08. Covenants of the Company. The Company will not at
------------------------
any time institute against the Trust any bankruptcy proceedings under any
United States federal or state bankruptcy or similar law in connection with
any obligations relating to the Trust Certificates, the Notes, the Trust
Agreement or any of the Basic Documents.
SECTION 11.09. No Petition. The Owner Trustee, by entering into
-----------
this Agreement, each Certificateholder, by accepting a Trust Certificate, and
the Indenture Trustee and each Noteholder, by accepting the benefits of this
Agreement, hereby covenant and agree that they will not at any time institute
against the Company or the Trust, or join in any institution against the
Company or the Trust of, any bankruptcy proceedings under any United States
federal or state bankruptcy or similar law in connection with any obligations
relating to the Trust Certificates, the Notes, this Agreement or any of the
Basic Documents.
SECTION 11.10. No Recourse. Each Certificateholder by accepting
-----------
a Trust Certificate acknowledges that such Certificateholder's Trust
Certificates represent beneficial interests in the Trust only and do not
represent interests in or obligations of the Depositor, the Servicer, the
Company, the Administrator, the Owner Trustee, the Indenture Trustee or any
Affiliate thereof and no recourse may be had against such parties or their
assets, except as may be expressly set forth or contemplated in this
Agreement, the Trust Certificates or the Basic Documents.
SECTION 11.11. Headings. The headings of the various Articles and
--------
Sections herein are for convenience of reference only and shall not define or
limit any of the terms or provisions hereof.
SECTION 11.12. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED
-------------
IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, WITHOUT REFERENCE TO
ITS CONFLICT OF LAW PROVISIONS, AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF
THE PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS.
SECTION 11.13. Depositor Payment Obligation. The Depositor shall
----------------------------
be responsible for payment of the Administrator's fees under the
Administration Agreement and shall reimburse the Administrator for all
expenses and liabilities of the Administrator incurred thereunder.
* * * * * *
IN WITNESS WHEREOF, the parties hereto have caused this Amended and
Restated Trust Agreement to be duly executed by their respective officers
hereunto duly authorized, as of the day and year first above written.
HEADLANDS MORTGAGE SECURITIES INC.,
as Depositor,
by:
----------------------------------
Name:
Title:
(______________________________),
by:
-----------------------------------
Name:
Title:
(_____________________),
not in its individual capacity but solely as
Owner Trustee,
by:
-----------------------------------
Name:
Title:
EXHIBIT A
FORM OF TRUST CERTIFICATE
-------------------------
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE
OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO
THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT,
AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH
OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY
PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF
FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE
REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
NUMBER $_________
R-___________ CUSIP NO. _________
HEADLANDS HOME EQUITY LOAN TRUST 199__-__
(_____)% HOME EQUITY LOAN ASSET-BACKED CERTIFICATES, SERIES 199__-__
evidencing a fractional undivided beneficial ownership interest in the Trust,
as defined below, the property of which includes a pool of (fixed-rate)
(adjustable rate) home equity revolving credit line loans caused to be sold
to the Trust by (_______________) pursuant to the Mortgage Loan Purchase
Agreement.
(This Trust Certificate does not represent an interest in or obligation of
HEADLANDS MORTGAGE SECURITIES INC., ( ) or any of their
respective affiliates, except to the extent described below.)
THIS CERTIFIES THAT (________________________) is the registered owner
of (____________________) DOLLARS nonassessable, fully paid, fractional
undivided interest in HEADLANDS HOME EQUITY LOAN TRUST 199__-__ (the "Trust")
formed by Headlands Mortgage Securities Inc., a Delaware corporation (the
"Depositor"), and (_______________), a (__________) corporation (the
"Company").
OWNER TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the Trust Certificates referred to in the within-mentioned
Trust Agreement.
(___________________), (___________________),
as Owner Trustee or as Owner Trustee
by: by: ( ),
--------------------------------
Authorized Signatory as Authenticating Agent
by:
------------------------
Authorized Signatory
The Trust was created pursuant to a Trust Agreement, dated as of
, 199__ (the "Trust Agreement"), among the Depositor, the
- - ---------------
Company and (____________), as owner trustee (the "Owner Trustee"), a summary
of certain of the pertinent provisions of which is set forth below. To the
extent not otherwise defined herein, the capitalized terms used herein have
the meanings assigned to them in the Trust Agreement or the Servicing
Agreement dated as of ___________, 199__ (as amended and supplemented from
time to time, the "Servicing Agreement"), among the Trust, the Depositor and
(_______________), as servicer (the "Servicer"), as applicable.
This Certificate is one of a duly authorized issue of Home Equity
Loan Asset-Backed Certificates, Series 199__-__ (herein called the "Trust
Certificates"). Also issued under the Indenture dated as of ___________,
199__ between the Trust and (________________), as indenture trustee, are the
(_______) classes of Notes designated as (_________________________
_____________________________________________________________________________
________ ______________________________________________) (collectively, the
"Notes"). This Trust Certificate is issued under and is subject to the
terms, provisions and conditions of the Trust Agreement, to which Trust
Agreement the Holder of this Trust Certificate by virtue of its acceptance
hereof assents and by which such Holder is bound. The property of the Trust
consists of a pool of (adjustable-) (fixed-) rate home equity loan revolving
credit line loans made or to be made int he future (the "Mortgage Loans"),
under certain home equity revolving credit line loan agreements and secured
primarily by second (deeds of trust) (mortgages) on residential properties
that are primarily one- to four-family properties (the "Mortgaged
Properties"); the collections in respect of the Mortgage Loans received after
the Cut-Off Date; property that secured a Mortgage Loan which has been
acquired by foreclosure or deed in lieu of foreclosure; (a surety bond) (a
letter of credit); an assignment of the Depositor's rights under the Mortgage
Loan Purchase Agreement; rights under certain hazard insurance policies
covering the Mortgaged Properties; and certain other property. (The rights
of the Holders of the Trust Certificates are subordinated to the rights of
the Holders of the Notes, as set forth in the Servicing Agreement.)
Under the Trust Agreement, there will be distributed on the
(_______) day of each month or, if such (_______) day is not a Business Day,
the next Business Day (each, a "Distribution Date"), commencing on
___________, 199__, to the Person in whose name this Trust Certificates is
registered at the close of business on the first day of the month or, if
Definitive Certificates are issued, the (_______) day of the prior month (the
"Record Date"), such Certificateholder's fractional undivided interest in the
amount to be distributed to Certificateholders on such Distribution Date. No
distributions of principal will be made on any Certificate until all of the
Notes have been paid in full.
(The Holder of this Trust Certificate acknowledges and agrees that
its rights to receive distributions in respect of this Trust Certificate are
subordinated to the rights of the Noteholders as described in the Servicing
Agreement and the Indenture.)
It is the intent of the Depositor, the Company, the Servicer and
the Certificateholders that, for purposes of federal income, state and local
income and single business tax and any other income taxes, the Trust will be
treated as a partnership and the Certificateholders (including the Company)
will be treated as partners in that partnership. The Company and the other
Certificateholders, by acceptance of a Trust Certificate, agree to treat, and
to take no action inconsistent with the treatment of, the Trust Certificates
for such tax purposes as partnership interests in the Trust.
Each Certificateholder or Certificate Owner, by its acceptance of a
Trust Certificate or, in the case of a Certificate Owner, a beneficial
interest in a Trust Certificate, covenants and agrees that such
Certificateholder or Certificate Owner, as the case may be, will not at any
time institute against the Company, or join in any institution against the
Company of, any bankruptcy, reorganization, arrangement, insolvency or
liquidation proceedings, or other proceedings under any United States federal
or state bankruptcy or similar law in connection with any obligations
relating to the Trust Certificates, the Notes, the Trust Agreement or any of
the Basic Documents.
Distributions on this Trust Certificate will be made as provided in
the Trust Agreement by the Owner Trustee by wire transfer or check mailed to
the Certificateholder of record in the Certificate Register without the
presentation or surrender of this Trust Certificate or the making of any
notation hereon, except that with respect to Trust Certificates registered on
the Record Date in the name of the nominee of the Clearing Agency (initially,
such nominee to be Cede & Co.), payments will be made by wire transfer in
immediately available funds to the account designated by such nominee.
Except as otherwise provided in the Trust Agreement and notwithstanding the
above, the final distribution on this Trust Certificate will be made after
due notice by the Owner Trustee of the pendency of such distribution and only
upon presentation and surrender of this Trust Certificate at the office or
agency maintained for that purpose by the Owner Trustee in the Borough of
Manhattan, The City of New York.
Reference is hereby made to the further provisions of this Trust
Certificate set forth on the reverse hereof, which further provisions shall
for all purposes have the same effect as if set forth at this place.
Unless the certificate of authentication hereon shall have been
executed by an authorized officer of the Owner Trustee, by manual signature,
this Trust Certificate shall not entitle the Holder hereof to any benefit
under the Trust Agreement or the Servicing Agreement or be valid for any
purpose.
THIS TRUST CERTIFICATE SHALL BE CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF DELAWARE, WITHOUT REFERENCE TO ITS CONFLICT OF LAW
PROVISIONS, AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE PARTIES HEREUNDER
SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS.
IN WITNESS WHEREOF, the Owner Trustee, on behalf of the Trust and
not in its individual capacity, has caused this Trust Certificate to be duly
executed.
HEADLANDS MORTGAGE SECURITIES INC.
by: (_____________________), not in its
individual capacity but solely as Owner
Trustee
Dated: by:
----------------------------------------
Authorized Signatory
(REVERSE OF TRUST CERTIFICATE)
The Trust Certificates do not represent an obligation of, or an
interest in, the Depositor, the Servicer, the Company, the Owner Trustee or
any affiliates of any of them and no recourse may be had against such parties
or their assets, except as expressly set forth or contemplated herein or in
the Trust Agreement or the Basic Documents. In addition, this Trust
Certificate is not guaranteed by any governmental agency or instrumentality
and is limited in right of payment to certain collections and recoveries with
respect to the Mortgage Loans (and certain other amounts), all as more
specifically set forth herein and in the Servicing Agreement. A copy of each
of the Servicing Agreement and the Trust Agreement may be examined by any
Certificateholder upon written request during normal business hours at the
principal office of the Depositor and at such other places, if any,
designated by the Depositor.
The Trust Agreement permits, with certain exceptions therein
provided, the amendment thereof and the modification of the rights and
obligations of the Depositor and the Company and the rights of the
Certificateholders under the Trust Agreement at any time by the Depositor,
the Company and the Owner Trustee with the consent of the Holders of the
Trust Certificates and the Notes, each voting as a class, evidencing not less
than a majority of the Certificate Balance and the outstanding principal
balance of the Notes of each such class. Any such consent by the Holder of
this Trust Certificate shall be conclusive and binding on such Holder and on
all future Holders of this Trust Certificate and of any Trust Certificate
issued upon the transfer hereof or in exchange herefor or in lieu hereof,
whether or not notation of such consent is made upon this Trust Certificate.
The Trust Agreement also permits the amendment thereof, in certain limited
circumstances, without the consent of the Holders of any of the Trust
Certificates.
As provided in the Trust Agreement and subject to certain
limitations therein set forth, the transfer of this Trust Certificate is
registerable in the Certificate Register upon surrender of this Trust
Certificate for registration of transfer at the offices or agencies of the
Certificate Registrar maintained by the Owner Trustee in the Borough of
Manhattan, The City of New York, accompanied by a written instrument of
transfer in form satisfactory to the Owner Trustee and the Certificate
Registrar duly executed by the Holder hereof or such Holder's attorney duly
authorized in writing, and thereupon one or more new Trust Certificates of
authorized denominations evidencing the same aggregate interest in the Trust
will be issued to the designated transferee. The initial Certificate
Registrar appointed under the Trust Agreement is (_________________), New
York, New York.
Except as provided in the Trust Agreement, the Trust Certificates
are issuable only as registered Trust Certificates without coupons in
denominations of $(__________) and in integral multiples of $(_______) in
excess thereof. As provided in the Trust Agreement and subject to certain
limitations therein set forth, Trust Certificates are exchangeable for new
Trust Certificates of authorized denominations evidencing the same aggregate
denomination, as requested by the Holder surrendering the same. No service
charge will be made for any such registration of transfer or exchange, but
the Owner Trustee or the Certificate Registrar may require payment of a sum
sufficient to cover any tax or governmental charge payable in connection
therewith.
The Owner Trustee, the Certificate Registrar and any agent of the
Owner Trustee or the Certificate Registrar may treat the Person in whose name
this Certificate is registered as the owner hereof for all purposes, and none
of the Owner Trustee, the Certificate Registrar or any such agent shall be
affected by any notice to the contrary.
The obligations and responsibilities created by the Trust Agreement
and the Trust created thereby shall terminate upon the payment to
Certificateholders of all amounts required to be paid to them pursuant to the
Trust Agreement and the Servicing Agreement and the disposition of all
property held as part of the Owner Trust Estate. The Servicer of the
Mortgage Loans may at its option purchase the Owner Trust Estate at a price
specified in the Servicing Agreement, and such purchase of the Mortgage Loans
and other property of the Trust will effect early retirement of the Trust
Certificates; however, such right of purchase is exercisable only as of the
last day of any Collection Period as of which the Pool Balance is less than
or equal to (____)% of the Original Pool Balance.
The Trust Certificates may not be acquired by (a) an employee
benefit plan (as defined in Section 3(3) of ERISA) that is subject to the
provisions of Title I of ERISA, (b) a plan described in Section 4975(e)(1) of
the Code or (c) any entity whose underlying assets include plan assets by
reason of a plan's investment in the entity (each, a "Benefit Plan"). By
accepting and holding this Trust Certificate, the Holder hereof shall be
deemed to have represented and warranted that it is not a Benefit Plan.
ASSIGNMENT
FOR VALUE RECEIVED the undersigned hereby sells, assigns and
transfers unto
PLEASE INSERT SOCIAL SECURITY OR
OTHER IDENTIFYING NUMBER OF ASSIGNEE
- - --------------------------------------------------------------------------
(Please print or type name and address, including postal zip code, of
assignee)
- - --------------------------------------------------------------------------
the within Trust Certificate, and all rights thereunder, hereby irrevocably
constituting and appointing
- - --------------------------------------------------------------------------
to transfer said Trust Certificate on the books of the Certificate Registrar,
with full power of substitution in the premises.
Dated:
___________________________________________*/
Signature Guaranteed:
____________________________*/
_________________
*/ NOTICE: The signature to this assignment must correspond with the name
- - -
as it appears upon the face of the within Trust Certificate in every
particular, without alteration, enlargement or any change whatever. Such
signature must be guaranteed by a member firm of the New York Stock Exchange
or a commercial bank or trust company.
EXHIBIT B
CERTIFICATE OF TRUST OF
HEADLANDS HOME EQUITY LOAN TRUST 199___
---------------------------------------
THIS Certificate of Trust of HEADLANDS HOME EQUITY LOAN TRUST
199__-__ (the "Trust"), dated , 199__, is being duly executed
--------------
and filed by (_____________________), a (___________________________), as
trustee, to form a business trust under the Delaware Business Trust Act (12
Del. Code, Section 3801 et seq.).
- - ---------
1. Name. The name of the business trust formed hereby is
----
HEADLANDS HOME EQUITY LOAN TRUST 199__-__.
2. Delaware Trustee. The name and business address of the trustee
----------------
of the Trust in the State of Delaware is (______________), (______________),
( _ _ _ _ _ _ _ _ _ _ _ _ _ _ ) , D e l a w a r e ( _ _ _ _ _ ) ,
Attention: (_______________________________).
IN WITNESS WHEREOF, the undersigned, being the sole trustee of the
Trust, has executed this Certificate of Trust as of the date first above
written.
(______________),
not in its individual capacity but solely
as owner trustee under a Trust Agreement
dated , 199
---------------- --
By:
--------------------------------
Name:
Title:
EXHIBIT C
(Form of Certificate Depository Agreement)
Exhibit 4.3
Form of Indenture
HEADLANDS HOME EQUITY LOAN TRUST 199_-__,
Issuer
AND
(_________________)
INDENTURE TRUSTEE
_________________________________________
INDENTURE
Dated as of _________, 199_
__________________________________________
HOME EQUITY LOAN NOTES
SERIES 199__-__
TABLE OF CONTENTS
-----------------
Section Page
- - ------- ----
ARTICLE I
Definitions
1.01. Definitions . . . . . . . . . . . . . . . . . . . . . 2
1.02. Incorporation by Reference of Trust Indenture Act . . 2
1.03. Rules of Construction. . . . . . . . . . . . . . . . 2
ARTICLE II
Original Issuance of Notes
2.01. Form . . . . . . . . . . . . . . . . . . . . . . . . 4
2.02. Execution, Authentication and Delivery . . . . . . . 4
2.03. Opinions of Counsel . . . . . . . . . . . . . . . . . 5
ARTICLE III
Covenants
3.01. Collection of Payments on Mortgage Loan Accounts . . 6
3.02. Maintenance of Office or Agency . . . . . . . . . . . 6
3.03. Money for Payments To Be Held in Trust; Paying
Agent; Certificate Paying Agent . . . . . . . . . . . 6
3.04. Existence . . . . . . . . . . . . . . . . . . . . . . 9
3.05. Payment of Principal and Interest; Defaulted
Interest . . . . . . . . . . . . . . . . . . . . . . 9
3.06. Protection of Trust Estate . . . . . . . . . . . . . 12
3.07. Opinions as to Trust Estate . . . . . . . . . . . . . 12
3.08. (Reserved) . . . . . . . . . . . . . . . . . . . . . 13
3.09. Performance of Obligations; Servicing Agreement . . . 13
3.10. Negative Covenants . . . . . . . . . . . . . . . . . 15
3.11. Annual Statement as to Compliance . . . . . . . . . . 16
3.12. Recording of Assignments . . . . . . . . . . . . . . 16
3.13. Representations and Warranties Concerning the
Mortgage Loans . . . . . . . . . . . . . . . . . . . 16
3.14. Indenture Trustee's Review of Related Documents . . . 17
3.15. Trust Estate; Related Documents . . . . . . . . . . . 18
3.16. Amendments to Servicing Agreement . . . . . . . . . . 19
3.17. Master Servicer as Agent and Bailee of Indenture
Trustee . . . . . . . . . . . . . . . . . . . . . . . 19
3.18. Investment Company Act . . . . . . . . . . . . . . . 20
3.19. Issuer May Consolidate, etc., Only on Certain Terms . 20
3.20. Successor or Transferee . . . . . . . . . . . . . . . 22
3.21. No Other Business . . . . . . . . . . . . . . . . . . 22
3.22. No Borrowing . . . . . . . . . . . . . . . . . . . . 22
3.23. Guarantees, Loans, Advances and Other Liabilities . . 22
3.24. Capital Expenditures . . . . . . . . . . . . . . . . 23
3.25. (Reserved) . . . . . . . . . . . . . . . . . . . . . 23
3.26. Restricted Payments . . . . . . . . . . . . . . . . . 23
3.27. Notice of Events of Default . . . . . . . . . . . . . 23
3.28. Further Instruments and Acts . . . . . . . . . . . . 23
3.29. Statements to Noteholders . . . . . . . . . . . . . . 23
3.30. (Reserved) (Grant of the Additional Loans) . . . . . 24
3.31. Determination of Note Rate and Certificate Rate. . . 25
3.32. Payments under the Credit Enhancement Instrument . . 25
3.33. Replacement Credit Enhancement Instrument . . . . . . 26
ARTICLE IV
The Notes; Satisfaction and Discharge of Indenture
4.01. The Notes(; Increase of Maximum Variable Funding
Balance; Additional Variable Funding Notes) . . . . . 27
4.02. Registration of and Limitations on Transfer and
Exchange of Notes; Appointment of Certificate
Registrar . . . . . . . . . . . . . . . . . . . . . . 29
4.03. Mutilated, Destroyed, Lost or Stolen Notes . . . . . 31
4.04. Persons Deemed Owners . . . . . . . . . . . . . . . . 32
4.05. Cancellation . . . . . . . . . . . . . . . . . . . . 32
4.06. Book-Entry Notes . . . . . . . . . . . . . . . . . . 33
4.07. Notices to Depository . . . . . . . . . . . . . . . . 34
4.08. Definitive Notes . . . . . . . . . . . . . . . . . . 34
4.09. Tax Treatment . . . . . . . . . . . . . . . . . . . . 34
4.10. Satisfaction and Discharge of Indenture . . . . . . . 35
4.11. Application of Trust Money . . . . . . . . . . . . . 36
4.12. Subrogation and Cooperation . . . . . . . . . . . . . 36
4.13. Repayment of Moneys Held by Paying Agent . . . . . . 37
ARTICLE V
Remedies
5.01. Events of Default . . . . . . . . . . . . . . . . . . 38
5.02. Acceleration of Maturity; Rescission and Annulment . 38
5.03. Collection of Indebtedness and Suits for Enforcement
by Indenture Trustee . . . . . . . . . . . . . . . . 39
5.04. Remedies; Priorities . . . . . . . . . . . . . . . . 41
5.05. Optional Preservation of the Trust Estate . . . . . . 43
5.06. Limitation of Suits . . . . . . . . . . . . . . . . . 44
5.07. Unconditional Rights of Noteholders To Receive
Principal and Interest . . . . . . . . . . . . . . . 45
5.08. Restoration of Rights and Remedies . . . . . . . . . 45
5.09. Rights and Remedies Cumulative . . . . . . . . . . . 45
5.10. Delay or Omission Not a Waiver . . . . . . . . . . . 45
5.11. Control by Noteholders . . . . . . . . . . . . . . . 46
5.12. Waiver of Past Defaults . . . . . . . . . . . . . . . 46
5.13. Undertaking for Costs . . . . . . . . . . . . . . . . 47
5.14. Waiver of Stay or Extension Laws . . . . . . . . . . 47
5.15. Sale of Trust Estate . . . . . . . . . . . . . . . . 47
5.16. Action on Notes . . . . . . . . . . . . . . . . . . . 49
ARTICLE VI
The Indenture Trustee
6.01. Duties of Indenture Trustee . . . . . . . . . . . . . 51
6.02. Rights of Indenture Trustee . . . . . . . . . . . . . 52
6.03. Individual Rights of Indenture Trustee . . . . . . . 53
6.04. Indenture Trustee's Disclaimer . . . . . . . . . . . 53
6.05. Notice of Event of Default . . . . . . . . . . . . . 53
6.06. Reports by Indenture Trustee to Holders . . . . . . . 53
6.07. Compensation and Indemnity . . . . . . . . . . . . . 53
6.08. Replacement of Indenture Trustee . . . . . . . . . . 54
6.09. Successor Indenture Trustee by Merger . . . . . . . . 55
6.10. Appointment of Co-Indenture Trustee or Separate
Indenture Trustee . . . . . . . . . . . . . . . . . . 56
6.11. Eligibility; Disqualification . . . . . . . . . . . . 57
6.12. Preferential Collection of Claims Against Issuer . . 57
6.13. Representation and Warranty . . . . . . . . . . . . . 58
6.14. Directions to Indenture Trustee . . . . . . . . . . . 58
6.15. No Consent to Certain Acts of Depositor . . . . . . . 58
ARTICLE VII
Noteholders' Lists and Reports
7.01. Issuer To Furnish Indenture Trustee Names and
Addresses of Noteholders . . . . . . . . . . . . . . 59
7.02. Preservation of Information; Communications to
Noteholders . . . . . . . . . . . . . . . . . . . . . 59
7.03. Reports by Issuer . . . . . . . . . . . . . . . . . . 59
7.04. Reports by Indenture Trustee . . . . . . . . . . . . 60
ARTICLE VIII
Accounts, Disbursements and Releases
8.01. Collection of Money . . . . . . . . . . . . . . . . . 61
8.02. Trust Accounts . . . . . . . . . . . . . . . . . . . 61
8.03. Opinion of Counsel . . . . . . . . . . . . . . . . . 63
8.04. Termination Upon Distribution to Noteholders . . . . 63
8.05. Release of Trust Estate . . . . . . . . . . . . . . . 63
8.06. Surrender of Notes Upon Final Payment . . . . . . . . 64
ARTICLE IX
Supplemental Indentures
-----------------------
9.01. Supplemental Indentures Without Consent of
Noteholders . . . . . . . . . . . . . . . . . . . . . 65
9.02. Supplemental Indentures With Consent of Noteholders . 66
9.03. Execution of Supplemental Indentures . . . . . . . . 68
9.04. Effect of Supplemental Indenture . . . . . . . . . . 68
9.05. Conformity with Trust Indenture Act . . . . . . . . . 68
9.06. Reference in Notes to Supplemental Indentures . . . . 69
ARTICLE X
(Reserved)
ARTICLE XI
Miscellaneous
11.01. Compliance Certificates and Opinions, etc . . . . . . 71
11.02. Form of Documents Delivered to Indenture Trustee . . . . . 73
11.03. Acts of Noteholders . . . . . . . . . . . . . . . . . . . 74
11.04. Notices, etc., to Indenture Trustee, Issuer, Credit
Enhancer and Rating Agencies . . . . . . . . . . . . . . . 74
11.05. Notices to Noteholders; Waiver . . . . . . . . . . . . . . 75
11.06. Alternate Payment and Notice Provisions . . . . . . . . . 76
11.07. Conflict with Trust Indenture Act . . . . . . . . . . . . 76
11.08. Effect of Headings . . . . . . . . . . . . . . . . . . . . 77
11.09. Successors and Assigns . . . . . . . . . . . . . . . . . . 77
11.10. Separability . . . . . . . . . . . . . . . . . . . . . . . 77
11.11. Benefits of Indenture . . . . . . . . . . . . . . . . . . 77
11.12. Legal Holidays . . . . . . . . . . . . . . . . . . . . . . 77
11.13. GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . 77
11.14. Counterparts . . . . . . . . . . . . . . . . . . . . . . . 77
11.15. Recording of Indenture . . . . . . . . . . . . . . . . . . 77
11.16. Issuer Obligation . . . . . . . . . . . . . . . . . . . . 78
11.17. No Petition . . . . . . . . . . . . . . . . . . . . . . . 78
11.18. Inspection . . . . . . . . . . . . . . . . . . . . . . . . 78
11.19. Authority of the Administrator . . . . . . . . . . . . . . 79
Signatures and Seals . . . . . . . . . . . . . . . . . . . . . . . . . 81
Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
EXHIBITS
Exhibit A-1 - Form of Term Notes
Exhibit A-2 - Form of Variable Funding Notes
Exhibit B - Mortgage Loan Schedule
Exhibit C - Form of Opinion to be delivered pursuant
to Section 4.01(b)(ii)
Exhibit D - Form of Opinion to be delivered pursuant
to Section 4.01(b)(iii)
Exhibit E - Loan Agreement
Exhibit F - Investment Letter
This Indenture, dated as of ______, 199_, between HEADLANDS HOME
EQUITY LOAN TRUST 199_-_, a Delaware business trust, as Issuer (the
"Issuer"), and (________________), as Indenture Trustee (the "Indenture
Trustee"),
WITNESSETH THAT:
Each party hereto agrees as follows for the benefit of the other
party and for the equal and ratable benefit of the Holders of the Issuer's
Series 199__-__ Asset Backed Term Notes (the "Notes").
GRANTING CLAUSE
The Issuer hereby Grants to the Indenture Trustee at the Closing
Date, as Indenture Trustee for the benefit of the Holders of the Notes, all
of the Issuer's right, title and interest in and to whether now existing or
hereafter created (a) the Mortgage Loans and all monies and proceeds due
thereon after the Cut-off Date, (b) the Servicing Agreement and the Mortgage
Loan Purchase Agreement, (c) all funds on deposit in the Funding Account,
including all income from the investment and reinvestment of funds therein,
(d) all funds on deposit from time to time in the Collection Account
allocable to the Mortgage Loans; (e) all funds on deposit from time to time
in the Payment Account and in all proceeds thereof; (f) the Policy; and (g)
all present and future claims, demands, causes and chooses in action in
respect of any or all of the foregoing and all payments on or under, and all
proceeds of every kind and nature whatsoever in respect of, any or all of the
foregoing and all payments on or under, and all proceeds of every kind and
nature whatsoever in the conversion thereof, voluntary or involuntary, into
cash or other liquid property, all cash proceeds, accounts, accounts
receivable, notes, drafts, acceptances, checks, deposit accounts, rights to
payment of any and every kind, and other forms of obligations and
receivables, instruments and other property which at any time constitute all
or part of or are included in the proceeds of any of the foregoing
(collectively, the "Trust Estate" or the "Collateral").
The foregoing Grant is made in trust to secure the payment of
principal of and interest on, and any other amounts owing in respect of, the
Notes, equally and ratably without prejudice, priority or distinction, and to
secure compliance with the provisions of this Indenture, all as provided in
this Indenture.
The Indenture Trustee, as Indenture Trustee on behalf of the
Holders of the Notes, acknowledges such Grant, accepts the trust under this
Indenture in accordance with the provisions hereof and agrees to perform its
duties as Indenture Trustee as required herein.
ARTICLE I
Definitions
Section 1.01. Definitions. For all purposes of this Indenture,
-----------
except as otherwise expressly provided herein or unless the context otherwise
requires, capitalized terms not otherwise defined herein shall have the
meanings assigned to such terms in the Definitions attached hereto as
Appendix A which is incorporated by reference herein. All other capitalized
terms used herein shall have the meanings specified herein.
Section 1.02. Incorporation by Reference of Trust Indenture Act.
-------------------------------------------------
Whenever this Indenture refers to a provision of the TIA, the provision is
incorporated by reference in and made a part of this Indenture. The
following TIA terms used in this Indenture have the following meanings:
"Commission" means the Securities and Exchange Commission.
"indenture securities" means the Notes.
"indenture security holder" means a Noteholder.
"indenture to be qualified" means this Indenture.
"indenture trustee" or "institutional trustee" means the Indenture
Trustee.
"obligor" on the indenture securities means the Issuer and any
other obligor on the indenture securities.
All other TIA terms used in this Indenture that are defined by the TIA,
defined by TIA reference to another statute or defined by Commission rule
have the meaning assigned to them by such definitions.
Section 1.03. Rules of Construction. Unless the context otherwise
---------------------
requires:
(i) a term has the meaning assigned to it;
(ii) an accounting term not otherwise defined has the meaning
assigned to it in accordance with generally accepted accounting
principles as in effect from time to time;
(iii) "or" is not exclusive;
(iv) "including" means including without limitation;
(v) words in the singular include the plural and words in the
plural include the singular; and
(vi) any agreement, instrument or statute defined or referred to
herein or in any instrument or certificate delivered in connection
herewith means such agreement, instrument or statute as from time to
time amended, modified or supplemented and includes (in the case of
agreements or instruments) references to all attachments thereto and
instruments incorporated therein; references to a Person are also to its
permitted successors and assigns.
