As filed with the Securities and Exchange Commission on June 2, 1999
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-3
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
HEADLANDS MORTGAGE SECURITIES INC.
(Exact name of registrant as specified in its Charter)
Delaware 68-039-7342
(State of Incorporation) (I.R.S. Employer Identification No.)
700 Larkspur Landing Circle
Suite 240
Larkspur, California 94939
(415) 925-5442
(Address, including zip code, and telephone number, including area code, of
principal executive offices)
Peter T. Paul
Headlands Mortgage Securities Inc.
700 Larkspur Landing Circle, Suite 240
Larkspur, California 94939
(415) 461-6790
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
<TABLE>
<CAPTION>
With a copy to:
<S> <C> <C>
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 94104 New York, New York 10048 New York, New York 10019
</TABLE>
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. |_|
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CALCULATION OF REGISTRATION FEE
=================================================================================================================
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 PRICE(1) FEE(2)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Asset Backed Securities............ $500,000,000 100% $500,000,000 $141,820.60
=================================================================================================================
(1) Estimated for the purpose of calculating the registration fee.
(2) $112,687,624 in securities are being carried forward and $34,147.76 of the filing fee associated with
the securities being carried forward and was previously paid with the earlier registration statement.
</TABLE>
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.
<PAGE>
The information in this prospectus supplement is not complete and may be
changed. We may not sell these securities until the registration statement
filed with the SEC is effective. This prospectus is not an offer to sell these
securities and it is not soliciting an offer to buy these securities in any
state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED JUNE 2, 1999
Prospectus Supplement
(To prospectus dated _________, ____)
$___________ (approximate)
HOME EQUITY LOAN TRUST 199_
HOME EQUITY LOAN ASSET-BACKED CERTIFICATES, SERIES 199_
HEADLANDS MORTGAGE SECURITIES INC.
AS SPONSOR
[LOGO] [HEADLANDS MORTGAGE COMPANY]
AS SELLER AND SERVICER
The certificates
represent THE TRUST
obligations of the o will issue [2] classes of senior certificates
trust only and do
not represent an o will issue a single residual certificate
interest in or
obligation of o will make a REMIC election for federal income tax
the sponsor, the purposes
trustee or any of
their affiliates. THE CERTIFICATES
o represent the entire beneficial interest in a
This prospectus trust, whose assets consist of a pool of closed-
supplement may end fixed rate mortgage loans
be used to offer
and sell the o currently have no trading market
certificates only
if accompanied o are obligations of the trust only and are not
by the obligations of the seller and servicer or its
prospectus. affiliates
CREDIT ENHANCEMENT
o will be provided in the form of
[overcollateralization] and an irrevocable
and unconditional certificate guaranty
insurance policy issued by [certificate
insurer]
REVIEW THE INFORMATION IN "RISK FACTORS" ON PAGE S-__ HEREIN AND ON PAGE __ IN
THE PROSPECTUS.
o For complete information about the certificates, read both this prospectus
supplement and the prospectus.
o __________________, the underwriter, will buy the offered certificates
from Headlands Mortgage Securities Inc. at a price equal to _______ of
their face value. The underwriter will sell the offered certificates
from time to time in negotiated transactions.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED
OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
[UNDERWRITER]
_____________, 199_
<PAGE>
TABLE OF CONTENTS
Page
----
PROSPECTUS SUPPLEMENT
Summary.................................................................4
Risk Factors............................................................9
The Certificate Insurer................................................12
[Headlands Mortgage Company............................................12
The Sponsor............................................................16
Description of the MortgagE Loans......................................16
Prepayment and Yield Considerations....................................21
Description of the Certificates........................................26
Use of Proceeds........................................................45
Federal Income Tax Consequences........................................45
State Taxes............................................................47
ERISA Considerations...................................................48
Legal Investment Considerations........................................50
Underwriting...........................................................51
Experts................................................................51
Legal Matters..........................................................51
Ratings................................................................51
PROSPECTUS
Risk Factors........................................................4
The Trust...........................................................8
Use of Proceeds....................................................14
The Sponsor........................................................14
Loan Program.......................................................14
Description of the Securities......................................17
Credit Enhancement.................................................31
Yield and Prepayment Consideration.................................38
The Agreements.....................................................41
Certain Legal Aspects of the Loans.................................58
Federal Income Tax Consequences....................................69
State Tax Considerations...........................................95
ERISA Considerations...............................................96
Legal Investment..................................................100
Method of Distribution............................................102
Legal Matters.....................................................103
Financial Information.............................................103
Available Information.............................................103
Incorporation of Certain Documents by Reference...................103
Rating............................................................104
Index of Defined Terms............................................105
<PAGE>
SUMMARY
This summary highlights selected information from this document and
does not contain all of the information that you need to consider in making your
investment decision. Please read this entire prospectus supplement and the
accompanying prospectus carefully for additional information about the offered
certificates.
HOME EQUITY LOAN ASSET-BACKED CERTIFICATES, SERIES 199_-_
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
LAST
INITIAL CLASS SCHEDULED
CERTIFICATE PRINCIPAL DISTRIBUTION
CLASS RATE BALANCE DATE RATING RATING TYPE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A-1 % $ -
- -------------------------------------------------------------------------------------------------
Class A-2 % $ -
- -------------------------------------------------------------------------------------------------
Class R N/A $0 -
- -------------------------------------------------------------------------------------------------
</TABLE>
The initial class principal balance is subject to a variance of ___%.
The Class R certificates are not being offered.
THE SELLER AND SERVICER
o [Headlands Mortgage Company].
o [Headlands Mortgage Company] maintains its principal office at 1100
Larkspur Landing Circle, Suite 101, Larkspur, California 94939]. Its
telephone number is [(415) 925-5442].
o The servicer will receive a monthly fee from the interest payments on
the mortgage loans equal to __% per annum on the principal balance of
each mortgage loan.
We refer you to "THE SELLER" in this prospectus supplement for additional
information.
THE SPONSOR
o Headlands Mortgage Securities Inc..
o Headlands Mortgage Securities Inc. maintains its principal office at
700 Larkspur Landing Circle, Suite 240, Larkspur, California 94939.
Its telephone number is (415) 925-5442.
We refer you to "THE DEPOSITOR" in this prospectus supplement for
additional information.
TRUST
o Home Equity Loan Trust 199_-_.
TRUSTEE
o [____________________________]