ARTICLE II
Original Issuance of Notes
Section 2.01. Form. The Term Notes (and the Variable Funding Notes,
----
in each case) together with the Indenture Trustee's certificate of
authentication, shall be in substantially the forms set forth in
Exhibit(s) A-1 (and A-2, respectively,) with such appropriate insertions,
omissions, substitutions and other variations as are required or permitted by
this Indenture and may have such letters, numbers or other marks of
identification and such legends or endorsements placed thereon as may,
consistently herewith, be determined by the officers executing such Notes, as
evidenced by their execution of the Notes. Any portion of the text of any
Note may be set forth on the reverse thereof, with an appropriate reference
thereto on the face of the Note.
The Notes shall be typewritten, printed, lithographed or engraved or
produced by any combination of these methods (with or without steel engraved
borders), all as determined by the Authorized Officers executing such Notes,
as evidenced by their execution of such Notes.
The terms of the Notes set forth in Exhibits A-1(, A-2) and A-3 are part
of the terms of this Indenture.
Section 2.02. Execution, Authentication and Delivery. The Notes
--------------------------------------
shall be executed on behalf of the Issuer by any of its Authorized Officers.
The signature of any such Authorized Officer on the Notes may be manual or
facsimile.
Notes bearing the manual or facsimile signature of individuals who were
at any time Authorized Officers of the Issuer shall bind the Issuer,
notwithstanding that such individuals or any of them have ceased to hold such
offices prior to the authentication and delivery of such Notes or did not
hold such offices at the date of such Notes.
The Indenture Trustee shall upon Issuer Request authenticate and deliver
Term Notes for original issue in an aggregate initial principal amount of
$(______________) (and Variable Funding Notes for original issue in an
aggregate initial principal amount of $(_____________)). (The Security
Balance of the Variable Funding Notes in the aggregate may not exceed the
Maximum Variable Funding Balance.) The aggregate principal amount of Notes
outstanding at any time may not exceed (the sum of) $(_____________) (and the
Security Balance of Additional Variable Funding Notes issued pursuant to the
terms of Section 4.01 hereof).
Each Note shall be dated the date of its authentication. The Notes
shall be issuable as registered Notes and the Term Notes shall be issuable in
the minimum initial Security Balances of $(________) and in integral
multiples of $(______) in excess thereof.
(Each Variable Funding Note shall be initially issued with a Security
Balance of $(______) or, if applicable, with a Security Balance in the amount
equal to the Additional Balance Differential for the Collection Period
related to the Payment Date following the date of issuance of such Variable
Funding Note pursuant to Section 4.01(c).)
No Note shall be entitled to any benefit under this Indenture or be
valid or obligatory for any purpose, unless there appears on such Note a
certificate of authentication substantially in the form provided for herein
executed by the Indenture Trustee by the manual signature of one of its
authorized signatories, and such certificate upon any Note shall be
conclusive evidence, and the only evidence, that such Note has been duly
authenticated and delivered hereunder.
Section 2.03. Opinions of Counsel. On the Closing Date, the
-------------------
Indenture Trustee shall have received: (i) an Opinion of Counsel, in form
and substance reasonably satisfactory to the Indenture Trustee and its
counsel, with respect to securities law matters; (ii) an Opinion of Counsel,
in form and substance reasonably satisfactory to the Indenture Trustee and
its counsel, with respect to the tax status of the arrangement created by the
Indenture; and (iii) an Opinion of Counsel to the Issuer, in form and
substance reasonably satisfactory to the Indenture Trustee and its counsel,
with respect to the due authorization, valid execution and delivery of this
Indenture and with respect to its binding effect on the Issuer.
ARTICLE III
Covenants
Section 3.01. Collection of Payments on Mortgage Loan Accounts. The
------------------------------------------------
Indenture Trustee shall establish and maintain with itself a trust account
(the "Payment Account") in which the Indenture Trustee shall, subject to the
terms of this paragraph, deposit, on the same day as it is received from the
Master Servicer, each remittance received by the Indenture Trustee with
respect to the Mortgage Loans. The Indenture Trustee shall make all payments
of principal of and interest on the Notes, subject to Section 3.03 as
provided in Section 3.05 herein from moneys on deposit in the Payment
Account.
Section 3.02. Maintenance of Office or Agency. The Issuer will
-------------------------------
maintain in the Borough of Manhattan, The City of New York, an office or
agency where, subject to satisfaction of conditions set forth herein, Notes
may be surrendered for registration of transfer or exchange, and where
notices and demands to or upon the Issuer in respect of the Notes and this
Indenture may be served. The Issuer hereby initially appoints the Indenture
Trustee to serve as its agent for the foregoing purposes. If at any time the
Issuer shall fail to maintain any such office or agency or shall fail to
furnish the Indenture Trustee with the address thereof, such surrenders,
notices and demands may be made or served at the Corporate Trust Office, and
the Issuer hereby appoints the Indenture Trustee as its agent to receive all
such surrenders, notices and demands.
Section 3.03. Money for Payments To Be Held in Trust; Paying Agent;
-----------------------------------------------------
Certificate Paying Agent. (a) As provided in Section 3.01, all payments
- - ------------------------
of amounts due and payable with respect to any Notes that are to be made from
amounts withdrawn from the Payment Account pursuant to Section 3.01 shall be
made on behalf of the Issuer by the Indenture Trustee or by the Paying Agent,
and no amounts so withdrawn from the Payment Account for payments of Notes
shall be paid over to the Issuer except as provided in this Section 3.03.
The Issuer will cause each Paying Agent other than the Indenture Trustee
to execute and deliver to the Indenture Trustee an instrument in which such
Paying Agent shall agree with the Indenture Trustee (and if the Indenture
Trustee acts as Paying Agent, it hereby so agrees), subject to the provisions
of this Section 3.03, that such Paying Agent will:
(i) hold all sums held by it for the payment of amounts due with
respect to the Notes in trust for the benefit of the Persons entitled
thereto until such sums shall be paid to such Persons or otherwise
disposed of as herein provided and pay such sums to such Persons as
herein provided;
(ii) give the Indenture Trustee notice of any default by the
Issuer of which it has actual knowledge in the making of any payment
required to be made with respect to the Notes;
(iii) at any time during the continuance of any such default, upon
the written request of the Indenture Trustee, forthwith pay to the
Indenture Trustee all sums so held in trust by such Paying Agent;
(iv) immediately resign as Paying Agent and forthwith pay to the
Indenture Trustee all sums held by it in trust for the payment of Notes
if at any time it ceases to meet the standards required to be met by a
Paying Agent at the time of its appointment; and
(v) comply with all requirements of the Code with respect to the
withholding from any payments made by it on any Notes of any applicable
withholding taxes imposed thereon and with respect to any applicable
reporting requirements in connection therewith.
The Issuer may at any time, for the purpose of obtaining the
satisfaction and discharge of this Indenture or for any other purpose, by
Issuer Request direct any Paying Agent to pay to the Indenture Trustee all
sums held in trust by such Paying Agent, such sums to be held by the
Indenture Trustee upon the same trusts as those upon which the sums were held
by such Paying Agent; and upon such payment by any Paying Agent to the Inden-
ture Trustee, such Paying Agent shall be released from all further liability
with respect to such money.
Subject to applicable laws with respect to escheat of funds, any money
held by the Indenture Trustee or any Paying Agent in trust for the payment of
any amount due with respect to any Note and remaining unclaimed for two years
after such amount has become due and payable shall be discharged from such
trust and be paid to the Issuer on Issuer Request; and the Holder of such
Note shall thereafter, as an unsecured general creditor, look only to the
Issuer for payment thereof (but only to the extent of the amounts so paid to
the Issuer), and all liability of the Indenture Trustee or such Paying Agent
with respect to such trust money shall thereupon cease; provided, however,
that the Indenture Trustee or such Paying Agent, before being required to
make any such repayment, shall at the expense and direction of the Issuer
cause to be published once, in an Authorized Newspaper published in the
English language, notice that such money remains unclaimed and that, after a
date specified therein, which shall not be less than 30 days from the date of
such publication, any unclaimed balance of such money then remaining will be
repaid to the Issuer. The Indenture Trustee shall also adopt and employ, at
the expense and direction of the Issuer, any other reasonable means of
notification of such repayment (including, but not limited to, mailing notice
of such repayment to Holders whose Notes have been called but have not been
surrendered for redemption or whose right to or interest in moneys due and
payable but not claimed is determinable from the records of the Indenture
Trustee or of any Paying Agent, at the last address of record for each such
Holder).
The Issuer hereby appoints (__________________) as Certificate Paying
Agent and Residual Ownership Interest Paying Agent to make payments to
Certificateholders and holders of the Residual Ownership Interest on behalf
of the Issuer in accordance with the provisions of the Certificates, Section
3.05 hereof and the provisions of the Trust Agreement, and $(_______________)
hereby accepts such appointment and further agrees that it will be bound by
the provisions of the Trust Agreement relating to the Certificate Paying
Agent and Residual Ownership Interest Paying Agent and will:
(i) hold all sums held by it for the payment of amounts due with
respect to the Certificates and the Residual Ownership Interest in trust
for the benefit of the Persons entitled thereto until such sums shall be
paid to such Persons or otherwise disposed of as herein provided and as
provided in the Trust Agreement and pay such sums to such Persons as
herein and therein provided;
(ii) give the Owner Trustee notice of any default by the Issuer
of which it has actual knowledge in the making of any payment required
to be made with respect to the Certificates;
(iii) at any time during the continuance of any such default, upon
the written request of the Owner Trustee forthwith pay to the Owner
Trustee on behalf of the Issuer all sums so held in Trust by such
Certificate Paying Agent;
(iv) immediately resign as Certificate Paying Agent and forthwith
pay to the Owner Trustee on behalf of the Issuer all sums held by it in
trust for the payment of Certificates and the Residual Ownership
Interest if at any time it ceases to meet the standards required to be
met by the Certificate Paying Agent or the Residual Ownership Interest
Paying Agent at the time of its appointment;
(v) comply with all requirements of the Code with respect to the
withholding from any payments made by it on any Certificates or the
holders of the Residual Ownership Interest of any applicable withholding
taxes imposed thereon and with respect to any applicable reporting
requirements in connection therewith; and
(vi) deliver to the Owner Trustee a copy of the report to
Certificateholders and holders of Residual Ownership Interest prepared
with respect to each Payment Date by the Master Servicer pursuant to
Section 4.01 of the Servicing Agreement.
Section 3.04. Existence. The Issuer will keep in full effect its
---------
existence, rights and franchises as a business trust under the laws of the
State of Delaware (unless it becomes, or any successor Issuer hereunder is or
becomes, organized under the laws of any other state or of the United States
of America, in which case the Issuer will keep in full effect its existence,
rights and franchises under the laws of such other jurisdiction) and will
obtain and preserve its qualification to do business in each jurisdiction in
which such qualification is or shall be necessary to protect the validity and
enforceability of this Indenture, the Notes, the Mortgage Loans and each
other instrument or agreement included in the Trust Estate.
Section 3.05. Payment of Principal and Interest; Defaulted Interest.
-----------------------------------------------------
(a) On each Payment Date from amounts on deposit in the Payment Account
after making (x) any deposit to the Funding Account pursuant to Section
8.02(b) and (y) any deposits to the Payment Account pursuant to Section
8.02(c)(ii) and Section 8.02(c)(i)(2), the Indenture Trustee, on behalf of
the Issuer shall pay to the Noteholders and the Certificate Paying Agent, on
behalf of the Issuer shall pay to the Certificateholders and the Certificate
Paying Agent, on behalf of the Issuer shall pay to the holders of the
Residual Ownership Interest, and the Indenture Trustee, in its capacity as
agent for the Issuer shall pay to other Persons, the amounts to which they
are entitled as set forth below:
(i) The sum of (x) to the Noteholders the sum of (a) one month's
interest at the Note Rate on the Security Balances of Notes immediately
prior to such Payment Date and (b) any previously accrued and unpaid
interest for prior Payment Dates and (y) to the Certificateholders, the
Certificate Distribution Amount for such Payment Date;
(ii) (if such Payment Date is after the Funding Period, to the
Noteholders and the Certificateholders as the case may be,) as principal
on the Term Notes(, Variable Funding Notes,) and the Certificates, the
applicable Security Percentage of the Principal Collection Distribution
Amount (and if such Payment Date is the first Payment Date following the
end of the Funding Period (if ending due to an Amortization Event) or
the Payment Date on which the Funding Period ends, to the Noteholders
and Certificateholders as principal on the Term Notes, Variable Funding
Notes, and Certificates the applicable Security Percentage of the amount
deposited from the Funding Account in respect of Security Principal
Collections);
(iii) to the Noteholders and the Certificateholders, as the case
may be, as principal on the Term Notes(, Variable Funding Notes) and the
Certificates, pro rata, based on the Security Balances from the amount
remaining on deposit in the Payment Account, up to the applicable
Security Percentage of Liquidation Loss Amounts for the related Col-
lection Period;
(iv) to the Noteholders and the Certificateholders, as the case
may be, as principal on the Term Notes(, Variable Funding Notes) and the
Certificates, pro rata, based on the Security Balances from the amount
remaining on deposit in the Payment Account, up to the applicable
Security Percentage of Carryover Loss Amounts;
(v) to the Credit Enhancer, in the amount of the premium for the
Credit Enhancement Instrument (and for any Additional Credit Enhancement
Instrument);
(vi) to the Credit Enhancer, to reimburse it for prior draws made
on the Credit Enhancement Instrument (and on any Additional Credit
Enhancement Instrument) (with interest thereon as provided in the
Insurance Agreement);
(vii) to the Noteholders and the Certificateholders, as the case
may be, as principal on the Term Notes(, Variable Funding Notes) and the
Certificates, pro rata, based on the Security Balances from Security
Interest Collections, up to the Accelerated Principal Distribution
Amount for such Payment Date (such amount, if any, paid pursuant to this
clause (vii) being referred to herein as the "Accelerated Principal
Payment Amount");
(viii) to the Credit Enhancer, any other amounts owed to the Credit
Enhancer pursuant to the Insurance Agreement;
(ix) (Reserved);
(x) to reimburse the Administrator for expenditures made on
behalf of the Issuer with respect to the performance of its duties under
the Indenture; and
(xi) any remaining amounts to the holders of the Residual
Ownership Interest as described in Section 5.01 of the Trust Agreement;
provided, however, in the event that on a Payment Date a Credit Enhancer
Default shall have occurred and be continuing then the priorities of
distributions described above will be adjusted such that payments of the
Certificate Distribution Amount and all other amounts to be paid in respect
of principal on the Certificates will not be paid until the full amount of
interest and principal in accordance with clauses (i)(x) and (ii) through
(iv) above that are due on the Notes on such Payment Date have been paid and
provided, further, that on the Final Scheduled Payment Date or other final
Payment Date, the amount to be paid pursuant to clause (ii) above shall be
equal to the Security Balances of the Securities immediately prior to such
Payment Date.
The amounts paid to Noteholders shall be paid to each Class in
accordance with the Class Percentage as set forth in paragraph (b) below.
Interest will accrue on the Notes during an Interest Period on the basis of
the actual number of days in such Interest Period and a year assumed to
consist of 360 days.
Any installment of interest or principal, if any, payable on any Note or
Certificate that is punctually paid or duly provided for by the Issuer on the
applicable Payment Date shall, if such Holder holds Notes or Certificates
other than the Designated Certificate of an aggregate initial Principal
Balance of at least $(___________) be paid to each Holder of record on the
preceding Record Date, by wire transfer to an account specified in writing by
such Holder reasonably satisfactory to the Indenture Trustee as of the
preceding Record Date or in all other cases or if no such instructions have
been delivered to the Indenture Trustee, by check to such Noteholder mailed
to such Holder's address as it appears in the Note Register the amount
required to be distributed to such Holder on such Payment Date pursuant to
such Holder's Securities; provided, however, that the Indenture Trustee shall
not pay to such Holders any amount required to be withheld from a payment to
such Holder by the Code.
(b) The principal of each Note shall be due and payable in full on the
Final Scheduled Payment Date for such Note as provided in the related form of
Note set forth in Exhibits A-1 (and A-2). All principal payments on each
Class of Notes shall be made to the Noteholders of such Class entitled
thereto in accordance with the Percentage Interests represented by such
Notes. Upon notice to the Indenture Trustee by the Issuer, the Indenture
Trustee shall notify the Person in whose name a Note is registered at the
close of business on the Record Date preceding the Final Scheduled Payment
Date or other final Payment Date. Such notice shall be mailed no later than
five Business Days prior to such Final Scheduled Payment Date or other final
Payment Date and shall specify that payment of the principal amount and any
interest due with respect to such Note at the Final Scheduled Payment Date or
other final Payment Date will be payable only upon presentation and surrender
of such Note and shall specify the place where such Note may be presented and
surrendered for such final payment.
Section 3.06. Protection of Trust Estate. (a) The Issuer will from
--------------------------
time to time execute and deliver all such supplements and amendments hereto
and all such financing statements, continuation statements, instruments of
further assurance and other instruments, and will take such other action
necessary or advisable to:
(i) maintain or preserve the lien and security interest (and the
priority thereof) of this Indenture or carry out more effectively the
purposes hereof;
(ii) perfect, publish notice of or protect the validity of any
Grant made or to be made by this Indenture;
(iii) enforce any of the Mortgage Loans; or
(iv) preserve and defend title to the Trust Estate and the rights
of the Indenture Trustee and the Noteholders in such Trust Estate
against the claims of all persons and parties.
(b) Except as otherwise provided in the Servicing Agreement or this
Indenture, the Indenture Trustee shall not remove any portion of the Trust
Estate that consists of money or is evidenced by an instrument, certificate
or other writing from the jurisdiction in which it was held at the date of
the most recent Opinion of Counsel delivered pursuant to Section 3.06 (or
from the jurisdiction in which it was held as described in the Opinion of
Counsel delivered at the Closing Date pursuant to Section 3.07(a), if no
Opinion of Counsel has yet been delivered pursuant to Section 3.07(b) unless
the Trustee shall have first received an Opinion of Counsel to the effect
that the lien and security interest created by this Indenture with respect to
such property will continue to be maintained after giving effect to such
action or actions.
The Issuer hereby designates the Indenture Trustee its agent and
attorney-in-fact to execute any financing statement, continuation statement
or other instrument required to be executed pursuant to this Section 3.06.
Section 3.07. Opinions as to Trust Estate. (a) On the Closing
---------------------------
Date, the Issuer shall furnish to the Indenture Trustee, the Owner Trustee
and to the Administrator an Opinion of Counsel either stating that, in the
opinion of such counsel, such action has been taken with respect to the
delivery of the Mortgage Notes, the recording of the Assignments of Mortgage,
the recording and filing of this Indenture, any indentures supplemental
hereto, and any other requisite documents, and with respect to the execution
and filing of any financing statements and continuation statements, as are
necessary to perfect and make effective the lien and security interest of
this Indenture and reciting the details of such action, or stating that, in
the opinion of such counsel, no such action is necessary to make such lien
and security interest effective.
(b) On or before December 31 in each calendar year, beginning in 199_,
the Issuer shall furnish to the Indenture Trustee and to the Administrator an
Opinion of Counsel at the expense of the Issuer either stating that, in the
opinion of such counsel, such action has been taken with respect to the
recording of the Assignments of Mortgage, the recording, filing, re-recording
and refiling of this Indenture, any indentures supplemental hereto and any
other requisite documents and with respect to the execution and filing of any
financing statements and continuation statements as is necessary to maintain
the lien and security interest created by this Indenture and reciting the
details of such action or stating that in the opinion of such counsel no such
action is necessary to maintain such lien and security interest. Such Opinion
of Counsel shall also describe the recording, filing, re-recording and refil-
ing of this Indenture, any indentures supplemental hereto and any other
requisite documents and the execution and filing of any financing statements
and continuation statements that will, in the opinion of such counsel, be
required to maintain the lien and security interest of this Indenture until
December 31 in the following calendar year.
Section 3.08. (Reserved)
Section 3.09. Performance of Obligations; Servicing Agreement. (a)
-----------------------------------------------
The Issuer will punctually perform and observe all of its obligations and
agreements contained in this Indenture, the Basic Documents and in the
instruments and agreements included in the Trust Estate. Except as otherwise
expressly provided therein, the Issuer shall not waive, amend, modify,
supplement or terminate any Basic Document, including without limitation the
Servicing Agreement or any provision thereof without the consent of the
Indenture Trustee or the Holders of at least a majority of the Security
Balances of the Notes, the Master Servicer and the Credit Enhancer. Upon the
taking of any such action with respect to any Basic Document the Issuer shall
give written notice thereof to the Rating Agencies.
(b) The Issuer may contract with other Persons to assist it in
performing its duties under this Indenture, and any performance of such
duties by a Person identified to the Indenture Trustee in an Officer's
Certificate of the Issuer shall be deemed to be action taken by the Issuer.
Initially, the Issuer has contracted with the Administrator to assist the
Issuer in performing its duties under this Indenture.
(c) The Issuer will not take any action or permit any action to be
taken by others which would release any Person from any of such Person's
covenants or obligations under any of the documents relating to the Mortgage
Loans or under any instrument included in the Trust Estate, or which would
result in the amendment, hypothecation, subordination, termination or
discharge of, or impair the validity or effectiveness of, any of the
documents relating to the Mortgage Loans or any such instrument, except such
actions as the Master Servicer is expressly permitted to take in the
Servicing Agreement.
(d) If the Issuer shall have knowledge of the occurrence of an Event of
Servicing Termination, the Issuer shall promptly notify the Indenture Trustee
thereof, and shall specify in such notice the action, if any, the Issuer is
taking in respect of such Event of Servicing Termination. If such Event of
Servicing Termination arises from the failure of the Master Servicer to
perform any of its duties or obligations under the Servicing Agreement with
respect to the Mortgage Loans, the Issuer may remedy such failure, provided
that if such Event of Servicing Termination arises from the failure by the
Master Servicer to comply with requirements imposed upon it under Section
3.04 of the Servicing Agreement with respect to hazard insurance for the
Mortgaged Properties securing the Mortgage Loans, the Issuer shall promptly,
as the case may be, pay such premiums or obtain substitute insurance coverage
meeting the requirements of said Section 3.04. So long as any such Event of
Servicing Termination shall be continuing, the Indenture Trustee may exercise
its remedies set forth in Section 7.01 of the Servicing Agreement. Unless
granted or permitted by the Credit Enhancer or the Holders of Securities to
the extent provided above, the Issuer may not waive any such Event of
Servicing Termination or terminate the rights and powers of the Master
Servicer under the Servicing Agreement.
(e) Upon any termination of the Master Servicer's rights and powers
pursuant to Section 7.01 of the Servicing Agreement, all rights, powers,
duties and responsibilities of the Master Servicer with respect to the
Mortgage Loans shall vest in and be assumed by the Indenture Trustee, and the
Indenture Trustee shall be the successor in all respect to the Master
Servicer in its capacity as servicer with respect to the Mortgage Loans under
the Servicing Agreement. Upon any such termination, the Indenture Trustee is
hereby authorized, and the Indenture Trustee hereby agrees, to mail a notice
to each Mortgagor directing each such Mortgagor to mail all payments in
respect of the related Mortgage Loan to the Indenture Trustee or its agent at
the address specified in such notice. The Indenture Trustee may resign as
the Master Servicer by giving written notice of such resignation to the
Issuer and the Credit Enhancer and in such event will be released from such
duties and obligations, such release to be effective on the date a new
servicer enters into a servicing agreement with the Issuer as provided below.
Upon delivery of any such notice to the Issuer, the Issuer shall obtain a new
servicer, satisfactory in all respects to the Indenture Trustee and the
Credit Enhancer, which shall enter into a servicing agreement with the Issuer
and the Indenture Trustee, such agreement to be not less favorable to the
Credit Enhancer in its reasonable judgment, or the Noteholders if a Credit
Enhancer Default shall have occurred and be continuing, than the Servicing
Agreement in any material respect. If, within 30 days after the delivery of
the notice referred to above, the Issuer shall not have obtained such new
servicer, the Indenture Trustee may appoint, or may petition a court of
competent jurisdiction to appoint, a successor servicer acceptable to the
Credit Enhancer to service the Mortgage Loans. In connection with any such
appointment, the Indenture Trustee may make such arrangements for the
compensation of such successor as it and such successor shall agree, and the
Issuer shall enter into an agreement with such successor for the servicing of
the Mortgage Loans, such agreement to be substantially similar to the
Servicing Agreement or otherwise acceptable to the Credit Enhancer; provided
that any such compensation of the successor servicer unless otherwise agreed
to by the Credit Enhancer, shall not be in excess of the Servicing Fee pay-
able to the Master Servicer under the Servicing Agreement. If the Indenture
Trustee shall succeed to the Master Servicer's duties as servicer of the
Mortgage Loans as provided herein, it shall do so in its individual capacity
and not in its capacity as Indenture Trustee.
(f) The Issuer shall at all times retain an Administrator (approved by
the Credit Enhancer under the Administration Agreement) and may enter into
contracts with other Persons for the performance of the Issuer's obligations
hereunder, and performance of such obligations by such Persons shall be
deemed to be performance of such obligations by the Issuer.
Section 3.10. Negative Covenants. So long as any Notes are
------------------
Outstanding, the Issuer shall not:
(i) except as expressly permitted by this Indenture, sell,
transfer, exchange or otherwise dispose of the Trust Estate, unless
directed to do so by the Indenture Trustee;
(ii) claim any credit on, or make any deduction from the
principal or interest payable in respect of, the Notes (other than
amounts properly withheld from such payments under the Code) or assert
any claim against any present or former Noteholder by reason of the
payment of the taxes levied or assessed upon any part of the Trust
Estate; or
(iii) (A) permit the validity or effectiveness of this Indenture
to be impaired, or permit the lien of this Indenture to be amended,
hypothecated, subordinated, terminated or discharged, or permit any
Person to be released from any covenants or obligations with respect to
the Notes under this Indenture except as may be expressly permitted
hereby, (B) permit any lien, charge, excise, claim, security interest,
mortgage or other encumbrance (other than the lien of this Indenture) to
be created on or extend to or otherwise arise upon or burden the Trust
Estate or any part thereof or any interest therein or the proceeds
thereof or (C) permit the lien of this Indenture not to constitute a
valid first priority security interest in the Trust Estate.
Section 3.11. Annual Statement as to Compliance. The Issuer will
---------------------------------
deliver to the Indenture Trustee, within 120 days after the end of each
fiscal year of the Issuer (commencing with the fiscal year 199_), an
Officer's Certificate stating, as to the Authorized Officer signing such
Officer's Certificate, that:
(i) a review of the activities of the Issuer during such year
and of its performance under this Indenture has been made under such
Authorized Officer's supervision; and
(ii) to the best of such Authorized Officer's knowledge, based on
such review, the Issuer has complied with all conditions and covenants
under this Indenture throughout such year, or, if there has been a
default in its compliance with any such condition or covenant,
specifying each such default known to such Authorized Officer and the
nature and status thereof.
Section 3.12. Recording of Assignments. The Issuer shall exercise
------------------------
its right under the Mortgage Loan Purchase Agreement with respect to the
obligation of the Seller to submit or cause to be submitted for recording all
Assignments of Mortgages on or prior to _________, 199_ with respect to the
Initial Loans and within (__) days following the related Deposit Date with
respect to any Additional Loans.
Section 3.13. Representations and Warranties Concerning the Mortgage
------------------------------------------------------
Loans. The Issuer has pledged to the Indenture Trustee all of its right
- - -----
under the Mortgage Loan Purchase Agreement and the Indenture Trustee has the
benefit of the representations and warranties made by the Seller in
Section (_____) thereof, Section (____) thereof and Section (__) thereof
concerning the Mortgage Loans and the right to enforce any remedy against the
Seller provided in such Section (_____) or Section (_____) to the same extent
as though such representations and warranties were made directly to the
Indenture Trustee.
Section 3.14. Indenture Trustee's Review of Related Documents. (a)
-----------------------------------------------
The Indenture Trustee agrees, for the benefit of the holders of the Notes, to
review, or the related Custodian shall review, unless the Indenture Trustee
or such Custodian made such review prior to the Closing Date, on or prior to
________, 199_ the Related Documents delivered to it on or prior to the
Closing Date and within 90 days of the related Deposit Date, the Related
Documents delivered to it in connection with any Additional Loan, in each
case in connection with the Grant of the Mortgage Loan listed on the Schedule
of Mortgage Loans as security for the Notes. Such review shall be limited to
a determination that all documents referred to in the definition of the term
Related Documents have been executed and are appropriately endorsed in the
manner called for in the Mortgage Loan Purchase Agreement and that the
Related Documents have been delivered with respect to each such Mortgage Loan
(other than the documents related to (i) any Mortgage Loan so listed which
has been subject to a Prepayment in full and termination of related Mortgage
Loan, the proceeds of which have been deposited in the Collection Account in
lieu of delivery of the applicable Related Documents, (ii) any Mortgage Loan
with respect to which the related Mortgaged Property was foreclosed,
repossessed or otherwise converted subsequent to the Cut-Off Date and prior
to the Closing Date or with respect to which foreclosure proceedings have
been commenced and for which the related Related Documents are required in
connection with the prosecution of such foreclosure proceedings and for which
the Issuer has delivered a trust receipt called for by Section 3.15(c) and
(iii) any Mortgage Loan as to which the original Assignment of Mortgage has
been submitted for recording), that all such documents have been executed,
and that all such documents relate to the Mortgage Loans listed on the
Schedule of Mortgage Loans. In performing such review, the Trustee may rely
upon the purported genuineness and due execution of any such document and on
the purported genuineness of any signature thereon.
(b) If any Related Document is defective in any material respect which
may materially and adversely affect the value of the related Mortgage Loan,
the interest of the Indenture Trustee or the Noteholders in such Mortgage
Loan, or if any document required to be delivered to the Indenture Trustee
has not been delivered, the Indenture Trustee or the related Custodian on
behalf of the Indenture Trustee shall notify the Issuer, the Seller, the
Credit Enhancer and the Master Servicer immediately after obtaining knowledge
thereof and the Indenture Trustee, as assignee of the Issuer's rights under
the Mortgage Loan Purchase Agreement, shall exercise its remedies in respect
of any such defect against the Seller as provided in the Mortgage Loan
Purchase Agreement.
Section 3.15. Trust Estate; Related Documents. (a) When required
-------------------------------
by the provisions of this Indenture, the Indenture Trustee shall execute
instruments to release property from the lien of this Indenture, or convey
the Indenture Trustee's interest in the same, in a manner and under
circumstances which are not inconsistent with the provisions of this
Indenture. No party relying upon an instrument executed by the Indenture
Trustee as provided in this Article III shall be bound to ascertain the
Indenture Trustee's authority, inquire into the satisfaction of any
conditions precedent or see to the application of any moneys.
(b) In order to facilitate the servicing of the Mortgage Loans, the
Master Servicer is hereby authorized in the name and on behalf of the
Indenture Trustee and the Issuer, to execute assumption agreements,
substitution agreements, and instruments of satisfaction or cancellation or
of partial or full release or discharge, or any other document contemplated
by the Servicing Agreement and other comparable instruments with respect to
the Mortgage Loans and with respect to the Mortgaged Properties subject to
the Mortgages (and the Indenture Trustee and the Owner Trustee shall promptly
execute any such documents on request of the Master Servicer), subject to the
obligations of the Master Servicer under the Servicing Agreement. If from
time to time the Master Servicer shall deliver to the Indenture Trustee or
the related Custodian copies of any written assurance, assumption agreement
or substitution agreement or other similar agreement pursuant to Section 3.05
of the Servicing Agreement, the Indenture Trustee or the related Custodian
shall check that each of such documents purports to be an original executed
copy (or a copy of the original executed document if the original executed
copy has been submitted for recording and has not yet been returned) and, if
so, shall file such documents, and upon receipt of the original executed copy
from the applicable recording office or receipt of a copy thereof certified
by the applicable recording office shall file such originals or certified
copies with the Related Documents. If any such documents submitted by the
Master Servicer do not meet the above qualifications, such documents shall
promptly be returned by the Indenture Trustee or the related Custodian to the
Master Servicer, with a direction to the Master Servicer to forward the
correct documentation.
(c) Upon Issuer Request accompanied by an Officers' Certificate of the
Master Servicer pursuant to Section 3.07 of the Servicing Agreement to the
effect that a Mortgage Loan has been the subject of a final payment or a
prepayment in full and the related Mortgage Loan has been terminated or that
substantially all Liquidation Proceeds which have been determined by the
Master Servicer in its reasonable judgment to be finally recoverable have
been recovered, and upon deposit to the Collection Account of such final
monthly payment, prepayment in full together with accrued and unpaid interest
to the date of such payment with respect to such Mortgage Loan or, if
applicable, Liquidation Proceeds, the Indenture Trustee and the Issuer shall
promptly release the Related Documents to the Master Servicer upon the order
of the Issuer, along with such documents as the Master Servicer or the
Mortgagor may request as contemplated by the Servicing Agreement to evidence
satisfaction and discharge of such Mortgage Loan. If from time to time and
as appropriate for the servicing or foreclosure of any Mortgage Loan, the
Master Servicer requests the Indenture Trustee or the related Custodian to
release the Related Documents and delivers to the Indenture Trustee or the
related Custodian a trust receipt reasonably satisfactory to the Indenture
Trustee or the related Custodian and signed by a Responsible Officer of the
Master Servicer, the Issuer and the Indenture Trustee or the related
Custodian shall release the Related Documents to the Master Servicer. If
such Mortgage Loans shall be liquidated and the Indenture Trustee or the
related Custodian receives a certificate from the Master Servicer as provided
above, then, upon request of the Issuer, the Indenture Trustee or the related
Custodian shall release the trust receipt to the Master Servicer upon the
order of the Issuer.
(d) The Indenture Trustee shall, at such time as there are no Notes
Outstanding and no amounts due to the Credit Enhancer, release all of the
Trust Estate to the Issuer (other than any cash held for the payment of the
Notes pursuant to Section 3.03 or 4.11), subject, however, to the rights of
the Indenture Trustee under Section 6.07.
Section 3.16. Amendments to Servicing Agreement. The Indenture
---------------------------------
Trustee may enter into any amendment or supplement to the Servicing Agreement
only in accordance with Section 8.01 of the Servicing Agreement. The
Indenture Trustee may, in its discretion, decline to enter into or consent to
any such supplement or amendment if its own rights, duties or immunities
shall be adversely affected.
Section 3.17. Master Servicer as Agent and Bailee of Indenture
------------------------------------------------
Trustee. Solely for purposes of perfection under Section 9-305 of the
- - -------
Uniform Commercial Code or other similar applicable law, rule or regulation
of the state in which such property is held by the Master Servicer, the
Indenture Trustee hereby acknowledges that the Master Servicer is acting as
agent and bailee of the Indenture Trustee in holding amounts on deposit in
the Collection Account pursuant to Section 3.02 of the Servicing Agreement,
as well as its agent and bailee in holding any Related Documents released to
the Master Servicer pursuant to Section 3.15(c), and any other items
constituting a part of the Trust Estate which from time to time come into the
possession of the Master Servicer. It is intended that, by the Master
Servicer's acceptance of such agency pursuant to Section 3.02 of the
Servicing Agreement, the Trustee, as a secured party, will be deemed to have
possession of such Related Documents, such moneys and such other items for
purposes of Section 9-305 of the Uniform Commercial Code of the state in
which such property is held by the Master Servicer.
Section 3.18. Investment Company Act. The Issuer shall not become
----------------------
an "investment company" or under the "control" of an "investment company" as
such terms are defined in the Investment Company Act of 1940, as amended (or
any successor or amendatory statute), and the rules and regulations
thereunder (taking into account not only the general definition of the term
"investment company" but also any available exceptions to such general
definition); provided, however, that the Issuer shall be in compliance with
this Section 3.18 if it shall have obtained an order exempting it from
regulation as an "investment company" so long as it is in compliance with the
conditions imposed in such order.
Section 3.19. Issuer May Consolidate, etc., Only on Certain Terms.
---------------------------------------------------
(a) The Issuer shall not consolidate or merge with or into any other Person,
unless:
(i) the Person (if other than the Issuer) formed by or surviving
such consolidation or merger shall be a Person organized and existing
under the laws of the United States of America or any state or the
District of Columbia and shall expressly assume, by an indenture
supplemental hereto, executed and delivered to the Indenture Trustee, in
form reasonably satisfactory to the Indenture Trustee, the due and
punctual payment of the principal of and interest on all Notes and
Certificates and the performance or observance of every agreement and
covenant of this Indenture on the part of the Issuer to be performed or
observed, all as provided herein;
(ii) immediately after giving effect to such transaction, no
Event of Default shall have occurred and be continuing;
(iii) the Rating Agencies shall have notified the Issuer that such
transaction shall not cause the rating of the Notes or the Certificates
to be reduced, suspended or withdrawn or to be considered by either
Rating Agency to be below investment grade without taking into account
the Credit Enhancement Instrument;
(iv) the Issuer shall have received an Opinion of Counsel (and
shall have delivered copies thereof to the Indenture Trustee) to the
effect that such transaction will not have any material adverse tax
consequence to the Issuer, any Noteholder or any Certificateholder;
(v) any action that is necessary to maintain the lien and
security interest created by this Indenture shall have been taken; and
(vi) the Issuer shall have delivered to the Indenture Trustee an
Officer's Certificate and an Opinion of Counsel each stating that such
consolidation or merger and such supplemental indenture comply with this
Article III and that all conditions precedent herein provided for
relating to such transaction have been complied with (including any
filing required by the Exchange Act).
(b) The Issuer shall not convey or transfer any of its properties or
assets, including those included in the Trust Estate, to any Person, unless:
(i) the Person that acquires by conveyance or transfer the
properties and assets of the Issuer the conveyance or transfer of which
is hereby restricted shall (A) be a United States citizen or a Person
organized and existing under the laws of the United States of America or
any state, (B) expressly assumes, by an indenture supplemental hereto,
executed and delivered to the Indenture Trustee, in form satisfactory to
the Indenture Trustee, the due and punctual payment of the principal of
and interest on all Notes and the performance or observance of every
agreement and covenant of this Indenture on the part of the Issuer to be
performed or observed, all as provided herein, (C) expressly agrees by
means of such supplemental indenture that all right, title and interest
so conveyed or transferred shall be subject and subordinate to the
rights of Holders of the Notes, (D) unless otherwise provided in such
supplemental indenture, expressly agrees to indemnify, defend and hold
harmless the Issuer against and from any loss, liability or expense
arising under or related to this Indenture and the Notes and
(E) expressly agrees by means of such supplemental indenture that such
Person (or if a group of Persons, then one specified Person) shall make
all filings with the Commission (and any other appropriate Person)
required by the Exchange Act in connection with the Notes;
(ii) immediately after giving effect to such transaction, no
Default or Event of Default shall have occurred and be continuing;
(iii) the Rating Agencies shall have notified the Issuer that such
transaction shall not cause the rating of the Notes or the Certificates
to be reduced, suspended or withdrawn;
(iv) the Issuer shall have received an Opinion of Counsel (and
shall have delivered copies thereof to the Indenture Trustee) to the
effect that such transaction will not have any material adverse tax
consequence to the Issuer, any Noteholder or any Certificateholder;
(v) any action that is necessary to maintain the lien and
security interest created by this Indenture shall have been taken; and
(vi) the Issuer shall have delivered to the Indenture Trustee an
Officer's Certificate and an Opinion of Counsel each stating that such
conveyance or transfer and such supplemental indenture comply with this
Article III and that all conditions precedent herein provided for
relating to such transaction have been complied with (including any
filing required by the Exchange Act).
Section 3.20. Successor or Transferee. (a) Upon any consolidation
-----------------------
or merger of the Issuer in accordance with Section 3.19(a), the Person formed
by or surviving such consolidation or merger (if other than the Issuer) shall
succeed to, and be substituted for, and may exercise every right and power
of, the Issuer under this Indenture with the same effect as if such Person
had been named as the Issuer herein.
(b) Upon a conveyance or transfer of all the assets and properties of
the Issuer pursuant to Section 3.19(b), the Issuer will be released from
every covenant and agreement of this Indenture to be observed or performed on
the part of the Issuer with respect to the Notes immediately upon the
delivery of written notice to the Indenture Trustee that the Issuer is to be
so released.
Section 3.21. No Other Business. The Issuer shall not engage in any
-----------------
business other than financing, purchasing, owning and selling and managing
the Mortgage Loans in the manner contemplated by this Indenture and the Basic
Documents and all activities incidental thereto.
Section 3.22. No Borrowing. The Issuer shall not issue, incur,
------------
assume, guarantee or otherwise become liable, directly or indirectly, for any
indebtedness except for the Notes.
Section 3.23. Guarantees, Loans, Advances and Other Liabilities.
-------------------------------------------------
Except as contemplated by this Indenture, the Issuer shall not make any loan
or advance or credit to, or guarantee (directly or indirectly or by an
instrument having the effect of assuring another's payment or performance on
any obligation or capability of so doing or otherwise), endorse or otherwise
become contingently liable, directly or indirectly, in connection with the
obligations, stocks or dividends of, or own, purchase, repurchase or acquire
(or agree contingently to do so) any stock, obligations, assets or securities
of, or any other interest in, or make any capital contribution to, any other
Person.
Section 3.24. Capital Expenditures. The Issuer shall not make any
--------------------
expenditure (by long-term or operating lease or otherwise) for capital assets
(either realty or personalty).
Section 3.25. (Reserved)
Section 3.26. Restricted Payments. The Issuer shall not, directly
-------------------
or indirectly, (i) pay any dividend or make any distribution (by reduction of
capital or otherwise), whether in cash, property, securities or a combination
thereof, to the Owner Trustee or any owner of a beneficial interest in the
Issuer or otherwise with respect to any ownership or equity interest or
security in or of the Issuer, (ii) redeem, purchase, retire or otherwise
acquire for value any such ownership or equity interest or security or
(iii) set aside or otherwise segregate any amounts for any such purpose;
provided, however, that the Issuer may make, or cause to be made,
(w) distributions to the Owner Trustee and the Certificateholders as
contemplated by, and to the extent funds are available for such purpose under
the Trust Agreement, (x) payment to the Master Servicer pursuant to the terms
of the Servicing Agreement and (y) payments to the Indenture Trustee pursuant
to Section 1(a)(ii) of the Administration Agreement and (z) make
distributions to the holders of the Residual Ownership Interest as
contemplated by the Trust Agreement. The Issuer will not, directly or
indirectly, make payments to or distributions from the Collection Account
except in accordance with this Indenture and the Basic Documents.
Section 3.27. Notice of Events of Default. The Issuer shall give
---------------------------
the Indenture Trustee the Credit Enhancer and the Rating Agencies prompt
written notice of each Event of Default hereunder and under the Trust
Agreement.
Section 3.28. Further Instruments and Acts. Upon request of the
----------------------------
Indenture Trustee, the Issuer will execute and deliver such further
instruments and do such further acts as may be reasonably necessary or proper
to carry out more effectively the purpose of this Indenture.
Section 3.29. Statements to Noteholders. The Indenture Trustee and
-------------------------
the Certificate Registrar shall forward by mail to each Noteholder and
Certificateholder, respectively, the Statement delivered to it pursuant to
Section 4.01 of the Servicing Agreement.
Section 3.30. (Reserved) (Grant of the Additional Loans. (a) In
-----------------------------
consideration of the delivery on each Deposit Date to or upon the order of
the Issuer of all or a portion of the amount in respect of Security Principal
Collections on deposit in the Funding Account, the Issuer shall, to the
extent of the availability thereof, on such Deposit Date during the Funding
Period Grant to the Indenture Trustee all of its right, title and interest in
the Additional Loans and simultaneously with the Grant of the Additional
Loans the Issuer will deliver the related Related Documents to the Indenture
Trustee or the related Custodian.
(b) The obligation of the Indenture Trustee to accept the Grant of the
Additional Loans and the other property and rights related thereto described
in paragraph (a) above is subject to the satisfaction of each of the
following conditions on or prior to each Deposit Date:
(i) the Indenture Trustee shall not have received written notice
from any Rating Agency or the Credit Enhancer to the effect that such
transfer of Additional Loans would adversely affect the then current
rating of the Notes or cause the rating assigned to the Securities to be
below investment grade without taking into account the Credit
Enhancement Instrument;
(ii) the Indenture Trustee shall have received a revised Mortgage
Loan Schedule, listing the Additional Loans;
(iii) the Master Servicer shall confirm to the Indenture Trustee
that it has deposited in the Collection Account all Principal
Collections and Interest Collections in respect of such Additional Loans
on or after the related Deposit Date for the Additional Loans;
(iv) the Indenture Trustee shall have received a duly completed
and executed Transfer Certificate in the form of Exhibit 1 to the
Mortgage Loan Purchase Agreement;
(v) the Seller at its expense and the Issuer at its expense, as
appropriate, shall have provided the Rating Agencies and the Credit
Enhancer with an opinion of counsel relating to the sale of the
Additional Loans to the Issuer and the Grant of the Additional Loans to
the Indenture Trustee which opinion shall be in the form of Exhibit 2 to
the Mortgage Loan Purchase Agreement; and
(vi) the Issuer shall have delivered to the Indenture Trustee an
Officer's Certificate and an Opinion of Counsel confirming the
satisfaction of each condition precedent specified in this paragraph
(b).
(c) The obligation of the Indenture Trustee to accept the Grant of an
Additional Loan on the related Deposit Date is subject to each Additional
Loan and the Additional Loans in the aggregate, as the case may be,
satisfying the conditions set forth in the Mortgage Loan Purchase Agreement.)
Section 3.31. Determination of Note Rate and Certificate Rate. On
-----------------------------------------------
the second LIBOR Business Day immediately preceding (i) the Closing Date in
the case of the first Interest Period and (ii) the first day of each
succeeding Interest Period, the Indenture Trustee shall determine LIBOR and
the Note Rate and the Certificate Rate for such Interest Period and shall
inform the Issuer, the Master Servicer and the Depositor at their respective
facsimile numbers given to the Indenture Trustee in writing thereof.
Section 3.32. Payments under the Credit Enhancement Instrument. (a)
------------------------------------------------
On any Payment Date, other than a Dissolution Payment Date, the Indenture
Trustee on behalf of the Noteholders, and in its capacity as Certificate
Paying Agent on behalf of the Certificateholders shall make a draw on the
Credit Enhancement Instrument in an amount if any equal to the sum of (x) the
amount by which the sum of (i) interest accrued at the Note Rate on the
Security Balance of the Notes plus (ii) the Certificate Distribution Amount
exceeds the amount on deposit in the Payment Account available to be
distributed therefor on such Payment Date and (y) the Guaranteed Principal
Payment Amount (the "Credit Enhancement Draw Amount").
(b) The Indenture Trustee shall submit, if a Credit Enhancement Draw
Amount is specified in any Statement to Holders prepared by the Master
Servicer pursuant to Section 4.01 of the Servicing Agreement, the Notice for
Payment (as defined in the Credit Enhancement Instrument) in the amount of
the Credit Enhancement Draw Amount to the Credit Enhancer no later than 2:00
P.M., New York City time, on the second Business Day prior to the applicable
Payment Date. Upon receipt of such Credit Enhancement Draw Amount in
accordance with the terms of the Credit Enhancement Instrument, the Indenture
Trustee shall deposit such Credit Enhancement Draw Amount in the Payment
Account for distribution to Holders pursuant to Section 3.05.
In addition, a draw may be made under the Credit Enhancement Instrument
in respect of any Avoided Payment (as defined in and pursuant to the terms
and conditions of the Credit Enhancement Instrument) and the Indenture
Trustee shall submit a Notice for Payment with respect thereto together with
the other documents required to be delivered to the Credit Enhancer pursuant
to the Credit Enhancement Instrument in connection with a draw in respect of
any Avoided Payment.
(c) In the event that any Additional Credit Enhancement Instruments are
issued pursuant to Section 4.01 and Section 2.02(B) of the Insurance
Agreement, the Indenture Trustee shall be authorized to make draws thereon
subject to the terms and conditions therein.
Section 3.33. Replacement Credit Enhancement Instrument. In the
-----------------------------------------
event of a Credit Enhancer Default or if the claims paying ability rating of
the Credit Enhancer is downgraded and such downgrade results in a downgrading
of the then current rating of the Securities (in each case, a "Replacement
Event"), the Issuer, at its expense, in accordance with and upon satisfaction
of the conditions set forth in the Credit Enhancement Instrument, including,
without limitation, payment in full of all amounts owed to the Credit
Enhancer, may, but shall not be required to, substitute a new surety bond or
surety bonds for the existing Credit Enhancement Instrument or may arrange
for any other form of credit enhancement; provided, however, that in each
case the Notes and the Certificates shall be rated no lower than the rating
assigned by each Rating Agency to the Notes and the Certificates immediately
prior to such Replacement Event and the timing and mechanism for drawing on
such new credit enhancement shall be reasonably acceptable to the Indenture
Trustee and provided further that the premiums under the proposed credit
enhancement shall not exceed such premiums under the existing Credit
Enhancement Instrument. It shall be a condition to substitution of any new
credit enhancement that there be delivered to the Indenture Trustee (i) an
Opinion of Counsel, acceptable in form to the Indenture Trustee, from counsel
to the provider of such new credit enhancement with respect to the
enforceability thereof and such other matters as the Indenture Trustee may
require and (ii) an Opinion of Counsel to the effect that such substitution
would not (a) adversely affect in any material respect the tax status of the
Notes and the Certificates or (b) cause the Issuer to be subject to a tax at
the entity level or to be classified as a taxable mortgage pool within the
meaning of Section 7701(i) of the Code. Upon receipt of the items referred
to above and payment of all amounts owing to the Credit Enhancer and the
taking of physical possession of the new credit enhancement, the Indenture
Trustee shall, within five Business Days following receipt of such items and
such taking of physical possession, deliver the replaced Credit Enhancement
Instrument to the Credit Enhancer. In the event of any such replacement the
Issuer shall give written notice thereof to the Rating Agencies.
ARTICLE IV
The Notes; Satisfaction and Discharge of Indenture
Section 4.01. The Notes(; Increase of Maximum Variable Funding
------------------------------------------------
Balance; Additional Variable Funding Notes). (a) The Term Notes shall be
- - -------------------------------------------
registered in the name of a nominee designated by the Depository. Beneficial
Owners will hold interests in the Term Notes through the book-entry
facilities of the Depository in minimum initial Principal Balances of
$(________) and integral multiples of $(_________) in excess thereof. (The
Capped Funding Notes will be issuable in minimum initial Principal Balances
of $(_______) and integral multiples of $(________) in excess thereof,
together with any additional amount necessary to cover the aggregate initial
Principal Balance of the Capped Funding Notes surrendered at the time of the
initial denominational exchange thereof (with such initial Principal Balance
in each case being deemed to be the Principal Balance of the Capped Funding
Notes at the time of such initial denominational exchange thereof).)
The Indenture Trustee may for all purposes (including the making of
payments due on the Notes) deal with the Depository as the authorized
representative of the Beneficial Owners with respect to the Term Notes for
the purposes of exercising the rights of Holders of Term Notes hereunder.
Except as provided in the next succeeding paragraph of this Section 4.01, the
rights of Beneficial Owners with respect to the Term Notes shall be limited
to those established by law and agreements between such Beneficial Owners and
the Depository and Depository Participants. Except as provided in Section
4.08, Beneficial Owners shall not be entitled to definitive certificates for
the Term Notes as to which they are the Beneficial Owners. Requests and
directions from, and votes of, the Depository as Holder of the Term Notes
shall not be deemed inconsistent if they are made with respect to different
Beneficial Owners. The Indenture Trustee may establish a reasonable record
date in connection with solicitations of consents from or voting by
Noteholders and give notice to the Depository of such record date. Without
the consent of the Issuer and the Indenture Trustee, no Term Note may be
transferred by the Depository except to a successor Depository that agrees to
hold such Note for the account of the Beneficial Owners.
In the event the Depository Trust Company resigns or is removed as
Depository, the Indenture Trustee with the approval of the Issuer may appoint
a successor Depository. If no successor Depository has been appointed within
30 days of the effective date of the Depository's resignation or removal,
each Beneficial Owner shall be entitled to certificates representing the
Notes it beneficially owns in the manner prescribed in Section 4.08.
The Notes shall, on original issue, be executed on behalf of the Issuer
by the Owner Trustee, not in its individual capacity but solely as Owner
Trustee, authenticated by the Note Registrar and delivered by the Indenture
Trustee to or upon the order of the Issuer.
((b) So long as no Amortization Event has occurred the Maximum Variable
Funding Balance on the Closing Date may be increased from time to time by an
aggregate amount not to exceed $(______________) and Additional Variable
Funding Notes may be issued upon satisfaction of the following conditions:
(i) the Indenture Trustee shall have received an Additional
Credit Enhancement Instrument pursuant to the terms and conditions of
the Insurance Agreement, including without limitation Section 2.02(B)
thereof;
(ii) the Indenture Trustee shall have received an Opinion of
Counsel to the Credit Enhancer in the form attached hereto as Exhibit C;
(iii) the Indenture Trustee shall have received an Opinion of
Counsel in the form attached hereto as Exhibit D;
(iv) the Indenture Trustee shall have received the documents
specified in Section 11.01(a) (other than clause (iii) thereof).
The Security Balance of such Additional Variable Funding Notes in the
aggregate will reflect the sum of (i) the related Excess Additional Balance
Differential and (ii) the Additional Balance Differential for each Collection
Period from the Collection Period during which the Additional Variable
Funding Notes are issued until the new Maximum Variable Funding Balance is
reached. Notwithstanding the foregoing, the Security Balance of each
specific Additional Variable Funding Note will be limited to the Maximum
Individual Variable Funding Balance as provided in subsection (c) below.
The Additional Variable Funding Notes issued in connection with the
first increase in the Maximum Variable Funding Balance pursuant to this
subsection will bear the designation "A" (in addition to the numerical
designation pursuant to subsection (c) below) and any subsequent Additional
Variable Funding Notes issued in connection with any subsequent increases in
the Maximum Variable Funding Balance will bear alphabetical designations in
the order of their issuance.
Any Additional Variable Funding Notes shall be in the form of Exhibit A-
2 hereof and for all purposes shall be Notes issued pursuant to this
Indenture and all references to Variable Funding Notes herein shall include
Additional Variable Funding Notes issued pursuant to this Section 4.01(b).
Upon the issuance of any Additional Variable Funding Notes the Issuer
will deliver written notice thereof to the Rating Agencies.
(c) Subject to the Maximum Variable Funding Balance at such time as the
Security Balance of any Variable Funding Note reaches the Maximum Individual
Variable Funding Balance no subsequent amounts in respect of the Additional
Balance Differential shall be added to the Security Balance of such Variable
Funding Note and instead a new Variable Funding Note shall be issued and
executed on behalf of the Issuer by the Owner Trustee, not in its individual
capacity but solely as Owner Trustee, authenticated by the Note Registrar and
delivered by the Indenture Trustee to or upon the order of the Issuer. All
subsequent amounts in respect of the Additional Balance Differential shall be
added to the Security Balance of such new Variable Funding Note (subject to
the Maximum Variable Funding Balance) until the Security Balance thereof
reaches the Maximum Individual Variable Funding Balance.
The Variable Funding Note issued on the Closing Date shall bear the
Designation "1" and each new Variable Funding Note will bear sequential
numerical designations in the order of their issuance. On each Payment Date
on or after the Accelerated Amortization Date a new Variable Funding Note
will be issued on each Payment Date in a principal amount equal to the lesser
of (a) the Maximum Individual Variable Funding Balance and (b) the Additional
Balance Differential for such Payment Date, but in no event will the
Principal Balance of the Variable Funding Notes exceed the Maximum Variable
Funding Balance without satisfying the conditions of Section 4.01 hereof.)
Section 4.02. Registration of and Limitations on Transfer and
-----------------------------------------------
Exchange of Notes; Appointment of Certificate Registrar. The Note
- - -------------------------------------------------------
Registrar shall cause to be kept at its Corporate Trust Office a Note
Register in which, subject to such reasonable regulations as it may pre-
scribe, the Note Registrar shall provide for the registration of Notes and of
transfers and exchanges of Notes as herein provided.
Subject to the restrictions and limitations set forth below, upon
surrender for registration of transfer of any Note at the Corporate Trust
Office, the Indenture Trustee shall execute and the Note Registrar shall
authenticate and deliver, in the name of the designated transferee or
transferees, one or more new Notes in authorized initial Security Balances
evidencing the same aggregate Percentage Interests.
(No Variable Funding Note, other than any Capped Funding Notes, may be
transferred. Subject to the provisions set forth below Capped Funding Notes
may be transferred, provided that with respect to the initial transfer
thereof by the Seller prior written notification of such transfer shall have
been given to the Rating Agencies and to the Credit Enhancer by the Seller
along with an Opinion of Counsel to the effect that such transfer will not
constitute a fraudulent conveyance under the laws of the relevant
jurisdiction.
No transfer of a Capped Funding Note shall be made unless such transfer
is exempt from the registration requirements of the Securities Act of 1933,
as amended, and any applicable state securities laws or is made in accordance
with said Act and laws. In the event of any such transfer, (i) unless such
transfer is made in reliance upon Rule 144A under the 1933 Act, the Indenture
Trustee or the Issuer may, require a written Opinion of Counsel (which may be
in-house counsel) acceptable to and in form and substance reasonably
satisfactory to the Indenture Trustee and the Issuer that such transfer may
be made pursuant to an exemption, describing the applicable exemption and the
basis therefor, from said Act and laws or is being made pursuant to said Act
and laws, which Opinion of Counsel shall not be an expense of the Indenture
Trustee or the Issuer and (ii) the Indenture Trustee shall require the
transferee to execute an investment letter (in substantially the form
attached hereto as Exhibit F) acceptable to and in form and substance
reasonably satisfactory to the Issuer and the Indenture Trustee certifying to
the Issuer and the Indenture Trustee the facts surrounding such transfer,
which investment letter shall not be an expense of the Indenture Trustee or
the Issuer. The Holder of a Variable Funding Note desiring to effect such
transfer shall, and does hereby agree to, indemnify the Indenture Trustee the
Credit Enhancer and the Issuer against any liability that may result if the
transfer is not so exempt or is not made in accordance with such federal and
state laws. Notwithstanding the foregoing, the restriction of transfer
specified in this paragraph is not applicable to any Capped Funding Notes
that have been registered under the Securities Act of 1933 pursuant to
Section 2.5 of the Mortgage Loan Purchase Agreement.)
Subject to the foregoing, at the option of the Noteholders, Notes may be
exchanged for other Notes of like tenor or, in each case in authorized
initial Principal Balances evidencing the same aggregate Percentage Interests
upon surrender of the Notes to be exchanged at the Corporate Trust Office of
the Note Registrar. (With respect to any surrender of Capped Funding Notes
for exchange the new Notes delivered in exchange therefor will bear the
designation "Capped" in addition to any other applicable designations.)
Whenever any Notes are so surrendered for exchange, the Indenture Trustee
shall execute and the Note Registrar shall authenticate and deliver the Notes
which the Noteholder making the exchange is entitled to receive. Each Note
presented or surrendered for registration of transfer or exchange shall (if
so required by the Note Registrar) be duly endorsed by, or be accompanied by
a written instrument of transfer in form reasonably satisfactory to the Note
Registrar duly executed by, the Holder thereof or his attorney duly
authorized in writing. Notes delivered upon any such transfer or exchange
will evidence the same obligations, and will be entitled to the same rights
and privileges, as the Notes surrendered.
No service charge shall be made for any registration of transfer or
exchange of Notes, but the Note Registrar shall require payment of a sum
sufficient to cover any tax or governmental charge that may be imposed in
connection with any registration of transfer or exchange of Notes.
All Notes surrendered for registration of transfer and exchange shall be
cancelled by the Note Registrar and delivered to the Indenture Trustee for
subsequent destruction without liability on the part of either.
The Issuer hereby appoints (___________________) as Certificate
Registrar to keep at its Corporate Trust Office a Certificate Register
pursuant to Section 3.09 of the Trust Agreement in which, subject to such
reasonable regulations as it may prescribe, the Certificate Registrar shall
provide for the registration of Certificates Residual Ownership Interests and
of transfers and exchanges thereof pursuant to Section 3.05 of the Trust
Agreement. (___________________) hereby accepts such appointment.
Section 4.03. Mutilated, Destroyed, Lost or Stolen Notes. If
------------------------------------------
(i) any mutilated Note is surrendered to the Indenture Trustee, or the
Indenture Trustee receives evidence to its satisfaction of the destruction,
loss or theft of any Note, and (ii) there is delivered to the Indenture
Trustee such security or indemnity as may be required by it to hold the
Issuer and the Indenture Trustee harmless, then, in the absence of notice to
the Issuer, the Note Registrar or the Indenture Trustee that such Note has
been acquired by a bona fide purchaser, and provided that the requirements of
Section 8-405 of the UCC are met, the Issuer shall execute, and upon its
request the Indenture Trustee shall authenticate and deliver, in exchange for
or in lieu of any such mutilated, destroyed, lost or stolen Note, a
replacement Note of the same Class; provided, however, that if any such
destroyed, lost or stolen Note, but not a mutilated Note, shall have become
or within seven days shall be due and payable, instead of issuing a
replacement Note, the Issuer may pay such destroyed, lost or stolen Note when
so due or payable without surrender thereof. If, after the delivery of such
replacement Note or payment of a destroyed, lost or stolen Note pursuant to
the proviso to the preceding sentence, a bona fide purchaser of the original
Note in lieu of which such replacement Note was issued presents for payment
such original Note, the Issuer and the Indenture Trustee shall be entitled to
recover such replacement Note (or such payment) from the Person to whom it
was delivered or any Person taking such replacement Note from such Person to
whom such replacement Note was delivered or any assignee of such Person,
except a bona fide purchaser, and shall be entitled to recover upon the
security or indemnity provided therefor to the extent of any loss, damage,
cost or expense incurred by the Issuer or the Indenture Trustee in connection
therewith.
Upon the issuance of any replacement Note under this Section 4.03, the
Issuer may require the payment by the Holder of such Note of a sum sufficient
to cover any tax or other governmental charge that may be imposed in relation
thereto and any other reasonable expenses (including the fees and expenses of
the Indenture Trustee) connected therewith.
Every replacement Note issued pursuant to this Section 4.03 in
replacement of any mutilated, destroyed, lost or stolen Note shall constitute
an original additional contractual obligation of the Issuer, whether or not
the mutilated, destroyed, lost or stolen Note shall be at any time
enforceable by anyone, and shall be entitled to all the benefits of this
Indenture equally and proportionately with any and all other Notes duly
issued hereunder.
The provisions of this Section 4.03 are exclusive and shall preclude (to
the extent lawful) all other rights and remedies with respect to the
replacement or payment of mutilated, destroyed, lost or stolen Notes.
Section 4.04. Persons Deemed Owners. Prior to due presentment for
---------------------
registration of transfer of any Note, the Issuer, the Indenture Trustee and
any agent of the Issuer or the Indenture Trustee may treat the Person in
whose name any Note is registered (as of the day of determination) as the
owner of such Note for the purpose of receiving payments of principal of and
interest, if any, on such Note and for all other purposes whatsoever, whether
or not such Note be overdue, and neither the Issuer, the Indenture Trustee
nor any agent of the Issuer or the Indenture Trustee shall be affected by
notice to the contrary.
Section 4.05. Cancellation. All Notes surrendered for payment,
------------
registration of transfer, exchange or redemption shall, if surrendered to any
Person other than the Indenture Trustee, be delivered to the Indenture
Trustee and shall be promptly cancelled by the Indenture Trustee. The Issuer
may at any time deliver to the Indenture Trustee for cancellation any Notes
previously authenticated and delivered hereunder which the Issuer may have
acquired in any manner whatsoever, and all Notes so delivered shall be
promptly cancelled by the Indenture Trustee. No Notes shall be authenticated
in lieu of or in exchange for any Notes cancelled as provided in this Section
4.05, except as expressly permitted by this Indenture. All cancelled Notes
may be held or disposed of by the Indenture Trustee in accordance with its
standard retention or disposal policy as in effect at the time unless the
Issuer shall direct by an Issuer Request that they be destroyed or returned
to it; provided, that such Issuer Request is timely and the Notes have not
been previously disposed of by the Indenture Trustee.
Section 4.06. Book-Entry Notes. The Term Notes, upon original
----------------
issuance, will be issued in the form of typewritten Notes representing the
Book-Entry Notes, to be delivered to The Depository Trust Company, the
initial Depository, by, or on behalf of, the Issuer. Such Term Notes shall
initially be registered on the Note Register in the name of Cede & Co., the
nominee of the initial Depository, and no Beneficial Owner will receive a
definitive Note representing such Beneficial Owner's interest in such Note,
except as provided in Section 4.08. Unless and until definitive, fully
registered Notes (the "Definitive Notes") have been issued to Beneficial
Owners pursuant to Section 4.08:
(i) the provisions of this Section 4.06 shall be in full force
and effect;
(ii) the Note Registrar and the Indenture Trustee shall be
entitled to deal with the Depository for all purposes of this Indenture
(including the payment of principal of and interest on the Notes and the
giving of instructions or directions hereunder) as the sole holder of
the Term Notes, and shall have no obligation to the Owners of Term
Notes;
(iii) to the extent that the provisions of this Section 4.06
conflict with any other provisions of this Indenture, the provisions of
this Section 4.06 shall control;
(iv) the rights of Beneficial Owners shall be exercised only
through the Depository and shall be limited to those established by law
and agreements between such Owners of Term Notes and the Depository
and/or the Depository Participants pursuant to the Note Depository
Agreement. Unless and until Definitive Term Notes are issued pursuant
to Section 4.08, the initial Depository will make book-entry transfers
among the Depository Participants and receive and transmit payments of
principal of and interest on the Notes to such Depository Participants;
and
(v) whenever this Indenture requires or permits actions to be
taken based upon instructions or directions of Holders of Term Notes
evidencing a specified percentage of the Security Balances of the Term
Notes, the Depository shall be deemed to represent such percentage only
to the extent that it has received instructions to such effect from
Beneficial Owners and/or Depository Participants owning or representing,
respectively, such required percentage of the beneficial interest in the
Term Notes and has delivered such instructions to the Indenture Trustee.
Section 4.07. Notices to Depository. Whenever a notice or other
---------------------
communication to the Term Note Holders is required under this Indenture,
unless and until Definitive Term Notes shall have been issued to Beneficial
Owners pursuant to Section 4.08, the Indenture Trustee shall give all such
notices and communications specified herein to be given to Holders of the
Term Notes to the Depository, and shall have no obligation to the Beneficial
Owners.
Section 4.08. Definitive Notes. If (i) the Administrator advises
----------------
the Indenture Trustee in writing that the Depository is no longer willing or
able to properly discharge its responsibilities with respect to the Term
Notes and the Administrator is unable to locate a qualified successor,
(ii) the Administrator at its option advises the Indenture Trustee in writing
that it elects to terminate the book-entry system through the Depository or
(iii) after the occurrence of an Event of Default, Owners of Term Notes
representing beneficial interests aggregating at least a majority of the
Security Balances of the Term Notes advise the Depository in writing that the
continuation of a book-entry system through the Depository is no longer in
the best interests of the Beneficial Owners, then the Depository shall notify
all Beneficial Owners and the Indenture Trustee of the occurrence of any such
event and of the availability of Definitive Term Notes to Beneficial Owners
requesting the same. Upon surrender to the Indenture Trustee of the
typewritten Term Notes representing the Book-Entry Notes by the Depository,
accompanied by registration instructions, the Issuer shall execute and the
Indenture Trustee shall authenticate the Definitive Term Notes in accordance
with the instructions of the Depository. None of the Issuer, the Note
Registrar or the Indenture Trustee shall be liable for any delay in delivery
of such instructions and may conclusively rely on, and shall be protected in
relying on, such instructions. Upon the issuance of Definitive Notes, the
Indenture Trustee shall recognize the Holders of the Definitive Notes as
Noteholders.
Section 4.09. Tax Treatment. The Issuer has entered into this
-------------
Indenture, and the Notes will be issued, with the intention that, for
federal, state and local income, single business and franchise tax purposes,
the Notes will qualify as indebtedness of the Issuer. The Issuer, by
entering into this Indenture, and each Noteholder, by its acceptance of its
Note (and each Beneficial Owner by its acceptance of an interest in the
applicable Book-Entry Note), agree to treat the Notes for federal, state and
local income, single business and franchise tax purposes as indebtedness of
the Issuer.
Section 4.10. Satisfaction and Discharge of Indenture. This
---------------------------------------
Indenture shall cease to be of further effect with respect to the Notes
except as to (i) rights of registration of transfer and exchange,
(ii) substitution of mutilated, destroyed, lost or stolen Notes, (iii) rights
of Noteholders to receive payments of principal thereof and interest thereon,
(iv) Sections 3.03, 3.04, 3.06, 3.10, 3.19, 3.21 and 3.22, (v) the rights,
obligations and immunities of the Indenture Trustee hereunder (including the
rights of the Indenture Trustee under Section 6.07 and the obligations of the
Indenture Trustee under Section 4.11) and (vi) the rights of Noteholders as
beneficiaries hereof with respect to the property so deposited with the
Indenture Trustee payable to all or any of them, and the Indenture Trustee,
on demand of and at the expense of the Issuer, shall execute proper
instruments acknowledging satisfaction and discharge of this Indenture with
respect to the Notes, when
(A) either
(1) all Notes theretofore authenticated and delivered (other than
(i) Notes that have been destroyed, lost or stolen and that have been
replaced or paid as provided in Section 4.03 and (ii) Notes for whose
payment money has theretofore been deposited in trust or segregated and
held in trust by the Issuer and thereafter repaid to the Issuer or
discharged from such trust, as provided in Section 3.03) have been
delivered to the Indenture Trustee for cancellation; or
(2) all Notes not theretofore delivered to the Indenture Trustee
for cancellation
a. have become due and payable, or
b. will become due and payable at the Final Scheduled
Payment Date within one year,
and the Issuer, in the case of a. or b. above, has irrevocably deposited
or caused to be irrevocably deposited with the Indenture Trustee cash or
direct obligations of or obligations guaranteed by the United States of
America (which will mature prior to the date such amounts are payable),
in trust for such purpose, in an amount sufficient to pay and discharge
the entire indebtedness on such Notes and Certificates then outstanding
not theretofore delivered to the Indenture Trustee for cancellation when
due on the Final Scheduled Payment Date;
(B) the Issuer has paid or caused to be paid all other sums
payable hereunder and under the Insurance Agreement by the Issuer; and
(C) the Issuer has delivered to the Indenture Trustee and the
Credit Enhancer an Officer's Certificate, an Opinion of Counsel and (if
required by the TIA or the Indenture Trustee) an Independent Certificate
from a firm of certified public accountants, each meeting the applicable
requirements of Section 11.01 and, subject to Section 11.01 each stating
that all conditions precedent herein provided for relating to the
satisfaction and discharge of this Indenture have been complied with
and, if the Opinion of Counsel relates to a deposit made in connection
with Section 4.10(A)(2)b. above, such opinion shall further be to the
effect that such deposit will not have any material adverse tax
consequences to the Issuer, any Noteholders or any Certificateholders.
Section 4.11. Application of Trust Money. All moneys deposited with
--------------------------
the Indenture Trustee pursuant to Section 4.10 hereof shall be held in trust
and applied by it, in accordance with the provisions of the Notes and this
Indenture, to the payment, either directly or through any Paying Agent or
Certificate Paying Agent, as the Indenture Trustee may determine, to the
Holders of Securities, of all sums due and to become due thereon for
principal and interest; but such moneys need not be segregated from other
funds except to the extent required herein or required by law.
Section 4.12. Subrogation and Cooperation. (a) The Issuer and the
---------------------------
Indenture Trustee acknowledge that (i) to the extent the Credit Enhancer
makes payments under the Credit Enhancement Instrument on account of
principal of or interest on the Notes or the Certificates, the Credit
Enhancer will be fully subrogated to the rights of such Holders to receive
such principal and interest from the Issuer, and (ii) the Credit Enhancer
shall be paid such principal and interest but only from the sources and in
the manner provided herein and in the Insurance Agreement for the payment of
such principal and interest.
The Indenture Trustee shall cooperate in all respects with any
reasonable request by the Credit Enhancer for action to preserve or enforce
the Credit Enhancer's rights or interest under this Indenture or the
Insurance Agreement without limiting the rights of the Noteholders as
otherwise set forth in the Indenture, including, without limitation, upon the
occurrence and continuance of a default under the Insurance Agreement, a
request to take any one or more of the following actions:
(i) institute Proceedings for the collection of all amounts then
payable on the Notes, or under this Indenture in respect to Notes and
all amounts payable under the Insurance Agreement enforce any judgment
obtained and collect from the Issuer moneys adjudged due;
(ii) sell the Trust Estate or any portion thereof or rights or
interest therein, at one or more public or private Sales called and
conducted in any manner permitted by law;
(iii) file or record all Assignments that have not previously been
recorded;
(iv) institute Proceedings from time to time for the complete or
partial foreclosure of this Indenture; and
(v) exercise any remedies of a secured party under the Uniform
Commercial Code and take any other appropriate action to protect and
enforce the rights and remedies of the Credit Enhancer hereunder.
Section 4.13. Repayment of Moneys Held by Paying Agent. In
----------------------------------------
connection with the satisfaction and discharge of this Indenture with respect
to the Notes, all moneys then held by any Administrator other than the
Indenture Trustee under the provisions of this Indenture with respect to such
Notes shall, upon demand of the Issuer, be paid to the Indenture Trustee to
be held and applied according to Section 3.05 and thereupon such Paying Agent
shall be released from all further liability with respect to such moneys.
ARTICLE V
Remedies
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Section 5.01. Events of Default. "Event of Default," wherever used
-----------------
herein, shall have the meaning provided in Appendix A; provided, however,
that no Event of Default will occur under clause (i) or clause (ii) of the
definition of "Event of Default" if the Issuer fails to make payments of
principal of and interest on the Notes so long as the Credit Enhancer makes
payments sufficient therefore under the Credit Enhancement Instrument.
The Issuer shall deliver to the Indenture Trustee and the Credit
Enhancer, within five days after the occurrence of an Event of Default,
written notice in the form of an Officer's Certificate of any event which
with the giving of notice and the lapse of time would become an Event of
Default under clause (iii) of the definition of "Event of Default", its
status and what action the Issuer is taking or proposes to take with respect
thereto.
Section 5.02. Acceleration of Maturity; Rescission and Annulment.
---------------------------------------------------
If an Event of Default should occur and be continuing, then and in every such
case the Indenture Trustee or the Holders of Notes representing not less than
a majority of the Security Balances of all Notes may declare the Notes to be
immediately due and payable, by a notice in writing to the Issuer (and to the
Indenture Trustee if given by Noteholders), and upon any such declaration the
unpaid principal amount of such Class of Notes, together with accrued and
unpaid interest thereon through the date of acceleration, shall become
immediately due and payable. Unless the prior written consent of the Credit
Enhancer shall have been obtained by the Indenture Trustee, the Payment Date
upon which such accelerated payment is due and payable shall not be a Payment
Date under the Credit Enhancement Instrument and the Indenture Trustee shall
not be authorized under Section 3.32 to make a draw therefor.
At any time after such declaration of acceleration of maturity has been
made and before a judgment or decree for payment of the money due has been
obtained by the Indenture Trustee as hereinafter in this Article V provided,
the Holders of Notes representing a majority of the Security Balances of all
Notes, by written notice to the Issuer and the Indenture Trustee, may rescind
and annul such declaration and its consequences if:
(i) the Issuer has paid or deposited with the Indenture Trustee
a sum sufficient to pay:
(A) all payments of principal of and interest on the Notes
and all other amounts that would then be due hereunder or upon the
Notes if the Event of Default giving rise to such acceleration had
not occurred; and
(B) all sums paid or advanced by the Indenture Trustee
hereunder and the reasonable compensation, expenses, disbursements
and advances of the Indenture Trustee and its agents and counsel;
and
(ii) all Events of Default, other than the nonpayment of the
principal of the Notes that has become due solely by such acceleration,
have been cured or waived as provided in Section 5.12.
No such rescission shall affect any subsequent default or impair any
right consequent thereto.
Section 5.03. Collection of Indebtedness and Suits for Enforcement
----------------------------------------------------
by Indenture Trustee. (a) The Issuer covenants that if (i) default is
- - --------------------
made in the payment of any interest on any Note when the same becomes due and
payable, and such default continues for a period of five days, or
(ii) default is made in the payment of the principal of or any installment of
the principal of any Note when the same becomes due and payable, the Issuer
will, upon demand of the Indenture Trustee, pay to it, for the benefit of the
Holders of Notes and of the Credit Enhancer, the whole amount then due and
payable on the Notes for principal and interest, with interest upon the
overdue principal, and in addition thereto such further amount as shall be
sufficient to cover the costs and expenses of collection, including the
reasonable compensation, expenses, disbursements and advances of the
Indenture Trustee and its agents and counsel.
(b) In case the Issuer shall fail forthwith to pay such amounts upon
such demand, the Indenture Trustee, in its own name and as trustee of an
express trust, subject to the provisions of Section 11.17 hereof may
institute a Proceeding for the collection of the sums so due and unpaid, and
may prosecute such Proceeding to judgment or final decree, and may enforce
the same against the Issuer or other obligor upon the Notes and collect in
the manner provided by law out of the property of the Issuer or other obligor
the Notes, wherever situated, the moneys adjudged or decreed to be payable.
(c) If an Event of Default occurs and is continuing, the Indenture
Trustee subject to the provisions of Section 11.17 hereof may, as more
particularly provided in Section 5.04, in its discretion, proceed to protect
and enforce its rights and the rights of the Noteholders and the Credit
Enhancer, by such appropriate Proceedings as the Indenture Trustee shall deem
most effective to protect and enforce any such rights, whether for the
specific enforcement of any covenant or agreement in this Indenture or in aid
of the exercise of any power granted herein, or to enforce any other proper
remedy or legal or equitable right vested in the Indenture Trustee by this
Indenture or by law.
(d) In case there shall be pending, relative to the Issuer or any other
obligor upon the Notes or any Person having or claiming an ownership interest
in the Trust Estate, Proceedings under Title 11 of the United States Code or
any other applicable federal or state bankruptcy, insolvency or other similar
law, or in case a receiver, assignee or trustee in bankruptcy or reorgani-
zation, liquidator, sequestrator or similar official shall have been
appointed for or taken possession of the Issuer or its property or such other
obligor or Person, or in case of any other comparable judicial Proceedings
relative to the Issuer or other obligor upon the Notes, or to the creditors
or property of the Issuer or such other obligor, the Indenture Trustee,
irrespective of whether the principal of any Notes shall then be due and
payable as therein expressed or by declaration or otherwise and irrespective
of whether the Indenture Trustee shall have made any demand pursuant to the
provisions of this Section, shall be entitled and empowered, by intervention
in such Proceedings or otherwise:
(i) to file and prove a claim or claims for the whole amount of
principal and interest owing and unpaid in respect of the Notes and to
file such other papers or documents as may be necessary or advisable in
order to have the claims of the Indenture Trustee (including any claim
for reasonable compensation to the Indenture Trustee and each
predecessor Indenture Trustee, and their respective agents, attorneys
and counsel, and for reimbursement of all expenses and liabilities
incurred, and all advances made, by the Indenture Trustee and each
predecessor Indenture Trustee, except as a result of negligence or bad
faith) and of the Noteholders allowed in such Proceedings;
(ii) unless prohibited by applicable law and regulations, to vote
on behalf of the Holders of Notes in any election of a trustee, a
standby trustee or Person performing similar functions in any such
Proceedings;
(iii) to collect and receive any moneys or other property payable
or deliverable on any such claims and to distribute all amounts received
with respect to the claims of the Noteholders and of the Indenture
Trustee on their behalf; and
(iv) to file such proofs of claim and other papers or documents
as may be necessary or advisable in order to have the claims of the
Indenture Trustee or the Holders of Notes allowed in any judicial
proceedings relative to the Issuer, its creditors and its property;
and any trustee, receiver, liquidator, custodian or other similar official in
any such Proceeding is hereby authorized by each of such Noteholders to make
payments to the Indenture Trustee, and, in the event that the Indenture
Trustee shall consent to the making of payments directly to such Noteholders,
to pay to the Indenture Trustee such amounts as shall be sufficient to cover
reasonable compensation to the Indenture Trustee, each predecessor Indenture
Trustee and their respective agents, attorneys and counsel, and all other
expenses and liabilities incurred, and all advances made, by the Indenture
Trustee and each predecessor Indenture Trustee except as a result of
negligence or bad faith.
(e) Nothing herein contained shall be deemed to authorize the Indenture
Trustee to authorize or consent to or vote for or accept or adopt on behalf
of any Noteholder any plan of reorganization, arrangement, adjustment or
composition affecting the Notes or the rights of any Holder thereof or to
authorize the Indenture Trustee to vote in respect of the claim of any Note-
holder in any such proceeding except, as aforesaid, to vote for the election
of a trustee in bankruptcy or similar Person.
(f) All rights of action and of asserting claims under this Indenture,
or under any of the Notes, may be enforced by the Indenture Trustee without
the possession of any of the Notes or the production thereof in any trial or
other Proceedings relative thereto, and any such action or proceedings
instituted by the Indenture Trustee shall be brought in its own name as
trustee of an express trust, and any recovery of judgment, subject to the
payment of the expenses, disbursements and compensation of the Indenture
Trustee, each predecessor Indenture Trustee and their respective agents and
attorneys, shall be for the ratable benefit of the Holders of the Term Notes
or the Variable Funding Notes, as applicable.
(g) In any Proceedings brought by the Indenture Trustee (and also any
Proceedings involving the interpretation of any provision of this Indenture
to which the Indenture Trustee shall be a party), the Indenture Trustee shall
be held to represent all the Holders of the Notes, and it shall not be
necessary to make any Noteholder a party to any such Proceedings.
Section 5.04. Remedies; Priorities. (a) If an Event of Default
--------------------
shall have occurred and be continuing, the Indenture Trustee subject to the
provisions of Section 11.17 hereof may do one or more of the following
(subject to Section 5.05):
(i) institute Proceedings in its own name and as trustee of an
express trust for the collection of all amounts then payable on the
Notes or under this Indenture with respect thereto, whether by
declaration or otherwise, and all amounts payable under the Insurance
Agreement, enforce any judgment obtained, and collect from the Issuer
and any other obligor upon such Notes moneys adjudged due;
(ii) institute Proceedings from time to time for the complete or
partial foreclosure of this Indenture with respect to the Trust Estate;
(iii) exercise any remedies of a secured party under the UCC and
take any other appropriate action to protect and enforce the rights and
remedies of the Indenture Trustee, the Holders of the Notes and the
Credit Enhancer; and
(iv) sell the Trust Estate or any portion thereof or rights or
interest therein, at one or more public or private sales called and
conducted in any manner permitted by law;
provided, however, that the Indenture Trustee may not sell or otherwise
liquidate the Trust Estate following an Event of Default, other than a
default in the payment of any principal or interest on the Notes for thirty
(30) days or more, unless (A) the Holders of 100% of the Security Balances of
the Securities and the Credit Enhancer, which consent will not be
unreasonably withheld consent thereto, (B) the proceeds of such sale or
liquidation distributable to Holders are sufficient to discharge in full all
amounts then due and unpaid upon the Securities for principal and interest
and to reimburse the Credit Enhancer for any amounts drawn under the Credit
Enhancement Instrument and any other amounts due the Credit Enhancer under
the Insurance Agreement or (C) the Indenture Trustee determines that the
Mortgage Loans will not continue to provide sufficient funds for the payment
of principal of and interest on either the Notes or the Certificates, as they
would have become due if the Notes had not been declared due and payable, and
the Indenture Trustee obtains the consent of the Credit Enhancer, which
consent will not be unreasonably withheld, and of the Holders of not less
than 66-2/3% of the Security Balances of the Securities. In determining such
sufficiency or insufficiency with respect to clause (B) and (C), the
Indenture Trustee may, but need not, obtain and rely upon an opinion of an
Independent investment banking or accounting firm of national reputation as
to the feasibility of such proposed action and as to the sufficiency of the
Trust Estate for such purpose. Notwithstanding the foregoing, so long as an
Event of Servicer Termination has not occurred, any Sale of the Trust Estate
shall be made subject to the continued Servicing of the Mortgage Loans by the
Master Servicer as provided in the Servicing Agreement.
(b) If the Indenture Trustee collects any money or property pursuant to
this Article V, it shall pay out the money or property in the following
order:
FIRST: to the Indenture Trustee for amounts due under
Section 6.07;
SECOND: to each Class of Noteholders for amounts due and unpaid
on the related Class of Notes for interest and to each Noteholder
of such Class in each case, ratably, without preference or priority
of any kind, according to the amounts due and payable on such Class
of Notes for interest from amounts available in the Trust Estate
for such Noteholders;
THIRD: to Holders of each Class of Notes for amounts due and
unpaid on the related Class of Notes for principal, from amounts
available in the Trust Estate for such Noteholders, and to each
Noteholder of such Class in each case ratably, without preference
or priority of any kind, according to the amounts due and payable
on such Class of Notes for principal, until the Security Balances
of each Class of Notes is reduced to zero;
FOURTH: to the Issuer for amounts required to be distributed to
the Certificateholders in respect of interest and principal
pursuant to the Trust Agreement;
FIFTH: (Reserved) (To the payment of all amounts due and owing to
the Credit Enhancer under the Insurance Agreement);
SIXTH: to the Issuer for amounts due under Article VIII of the
Trust Agreement; and
SEVENTH: to the payment of the remainder, if any to the Issuer or
any other person legally entitled thereto.
The Indenture Trustee may fix a record date and payment date for any
payment to Noteholders pursuant to this Section 5.04. At least 15 days
before such record date, the Issuer shall mail to each Noteholder and the
Indenture Trustee a notice that states the record date, the payment date and
the amount to be paid.
Section 5.05. Optional Preservation of the Trust Estate. If the
-----------------------------------------
Notes have been declared to be due and payable under Section 5.02 following
an Event of Default and such declaration and its consequences have not been
rescinded and annulled, the Indenture Trustee may, but need not, elect to
maintain possession of the Trust Estate. It is the desire of the parties
hereto and the Noteholders that there be at all times sufficient funds for
the payment of principal of and interest on the Securities and other
obligations of the Issuer including payment to the Credit Enhancer, and the
Indenture Trustee shall take such desire into account when determining
whether or not to maintain possession of the Trust Estate. In determining
whether to maintain possession of the Trust Estate, the Indenture Trustee
may, but need not, obtain and rely upon an opinion of an Independent
investment banking or accounting firm of national reputation as to the
feasibility of such proposed action and as to the sufficiency of the Trust
Estate for such purpose.
Section 5.06. Limitation of Suits. No Holder of any Note shall have
-------------------
any right to institute any Proceeding, judicial or otherwise, with respect to
this Indenture, or for the appointment of a receiver or trustee, or for any
other remedy hereunder, unless and subject to the provisions of Section 11.17
hereof:
(i) such Holder has previously given written notice to the
Indenture Trustee of a continuing Event of Default;
(ii) the Holders of not less than 25% of the Security Balances of
the Notes have made written request to the Indenture Trustee to
institute such Proceeding in respect of such Event of Default in its own
name as Indenture Trustee hereunder;
(iii) such Holder or Holders have offered to the Indenture Trustee
reasonable indemnity against the costs, expenses and liabilities to be
incurred in complying with such request;
(iv) the Indenture Trustee for 60 days after its receipt of such
notice, request and offer of indemnity has failed to institute such
Proceedings; and
(v) no direction inconsistent with such written request has been
given to the Indenture Trustee during such 60-day period by the Holders
of a majority of the Security Balances of the Notes.
It is understood and intended that no one or more Holders of Notes shall have
any right in any manner whatever by virtue of, or by availing of, any
provision of this Indenture to affect, disturb or prejudice the rights of any
other Holders of Notes or to obtain or to seek to obtain priority or
preference over any other Holders or to enforce any right under this
Indenture, except in the manner herein provided.
In the event the Indenture Trustee shall receive conflicting or
inconsistent requests and indemnity from two or more groups of Holders of
Notes, each representing less than a majority of the Security Balances of the
Notes, the Indenture Trustee in its sole discretion may determine what
action, if any, shall be taken, notwithstanding any other provisions of this
Indenture.
Section 5.07. Unconditional Rights of Noteholders To Receive
----------------------------------------------
Principal and Interest. Notwithstanding any other provisions in this
- - ----------------------
Indenture, the Holder of any Note shall have the right, which is absolute and
unconditional, to receive payment of the principal of and interest, if any,
on such Note on or after the respective due dates thereof expressed in such
Note or in this Indenture and to institute suit for the enforcement of any
such payment, and such right shall not be impaired without the consent of
such Holder.
Section 5.08. Restoration of Rights and Remedies. If the Indenture
----------------------------------
Trustee or any Noteholder has instituted any Proceeding to enforce any right
or remedy under this Indenture and such Proceeding has been discontinued or
abandoned for any reason or has been determined adversely to the Indenture
Trustee or to such Noteholder, then and in every such case the Issuer, the
Indenture Trustee and the Noteholders shall, subject to any determination in
such Proceeding, be restored severally and respectively to their former
positions hereunder, and thereafter all rights and remedies of the Indenture
Trustee and the Noteholders shall continue as though no such Proceeding had
been instituted.
Section 5.09. Rights and Remedies Cumulative. No right or remedy
------------------------------
herein conferred upon or reserved to the Indenture Trustee or to the
Noteholders is intended to be exclusive of any other right or remedy, and
every right and remedy shall, to the extent permitted by law, be cumulative
and in addition to every other right and remedy given hereunder or now or
hereafter existing at law or in equity or otherwise. The assertion or
employment of any right or remedy hereunder, or otherwise, shall not prevent
the concurrent assertion or employment of any other appropriate right or
remedy.
Section 5.10. Delay or Omission Not a Waiver. No delay or omission
------------------------------
of the Indenture Trustee or any Holder of any Note to exercise any right or
remedy accruing upon any Event of Default shall impair any such right or
remedy or constitute a waiver of any such Event of Default or an acquiescence
therein. Every right and remedy given by this Article V or by law to the
Indenture Trustee or to the Noteholders may be exercised from time to time,
and as often as may be deemed expedient, by the Indenture Trustee or by the
Noteholders, as the case may be.
Section 5.11. Control by Noteholders. The Holders of a majority of
----------------------
the Security Balances of Notes shall have the right to direct the time,
method and place of conducting any Proceeding for any remedy available to the
Indenture Trustee with respect to the Notes or exercising any trust or power
conferred on the Indenture Trustee; provided that:
(i) such direction shall not be in conflict with any rule of law
or with this Indenture;
(ii) subject to the express terms of Section 5.04, any direction
to the Indenture Trustee to sell or liquidate the Trust Estate shall be
by Holders of Notes representing not less than 100% of the Security
Balances of Notes;
(iii) if the conditions set forth in Section 5.05 have been
satisfied and the Indenture Trustee elects to retain the Trust Estate
pursuant to such Section, then any direction to the Indenture Trustee by
Holders of Notes representing less than 100% of the Security Balances of
Notes to sell or liquidate the Trust Estate shall be of no force and
effect; and
(iv) the Indenture Trustee may take any other action deemed
proper by the Indenture Trustee that is not inconsistent with such
direction.
Notwithstanding the rights of Noteholders set forth in this Section, subject
to Section 6.01, the Indenture Trustee need not take any action that it
determines might involve it in liability or might materially adversely affect
the rights of any Noteholders not consenting to such action.
Section 5.12. Waiver of Past Defaults. Prior to the declaration of
------------------------
the acceleration of the maturity of the Notes as provided in Section 5.02,
the Holders of Notes of not less than a majority of the Security Balances of
the Notes may waive any past Event of Default and its consequences except an
Event of Default (a) with respect to payment of principal of or interest on
any of the Notes or (b) in respect of a covenant or provision hereof which
cannot be modified or amended without the consent of the Holder of each Note
or (c) the waiver of which would materially and adversely affect the
interests of the Credit Enhancer or modify its obligation under the Credit
Enhancement Instrument. In the case of any such waiver, the Issuer, the
Indenture Trustee and the Holders of the Notes shall be restored to their
former positions and rights hereunder, respectively; but no such waiver shall
extend to any subsequent or other Event of Default or impair any right conse-
quent thereto.
Upon any such waiver, any Event of Default arising therefrom shall be
deemed to have been cured and not to have occurred, for every purpose of this
Indenture; but no such waiver shall extend to any subsequent or other Event
of Default or impair any right consequent thereto.
Section 5.13. Undertaking for Costs. All parties to this Indenture
----------------------
agree, and each Holder of any Note by such Holder's acceptance thereof shall
be deemed to have agreed, that any court may in its discretion require, in
any suit for the enforcement of any right or remedy under this Indenture, or
in any suit against the Indenture Trustee for any action taken, suffered or
omitted by it as Indenture Trustee, the filing by any party litigant in such
suit of an undertaking to pay the costs of such suit, and that such court may
in its discretion assess reasonable costs, including reasonable attorneys'
fees, against any party litigant in such suit, having due regard to the
merits and good faith of the claims or defenses made by such party litigant;
but the provisions of this Section 5.13 shall not apply to (a) any suit
instituted by the Indenture Trustee, (b) any suit instituted by any
Noteholder, or group of Noteholders, in each case holding in the aggregate
more than 10% of the Security Balances of the Notes or (c) any suit
instituted by any Noteholder for the enforcement of the payment of principal
of or interest on any Note on or after the respective due dates expressed in
such Note and in this Indenture.
Section 5.14. Waiver of Stay or Extension Laws. The Issuer
--------------------------------
covenants (to the extent that it may lawfully do so) that it will not at any
time insist upon, or plead or in any manner whatsoever, claim or take the
benefit or advantage of, any stay or extension law wherever enacted, now or
at any time hereafter in force, that may affect the covenants or the
performance of this Indenture; and the Issuer (to the extent that it may
lawfully do so) hereby expressly waives all benefit or advantage of any such
law, and covenants that it will not hinder, delay or impede the execution of
any power herein granted to the Indenture Trustee, but will suffer and permit
the execution of every such power as though no such law had been enacted.
Section 5.15. Sale of Trust Estate. (a) The power to effect any
--------------------
sale or other disposition (a "Sale") of any portion of the Trust Estate
pursuant to Section 5.04 is expressly subject to the provisions of Section
5.05 and this Section 5.15. The power to effect any such Sale shall not be
exhausted by any one or more Sales as to any portion of the Trust Estate
remaining unsold, but shall continue unimpaired until the entire Trust Estate
shall have been sold or all amounts payable on the Notes and under this
Indenture and under the Insurance Agreement shall have been paid. The
Indenture Trustee may from time to time postpone any public Sale by public
announcement made at the time and place of such Sale. The Indenture Trustee
hereby expressly waives its right to any amount fixed by law as compensation
for any Sale.
(b) The Indenture Trustee shall not in any private Sale sell the Trust
Estate, or any portion thereof, unless
(1) the Holders of all Securities and the Credit Enhancer consent
to or direct the Indenture Trustee to make, such Sale, or
(2) the proceeds of such Sale would be not less than the entire
amount which would be payable to the Noteholders under the Notes,
Certificateholders under the Certificates and the Credit Enhancer in respect
of amounts drawn under the Credit Enhancement Instrument and any other
amounts due the Credit Enhancer under the Insurance Agreement, in full
payment thereof in accordance with Section 5.02, on the Payment Date next
succeeding the date of such Sale, or
(3) The Indenture Trustee determines, in its sole discretion, that
the conditions for retention of the Trust Estate set forth in Section 5.05
cannot be satisfied (in making any such determination, the Indenture Trustee
may rely upon an opinion of an Independent investment banking firm obtained
and delivered as provided in Section 5.05, and the Credit Enhancer consents
to such Sale, which consent will not be unreasonably withheld and the Holders
representing at least 66-2/3% of the Security Balances of the Securities
consent to such Sale.
The purchase by the Indenture Trustee of all or any portion of the Trust
Estate at a private Sale shall not be deemed a Sale or other disposition
thereof for purposes of this Section 5.15(b).
(c) Unless the Holders and the Credit Enhancer have otherwise consented
or directed the Indenture Trustee, at any public Sale of all or any portion
of the Trust Estate at which a minimum bid equal to or greater than the
amount described in paragraph (2) of subsection (b) of this Section 5.15 has
not been established by the Indenture Trustee and no Person bids an amount
equal to or greater than such amount, the Indenture Trustee shall bid an
amount at least $1.00 more than the highest other bid.
(d) In connection with a Sale of all or any portion of the Trust Estate
(1) any Holder or Holders of Notes may bid for and with the
consent of the Credit Enhancer purchase the property offered for sale, and
upon compliance with the terms of sale may hold, retain and possess and
dispose of such property, without further accountability, and may, in paying
the purchase money therefor, deliver any Notes or claims for interest thereon
in lieu of cash up to the amount which shall, upon distribution of the net
proceeds of such sale, be payable thereon, and such Notes, in case the
amounts so payable thereon shall be less than the amount due thereon, shall
be returned to the Holders thereof after being appropriately stamped to show
such partial payment;
(2) the Indenture Trustee may bid for and acquire the property
offered for Sale in connection with any Sale thereof, and, subject to any
requirements of, and to the extent permitted by, applicable law in connection
therewith, may purchase all or any portion of the Trust Estate in a private
sale, and, in lieu of paying cash therefor, may make settlement for the
purchase price by crediting the gross Sale price against the sum of (A) the
amount which would be distributable to the Holders of the Notes and Holders
of Certificates and amounts owing to the Credit Enhancer as a result of such
Sale in accordance with Section 5.04(b) on the Payment Date next succeeding
the date of such Sale and (B) the expenses of the Sale and of any Proceedings
in connection therewith which are reimbursable to it, without being required
to produce the Notes in order to complete any such Sale or in order for the
net Sale price to be credited against such Notes, and any property so
acquired by the Indenture Trustee shall be held and dealt with by it in
accordance with the provisions of this Indenture;
(3) the Indenture Trustee shall execute and deliver an appropriate
instrument of conveyance transferring its interest in any portion of the
Trust Estate in connection with a Sale thereof;
(4) the Indenture Trustee is hereby irrevocably appointed the
agent and attorney-in-fact of the Issuer to transfer and convey its interest
in any portion of the Trust Estate in connection with a Sale thereof, and to
take all action necessary to effect such Sale; and
(5) no purchaser or transferee at such a Sale shall be bound to
ascertain the Indenture Trustee's authority, inquire into the satisfaction of
any conditions precedent or see to the application of any moneys.
Section 5.16. Action on Notes. The Indenture Trustee's right to
---------------
seek and recover judgment on the Notes or under this Indenture shall not be
affected by the seeking, obtaining or application of any other relief under
or with respect to this Indenture. Neither the lien of this Indenture nor
any rights or remedies of the Indenture Trustee or the Noteholders shall be
impaired by the recovery of any judgment by the Indenture Trustee against the
Issuer or by the levy of any execution under such judgment upon any portion
of the Trust Estate or upon any of the assets of the Issuer. Any money or
property collected by the Indenture Trustee shall be applied in accordance
with Section 5.04(b).
Section 5.17. Performance and Enforcement of Certain Obligations.
---------------------------------------------------
(a) Promptly following a request from the Indenture Trustee to do so and at
the Administrator's expense, the Issuer shall take all such lawful action as
the Indenture Trustee may request to compel or secure the performance and
observance by the Seller and the Master Servicer, as applicable, of each of
their obligations to the Issuer under or in connection with the Mortgage Loan
Purchase Agreement and the Servicing Agreement, and to exercise any and all
rights, remedies, powers and privileges lawfully available to the Issuer
under or in connection with the Mortgage Loan Purchase Agreement and the
Servicing Agreement to the extent and in the manner directed by the Indenture
Trustee, including the transmission of notices of default on the part of the
Seller or the Master Servicer thereunder and the institution of legal or
administrative actions or proceedings to compel or secure performance by the
Seller or the Master Servicer of each of their obligations under the Mortgage
Loan Purchase Agreement and the Servicing Agreement.
(b) If an Event of Default has occurred and is continuing, the
Indenture Trustee subject to the rights of the Credit Enhancer under the
Servicing Agreement may, and at the direction (which direction shall be in
writing or by telephone (confirmed in writing promptly thereafter)) of the
Holders of 66-2/3% of the Security Balances of the Notes shall, exercise all
rights, remedies, powers, privileges and claims of the Issuer against the
Seller or the Master Servicer under or in connection with the Mortgage Loan
Purchase Agreement and the Servicing Agreement, including the right or power
to take any action to compel or secure performance or observance by the
Seller or the Master Servicer, as the case may be, of each of their
obligations to the Issuer thereunder and to give any consent, request,
notice, direction, approval, extension or waiver under the Mortgage Loan
Purchase Agreement and the Servicing Agreement, as the case may be, and any
right of the Issuer to take such action shall not be suspended.
ARTICLE VI
The Indenture Trustee
---------------------
Section 6.01. Duties of Indenture Trustee. (a) If an Event of
---------------------------
Default has occurred and is continuing, the Indenture Trustee shall exercise
the rights and powers vested in it by this Indenture and use the same degree
of care and skill in their exercise as a prudent person would exercise or use
under the circumstances in the conduct of such person's own affairs.
(b) Except during the continuance of an Event of Default:
(i) the Indenture Trustee undertakes to perform such duties and
only such duties as are specifically set forth in this Indenture and no
implied covenants or obligations shall be read into this Indenture
against the Indenture Trustee; and
(ii) in the absence of bad faith on its part, the Indenture
Trustee may conclusively rely, as to the truth of the statements and the
correctness of the opinions expressed therein, upon certificates or
opinions furnished to the Indenture Trustee and conforming to the
requirements of this Indenture; however, the Indenture Trustee shall
examine the certificates and opinions to determine whether or not they
conform to the requirements of this Indenture.
(c) The Indenture Trustee may not be relieved from liability for its
own negligent action, its own negligent failure to act or its own willful
misconduct, except that:
(i) this paragraph does not limit the effect of paragraph (b) of
this Section 6.01;
(ii) the Indenture Trustee shall not be liable for any error of
judgment made in good faith by a Responsible Officer unless it is proved
that the Indenture Trustee was negligent in ascertaining the pertinent
facts; and
(iii) the Indenture Trustee shall not be liable with respect to
any action it takes or omits to take in good faith in accordance with a
direction received by it (A) pursuant to Section 5.11 or (B) from the
Credit Enhancer, which it is entitled to give under any of the Basic
Documents.
(d) Every provision of this Indenture that in any way relates to the
Indenture Trustee is subject to paragraphs (a), (b), (c) and (g) of this
Section 6.01.
(e) The Indenture Trustee shall not be liable for interest on any money
received by it except as the Indenture Trustee may agree in writing with the
Issuer.
(f) Money held in trust by the Indenture Trustee need not be segregated
from other funds except to the extent required by law or the terms of this
Indenture.
(g) No provision of this Indenture shall require the Indenture Trustee
to expend or risk its own funds or otherwise incur financial liability in the
performance of any of its duties hereunder or in the exercise of any of its
rights or powers, if it shall have reasonable grounds to believe that
repayment of such funds or adequate indemnity against such risk or liability
is not reasonably assured to it.
(h) Every provision of this Indenture relating to the conduct or
affecting the liability of or affording protection to the Indenture Trustee
shall be subject to the provisions of this Section and to the provisions of
the TIA.
Section 6.02. Rights of Indenture Trustee. (a) The Indenture
---------------------------
Trustee may rely on any document believed by it to be genuine and to have
been signed or presented by the proper person. The Indenture Trustee need
not investigate any fact or matter stated in the document.
(b) Before the Indenture Trustee acts or refrains from acting, it may
require an Officer's Certificate or an Opinion of Counsel. The Indenture
Trustee shall not be liable for any action it takes or omits to take in good
faith in reliance on an Officer's Certificate or Opinion of Counsel.
(c) The Indenture Trustee may execute any of the trusts or powers
hereunder or perform any duties hereunder either directly or by or through
agents or attorneys or a custodian or nominee, and the Indenture Trustee
shall not be responsible for any misconduct or negligence on the part of, or
for the supervision of, any such agent, attorney, custodian or nominee
appointed with due care by it hereunder.
(d) The Indenture Trustee shall not be liable for any action it takes
or omits to take in good faith which it believes to be authorized or within
its rights or powers; provided, however, that the Indenture Trustee's conduct
does not constitute willful misconduct, negligence or bad faith.
(e) The Indenture Trustee may consult with counsel, and the advice or
opinion of counsel with respect to legal matters relating to this Indenture
and the Notes shall be full and complete authorization and protection from
liability in respect to any action taken, omitted or suffered by it hereunder
in good faith and in accordance with the advice or opinion of such counsel.
Section 6.03. Individual Rights of Indenture Trustee. The Indenture
--------------------------------------
Trustee in its individual or any other capacity may become the owner or
pledgee of Notes and may otherwise deal with the Issuer or its Affiliates
with the same rights it would have if it were not Indenture Trustee. Any
Administrator, Note Registrar, co-registrar or co-paying agent may do the
same with like rights. However, the Indenture Trustee must comply with
Sections 6.11 and 6.12.
Section 6.04. Indenture Trustee's Disclaimer. The Indenture Trustee
------------------------------
shall not be responsible for and makes no representation as to the validity
or adequacy of this Indenture or the Notes, it shall not be accountable for
the Issuer's use of the proceeds from the Notes, and it shall not be
responsible for any statement of the Issuer in the Indenture or in any
document issued in connection with the sale of the Notes or in the Notes
other than the Indenture Trustee's certificate of authentication.
Section 6.05. Notice of Event of Default. If an Event of Default
--------------------------
occurs and is continuing and if it is known to a Responsible Officer of the
Indenture Trustee, the Indenture Trustee shall give notice thereof to the
Credit Enhancer. The Trustee shall mail to each Noteholder notice of the
Event of Default within 90 days after it occurs. Except in the case of an
Event of Default in payment of principal of or interest on any Note, the
Indenture Trustee may withhold the notice if and so long as a committee of
its Responsible Officers in good faith determines that withholding the notice
is in the interests of Noteholders.
Section 6.06. Reports by Indenture Trustee to Holders. The
---------------------------------------
Indenture Trustee shall deliver to each Noteholder such information as may be
required to enable such holder to prepare its federal and state income tax
returns. In addition, upon the Issuer's written request, the Indenture
Trustee shall promptly furnish information reasonably requested by the Issuer
that is reasonably available to the Indenture Trustee to enable the Issuer to
perform its federal and state income tax reporting obligations.
Section 6.07. Compensation and Indemnity. The Issuer shall or shall
--------------------------
cause the Administrator to pay to the Indenture Trustee on each Payment Date
reasonable compensation for its services. The Indenture Trustee's
compensation shall not be limited by any law on compensation of a trustee of
an express trust. The Issuer shall or shall cause the Administrator to
reimburse the Indenture Trustee for all reasonable out-of-pocket expenses
incurred or made by it, including costs of collection, in addition to the
compensation for its services. Such expenses shall include the reasonable
compensation and expenses, disbursements and advances of the Indenture
Trustee's agents, counsel, accountants and experts. The Issuer shall or
shall cause the Administrator to indemnify the Indenture Trustee against any
and all loss, liability or expense (including attorneys' fees) incurred by it
in connection with the administration of this trust and the performance of
its duties hereunder. The Indenture Trustee shall notify the Issuer and the
Administrator promptly of any claim for which it may seek indemnity. Failure
by the Indenture Trustee to so notify the Issuer and the Administrator shall
not relieve the Issuer or the Administrator of its obligations hereunder.
The Issuer shall or shall cause the Administrator to defend any such claim,
and the Indenture Trustee may have separate counsel and the Issuer shall or
shall cause the Administrator to pay the fees and expenses of such counsel.
Neither the Issuer nor the Administrator need reimburse any expense or
indemnify against any loss, liability or expense incurred by the Indenture
Trustee through the Indenture Trustee's own willful misconduct, negligence or
bad faith.
The Issuer's payment obligations to the Indenture Trustee pursuant to
this Section 6.07 shall survive the discharge of this Indenture. When the
Indenture Trustee incurs expenses after the occurrence of an Event of Default
specified in Section 5.01(iv) or (v) with respect to the Issuer, the expenses
are intended to constitute expenses of administration under Title 11 of the
United States Code or any other applicable federal or state bankruptcy,
insolvency or similar law.
Section 6.08. Replacement of Indenture Trustee. No resignation or
--------------------------------
removal of the Indenture Trustee and no appointment of a successor Indenture
Trustee shall become effective until the acceptance of appointment by the
successor Indenture Trustee pursuant to this Section 6.08. The Indenture
Trustee may resign at any time by so notifying the Issuer and the Credit
Enhancer. The Holders of a majority of Security Balances of the Notes may
remove the Indenture Trustee by so notifying the Indenture Trustee and the
Credit Enhancer and may appoint a successor Indenture Trustee. The Issuer
shall remove the Indenture Trustee if:
(i) the Indenture Trustee fails to comply with Section 6.11;
(ii) the Indenture Trustee is adjudged a bankrupt or insolvent;
(iii) a receiver or other public officer takes charge of the
Indenture Trustee or its property; or
(iv) the Indenture Trustee otherwise becomes incapable of acting.
If the Indenture Trustee resigns or is removed or if a vacancy exists in
the office of Indenture Trustee for any reason (the Indenture Trustee in such
event being referred to herein as the retiring Indenture Trustee), the Issuer
shall promptly appoint a successor Indenture Trustee.
A successor Indenture Trustee shall deliver a written acceptance of its
appointment to the retiring Indenture Trustee and to the Issuer. Thereupon
the resignation or removal of the retiring Indenture Trustee shall become
effective, and the successor Indenture Trustee shall have all the rights,
powers and duties of the Indenture Trustee under this Indenture. The succes-
sor Indenture Trustee shall mail a notice of its succession to Noteholders.
The retiring Indenture Trustee shall promptly transfer all property held by
it as Indenture Trustee to the successor Indenture Trustee.
If a successor Indenture Trustee does not take office within 60 days
after the retiring Indenture Trustee resigns or is removed, the retiring
Indenture Trustee, the Issuer or the Holders of a majority of Security
Balances of the Notes may petition any court of competent jurisdiction for
the appointment of a successor Indenture Trustee.
If the Indenture Trustee fails to comply with Section 6.11, any
Noteholder may petition any court of competent jurisdiction for the removal
of the Indenture Trustee and the appointment of a successor Indenture
Trustee.
Notwithstanding the replacement of the Indenture Trustee pursuant to
this Section, the Issuer's and the Administrator's obligations under
Section 6.07 shall continue for the benefit of the retiring Indenture
Trustee.
Section 6.09. Successor Indenture Trustee by Merger. If the
-------------------------------------
Indenture Trustee consolidates with, merges or converts into, or transfers
all or substantially all its corporate trust business or assets to, another
corporation or banking association, the resulting, surviving or transferee
corporation without any further act shall be the successor Indenture Trustee;
provided, that such corporation or banking association shall be otherwise
qualified and eligible under Section 6.11. The Indenture Trustee shall
provide the Rating Agencies prior written notice of any such transaction.
In case at the time such successor or successors by merger, conversion
or consolidation to the Indenture Trustee shall succeed to the trusts created
by this Indenture any of the Notes shall have been authenticated but not
delivered, any such successor to the Indenture Trustee may adopt the
certificate of authentication of any predecessor trustee, and deliver such
Notes so authenticated; and in case at that time any of the Notes shall not
have been authenticated, any successor to the Indenture Trustee may authen-
ticate such Notes either in the name of any predecessor hereunder or in the
name of the successor to the Indenture Trustee; and in all such cases such
certificates shall have the full force which it is anywhere in the Notes or
in this Indenture provided that the certificate of the Indenture Trustee
shall have.
Section 6.10. Appointment of Co-Indenture Trustee or Separate
-----------------------------------------------
Indenture Trustee. (a) Notwithstanding any other provisions of this
- - -----------------
Indenture, at any time, for the purpose of meeting any legal requirement of
any jurisdiction in which any part of the Trust Estate may at the time be
located, the Indenture Trustee shall have the power and may execute and
deliver all instruments to appoint one or more Persons to act as a co-trustee
or co-trustees, or separate trustee or separate trustees, of all or any part
of the Trust, and to vest in such Person or Persons, in such capacity and for
the benefit of the Noteholders, such title to the Trust Estate, or any part
hereof, and, subject to the other provisions of this Section, such powers,
duties, obligations, rights and trusts as the Indenture Trustee may consider
necessary or desirable. No co-trustee or separate trustee hereunder shall be
required to meet the terms of eligibility as a successor trustee under
Section 6.11 and no notice to Noteholders of the appointment of any co-
trustee or separate trustee shall be required under Section 6.08 hereof.
(b) Every separate trustee and co-trustee shall, to the extent
permitted by law, be appointed and act subject to the following provisions
and conditions:
(i) all rights, powers, duties and obligations conferred or
imposed upon the Indenture Trustee shall be conferred or imposed upon
and exercised or performed by the Indenture Trustee and such separate
trustee or co-trustee jointly (it being understood that such separate
trustee or co-trustee is not authorized to act separately without the
Indenture Trustee joining in such act), except to the extent that under
any law of any jurisdiction in which any particular act or acts are to
be performed the Indenture Trustee shall be incompetent or unqualified
to perform such act or acts, in which event such rights, powers, duties
and obligations (including the holding of title to the Trust Estate or
any portion thereof in any such jurisdiction) shall be exercised and
performed singly by such separate trustee or co-trustee, but solely at
the direction of the Indenture Trustee;
(ii) no trustee hereunder shall be personally liable by reason of
any act or omission of any other trustee hereunder; and
(iii) the Indenture Trustee may at any time accept the resignation
of or remove any separate trustee or co-trustee.
(c) Any notice, request or other writing given to the Indenture Trustee
shall be deemed to have been given to each of the then separate trustees and
co-trustees, as effectively as if given to each of them. Every instrument
appointing any separate trustee or co-trustee shall refer to this Agreement
and the conditions of this Article VI. Each separate trustee and co-trustee,
upon its acceptance of the trusts conferred, shall be vested with the estates
or property specified in its instrument of appointment, either jointly with
the Indenture Trustee or separately, as may be provided therein, subject to
all the provisions of this Indenture, specifically including every provision
of this Indenture relating to the conduct of, affecting the liability of, or
affording protection to, the Indenture Trustee. Every such instrument shall
be filed with the Indenture Trustee.
(d) Any separate trustee or co-trustee may at any time constitute the
Indenture Trustee, its agent or attorney-in-fact with full power and
authority, to the extent not prohibited by law, to do any lawful act under or
in respect of this Agreement on its behalf and in its name. If any separate
trustee or co-trustee shall die, become incapable of acting, resign or be
removed, all of its estates, properties, rights, remedies and trusts shall
vest in and be exercised by the Indenture Trustee, to the extent permitted by
law, without the appointment of a new or successor trustee.
Section 6.11. Eligibility; Disqualification. The Indenture Trustee
-----------------------------
shall at all times satisfy the requirements of TIA Section 310(a). The
Indenture Trustee shall have a combined capital and surplus of at least
$50,000,000 as set forth in its most recent published annual report of
condition and it or its parent shall have a long-term debt rating of (____)
or better by (______). The Indenture Trustee shall comply with TIA
Section 310(b), including the optional provision permitted by the second
sentence of TIA Section 310(b)(9); provided, however, that there shall be
excluded from the operation of TIA Section 310(b)(1) any indenture or
indentures under which other securities of the Issuer are outstanding if the
requirements for such exclusion set forth in TIA Section 310(b)(1) are met.
Section 6.12. Preferential Collection of Claims Against Issuer. The
------------------------------------------------
Indenture Trustee shall comply with TIA Section 311(a), excluding any
creditor relationship listed in TIA Section 311(b). An Indenture Trustee who
has resigned or been removed shall be subject to TIA Section 311(a) to the
extent indicated.
Section 6.13. Representation and Warranty. The Indenture Trustee
---------------------------
represents and warrants to the Issuer, for the benefit of the Noteholders,
that this Indenture has been executed and delivered by one of its Responsible
Officers who is duly authorized to execute and deliver such document in such
capacity on its behalf.
Section 6.14. Directions to Indenture Trustee. The Indenture
-------------------------------
Trustee is hereby directed:
(a) to accept assignment of the Mortgage Loans and hold the assets of
the Trust in trust for the Noteholders;
(b) to issue, execute and deliver the Notes substantially in the form
prescribed by Exhibit A in accordance with the terms of this Indenture; and
(c) to take all other actions as shall be required to be taken by the
terms of this Indenture.
Section 6.15. No Consent to Certain Acts of Depositor. The
---------------------------------------
Indenture Trustee shall not consent to any action proposed to be taken by the
Depositor pursuant to Article (_______________) of the Depositor's
Certificate of Incorporation.
ARTICLE VII
Noteholders' Lists and Reports
------------------------------
Section 7.01. Issuer To Furnish Indenture Trustee Names and
---------------------------------------------
Addresses of Noteholders. The Issuer will furnish or cause to be
- - ------------------------
furnished to the Indenture Trustee (a) not more than five days after each
Record Date, a list, in such form as the Indenture Trustee may reasonably
require, of the names and addresses of the Holders of Notes as of such Record
Date, (b) at such other times as the Indenture Trustee and the Credit
Enhancer may request in writing, within 30 days after receipt by the Issuer
of any such request, a list of similar form and content as of a date not more
than 10 days prior to the time such list is furnished; provided, however,
that so long as the Indenture Trustee is the Note Registrar, no such list
shall be required to be furnished.
Section 7.02. Preservation of Information; Communications to
----------------------------------------------
Noteholders. (a) The Indenture Trustee shall preserve, in as current a
- - -----------
form as is reasonably practicable, the names and addresses of the Holders of
Notes contained in the most recent list furnished to the Indenture Trustee as
provided in Section 7.01 and the names and addresses of Holders of Notes
received by the Indenture Trustee in its capacity as Note Registrar. The
Indenture Trustee may destroy any list furnished to it as provided in such
Section 7.01 upon receipt of a new list so furnished.
(b) Noteholders may communicate pursuant to TIA Section 312(b) with
other Noteholders with respect to their rights under this Indenture or under
the Notes.
(c) The Issuer, the Indenture Trustee and the Note Registrar shall have
the protection of TIA Section 312(c).
Section 7.03. Reports by Issuer. (a) The Issuer shall:
-----------------
(i) file with the Indenture Trustee, within 15 days after the
Issuer is required to file the same with the Commission, copies of the
annual reports and of the information, documents and other reports (or
copies of such portions of any of the foregoing as the Commission may
from time to time by rules and regulations prescribe) that the Issuer
may be required to file with the Commission pursuant to Section 13 or
15(d) of the Exchange Act;
(ii) file with the Indenture Trustee, and the Commission in
accordance with rules and regulations prescribed from time to time by
the Commission such additional information, documents and reports with
respect to compliance by the Issuer with the conditions and covenants of
this Indenture as may be required from time to time by such rules and
regulations; and
(iii) supply to the Indenture Trustee (and the Indenture Trustee
shall transmit by mail to all Noteholders described in TIA
Section 313(c)) such summaries of any information, documents and reports
required to be filed by the Issuer pursuant to clauses (i) and (ii) of
this Section 7.03(a) and by rules and regulations prescribed from time
to time by the Commission.
(b) Unless the Issuer otherwise determines, the fiscal year of the
Issuer shall end on December 31 of each year.
Section 7.04. Reports by Indenture Trustee. If required by TIA
----------------------------
Section 313(a), within 60 days after each January 1 beginning with
___________, 199_, the Indenture Trustee shall mail to each Noteholder as
required by TIA Section 313(c) and to the Credit Enhancer a brief report
dated as of such date that complies with TIA Section 313(a). The Indenture
Trustee also shall comply with TIA Section 313(b).
A copy of each report at the time of its mailing to Noteholders shall be
filed by the Indenture Trustee with the Commission and each stock exchange,
if any, on which the Term Notes are listed. The Issuer shall notify the
Indenture Trustee if and when the Term Notes are listed on any stock
exchange.
ARTICLE VIII
Accounts, Disbursements and Releases
------------------------------------
Section 8.01. Collection of Money. Except as otherwise expressly
-------------------
provided herein, the Indenture Trustee may demand payment or delivery of, and
shall receive and collect, directly and without intervention or assistance of
any fiscal agent or other intermediary, all money and other property payable
to or receivable by the Indenture Trustee pursuant to this Indenture. The
Indenture Trustee shall apply all such money received by it as provided in
this Indenture. Except as otherwise expressly provided in this Indenture, if
any default occurs in the making of any payment or performance under any
agreement or instrument that is part of the Trust Estate, the Indenture
Trustee may take such action as may be appropriate to enforce such payment or
performance, including the institution and prosecution of appropriate
Proceedings. Any such action shall be without prejudice to any right to
claim a Default or Event of Default under this Indenture and any right to
proceed thereafter as provided in Article V.
Section 8.02. Trust Accounts. (a) On or prior to the Closing Date,
--------------
the Issuer shall cause the Indenture Trustee to establish and maintain, in
the name of the Indenture Trustee, for the benefit of the Noteholders and the
Certificateholders and the Credit Enhancer, the Payment Account as provided
in Section 3.01 of this Indenture.
(b) All moneys deposited from time to time in the Payment Account
pursuant to the Servicing Agreement and all deposits therein pursuant to this
Indenture are for the benefit of the Noteholders, the Certificateholders and
the holders of the Residual Ownership Interest and all investments made with
such moneys including all income or other gain from such investments are for
the benefit of the Master Servicer as provided by the Servicing Agreement.
On each Payment Date during the Funding Period the Indenture Trustee
shall withdraw Net Principal Collections from the Payment Account and deposit
Net Principal Collections to the Funding Account.
On each Payment Date, the Indenture Trustee shall distribute all amounts
on deposit in the Payment Account (after giving effect to the withdrawal
referred to in the preceding paragraph) to Noteholders in respect of the
Notes and in its capacity as Certificate Paying Agent to Certificateholders
in the order of priority set forth in Section 3.05 (except as otherwise
provided in Section 5.04(b).
The Master Servicer may direct the Indenture Trustee to invest any funds
in the Payment Account in Eligible Investments maturing no later than the
Business Day preceding each Payment Date and shall not be sold or disposed of
prior to the maturity. Unless otherwise instructed by the Master Servicer,
the Indenture Trustee shall invest all funds in the Payment Account in its
(__________) Short Term Investment Fund so long as it is an Eligible
Investment.
((c) On or before the Closing Date the Issuer shall open, at the
Corporate Trust Office, an account which shall be the "Funding Account". The
Master Servicer may direct the Indenture Trustee to invest any funds in the
Funding Account in Eligible Investments maturing no later than the Business
Day preceding each Payment Date and shall not be sold or disposed of prior to
the maturity. Unless otherwise instructed by the Master Servicer, the
Indenture Trustee shall invest all funds in the Payment Account in its
Corporate Trust Short Term Investment Fund so long as it is an Eligible
Investment. During the Funding Period, any amounts received by the Indenture
Trustee in respect of Net Principal Collections for deposit in the Funding
Account, together with any Eligible Investments in which such moneys are or
will be invested or reinvested during the term of the Notes, shall be held by
the Indenture Trustee in the Funding Account as part of the Trust Estate,
subject to disbursement and withdrawal as herein provided.
(i) Amounts on deposit in the Funding Account in respect of Net
Principal Collections may be withdrawn on each Deposit Date and (1) paid
to the Issuer in payment for Additional Loans by the deposit of such
amount to the Collection Account and (2) at the end of the Funding
Period any amounts remaining in the Funding Account after the withdrawal
called for by clause (1) shall be deposited in the Payment Account to be
included in the payment of principal on the Payment Date that is the
last day of the Funding Period.
(ii) Amounts on deposit in the Funding Account in respect of
investment earnings shall be withdrawn on each Payment Date and
deposited in the Payment Account and included in the amounts paid to
Noteholders and Certificateholders.
(d) (i) Any investment in the institution with which the Funding
Account is maintained may mature on such Payment Date and (ii) any other
investment may mature on such Payment Date if the Indenture Trustee shall
advance funds on such Payment Date to the Funding Account in the amount
payable on such investment on such Payment Date, pending receipt thereof to
the extent necessary to make distributions on the Notes and the Certificates)
and shall not be sold or disposed of prior to maturity.)
Section 8.03. Opinion of Counsel. The Indenture Trustee shall
------------------
receive at least seven days notice when requested by the Issuer to take any
action pursuant to Section 8.05(a), accompanied by copies of any instruments
to be executed, and the Indenture Trustee shall also require, as a condition
to such action, an Opinion of Counsel, in form and substance satisfactory to
the Indenture Trustee, stating the legal effect of any such action, outlining
the steps required to complete the same, and concluding that all conditions
precedent to the taking of such action have been complied with and such
action will not materially and adversely impair the security for the Notes or
the rights of the Noteholders in contravention of the provisions of this
Indenture; provided, however, that such Opinion of Counsel shall not be
required to express an opinion as to the fair value of the Trust Estate.
Counsel rendering any such opinion may rely, without independent
investigation, on the accuracy and validity of any certificate or other
instrument delivered to the Indenture Trustee in connection with any such
action.
Section 8.04. Termination Upon Distribution to Noteholders. This
--------------------------------------------
Indenture and the respective obligations and responsibilities of the Issuer
and the Indenture Trustee created hereby shall terminate upon the
distribution to Noteholders, Certificateholders, holders of the Residual
Ownership Interest and the Indenture Trustee of all amounts required to be
distributed pursuant to Article III; provided, however, that in no event
shall the trust created hereby continue beyond the expiration of 21 years
from the death of the survivor of the descendants of Joseph P. Kennedy, the
late ambassador of the United States to the Court of St. James, living on the
date hereof.
Section 8.05. Release of Trust Estate. (a) Subject to the payment
-----------------------
of its fees and expenses, the Indenture Trustee may, and when required by the
provisions of this Indenture shall, execute instruments to release property
from the lien of this Indenture, or convey the Indenture Trustee's interest
in the same, in a manner and under circumstances that are not inconsistent
with the provisions of this Indenture. No party relying upon an instrument
executed by the Indenture Trustee as provided in Article IV hereunder shall
be bound to ascertain the Indenture Trustee's authority, inquire into the
satisfaction of any conditions precedent, or see to the application of any
moneys.
(b) The Indenture Trustee shall, at such time as (i) there are no Notes
Outstanding, (ii) all sums due the Indenture Trustee pursuant to this
Indenture have been paid, and (iii) all sums due the Credit Enhancer have
been paid, release any remaining portion of the Trust Estate that secured the
Notes from the lien of this Indenture. The Indenture Trustee shall release
property from the lien of this Indenture pursuant to this Section 8.05 only
upon receipt of an request from the Issuer accompanied by an Officers'
Certificate, an Opinion of Counsel, and (if required by the TIA) Independent
Certificates in accordance with TIA Section 314(c) and 314(d)(1) meeting the
applicable requirements as described herein, and a letter from the President
or any Vice President or any Secretary of the Credit Enhancer, if any,
stating that the Credit Enhancer has no objection to such request from the
Issuer.
Section 8.06. Surrender of Notes Upon Final Payment. By acceptance
-------------------------------------
of any Note, the Holder thereof agrees to surrender such Note to the
Indenture Trustee promptly, prior to such Noteholder's receipt of the final
payment thereon.
ARTICLE IX
Supplemental Indentures
-----------------------
Section 9.01. Supplemental Indentures Without Consent of
------------------------------------------
Noteholders. (a) Without the consent of the Holders of any Notes but
- - -----------
with the consent of the Credit Enhancer and prior notice to the Rating
Agencies and the Credit Enhancer, the Issuer and the Indenture Trustee, when
authorized by an Issuer Request, at any time and from time to time, may enter
into one or more indentures supplemental hereto (which shall conform to the
provisions of the Trust Indenture Act as in force at the date of the
execution thereof), in form satisfactory to the Indenture Trustee, for any of
the following purposes:
(i) to correct or amplify the description of any property at any
time subject to the lien of this Indenture, or better to assure, convey
and confirm unto the Indenture Trustee any property subject or required
to be subjected to the lien of this Indenture, or to subject to the lien
of this Indenture additional property;
(ii) to evidence the succession, in compliance with the
applicable provisions hereof, of another person to the Issuer, and the
assumption by any such successor of the covenants of the Issuer herein
and in the Notes contained;
(iii) to add to the covenants of the Issuer, for the benefit of
the Holders of the Notes, or to surrender any right or power herein
conferred upon the Issuer;
(iv) to convey, transfer, assign, mortgage or pledge any property
to or with the Indenture Trustee;
(v) to cure any ambiguity, to correct or supplement any
provision herein or in any supplemental indenture that may be
inconsistent with any other provision herein or in any supplemental
indenture or to make any other provisions with respect to matters or
questions arising under this Indenture or in any supplemental indenture;
provided, that such action shall not adversely affect the interests of
the Holders of the Notes;
(vi) to evidence and provide for the acceptance of the
appointment hereunder by a successor trustee with respect to the Notes
and to add to or change any of the provisions of this Indenture as shall
be necessary to facilitate the administration of the trusts hereunder by
more than one trustee, pursuant to the requirements of Article VI; or
(vii) to modify, eliminate or add to the provisions of this
Indenture to such extent as shall be necessary to effect the
qualification of this Indenture under the TIA or under any similar
federal statute hereafter enacted and to add to this Indenture such
other provisions as may be expressly required by the TIA;
provided, however, that no such indenture supplements shall be entered into
unless the Indenture Trustee shall have received an Opinion of Counsel that
entering into such indenture supplement will not have any material adverse
tax consequences to the Noteholders.
The Indenture Trustee is hereby authorized to join in the execution of
any such supplemental indenture and to make any further appropriate
agreements and stipulations that may be therein contained.
(b) The Issuer and the Indenture Trustee, when authorized by an Issuer
Request, may, also without the consent of any of the Holders of the Notes but
with the consent of the Credit Enhancer and prior notice to the Rating
Agencies and the Credit Enhancer, enter into an indenture or indentures
supplemental hereto for the purpose of adding any provisions to, or changing
in any manner or eliminating any of the provisions of, this Indenture or of
modifying in any manner the rights of the Holders of the Notes under this
Indenture; provided, however, that such action shall not, as evidenced by an
Opinion of Counsel, (i) adversely affect in any material respect the
interests of any Noteholder or (ii) cause the Issuer to be subject to an
entity level tax or be classified as a taxable mortgage pool within the
meaning of Section 7701(i) of the Code.
Section 9.02. Supplemental Indentures With Consent of Noteholders. The
Issuer and the Indenture Trustee, when authorized by an Issuer---------------
- - ------------------------------------ Request, also may, with prior notice to
the Rating Agencies and, with the written consent of the Credit Enhancer and
with the consent of the Holders of not less than a majority of the Security
Balances of each Class of Notes, by Act of such Holders delivered to the
Issuer and the Indenture Trustee, enter into an indenture or indentures
supplemental hereto for the purpose of adding any provisions to, or changing
in any manner or eliminating any of the provisions of, this Indenture or of
modifying in any manner the rights of the Holders of the Notes under this
Indenture; provided, however, that no such supplemental indenture shall,
without the consent of the Holder of each Note affected thereby:
(i) change the date of payment of any installment of principal
of or interest on any Note, or reduce the principal amount thereof or
the interest rate thereon, change the provisions of this Indenture
relating to the application of collections on, or the proceeds of the
sale of, the Trust Estate to payment of principal of or interest on the
Notes, or change any place of payment where, or the coin or currency in
which, any Note or the interest thereon is payable, or impair the right
to institute suit for the enforcement of the provisions of this
Indenture requiring the application of funds available therefor, as
provided in Article V, to the payment of any such amount due on the
Notes on or after the respective due dates thereof;
(ii) reduce the percentage of the Security Balances of the Notes,
the consent of the Holders of which is required for any such
supplemental indenture, or the consent of the Holders of which is
required for any waiver of compliance with certain provisions of this
Indenture or certain defaults hereunder and their consequences provided
for in this Indenture;
(iii) modify or alter the provisions of the proviso to the
definition of the term "Outstanding" or modify or alter the exception in
the definition of the term "Holder";
(iv) reduce the percentage of the Security Balances of the Notes
required to direct the Indenture Trustee to direct the Issuer to sell or
liquidate the Trust Estate pursuant to Section 5.04;
(v) modify any provision of this Section 9.02 except to increase
any percentage specified herein or to provide that certain additional
provisions of this Indenture or the Basic Documents cannot be modified
or waived without the consent of the Holder of each Note affected
thereby;
(vi) modify any of the provisions of this Indenture in such
manner as to affect the calculation of the amount of any payment of
interest or principal due on any Note on any Payment Date (including the
calculation of any of the individual components of such calculation); or
(vii) permit the creation of any lien ranking prior to or on a
parity with the lien of this Indenture with respect to any part of the
Trust Estate or, except as otherwise permitted or contemplated herein,
terminate the lien of this Indenture on any property at any time subject
hereto or deprive the Holder of any Note of the security provided by the
lien of this Indenture; and provided, further, that such action shall
not, as evidenced by an Opinion of Counsel, cause the Issuer to be
subject to an entity level tax or be classified as a taxable mortgage
pool within the meaning of Section 7701(i) of the Code.
The Indenture Trustee may in its discretion determine whether or not any
Notes would be affected by any supplemental indenture and any such
determination shall be conclusive upon the Holders of all Notes, whether
theretofore or thereafter authenticated and delivered hereunder. The
Indenture Trustee shall not be liable for any such determination made in good
faith.
It shall not be necessary for any Act of Noteholders under this Section
9.02 to approve the particular form of any proposed supplemental indenture,
but it shall be sufficient if such Act shall approve the substance thereof.
Promptly after the execution by the Issuer and the Indenture Trustee of
any supplemental indenture pursuant to this Section 9.02, the Indenture
Trustee shall mail to the Holders of the Notes to which such amendment or
supplemental indenture relates a notice setting forth in general terms the
substance of such supplemental indenture. Any failure of the Indenture
Trustee to mail such notice, or any defect therein, shall not, however, in
any way impair or affect the validity of any such supplemental indenture.
Section 9.03. Execution of Supplemental Indentures. In executing,
------------------------------------
or permitting the additional trusts created by, any supplemental indenture
permitted by this Article IX or the modification thereby of the trusts
created by this Indenture, the Indenture Trustee shall be entitled to
receive, and subject to Sections 6.01 and 6.02, shall be fully protected in
relying upon, an Opinion of Counsel stating that the execution of such
supplemental indenture is authorized or permitted by this Indenture. The
Indenture Trustee may, but shall not be obligated to, enter into any such
supplemental indenture that affects the Indenture Trustee's own rights,
duties, liabilities or immunities under this Indenture or otherwise.
Section 9.04. Effect of Supplemental Indenture. Upon the execution
--------------------------------
of any supplemental indenture pursuant to the provisions hereof, this
Indenture shall be and shall be deemed to be modified and amended in
accordance therewith with respect to the Notes affected thereby, and the
respective rights, limitations of rights, obligations, duties, liabilities
and immunities under this Indenture of the Indenture Trustee, the Issuer and
the Holders of the Notes shall thereafter be determined, exercised and
enforced hereunder subject in all respects to such modifications and amend-
ments, and all the terms and conditions of any such supplemental indenture
shall be and be deemed to be part of the terms and conditions of this
Indenture for any and all purposes.
Section 9.05. Conformity with Trust Indenture Act. Every amendment
-----------------------------------
of this Indenture and every supplemental indenture executed pursuant to this
Article IX shall conform to the requirements of the Trust Indenture Act as
then in effect so long as this Indenture shall then be qualified under the
Trust Indenture Act.
Section 9.06. Reference in Notes to Supplemental Indentures. Notes
---------------------------------------------
authenticated and delivered after the execution of any supplemental indenture
pursuant to this Article IX may, and if required by the Indenture Trustee
shall, bear a notation in form approved by the Indenture Trustee as to any
matter provided for in such supplemental indenture. If the Issuer or the
Indenture Trustee shall so determine, new Notes so modified as to conform, in
the opinion of the Indenture Trustee and the Issuer, to any such supplemental
indenture may be prepared and executed by the Issuer and authenticated and
delivered by the Indenture Trustee in exchange for Outstanding Notes.
ARTICLE X
(Reserved)
ARTICLE XI
Miscellaneous
-------------
Section 11.01. Compliance Certificates and Opinions, etc.
------------------------------------------
(a) Upon any application or request by the Issuer to the Indenture Trustee
to take any action under any provision of this Indenture, the Issuer shall
furnish to the Indenture Trustee and to the Credit Enhancer (i) an Officer's
Certificate stating that all conditions precedent, if any, provided for in
this Indenture relating to the proposed action have been complied with,
(ii) an Opinion of Counsel stating that in the opinion of such counsel all
such conditions precedent, if any, have been complied with and (iii) (if
required by the TIA) an Independent Certificate from a firm of certified
public accountants meeting the applicable requirements of this Section 11.01,
except that, in the case of any such application or request as to which the
furnishing of such documents is specifically required by any provision of
this Indenture, no additional certificate or opinion need be furnished.
Every certificate or opinion with respect to compliance with a condition
or covenant provided for in this Indenture shall include:
(1) a statement that each signatory of such certificate or opinion
has read or has caused to be read such covenant or condition and the
definitions herein relating thereto;
(2) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions
contained in such certificate or opinion are based;
(3) a statement that, in the opinion of each such signatory, such
signatory has made such examination or investigation as is necessary to
enable such signatory to express an informed opinion as to whether or
not such covenant or condition has been complied with; and
(4) a statement as to whether, in the opinion of each such
signatory, such condition or covenant has been complied with; and
(5) if the Signer of such Certificate or Opinion is required to be
Independent, the Statement required by the definition of the term
"Independent".
(b) (i) Prior to the deposit of any Collateral or other property or
securities with the Indenture Trustee that is to be made the basis for the
release of any property or securities subject to the lien of this Indenture,
the Issuer shall, in addition to any obligation imposed in Section 11.01(a)
or elsewhere in this Indenture, furnish to the Indenture Trustee an Officer's
Certificate certifying or stating the opinion of each person signing such
certificate as to the fair value (within 90 days of such deposit) to the
Issuer of the Collateral or other property or securities to be so deposited.
(ii) Whenever the Issuer is required to furnish to the Indenture
Trustee an Officer's Certificate certifying or stating the opinion of any
signer thereof as to the matters described in clause (i) above, the Issuer
shall also deliver to the Indenture Trustee an Independent Certificate as to
the same matters, if the fair value to the Issuer of the securities to be so
deposited and of all other such securities made the basis of any such with-
drawal or release since the commencement of the then-current fiscal year of
the Issuer, as set forth in the certificates delivered pursuant to clause (i)
above and this clause (ii), is 10% or more of the Security Balances of the
Notes, but such a certificate need not be furnished with respect to any
securities so deposited, if the fair value thereof to the Issuer as set forth
in the related Officer's Certificate is less than $25,000 or less than one
percent of the Security Balances of the Notes.
(iii) Whenever any property or securities are to be released from
the lien of this Indenture, the Issuer shall also furnish to the Indenture
Trustee an Officer's Certificate certifying or stating the opinion of each
person signing such certificate as to the fair value (within 90 days of such
release) of the property or securities proposed to be released and stating
that in the opinion of such person the proposed release will not impair the
security under this Indenture in contravention of the provisions hereof.
(iv) Whenever the Issuer is required to furnish to the Indenture
Trustee an Officer's Certificate certifying or stating the opinion of any
signer thereof as to the matters described in clause (iii) above, the Issuer
shall also furnish to the Indenture Trustee an Independent Certificate as to
the same matters if the fair value of the property or securities and of all
other property, other than property as contemplated by clause (v) below or
securities released from the lien of this Indenture since the commencement of
the then-current calendar year, as set forth in the certificates required by
clause (iii) above and this clause (iv), equals 10% or more of the Security
Balances of the Notes, but such certificate need not be furnished in the case
of any release of property or securities if the fair value thereof as set
forth in the related Officer's Certificate is less than $25,000 or less than
one percent of the then Security Balances of the Notes.
(v) Notwithstanding any provision of this Indenture, the Issuer
may, without compliance with the requirements of the other provisions of this
Section 11.01, (A) collect, sell or otherwise dispose of Mortgage Loans and
Mortgaged Properties as and to the extent permitted or required by the Basic
Documents or (B) make cash payments out of the Payment Account as and to the
extent permitted or required by the Basic Documents, so long as the Issuer
shall deliver to the Indenture Trustee every six months, commencing
__________, 199_, an Officer's Certificate of the Issuer stating that all the
dispositions of Collateral described in clauses (A) or (B) above that
occurred during the preceding six calendar months were in the ordinary course
of the Issuer's business and that the proceeds thereof were applied in
accordance with the Basic Documents.
Section 11.02. Form of Documents Delivered to Indenture Trustee. In
------------------------------------------------
any case where several matters are required to be certified by, or covered by
an opinion of, any specified Person, it is not necessary that all such
matters be certified by, or covered by the opinion of, only one such Person,
or that they be so certified or covered by only one document, but one such
Person may certify or give an opinion with respect to some matters and one or
more other such Persons as to other matters, and any such Person may certify
or give an opinion as to such matters in one or several documents.
Any certificate or opinion of an Authorized Officer of the Issuer may be
based, insofar as it relates to legal matters, upon a certificate or opinion
of, or representations by, counsel, unless such officer knows, or in the
exercise of reasonable care should know, that the certificate or opinion or
representations with respect to the matters upon which his certificate or
opinion is based are erroneous. Any such certificate of an Authorized
Officer or Opinion of Counsel may be based, insofar as it relates to factual
matters, upon a certificate or opinion of, or representations by, an officer
or officers of the Seller, the Issuer or the Administrator, stating that the
information with respect to such factual matters is in the possession of the
Seller, the Issuer or the Administrator, unless such counsel knows, or in the
exercise of reasonable care should know, that the certificate or opinion or
representations with respect to such matters are erroneous.
Where any Person is required to make, give or execute two or more
applications, requests, consents, certificates, statements, opinions or other
instruments under this Indenture, they may, but need not, be consolidated and
form one instrument.
Whenever in this Indenture, in connection with any application or
certificate or report to the Indenture Trustee, it is provided that the
Issuer shall deliver any document as a condition of the granting of such
application, or as evidence of the Issuer's compliance with any term hereof,
it is intended that the truth and accuracy, at the time of the granting of
such application or at the effective date of such certificate or report (as
the case may be), of the facts and opinions stated in such document shall in
such case be conditions precedent to the right of the Issuer to have such
application granted or to the sufficiency of such certificate or report. The
foregoing shall not, however, be construed to affect the Indenture Trustee's
right to rely upon the truth and accuracy of any statement or opinion
contained in any such document as provided in Article VI.
Section 11.03. Acts of Noteholders. (a) Any request, demand,
-------------------
authorization, direction, notice, consent, waiver or other action provided by
this Indenture to be given or taken by Noteholders may be embodied in and
evidenced by one or more instruments of substantially similar tenor signed by
such Noteholders in person or by agents duly appointed in writing; and except
as herein otherwise expressly provided such action shall become effective
when such instrument or instruments are delivered to the Indenture Trustee,
and, where it is hereby expressly required, to the Issuer. Such instrument
or instruments (and the action embodied therein and evidenced thereby) are
herein sometimes referred to as the "Act" of the Noteholders signing such
instrument or instruments. Proof of execution of any such instrument or of a
writing appointing any such agent shall be sufficient for any purpose of this
Indenture and (subject to Section 6.01) conclusive in favor of the Indenture
Trustee and the Issuer, if made in the manner provided in this Section 11.03.
(b) The fact and date of the execution by any person of any such
instrument or writing may be proved in any manner that the Indenture Trustee
deems sufficient.
(c) The ownership of Notes shall be proved by the Note Register.
(d) Any request, demand, authorization, direction, notice, consent,
waiver or other action by the Holder of any Notes shall bind the Holder of
every Note issued upon the registration thereof or in exchange therefor or in
lieu thereof, in respect of anything done, omitted or suffered to be done by
the Indenture Trustee or the Issuer in reliance thereon, whether or not
notation of such action is made upon such Note.
Section 11.04. Notices, etc., to Indenture Trustee, Issuer, Credit
---------------------------------------------------
Enhancer and Rating Agencies. Any request, demand, authorization,
- - -----------------------------
direction, notice, consent, waiver or Act of Noteholders or other documents
provided or permitted by this Indenture shall be in writing and if such
request, demand, authorization, direction, notice, consent, waiver or act of
Noteholders is to be made upon, given or furnished to or filed with:
(i) the Indenture Trustee by any Noteholder or by the Issuer
shall be sufficient for every purpose hereunder if made, given,
furnished or filed in writing to or with the Indenture Trustee at the
Corporate Trust Office, or
(ii) the Issuer by the Indenture Trustee or by any Noteholder
shall be sufficient for every purpose hereunder if in writing and mailed
first-class, postage prepaid to the Issuer addressed to: Headlands Home
Equity Loan Trust 199_-__ in care of (_____________), (______________)
Attention of (_________) with a copy to the Administrator at
(______________), Attention: (_____________), or at any other address
previously furnished in writing to the Indenture Trustee by the Issuer
or the Administrator. The Issuer shall promptly transmit any notice
received by it from the Noteholders to the Indenture Trustee, or
(iii) the Credit Enhancer by the Issuer, the Indenture Trustee or
by any Noteholders shall be sufficient for every purpose hereunder to in
writing and mailed, first-class postage pre-paid, or personally
delivered or telecopied to: (_______________), Attention:
(______________), Telephone: (_____________), Telecopier:
(___________).
Notices required to be given to the Rating Agencies by the Issuer, the
Indenture Trustee or the Owner Trustee shall be in writing, personally
delivered or mailed by certified mail, return receipt requested, to ((i) in
the case of Duff & Phelps, at the following address: (________________);)
(and) ((ii) in the case of Fitch Investors Service, L.P., at the following
address: (______________);) (and) ((iii) in the case of Moody's, at the
following address: Moody's Investors Service, ABS Monitoring Department, 99
Church Street, New York, New York 10007); (and) ((iv) in the case of Standard
& Poor's, at the following address: Standard & Poor's Corporation, 26
Broadway (15th Floor), New York, New York 10004, Attention of Asset Backed
Surveillance Department;) or as to each of the foregoing, at such other
address as shall be designated by written notice to the other parties.
Section 11.05. Notices to Noteholders; Waiver. Where this Indenture
------------------------------
provides for notice to Noteholders of any event, such notice shall be
sufficiently given (unless otherwise herein expressly provided) if in writing
and mailed, first-class, postage prepaid to each Noteholder affected by such
event, at his address as it appears on the Note Register, not later than the
latest date, and not earlier than the earliest date, prescribed for the
giving of such notice. In any case where notice to Noteholders is given by
mail, neither the failure to mail such notice nor any defect in any notice so
mailed to any particular Noteholder shall affect the sufficiency of such
notice with respect to other Noteholders, and any notice that is mailed in
the manner herein provided shall conclusively be presumed to have been duly
given.
Where this Indenture provides for notice in any manner, such notice may
be waived in writing by any Person entitled to receive such notice, either
before or after the event, and such waiver shall be the equivalent of such
notice. Waivers of notice by Noteholders shall be filed with the Indenture
Trustee but such filing shall not be a condition precedent to the validity of
any action taken in reliance upon such a waiver.
In case, by reason of the suspension of regular mail service as a result
of a strike, work stoppage or similar activity, it shall be impractical to
mail notice of any event to Noteholders when such notice is required to be
given pursuant to any provision of this Indenture, then any manner of giving
such notice as shall be satisfactory to the Indenture Trustee shall be deemed
to be a sufficient giving of such notice.
Where this Indenture provides for notice to the Rating Agencies, failure
to give such notice shall not affect any other rights or obligations created
hereunder, and shall not under any circumstance constitute an Event of
Default.
Section 11.06. Alternate Payment and Notice Provisions.
---------------------------------------
Notwithstanding any provision of this Indenture or any of the Notes to the
contrary, the Issuer may enter into any agreement with any Holder of a Note
providing for a method of payment, or notice by the Indenture Trustee or any
Administrator to such Holder, that is different from the methods provided for
in this Indenture for such payments or notices. The Issuer will furnish to
the Indenture Trustee a copy of each such agreement and the Indenture Trustee
will cause payments to be made and notices to be given in accordance with
such agreements.
Section 11.07. Conflict with Trust Indenture Act. If any provision
---------------------------------
hereof limits, qualifies or conflicts with another provision hereof that is
required to be included in this Indenture by any of the provisions of the
Trust Indenture Act, such required provision shall control.
The provisions of TIA SectionSection 310 through 317 that impose duties
on any person (including the provisions automatically deemed included herein
unless expressly excluded by this Indenture) are a part of and govern this
Indenture, whether or not physically contained herein.
Section 11.08. Effect of Headings. The Article and Section headings
------------------
herein are for convenience only and shall not affect the construction hereof.
Section 11.09. Successors and Assigns. All covenants and agreements
----------------------
in this Indenture and the Notes by the Issuer shall bind its successors and
assigns, whether so expressed or not. All agreements of the Indenture
Trustee in this Indenture shall bind its successors, co-trustees and agents.
Section 11.10. Separability. In case any provision in this
------------
Indenture or in the Notes shall be invalid, illegal or unenforceable, the
validity, legality, and enforceability of the remaining provisions shall not
in any way be affected or impaired thereby.
Section 11.11. Benefits of Indenture. The Credit Enhancer and its
---------------------
successors and assigns shall be a third-party beneficiary to the provisions
of this Indenture. Nothing in this Indenture or in the Notes, express or
implied, shall give to any Person, other than the parties hereto and their
successors hereunder, and the Noteholders, and any other party secured
hereunder, and any other Person with an ownership interest in any part of the
Trust Estate, any benefit or any legal or equitable right, remedy or claim
under this Indenture.
Section 11.12. Legal Holidays. In any case where the date on which
--------------
any payment is due shall not be a Business Day, then (notwithstanding any
other provision of the Notes or this Indenture) payment need not be made on
such date, but may be made on the next succeeding Business Day with the same
force and effect as if made on the date on which nominally due, and no
interest shall accrue for the period from and after any such nominal date.
Section 11.13. GOVERNING LAW. THIS INDENTURE SHALL BE CONSTRUED IN
-------------
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REFERENCE TO ITS
CONFLICT OF LAW PROVISIONS, AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE
PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS.
Section 11.14. Counterparts. This Indenture may be executed in any
------------
number of counterparts, each of which so executed shall be deemed to be an
original, but all such counterparts shall together constitute but one and the
same instrument.
Section 11.15. Recording of Indenture. If this Indenture is subject
----------------------
to recording in any appropriate public recording offices, such recording is
to be effected by the Issuer and at its expense accompanied by an Opinion of
Counsel (which may be counsel to the Indenture Trustee or any other counsel
reasonably acceptable to the Indenture Trustee) to the effect that such
recording is necessary either for the protection of the Noteholders or any
other Person secured hereunder or for the enforcement of any right or remedy
granted to the Indenture Trustee under this Indenture.
Section 11.16. Issuer Obligation. No recourse may be taken,
-----------------
directly or indirectly, with respect to the obligations of the Issuer, the
Owner Trustee or the Indenture Trustee on the Notes or under this Indenture
or any certificate or other writing delivered in connection herewith or
therewith, against (i) the Indenture Trustee or the Owner Trustee in its
individual capacity, (ii) any owner of a beneficial interest in the Issuer or
(iii) any partner, owner, beneficiary, agent, officer, director, employee or
agent of the Indenture Trustee or the Owner Trustee in its individual
capacity, any holder of a beneficial interest in the Issuer, the Owner
Trustee or the Indenture Trustee or of any successor or assign of the
Indenture Trustee or the Owner Trustee in its individual capacity, except as
any such Person may have expressly agreed (it being understood that the
Indenture Trustee and the Owner Trustee have no such obligations in their
individual capacity) and except that any such partner, owner or beneficiary
shall be fully liable, to the extent provided by applicable law, for any
unpaid consideration for stock, unpaid capital contribution or failure to pay
any installment or call owing to such entity. For all purposes of this
Indenture, in the performance of any duties or obligations of the Issuer
hereunder, the Owner Trustee shall be subject to, and entitled to the
benefits of, the terms and provisions of Article VI, VII and VIII of the
Trust Agreement.
Section 11.17. No Petition. The Indenture Trustee, by entering into
-----------
this Indenture, and each Noteholder, by accepting a Note, hereby covenant and
agree that they will not at any time institute against the Depositor or the
Issuer, or join in any institution against the Depositor or the Issuer of,
any bankruptcy, reorganization, arrangement, insolvency or liquidation
proceedings, or other proceedings under any United States federal or state
bankruptcy or similar law in connection with any obligations relating to the
Notes, this Indenture or any of the Basic Documents.
Section 11.18. Inspection. The Issuer agrees that, on reasonable
----------
prior notice, it will permit any representative of the Indenture Trustee,
during the Issuer's normal business hours, to examine all the books of
account, records, reports and other papers of the Issuer, to make copies and
extracts therefrom, to cause such books to be audited by Independent
certified public accountants, and to discuss the Issuer's affairs, finances
and accounts with the Issuer's officers, employees, and Independent certified
public accountants, all at such reasonable times and as often as may be
reasonably requested. The Indenture Trustee shall and shall cause its
representatives to hold in confidence all such information except to the
extent disclosure may be required by law (and all reasonable applications for
confidential treatment are unavailing) and except to the extent that the
Indenture Trustee may reasonably determine that such disclosure is consistent
with its obligations hereunder.
Section 11.19. Authority of the Administrator. Each of the parties
------------------------------
to this Indenture acknowledges that the Issuer and the Owner Trustee have
each appointed the Administrator to act as its agent to perform the duties
and obligations of the Issuer hereunder. Unless otherwise instructed by the
Issuer or the Owner Trustee, copies of all notices, requests, demands and
other documents to be delivered to the Issuer or the Owner Trustee pursuant
to the terms hereof shall be delivered to the Administrator. Unless
otherwise instructed by the Issuer or the Owner Trustee, all notices,
requests, demands and other documents to be executed or delivered, and any
action to be taken, by the Issuer or the Owner Trustee pursuant to the terms
hereof may be executed, delivered and/or taken by the Administrator pursuant
to the Administration Agreement.
IN WITNESS WHEREOF, the Issuer and the Indenture Trustee have caused
their names to be signed hereto by their respective officers thereunto duly
authorized, all as of the day and year first above written.
HEADLANDS HOME EQUITY LOAN TRUST 199_-__
as Issuer
By: (______________________),
not in its individual capacity
but solely as Owner Trustee
By:___________________________________
Name:
Title:
(________________________________),
as Indenture Trustee, as Certificate Paying Agent
and as Certificate Registrar
By:____________________________________
Name:
Title:
(___________________)
hereby accepts the appointment as Certificate Paying Agent pursuant to
Section 3.03 hereof and as Certificate Registrar pursuant to Section
4.02 hereof.
______________________________
By:
Title:
STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK )
On this ____ day of __________, before me personally appeared ______-
________, to me known, who being by me duly sworn, did depose and say, that
he resides at _________________, __________________ _____, that he is the
___________________ of the Owner Trustee, one of the corporations
described in and which executed the above instrument; that he knows the seal
of said corporation; that the seal affixed to said instrument is such
corporate seal; that it was so affixed by order of the Board of Directors of
said corporation; and that he signed his name thereto by like order.
___________________________
Notary Public
(NOTARIAL SEAL)
STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK )
On this ____ day of __________, before me personally appeared
_____________, to me known, who being by me duly sworn, did depose and say,
that he resides at ____________________________________________________, that
he is the ______________ of ________________, as Indenture Trustee, one of
the corporations described in and which executed the above instrument; that
he knows the seal of said corporation; that the seal affixed to said instru-
ment is such corporate seal; that it was so affixed by order of the Board of
Directors of said corporation; and that he signed his name thereto by like
order.
___________________________
Notary Public
(NOTARIAL SEAL)
STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK )
On this ____ day of __________, before me personally appeared
_______________, to me known, who being by me duly sworn, did depose and say,
that he resides at ___________________________________________, that
he is an ________________ of _______________, as Indenture Trustee, one of
the corporations described in and which executed the above instrument; that
he knows the seal of said corporation; that the seal affixed to said instru-
ment is such corporate seal; that it was so affixed by order of the Board of
Directors of said corporation; and that he signed his name thereto by like
order.
___________________________
Notary Public
(NOTARIAL SEAL)
(EXHIBIT C
(FORM OF OPINION)
(Date)
To: The Persons Listed On the Attached Schedule
Re: HEADLANDS HOME EQUITY LOAN TRUST 199_-__
Headlands Home Equity Loan Asset-Backed Securities
Series 199__-__
--------------------------------------------------
Ladies and Gentlemen:
We have acted as counsel to (____________________) ("(_____)") in
connection with the issuance by (________) of its Surety Bond Number (SB___)
(the "Surety Bond") issued pursuant to the ( ), dated as of
______________, 199_ among ("________"), Headlands Mortgage Securities Inc.,
as Depositor (the "Depositor"), (_____________) ("(___)"), as Seller and
Master Servicer and Headlands Home Equity Loan Trust 199_-__ (the "Issuer")
(the "Insurance Agreement") with respect to the Additional Variable Funding
Notes issued pursuant to the Indenture, dated as of ____________, 199_
between the Issuer and (_______________), as Indenture Trustee.)
For the purposes of this opinion, we have examined and are familiar with
originals or copies, certified or otherwise identified to our satisfaction of
((i) the (Articles of Incorporation) (Certificate of Incorporation) (Articles
of Association) and the By-Laws of (____); (ii) resolutions adopted by the
Board of Directors of (____) relevant to the issuance of the Surety Bond;
(iii) the Surety Bond; (iv) the Insurance Agreement; (v) the certificate of
the Secretary of (_____) dated as of the date hereof (the "Certificate");)
and (vi) such other documents that we have deemed necessary or appropriate as
a basis for the opinion set forth below.
Capitalized terms used herein and not otherwise defined shall have the
meanings ascribed to them in the (Definitions incorporated in and attached as
an Appendix to the Indenture.)
In our examination we have assumed the genuineness of all signatures and
the legal capacity of natural persons (other than with respect to officers of
(_____)), the authenticity of all documents submitted to us as originals, the
conformity to original documents of all documents submitted to us as certi-
fied or photostatic copies and the authenticity of the originals of such
copies. We have relied upon the certificates, statements and representations
of officers and other representatives of (_____) with regard to all facts
(but not conclusions of law) material to the opinions set forth below and
have not conducted an independent inquiry as to such matters. Based upon and
subject to the foregoing, we are of the opinion that:
1. (____) is a corporation validly existing, in good standing and
licensed to transact the business of surety and financial guaranty
insurance under the laws of the State of New York.
2. (____) has the corporate power to execute and deliver, and to take
all action required of it under the Surety Bond.
3. Except as have already been obtained, no authorization, consent,
approval, license, formal exemption, or declaration from, nor any
registration or filing with, any court or governmental agency or body of
the United States of America or the State of New York, which if not
obtained would affect or impair the validity or enforceability of the
Surety Bond is required in connection with the execution and delivery by
(____) of the Surety Bond or in connection with (____)'s performance of
its obligations thereunder.
4. The Surety Bond has been duly authorized, executed and delivered by
(____) and constitutes the legally valid and binding obligation of
(____), enforceable in accordance with its terms subject, as to enforce-
ment, to (a) bankruptcy, reorganization, insolvency, moratorium and
other similar laws relating to or affecting the enforcement of creditor-
s' rights generally, including, without limitation, laws relating to
fraudulent transfers or conveyances, preferential transfers and equita-
ble subordination, presently or from time to time in effect, and general
principles of equity (regardless of whether such enforcement is consid-
ered in a proceeding in equity or at law), as such laws may be applied
in any such proceeding with respect to (_____) and (b) the qualification
that the remedy of specific performance may be subject to equitable
defenses and to the discretion of the court before which any proceedings
with respect thereto may be brought.
5. The Surety Bond is not required to be registered under the Securi-
ties Act of 1933, as amended.
We express no opinion as to the laws of any jurisdiction other than the
federal laws of the United States of America and the laws of the State of New
York. This opinion is limited to the laws of New York and the United States
of America as in effect on the date hereof and, in rendering this opinion, we
assume no obligation to revise or supplement this opinion should the present
laws, or the interpretation thereof, be changed.
This opinion has been furnished solely for the benefit of the persons
listed on the attached Schedule A in connection with the transactions
described herein and on the condition that the opinions expressed herein may
not be published or otherwise communicated to any other party, or relied upon
by any other party, without prior written approval in each instance.
Very truly yours,)
Schedule A
Opinion of (Date)
Re: HEADLANDS HOME EQUITY LOAN TRUST 199__-__
Home Equity Loan Asset-Backed Securities
Series 199__-__
------------------------------------------
Headlands Mortgage Securities Inc.
700 Larkspur Landing Circle, Suite 240
Larkspur, California 94939
(______________________),
as Seller and Servicer
(______________________)
(Duff & Phelps Credit Rating Co.)
(_______________________________)
(Moody's Investors Service, Inc.
99 Church Street
New York, New York 10007)
(Fitch Investors Service, L.P.)
( )
(Standard & Poor's Ratings Group
26 Broadway, 15th Floor
New York, New York 10007)
(________________________),
as Indenture Trustee
(________________________)
(________________________),
as Owner Trustee
(________________________)
(EXHIBIT D
__________, 199_
Headlands Mortgage Securities Inc.
700 Larkspur Landing Cirlce, Suite 240
Larkspur, California 94939
(_______________________)
(_______________________)
(_______________________)
(_______________________)
(_______________________)
(_______________________)
Re: Headlands Home Equity Loan Trust 199_-__
----------------------------------------
Ladies and Gentlemen:
We have acted as counsel to Headlands Mortgage Securities Inc., a
Delaware corporation (the "Depositor"), in connection with (i) the purchase
of certain adjustable rate home equity revolving credit line loans (the
"Mortgage Loans") pursuant to a mortgage loan purchase agreement, dated as of
__________, 199_ (the "Mortgage Loan Purchase Agreement") between
(_____________________), as seller (the "Seller") and the Depositor, dated as
of __________, 199_ (the "Agreement"), and (ii) the sale by the Depositor of
the Mortgage Loans to Headlands Home Equity Loan Trust 199_-__, a Delaware
business trust (the "Issuer"), created by a Trust Agreement dated as of
____________, 199_ (the "Trust Agreement") among the Depositor, and (_______-
____) as owner trustee (the "Owner Trustee"). In exchange for the Mortgage
Loans, the Issuer has issued Home Equity Loan Asset-Backed Term Notes, Series
199__-__ (the "Term Notes"), Home Equity Loan Asset-Backed Variable Funding
Notes, Series 199__-__ (the "Variable Funding Notes", and together with the
Term Notes, the "Notes") and Home Equity Loan Asset-Backed Certificates,
Series 199__-__ (the "Certificates", and together with the Notes, the
"Securities"). The Issuer wishes to increase the Maximum Variable Funding
Balance of the Variable funding Notes in excess of $(___________) as provided
for in Section 4.01 of the Indenture. Capitalized terms not otherwise
defined herein shall (unless otherwise specifically set forth herein) have
the meanings ascribed to such terms in the Trust Agreement.
This opinion is rendered pursuant to Section 4.01(b)(iii) of the
Indenture.
In arriving at the opinions expressed below, we have examined such
documents and records as we have deemed appropriate, including the following:
1. A signed copy of the Indenture.
2. A signed copy of the Trust Agreement.
3. Specimens of the Notes.
As to any facts material to the following opinions which we did not
independently establish or verify, we have relied upon statements and
representations of the responsible officers and other representations of the
Depositor and of public officials and agencies.
Based upon the foregoing and consideration of such other matters as we
have deemed appropriate, we are of the opinion that:
1. For federal income tax purposes, as a result of the increase in the
Maximum Variable Funding Balance of the Variable Funding Notes in excess of
$(____________), the Issuer will not be classified as an association or a
publicly traded partnership taxable as a corporation, or as a taxable
mortgage pool within the meaning of section 7701(i) of the Code.
2. The Variable Funding Notes will be treated as debt for federal
income tax purposes and will not affect the Classification as debt of any
other class of Notes.
We do not express any opinion as to any laws other than the federal tax
law of the United States of America.
The opinions set forth herein are expressly subject to there being no
additional facts that would materially affect the validity of the assumptions
and conclusions set forth herein or upon which this opinion is based.
No one other than you shall be entitled to rely on the opinions ex-
pressed herein. This opinion letter is not intended to be employed in any
transaction other than the one described above and is being delivered to you
on the understanding that neither it nor its contents may be published,
communicated or otherwise made available, in whole or in part, to any other
party or entity without, in each instance, our specific prior written
consent.
Very truly yours,)
Exhibit 4.4
Form of Mortgage Loan Purchase Agreement
(____________________)
Seller of the Mortgage Loans,
and
HEADLANDS MORTGAGE SECURITIES INC.
Purchaser of the Mortgage Loans
-----------------------------------
MORTGAGE LOAN PURCHASE AGREEMENT
Dated as of ___________, 199_
-----------------------------------
MORTGAGE LOAN PURCHASE AGREEMENT
Mortgage Loan Purchase Agreement (the "Agreement") dated as of
__________, 199_ between (__________________) (the "Seller") and Headlands
Mortgage Securities Inc. (the "Purchaser").
BACKGROUND
----------
The following statements are the mutual representations of the parties
with respect to certain factual matters forming the basis for this Agreement
and are an integral part of this Agreement.
A. MORTGAGE LOANS. The Seller possesses (i) the notes or other
--------------
evidence of indebtedness (the "Mortgage Notes") under the home equity lines
of credit so indicated on Schedule I hereto referred to below (the "Mortgage
Loans"), (ii) the mortgages (the "Mortgages") on the properties (the
"Mortgaged Properties") securing such Mortgage Loans, including rights to (a)
any property acquired by foreclosure or deed in lieu of foreclosure or other-
wise, and (b) the proceeds of any insurance policies covering the Mortgage
Loans or the Mortgaged Properties or the obligors on the Mortgage Loans.
B. SALE OF MORTGAGE LOANS. The parties desire that the Seller sell
----------------------
the Mortgage Loans ((inclusive)(exclusive) of the obligation to fund future
advances under each Loan Agreement after the Closing Date) to the Purchaser
pursuant to the terms of this Agreement. Pursuant to the terms of a
(__________) Agreement dated as of ________, 199_ (the "(_________)
Agreement") among the Purchaser, as depositor, (________), as servicer, and
(__________), as trustee (the "Trustee"), the Purchaser will convey the
Mortgage Loans ((inclusive)(exclusive) of the obligation to fund future
advances under each Loan Agreement after the Closing Date) to Headlands Home
Equity Loan Trust 199__-__ (the "Trust").
C. DEFINITIONS. Capitalized terms not specifically defined in this
-----------
Agreement which are defined in the (_____________ _____) Agreement shall
have the same meaning when used herein as when used in the
(____________________).
STATEMENT OF AGREEMENT
----------------------
The parties, each in consideration of the promises of the other and
for other good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, hereby agree as follows:
SECTION 1. SALE OF MORTGAGE LOANS. (a) The Seller, concurrently with
----------------------
the execution and delivery of this Agreement, does hereby sell, assign, set
over, and otherwise convey to the Purchaser, without recourse, all of its
right, title and interest in, to and under the following, whether now
existing or hereafter acquired and wherever located: (i) the Mortgage Loans,
including the Asset Balance (including all Additional Balances) and all
collections of interest and principal in respect thereof received on or after
the Cut-off Date (except collections in respect of interest for the period
from (_____________) to (_____________)); (ii) property which secured a
Mortgage Loan and which has been acquired by foreclosure or deed in lieu of
foreclosure; (iii) the interest of the Seller in any insurance policies in
respect of the Mortgage Loans; (iv) the Seller's rights under the (_________
_________); and (v) all proceeds of the foregoing(; provided, however, that
the Purchaser does not assume the obligation under each Loan Agreement
(including, without limitation, such obligation under the Loan Agreement for
each Mortgage Loan after the Closing Date) to fund future advances to the
Mortgagor thereunder, and the Purchaser shall not be obligated to fund any
such future advances). (Future advances made to a Mortgagor under a Loan
Agreement (each an "Additional Balance") shall be part of the related Asset
Balance. The Seller shall give the Purchaser monthly notice of such advances
on or prior to each Determination Date.)
In connection with such conveyance, the Seller further agrees, at its
own expense, on or prior to the date of this Agreement (a) to indicate in its
books and records that the Mortgage Loans have been sold to the Purchaser
pursuant to this Agreement and (b) to deliver to the Purchaser a computer
file or microfiche list containing a true and complete list of all such
Mortgage Loans specifying for each such Mortgage Loan, as of the Cut-off
Date, (i) its account number, (ii) its delinquency status, and (iii) the
aggregate amount outstanding under the Mortgage Loan as of the Cut-off Date.
Such file, which forms a part of Exhibit __ to the (_________) Agreement,
shall also be marked as Schedule I to this Agreement and is hereby
incorporated into and made a part of this Agreement.
In connection with such sale and assignment by the Seller to the
Purchaser, the Seller on or prior to the Closing Date shall deliver to the
Purchaser the following documents or instruments with respect to each
Mortgage Loan so transferred and assigned:
(i) The original Mortgage Note endorsed without recourse to
(____________________);
(ii) the original recorded Assignment of Mortgage from
(____________________) in recordable form(, which, in the case of any
Mortgage Loan secured by Mortgaged Property located in the State of New
York, shall state that such Assignment of Mortgage is not subject to the
requirements of Section 275 of the Real Property Law because it is an
assignment within the secondary mortgage market);
(iii) the original recorded Mortgage with an evidence of a recording
indicated thereon or, if, in connection with any Mortgage Loan, the
Seller cannot deliver the original Mortgage with evidence of recording
thereon on or prior to the Closing Date because such original Mortgage
has been lost, the Seller shall deliver or cause to be delivered to the
Purchaser a true and correct copy of such Mortgage, together with a
certificate by the appropriate county recording office where such
Mortgage is recorded;
(iv) the title search, and either a full appraisal or a drive-by
inspection, obtained by the originator at the time the Mortgagor applied
for the Mortgage Loan;
(v) with respect to each Mortgage Loan listed on Schedule II, a
title policy;
(vi) the original of any guaranty executed in connection with the
Mortgage Note;
(vii) the original of each assumption, modification, consolidation
or substitution agreement, if any, relating to the Mortgage Loan; and
(viii) any security agreement, chattel mortgage or equivalent
instrument executed in connection with the Mortgage.
The Seller further hereby confirms to the Purchaser that it has caused
the portions of the Electronic Ledger relating to the Mortgage Loans
maintained by the Servicer to be clearly and unambiguously marked to indicate
that the Mortgage Loans have been sold to the Purchaser.
The Purchaser hereby acknowledges its acceptance of all right, title and
interest to the property, now existing and hereafter created, conveyed to it
pursuant to this Section 1.
The parties hereto intend that the transaction set forth herein be a
sale by the Seller to the Purchaser of all the Seller's right, title and
interest in and to the Mortgage Loans and other property described above. In
the event the transaction set forth herein is deemed not to be a sale, the
Seller hereby grants to the Purchaser a security interest in all of the
Seller's right, title and interest in, to and under the Mortgage Loans
whether now existing or hereafter created, all monies due or to become due on
the Mortgage Loans and all proceeds of any thereof; and this Agreement shall
constitute a security agreement under applicable law.
In connection with such sale, assignment, and conveyance, the Seller has
filed, in the appropriate office in the State of (______), a UCC-1 financing
statement executed by the Seller as seller, naming the Purchaser as purchaser
and listing the Mortgage Loans and the other property described above as
collateral. In connection with such filing, the Seller agrees that it shall
cause to be filed all necessary continuation statements thereof and to take
or cause to be taken such actions and execute such documents as are necessary
to perfect and protect the Purchaser's interest in the Mortgage Loans and the
other property described above.
(b) (No assignment from the Seller of any Mortgage Loan shall be
required to be recorded in any public real property or other records so long
as no Assignment Event shall have occurred. Upon the occurrence of an
Assignment Event, at the request of the Purchaser, the Seller shall as
promptly as practicable, (a) endorse, or cause to be endorsed, each Mortgage
Note without recourse to the order of the Trustee, on behalf of the
Certificateholders, and (b) prepare and execute, or cause to be prepared and
executed, an assignment to the Trustee in recordable form for each Mortgage
Loan sold by the Seller hereunder and deliver such endorsed Mortgage Notes
and assignments to the Purchaser.)
SECTION 2. PAYMENT OF PURCHASE PRICE FOR CUT-OFF DATE ASSET BALANCES
---------------------------------------------------------
(AND ADDITIONAL BALANCES).
- - -------------------------
(a) (The purchase price ("Purchase Price") for each Mortgage Loan, and
for each Additional Balance, shall be the Cut-off Date Asset Balance thereof
(or the principal amount of the draw under the Credit Line Agreement, in the
case of an Additional Balance) on the due date for payment for such Mortgage
Loan, in the case of a Mortgage Loan, or the date of the creation of the
Additional Balance, in the case of an Additional Balance. In consideration
of the sale of the Mortgage Loans (including Additional Balances) from the
Seller to the Purchaser on the Closing Date, the Purchaser agrees to pay to
the Seller on the date of this Agreement, by book-entry transfer or otherwise
on the books and records of the Purchaser and the Seller, an amount equal to
$(_____________). The remainder of the Purchase Price of the Mortgage Loans
sold to the Purchaser as of the Closing Date shall be contributed as capital
by the Seller to the Purchaser.
(b) The Purchase Price for Mortgage Loans and Additional Balances shall
be paid or provided for on the Closing Date and each subsequent date on which
Additional Balances are drawn on the Credit Line Agreements in either of the
following ways: (i) by payment in cash of immediately available funds; or
(ii) in the event that the total Purchase Price is not paid in full in cash
by the Purchaser on the date of purchase, the Seller shall convey the amount
of such cash shortfall as a capital contribution to the Purchaser. The
monthly notice delivered by the Seller to the Purchaser pursuant to Section 1
of this Agreement shall indicate the amount of the Purchase Price for
Additional Balances paid by the Purchaser during the prior month in cash and
the amount of capital contributions by the Seller to the Purchaser.)
SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE SELLER. The Seller
--------------------------------------------
hereby makes to and for the benefit of the Purchaser each of the following
representations and warranties:
(i) The Seller is a corporation duly organized, validly existing
and in good standing under the laws of the State of (______________) and
has the power to own its property and to conduct its business as it is
presently owned and as such business is presently conducted;
(ii) The Seller is neither required to qualify nor to register as a
foreign corporation in any state in order to conduct its business, and
is not required under federal or state law to obtain any licenses or
approvals with respect to such business except such as have been
obtained prior to the Closing Date;
(iii) The Seller has the power and authority to make, execute,
deliver and perform its obligations under this Agreement and all of the
transactions contemplated under this Agreement, and has taken all
necessary corporate action to authorize the execution, delivery and
performance of this Agreement;
(iv) The Seller is not required to obtain the consent of any other
party or any consent, license, approval or authorization from, or
registration or declaration with, any governmental authority, bureau or
agency in connection with the execution, delivery, performance, validity
or enforceability of this Agreement, except such as have been obtained
or filed, as the case may be, prior to the Closing Date;
(v) The execution, delivery and performance of this Agreement by
the Seller will not violate or conflict with any provision of any
existing law or regulation or any order or decree of any court
applicable to the Seller or any provision of the (Certificate of
Incorporation) (Articles of Incorporation) (Articles of Association) or
By-laws of the Seller, or constitute a material breach of any mortgage,
indenture, contract or other agreement to which the Seller is a party or
by which the Seller may be bound;
(vi) There are no proceedings or investigations pending or, to the
best knowledge of the Seller, threatened, before any court, regulatory
body, administrative agency, arbitrator or other tribunal or
governmental instrumentality (i) asserting the invalidity of this
Agreement, (ii) seeking to prevent the consummation of any of the
transactions contemplated by this Agreement, (iii) seeking any
determination or ruling that, in the reasonable judgment of the Seller,
would materially and adversely affect the transactions contemplated by
this Agreement or the performance by the Seller of its obligations under
this Agreement, (iv) seeking any determination or ruling that would
materially and adversely affect the validity or enforceability of this
Agreement, (v) seeking to affect adversely the Federal income tax
attributes of the Trust, or (vi) seeking to impose any tax upon the
Seller as a result of the sale of the Mortgage Loans pursuant to this
Agreement; and
(vii) The Seller is not insolvent and will not be insolvent
following the consummation on the Closing Date of the transactions
contemplated by this Agreement and has not entered into such
transactions, including the transfer by the Seller to the Purchaser of
the property specified in Section 1, in contemplation of insolvency or
with a view to hindering its creditors.
The representations and warranties set forth in this Section 3 shall
survive the sale of the Mortgage Loans to the Purchaser and the transfer of
the Mortgage Loans by the Purchaser to the Trust and the delivery of the
Mortgage Files to the Trustee. Upon discovery by the Seller or the Purchaser
of a breach of any of the foregoing representations and warranties, the party
discovering such breach shall give prompt written notice thereof to the other
party.
SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE SELLER REGARDING THIS
-----------------------------------------------------------
AGREEMENT AND THE MORTGAGE LOANS: REPURCHASE OF CERTAIN MORTGAGE LOANS. (a)
- - ----------------------------------------------------------------------
The Seller represents and warrants to the Purchaser as of the Transfer Date
with respect to each Mortgage Loan sold to the Purchaser (except as otherwise
expressly stated) that, as to each Mortgage Loan or its related Asset
Balance:
(i) this Agreement constitutes a legal, valid and binding
obligation of the Seller, enforceable against the Seller in accordance
with its terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
now or hereafter in effect affecting the enforcement of creditors'
rights in general and except as such enforceability may be limited by
general principles of equity (whether considered in a proceeding at law
or in equity);
(ii) this Agreement constitutes a valid sale and assignment to the
Purchaser of all right, title and interest of the Seller in and to the
Mortgage Loans, all monies due or to become due with respect thereto,
and all proceeds of such Mortgage Loans;
(iii) the information set forth with respect to each Mortgage Loan
on Schedule I hereto was true and correct in all material respects as of
the date or dates respecting which such information is furnished;
(iv) immediately prior to the sale of the Mortgage Loans to the
Purchaser, the Seller was the sole owner and holder of the Mortgage
Loans, free and clear of any and all liens, pledges, participations,
charges or security interests of any nature whatsoever, and had full
right and authority, subject to no interest or participation of, or
agreement with, any other party, to sell and assign the same;
(v) each Mortgage evidences a valid, subsisting and enforceable
first or second lien on the Mortgaged Property therein described, which
lien secures the indebtedness outstanding under the Mortgage Loan as of
the Cut-off Date and the indebtedness thereafter incurred as a result of
any Additional Balances created under such Mortgage Loan subsequent to
the Cut-off Date; such Mortgaged Property is free and clear of all
encumbrances and liens having priority over the lien of the related
Mortgage except for (A) if such lien is a second lien, the first lien on
such Mortgaged Property and (B) such other encumbrances and liens to
which like properties are commonly subject and that are commonly
acceptable to home equity mortgage lenders in the jurisdiction where the
related Mortgaged Property is located that do not individually or in the
aggregate materially affect the benefits of the security intended to be
provided by the Mortgage; with respect to each Mortgage Loan secured by
Mortgaged Property located in the State of Connecticut, subsequent to
the recording of the related original Mortgage, the Seller has not
received written notice of any mortgage, lien, attachment, lis pendens,
legal proceedings or adjudication against such Mortgaged Property; with
respect to each Mortgage Loan secured by Mortgaged Property located in
the State of New York, subsequent to the recording of the related
original Mortgage, the Seller has not received written notice of any
mechanic's lien filed against the property pursuant to the New York Lien
Law; any security agreement, chattel mortgage or equivalent document
related to, and delivered to the Purchaser in connection with, such
Mortgage Loan establishes a valid and subsisting first or second lien on
the property described therein; and the terms of the Mortgage, and any
security agreement, chattel mortgage or equivalent document relating to
such Mortgage, may be enforced by the Purchaser and its successors and
assigns;
(vi) the Seller has not impaired, waived, altered or modified the
related Mortgage or Mortgage Note in any material respect, except by a
written instrument that has been recorded, or satisfied, canceled or
subordinated such Mortgage in whole or in part, released the Mortgaged
Property in whole or in part from the lien of such Mortgage, or executed
any instrument of release, cancellation, modification or satisfaction
with respect to such Mortgage;
(vii) there are no defaults in complying with the terms of any
Mortgage, and all taxes, governmental assessments, insurance premiums,
and water, sewer and municipal charges, if applicable, that previously
became due and owing have been paid; the Seller has not advanced funds,
or induced, solicited or knowingly received any advance of funds by a
party other than the Mortgagor, directly or indirectly, for the payment
of any amount required by the Mortgage;
(viii) there is no proceeding pending or threatened for the total or
partial condemnation of any Mortgaged Property; each Mortgaged Property
is undamaged by waste, fire, earthquake or earth movement, windstorm,
flood, tornado or other casualty, so as to have a material adverse
effect on the value of the related Mortgaged Property as security for
the related Mortgage Loan or the use for which the premises were
intended; and no Mortgaged Property is located on a hazardous or toxic
waste site;
(ix) each Mortgaged Property is free and clear of all mechanics'
and materialmen's liens, or other similar liens, that are prior to or
equal to the lien of the related Mortgage; and there are no rights
outstanding that could result in any such prior or equal mechanics' or
materialmen's lien or similar lien being imposed on a Mortgaged
Property;
(x) each Mortgaged Property consists of a fee simple estate in
real property; all of the improvements that are included for the purpose
of determining the Appraised Value of the Mortgaged Property lie wholly
within the boundaries and building restriction lines of such property
(and, if the related Mortgaged Property is a condominium unit, such
improvements lie wholly within the project); and, (based upon a
"drive-by" inspection, with respect to Credit Limits of up to and
including $___, or an appraisal, with respect to Credit Limits of over
$___, made in connection with the application for the related Mortgage
Loan,) no improvements on adjoining property that encroach on the
Mortgaged Property have been revealed by such "drive-by" inspection or
appraisal, unless Federal Housing Administration or Veterans'
Administration regulations, or FNMA or FHLMC guidelines, permit such an
encroachment;
(xi) each Mortgage Loan meets, or is exempt from, applicable state
or federal laws, regulations or other requirements pertaining to usury,
and no Mortgage Loan is usurious;
(xii) no improvement located on or being part of a Mortgaged
Property is in violation of any applicable zoning law or regulation; all
inspections licenses and certificates required to be made or issued with
respect to all occupied portions of the Mortgaged Property and, with
respect to the use and occupancy of the same including, but not limited
to, certificates of occupancy and fire underwriting certificates, have
been made or obtained from the appropriate authorities;
(xiii) the Seller and every other holder of each Mortgage, if any,
were authorized to transact business in the jurisdiction in which the
related Mortgaged Property is located at all times when such party held
such Mortgage;
(xiv) no payment required to be made on any Mortgage Loan under the
terms of the related Mortgage Note is more than 90 days delinquent;
(xv) each Mortgage Note and the related Mortgage are genuine and
each is the valid and binding obligation of the maker thereof,
enforceable in accordance with its terms, except as such enforcement may
be limited by bankruptcy, insolvency, reorganization or other similar
laws affecting the enforcement of creditors' rights generally and by
general equity principles (regardless of whether such enforcement is
considered in a proceeding in equity or at law); all parties to each
Mortgage Note and the related Mortgage had legal capacity to execute
such Mortgage Note and such Mortgage, and each Mortgage Note and
Mortgage has been duly and properly executed by the Mortgagor;
(xvi) any and all requirements of any federal, state or local law,
including, without limitation, truth-in-lending, real estate settlement
procedures, consumer credit protection, equal credit opportunity or
disclosure laws, applicable to the Mortgage Loan have been complied
with;
(xvii) all improvements securing each Mortgage Loan are insured, by a
generally acceptable insurance company licensed to do business in the
jurisdiction where the Mortgaged Property is located, against loss by
fire and such hazards as are customarily covered under a standard
extended coverage endorsement in the area where the related Mortgaged
Property is located, in an amount that is not less than the amount
required pursuant to the (____________________) Agreement. If the
Mortgaged Property is a condominium unit, it is included under the
coverage afforded by a blanket policy for the project to the extent not
covered by an individual unit insurance policy consistent with the
immediately preceding sentence. If, upon origination of the Mortgage
Loan, the Mortgaged Property was in an area identified in the Federal
Register by the Federal Emergency Management Agency as having special
flood hazards (and such flood insurance has been made available), a
flood insurance policy meeting the requirements of the guidelines of the
Federal Insurance Administration is in effect with a generally
acceptable insurance carrier, in an amount that is not less than the
amount required pursuant to the (_________ _________) Agreement. Each
Mortgage obligates the Mortgagor thereunder to maintain all such
insurance at the Mortgagor's cost and expense; and each of the foregoing
insurance policies contains a standard mortgagee clause that names the
originator and its successors and assigns as first or second mortgagee,
as the case may be. Each of the hazard insurance policies is the valid
and binding obligation of the related insurer, is in full force and
effect, and will be in full force and effect and insure to the benefit
of the Purchaser upon the consummation of the transactions contemplated
by this Agreement. The Seller has not engaged in, and has no knowledge
of the Mortgagor's having engaged in, any act or omission that would
impair the coverage of any such policy, the benefits of the endorsement
provided for herein, or the validity and binding effect of either;
(xviii) there is no default, breach, violation or event of
acceleration existing under any Mortgage or the related Mortgage Note
and no event that, with the passage of time or with notice and the
expiration of any grace or cure period, would constitute a default,
breach, violation or event of acceleration; and the Seller has not
waived any default, breach, violation or event of acceleration.
(xix) no Mortgage Note is subject to any right of rescission,
set-off, counterclaim or defense, including the defense of usury, nor
will the operation of any of the terms of any Mortgage Note, or the
exercise of any right thereunder, render such Mortgage Note
unenforceable, in whole or in part, or subject it to any right of
rescission, set-off, counterclaim or defense, including the defense of
usury, and no such right of rescission, setoff, counterclaim or defense
has been asserted with respect thereto;
(xx) each Mortgage Note is not and has not been secured by any
collateral except the lien of the corresponding Mortgage and the
security interest of any applicable security agreement, chattel mortgage
or equivalent document referred to in subparagraph (v) above;
(xxi) each Mortgage contains customary and enforceable provisions
such as to render the rights and remedies of the holder thereof adequate
for the realization against the Mortgaged Property of the benefits of
the security provided thereby, including, without limitation, (i) in the
case of a Mortgage designated as a deed of trust, by trustee's sale and
(ii) otherwise by judicial foreclosure; and there is no exemption
available to the Mortgagor that would interfere with such right to
foreclose or sell the Mortgaged Property at a trustee's sale;
(xxii) no Mortgagor is a debtor in any state or federal bankruptcy or
insolvency proceeding;
(xxiii) the Mortgaged Properties are located in the States of
(____________________); each Mortgaged Property consists of a single
parcel of real property with a one-to-four-family residence erected
thereon, a townhouse, an individual condominium unit, or an individual
unit in a planned unit development, provided, however, that any such
condominium unit or planned unit development is either (i) located in a
project that has been approved by, or would otherwise be acceptable to,
FNMA or FHLMC or (ii) the Combined Loan-to-Value Ratio of the Mortgage
Loan secured by such condominium unit or unit in a planned unit
development is (____)% or less as of the Cut-off Date; and no such
parcel has erected thereon a mobile home or manufactured dwelling;
(xxiv) as of the Closing Date, each Mortgage Loan meets the
requirements set by the OTS for investment by a federal savings and loan
association, subject to such association's charter and bylaws and
applicable governmental regulation regarding percentage of assets
limitations;
(xxv) the Seller maintains either a blanket hazard insurance policy
or a mortgage impairment insurance policy providing coverage for, among
other things, fire and the extended coverage hazards, with respect to
the Mortgage Loans and, as of the Closing Date, any such policy is in
full force and effect;
(xxvi) each Mortgaged Property is either an owner-occupied primary
residence, a second home or a residential investor property;
(xxvii) with respect to each Mortgage Loan, the Loan Rate as of the
Cut-off Date, net of the premium payable on any related credit life
insurance policy, was either (____)%, (____)%, or (____)% per annum and
the weighted average of the Loan Rates as of the Cut-off Date was
(____)% per annum;
(xxviii) each Mortgage Loan contains a "due-on-sale" clause permitting
the mortgagee to accelerate the payment of the indebtedness evidenced
thereby upon the sale of the related Mortgaged Property;
(xxix) no Mortgage Loan had a Combined Loan-to-Value Ratio in excess
of (___)%;
(xxx) upon the Seller's transfer of the Mortgage Loans to the
Purchaser in accordance with the terms hereof, the Purchaser became the
sole owner of all the right, title and interest in, to and under the
Mortgage Loans, including all principal amounts thereof outstanding as
of the Cut-off Date and all principal amounts that may hereafter be
outstanding thereunder as a result of future Draws or the capitalization
of interest due and unpaid thereon, free and clear of all liens,
pledges, charges and encumbrances whatsoever;
(xxxi) no Mortgage Note has been prepared on a form other than the
forms of Mortgage Notes attached hereto as Exhibit A, no Mortgage has
been prepared on a form other than the forms of Mortgages attached
hereto as Exhibit B and no riders were appended to any Mortgage at the
time of execution thereof;
(xxxii) each Mortgage Loan was originated by a savings and loan
association, savings bank, commercial bank, credit union, insurance
company, or similar institution which is supervised and examined by a
federal or state authority, or by a mortgagee approved by the Secretary
of Housing and Urban Development pursuant to sections 203 and 211 of the
National Housing Act;
(xxxiii) the Mortgage Note for each Mortgage Loan provides that the
Loan Rate is (fixed)(adjusted monthly on each Interest Rate Adjustment
Date to equal the sum of the Index and the Gross Margin, subject to any
Rate Cap); the Mortgage Note is payable monthly on each Due Date in
amounts calculated in the manner set forth therein, with interest
calculated and payable in arrears; no Mortgage Note contains provisions
permitting negative amortization (other than the provision for
Capitalized Interest); and the average Cut-off Date Asset Balance was
approximately $(_______________);
(xxxiv) the Mortgaged Property is lawfully occupied under applicable
law; and all inspections, licenses and certificates required to be made
or issued with respect to all occupied portions of the Mortgaged
Property and, with respect to the use and occupancy of the same,
including but not limited to certificates of occupancy and fire
underwriting certificates, have been made or obtained from the
appropriate authorities;
(xxxv) in the event the Mortgage constitutes a deed for trust, a
trustee, duly qualified under applicable law to serve as such, has been
properly designated, currently so serves and is named in the Mortgage,
and no fees or expenses are or will become payable by the Purchaser to
the trustee under the deed of trust, except in connection with a
trustee's sale after default by the Mortgagor; and
(xxxvi) the Mortgage Note, the Mortgage, and any other documents
required to be delivered under the Pooling and Servicing Agreement with
respect to the Mortgage Loans have been delivered to the Trustee or the
Custodian; and the Trustee or the Custodian is in possession of a
complete, true and accurate Mortgage File.
The representations and warranties set forth in this Section 4 shall
survive the sale of the Mortgage Loans to the Purchaser and the transfer of
the Mortgage Loans by the Purchaser to the Trust and the delivery of the
Mortgage Files to the Trustee. Upon discovery by the Seller or the Purchaser
of a breach of any of the representations and warranties set forth in this
Section 4, the party discovering such breach shall give prompt written notice
thereof to the other party. Within 60 days of its discovery or its receipt
of notice of breach, the Seller shall use all reasonable efforts to cure such
breach in all material respects or shall, not later than the Business Day
immediately preceding the Distribution Date in the month following the
Collection Period in which any such cure period expired, repurchase such
Mortgage Loan from the Purchaser in the same manner and subject to the same
conditions as set forth in Section 5, other than with respect to breaches
solely related to the representations and warranties set forth in clause (i)
or (ii) of this Section 4. Upon making such repurchase and sending any
required payment to the Purchaser, the Seller shall be entitled to receive an
instrument of assignment or transfer, without recourse, representation or
warranty, from the Purchaser to the same extent as set forth in Section 5
with respect to the repurchase of the Mortgage Loans under that Section. It
is understood and agreed that the obligation of the Seller to repurchase a
Mortgage Loan as to which a breach has occurred and is continuing and to make
any required payment to the Purchaser shall constitute the sole remedy
respecting such breach available to the Purchaser against the Seller;
provided, however, that the Seller shall defend and indemnify the Purchaser
- - -------- -------
against all costs, expenses, losses, damages, claims and liabilities,
including reasonable fees and expenses of counsel, which may be asserted
against or incurred by the Purchaser as a result of any breach of any such
representation or warranty. Notwithstanding the foregoing, with regard to
any breach of the representation and warranty set forth in clause (iv) of
this Section 4, the sale and assignment of the affected Mortgage Loans shall
be deemed void and the Seller shall pay to the Purchaser the sum of (i) the
amount of the related Asset Balances and (ii) the amount of any losses
suffered with respect to the affected Mortgage Loans.
In the event of a breach of any of the representations and warranties in
clause (i) or clause (ii) of this Section 4 that materially and adversely
affects the interests of the Purchaser, the Purchaser by written notice to
the Seller, may direct the Seller to repurchase all of the Mortgage Loans
within 60 days of such notice. The Seller shall repurchase such Mortgage
Loans on the Distribution Date immediately succeeding the expiration of such
applicable period; provided that such repurchase will not be required to be
made if on the Business Day prior to such Distribution Date, such
representation and warranty shall then be true and correct in all material
respects or the breach of such representations and warranties no longer
materially and adversely affects the interests of the Purchaser. The Seller
shall pay to the Purchaser an amount equal to the aggregate Asset Balances of
the Mortgage Loans on the Distribution Date on which the repurchase is
scheduled to be made plus an amount equal to all interest accrued but unpaid
on such Mortgage Loans through the end of the related Collection Period. If
the Purchaser gives a notice as provided above, the obligation of the Seller
to make any such deposit will constitute the sole remedy respecting a breach
of the representations and warranties available to the Purchaser against the
Seller.
SECTION 5. ACCEPTANCE BY THE PURCHASER: REPURCHASE OF MORTGAGE LOANS.
---------------------------------------------------------
The Purchaser hereby acknowledges its acceptance of the sale and assignment
of the Mortgage Notes and the Mortgages, and its receipt of the Mortgage
Files delivered pursuant to Section 1. If the time to cure any defect in
respect of any Mortgage Loan of which the Purchaser has notified the Seller
following the Purchaser's review of the Mortgage Files has expired or if at
any time any loss is suffered by the Purchaser in respect of any Mortgage
Loan as a result of (i) a defect in any document constituting a part of its
Mortgage File, (ii) an assignment of the related Mortgage not having been
recorded as required by Section 1(a), or (iii) the failure by the Seller to
satisfy its obligation under Section 1(b), then on the next succeeding
Business Day, the Seller shall be obligated to repurchase all right, title
and interest of the Purchaser in and to such Mortgage Loan, without recourse,
representation or warranty, on such Business Day; provided, however, that
-------- -------
interest accrued on the Asset Balance of such Mortgage Loan to the end of the
Collection Period during which the date of repurchase occurs shall be the
property of the Purchaser. Within two Business Days after the Business Day
on which such repurchase arises the Seller shall pay to the Purchaser an
amount in immediately available funds equal to the Asset Balance of such
Mortgage Loan (the "Repurchase Price"). Upon receipt of the Repurchase Price
for such Mortgage Loan, the Purchaser shall execute such documents and
instruments of transfer presented by the Seller, and take such other actions
as shall reasonably be requested by the Seller to effect the repurchase by
the Seller of such Mortgage Loan pursuant to this Section. It is understood
and agreed that the obligation of the Seller to repurchase such a Mortgage
Loan shall constitute the sole remedy respecting such defect available to the
Purchaser against the Seller.
SECTION 6. COVENANTS OF THE SELLER. The Seller hereby covenants that:
-----------------------
(a) SECURITY INTERESTS. Except for the conveyances hereunder and the
------------------
(____________________) Agreement, the Seller will not sell, pledge, assign or
transfer to any other Person, or grant, create, incur, assume or suffer to
exist any Lien on any Mortgage Loan or the related Mortgaged Property,
whether now existing or hereafter created, or any interest therein; and the
Seller will defend the right, title and interest of the Purchaser in, to and
under the Mortgage Loans and the related Mortgaged Property, whether now
existing or hereafter created, against all claims of third parties claiming
through or under the Seller; provided, however, that nothing in this Section
-------- -------
6(a) shall prevent or be deemed to prohibit the Seller from suffering to
exist upon any Mortgage Loans or the related Mortgaged Property any Liens for
municipal or other local taxes and other governmental charges if such taxes
or governmental charges shall not at the time be due and payable or if the
Seller shall currently be contesting the validity thereof in good faith by
appropriate proceedings and shall have set aside on its books adequate
reserves with respect thereto.
(b) NOTICE OF LIENS. The Seller shall notify the Purchaser promptly
---------------
after becoming aware of the existence of any Lien on any Mortgage Loans or
the related Mortgaged Property other than the conveyances hereunder and the
(____________________) Agreement.
(c) DELIVERY OF COLLECTIONS. In the event that the Seller receives
-----------------------
payments or other proceeds with respect to the Mortgage Loans conveyed
hereunder, the Seller agrees to remit to the Purchaser or its designee all
such payments or other proceeds as soon as practicable after receipt thereof
by the Transferor, but in no event later than (__) Business Days after the
receipt by the Seller thereof.
SECTION 7. TERMINATION. The respective obligations and
-----------
responsibilities of the Seller and the Purchaser created hereby shall
terminate, except for the Seller's indemnity obligations as provided herein,
upon the termination of the Trust as provided in Article (__) of the
(____________________) Agreement.
SECTION 8. AMENDMENT. (a) This Agreement may be amended from time to
---------
time by the Purchaser and the Seller, without the consent of any of the
Certificateholders, to cure any ambiguity, to correct or supplement any
provisions herein which may be inconsistent with any other provisions herein,
or to add any other provisions with respect to matters or questions arising
under this Agreement which shall not be inconsistent with the provisions of
this Agreement or the (____________________) Agreement; provided, however,
that such action shall not, (i) as evidenced by a letter from each Rating
Agency rating the Investor Certificates delivered to the Trustee, adversely
affect the rating on the Investor Certificates, or (ii) as evidenced by an
opinion of counsel satisfactory to the Trustee, cause the Trust to be
characterized for federal income tax purposes as an association taxable as a
corporation or a taxable mortgage pool or adversely affect the treatment of
the Certificates as debt for federal income tax purposes.
(b) This Agreement may also be amended from time to time by the
Purchaser and the Seller with the consent of the Holders of Investor
Certificates evidencing Percentage Interests aggregating not less than 51%,
for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of this Agreement or modifying in any
manner the rights of the Certificateholders hereunder; provided, however,
-------- -------
that no such amendment shall (i) reduce in any manner the amount of, or delay
the timing of, collections of payments on Mortgage Loans or distributions
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 Holders of all
Certificates then outstanding.
(c) Promptly after the execution of any such amendment made with the
consent of the Investor Certificateholders, the Purchaser shall furnish, or
cause to be furnished, written notification of the substance of such
amendment to each Investor Certificateholder. The Purchaser shall give, or
cause to be given, to each Rating Agency ten Business Days' notice of any
proposed amendment pursuant to this Section 8, and the Purchaser shall give,
or cause to be given, to each Rating Agency notice of any amendment adopted
pursuant to this Section.
(d) Not less than 10 days prior to the execution of any amendment to
this Agreement under subsection 8(b), the Purchaser shall furnish written
notice of such amendment including a copy of the text of the proposed
amendment to each Investor Certificateholder and to the Rating Agencies.
Promptly after the execution of any amendment the Purchaser shall furnish, or
cause to be furnished, written notification of the substance of such
amendment to each Investor Certificateholder and to the Rating Agencies.
(e) It shall not be necessary for the consent of Investor
Certificateholders under this Section 8 to approve the particular form of any
proposed amendment, but it shall be sufficient if such Certificateholders
shall approve the substance thereof. The manner of obtaining such consents
and of evidencing the authorization of the execution thereof by
Certificateholders shall be subject to such reasonable requirements as the
Trustee may prescribe.
SECTION 9. ASSIGNMENT. Notwithstanding anything to the contrary
----------
contained herein, this Agreement may not be assigned by the Purchaser or the
Seller except as contemplated by this Section 9; provided, however, that
-------- -------
simultaneously with the execution and delivery of this Agreement, the
Purchaser shall assign all of its right, title and interest herein to the
Trustee for the benefit of the Certificateholders as provided in the
(____________________) Agreement, to which the Seller hereby expressly
consents. The Seller agrees to perform its obligations hereunder for the
benefit of the Trust and that the Trustee may enforce the provisions of this
Agreement, exercise the rights of the Purchaser and enforce the obligations
of the Seller hereunder without the consent of the Purchaser and to the same
effect as if the Trustee was a party hereto.
SECTION 10. THIRD-PARTY BENEFICIARIES. This Agreement will inure to
-------------------------
the benefit of and be binding upon the parties hereto, the Trustee, and the
Certificateholders, which shall be considered to be third-party beneficiaries
hereof. Except as otherwise provided in this Agreement, no other person will
have any right or obligation hereunder.
SECTION 11. PURCHASER INDEMNIFICATION. The Seller shall pay, indemnify
-------------------------
and hold harmless the Purchaser, the Trust, the Trustee and each Investor
Certificateholder from and against any loss, liability, expense, damage or
injury (except, in the case of indemnification of any Certificateholder, to
the extent that they arise from any action by such Investor
Certificateholder) suffered or sustained pursuant to this Agreement,
including, but not limited to, any judgment, award, settlement, reasonable
attorneys' fees and other costs or expenses incurred in connection with the
--------
defense of any actual or threatened action, proceeding or claim; provided,
however, that the Seller shall not indemnify the Purchaser, the Trust, the
- - -------
Trustee or the Investor Certificateholders if such loss, liability, expense,
damage or injury is due to the gross negligence or willful misconduct of the
Purchaser or the Trustee and provided further that the Seller shall not
indemnify the Trust or the Investor Certificateholders for any liabilities,
costs or expenses of the Trust or the Investor Certificateholders arising
under any tax law, including, without limitation, Federal, State or local or
franchise taxes. The provisions of this indemnity shall run directly to and
be enforceable by an injured party subject to the limitations hereof.
SECTION 12. MERGER OR CONSOLIDATION OF, OR ASSUMPTION OF THE
------------------------------------------------
OBLIGATIONS OF, THE SELLER. (a) The Seller shall not consolidate with or
- - --------------------------
merge into any other corporation or convey or transfer its properties and
assets substantially as an entirety to any Person, unless:
(i) The corporation formed by such consolidation or into which the
Seller is merged or the Person which acquires by conveyance or transfer
the properties and assets of the Seller substantially as an entirety
shall be organized and existing under the laws of the United States of
America or any State or the District of Columbia, and, if the Seller is
not the surviving entity, shall expressly assume, by an agreement
supplemental hereto, executed and delivered to the Purchaser and the
Trustee, in form satisfactory to the Purchaser and the Trustee, the
performance of every covenant and obligation of the Seller, as
applicable hereunder and shall benefit from all the rights granted to
the Seller, as applicable hereunder; and
(ii) The Seller shall have delivered to the Purchaser and the
Trustee an Officer's Certificate signed by a Vice President (or any more
senior officer) of the Seller and an Opinion of Counsel each stating
that such consolidation, merger, conveyance or transfer and such
supplemental agreement comply with this Section 12 and that all
conditions precedent herein provided for relating to such transaction
have been complied with.
(b) The obligations of the Seller hereunder shall not be assignable nor
shall any Person succeed to the obligations of the Seller hereunder except in
each case in accordance with the provisions of the foregoing paragraph and of
Section 9.
SECTION 13. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED IN
-------------
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK AND THE OBLIGATIONS, RIGHTS
AND REMEDIES OF THE PARTIES HERETO SHALL BE DETERMINED IN ACCORDANCE WITH
SUCH LAWS.
SECTION 14. ENTIRE AGREEMENT. This Agreement contains the entire
----------------
agreement and amends, restates and supersedes any prior agreement between the
parties relating to the subject matter hereof, and there are no other
representations, endorsements, promises, agreements or understandings, oral,
written or inferred, between the parties relating to the subject matter
hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized as of the
date first set forth above.
( )
____________________________
Name:
Title:
HEADLANDS MORTGAGE SECURITIES INC.
____________________________
Name:
Title:
SCHEDULE I
Mortgage Loan Information
SCHEDULE II
Exhibit A
---------
Forms of Mortgage Note
Exhibit B
---------
Forms of Mortgage
Exhibit 5.1
Opinion of Tobin & Tobin
July 11, 1997
Headlands Mortgage Securities Inc.
700 Larkspur Landing Circle
Suite 250
Larkspur, CA 94939
Re: Prospectus Supplement to Headlands Mortgage
Securities Inc., Registration No. 333-28031
--------------------------------------------
Ladies and Gentlemen:
We have acted as counsel to Headlands Mortgage Securities Inc., a
Delaware corporation (the "Company"), in connection with the preparation of a
registration statement on Form S-3 (the "Registration Statement") for the
registration with the Securities and Exchange Commission under the Securities
Act of 1933, as amended (the "Act"), of Asset Backed Securities with an
aggregate offering price of up to $750,000,000. As described in the
Registration Statement, the Asset Backed Securities consist of Asset Backed
Certificates ("Certificates") and Asset Backed Notes ("Notes").
The Certificates may be issued from time to time in series. Each
series of Certificates will be issued by a trust (each, a "Trust") formed by
the Company pursuant to a pooling and servicing agreement (each, a "Pooling
and Servicing Agreement") among the Company, a master servicer (the "Master
Servicer"), a seller (the "Seller") and a trustee (the "Trustee"). Each
series of Certificates issued by a Trust may include one or more classes of
Certificates. The Notes are issuable in series under separate indentures
(each such agreement an "Indenture"), between an issuer and an indenture
trustee.
We have examined and relied upon copies of the Company's Bylaws,
the Registration Statement, the form of Pooling and Servicing Agreement and
the forms of Certificates included as exhibits thereto, the form of Indenture
and the forms of Notes included as exhibits thereto, and such other records,
documents and statutes as we have deemed necessary for purposes of this
opinion.
In our examination we have assumed the genuineness of all
signatures, the authenticity of all documents submitted to us as originals,
the conformity to original documents of all documents submitted to us as
certified or photostatic copies and the authenticity of the originals of such
documents. As to any facts material to the opinions expressed herein that
were not independently established or verified, we have relied upon
statements and representations of officers and other representatives of the
Company and others.
Based upon the foregoing, we are of the opinion that:
1. When any Pooling and Servicing Agreement relating to a series
of Certificates has been duly and validly authorized by all necessary action
on the part of the Company and has been duly executed and delivered by the
Company, the Master Servicer, the Seller, the Trustee and any other party
thereto, such Pooling and Servicing Agreement will constitute a legal, valid
and binding agreement of the Company, enforceable against the Company in
accordance with its terms, except as enforcement thereof may be limited by
bankruptcy, insolvency or other laws relating to or affecting creditors'
rights generally or by general equity principles.
2. When a series of Certificates has been duly authorized by all
necessary action on the part of the Company (subject to the terms thereof
being otherwise in compliance with applicable law at such time), duly
executed and authenticated by the Trustee for such series in accordance with
the terms of the related Pooling and Servicing Agreement and issued and
delivered against payment therefor as described in the Registration Statement
and the Prospectus and Prospectus Supplement delivered in connection
therewith, such series of Certificates will be legally and validly issued,
fully paid and nonassessable, and the holders thereof will be entitled to the
benefits of the related Pooling and Servicing Agreement.
3. When an Indenture for a series of Notes has been duly
authorized by all necessary action and duly executed and delivered by the
parties thereto, such Indenture will be a legal and valid obligation of the
applicable issuer.
4. When an Indenture for a series of Notes has been duly
authorized by all necessary action and duly executed and delivered by the
parties thereto, and when the Notes of such series have been duly executed
and authenticated in accordance with the provisions of that Indenture, and
issued and sold as contemplated in the Registration Statement and the
Prospectus and Prospectus Supplement delivered in connection therewith, such
Notes will be legally and validly issued and outstanding, fully paid and
non-assessable, and will be binding obligations of the applicable issuer, and
the holders of such Bonds will be entitled to the benefits of that Indenture.
In rendering the foregoing opinions, we express no opinion as to
the laws of any jurisdiction other than the laws of the State of New York
(excluding choice of law principles therein), the corporation laws of the
State of Delaware and the federal laws of the United States of America.
We hereby consent to the filing of this letter as an exhibit to the
Registration Statement and to the references to this firm under the heading
"Legal Matters" in the base prospectus and prospectus supplement forming a
part of the Registration Statement, without admitting that we are "experts"
within the meaning of the Act or the Rules and Regulations of the Commission
issued thereunder, with respect to any part of the Registration Statement,
including this exhibit.
Very truly yours,
/s/ Tobin & Tobin
Exhibit 8.1
Opinion of Brown & Wood LLP
July 11, 1997
Headlands Mortgage Securities Inc.
700 Larkspur Landing Circle, Suite 240
Larkspur, California 94939
Re: Headlands Mortgage Securities Inc.
Registration Statement on Form S-3
----------------------------------
Ladies and Gentlemen:
We have acted as special tax counsel to Headlands Mortgage Securities
Inc., a Delaware corporation (the "Company"), in connection with the
preparation of a registration statement on Form S-3 (the "Registration
Statement") for the registration with the Securities and Exchange Commission
(the "Commission") under the Securities Act of 1933, as amended (the "Act"),
of asset backed securities (the "Securities") in an aggregate principal
amount of up to $750,000,000. As described in the Registration Statement,
the Securities will be issued from time to time in series. Each series of
Securities will be issued by a trust (each, a "Trust") formed by the Company
pursuant to a (i) pooling and servicing agreement (each, a "Pooling and
Servicing Agreement") among the Company, a master servicer, a seller and a
trustee, (ii) a trust agreement (each, a "Trust Agreement") between a
depositor and a trustee or (iii) an indenture (each, an "Indenture") between
the related Trust and an indenture Trustee. Each series of Securities issued
by a Trust may include one or more classes of Securities. The Securities
will be sold from time to time pursuant to certain underwriting agreements
(each, an "Underwriting Agreement") among the Company and the underwriter or
underwriters named therein.
In arriving at the opinion expressed below, we have assumed that each
Pooling and Servicing Agreement, Trust Agreement and Indenture will be duly
authorized by all necessary corporate action by the parties thereto for the
related series of Securities and will be duly executed and delivered by the
parties thereto substantially in the applicable form filed or incorporated by
reference as an exhibit to the Registration Statement, that each series of
Securities will be duly executed and delivered in substantially the forms
set forth in the related Pooling and Servicing Agreement, Trust Agreement
or Indenture filed or incorporated by reference as an exhibit to the
Registration Statement, and that Securities will be sold as described in the
Registration Statement.
We have advised the Registrant with respect to certain federal income
tax consequences of the proposed issuance of the Securities. This advice is
summarized under the headings "Summary of Terms -- Federal Income Tax
Consequences" and "Federal Income Tax Consequences" in the prospectus
relating to the Securities (the "Prospectus"), all a part of the Registration
Statement. Such description does not purport to discuss all possible federal
income tax ramifications of the proposed issuance of the Securities, but with
respect to those tax consequences that are discussed, in our opinion, the
description is accurate in all material respects.
This opinion is based on the facts and circumstances set forth in the
Registration Statement and in the other documents reviewed by us. Our
opinion as to the matters set forth herein could change with respect to a
particular series of Securities as a result of changes in facts or
circumstances, changes in the terms of the documents reviewed by us, or
changes in the law subsequent to the date hereof. Because the Prospectus
contemplates series of Securities with numerous different characteristics,
you should be aware that the particular characteristics of each series of
Securities and the tax characteristics of the related Trust must be
considered in determining the applicability of this
opinion to a particular series of Securities and the related Trust. Therefore
this opinion should not be relied upon for a particular series of Certificates
or the related Trust absent our express confirmation of our opinion for a
particular series of Certificates or Trust.
We hereby consent to the filing of this letter as an exhibit to the
Registration Statement and to a reference to this firm (as counsel to the
Registrant) under the heading "Federal Income Tax Consequences" in the
Prospectus forming a part of the Registration Statement, without implying or
admitting that we are "experts" within the meaning of the Act or the rules
and regulations of the Commission issued thereunder, with respect to any part
of the Registration Statement, including this exhibit.
Very truly yours,
/s/ Brown & Wood LLP
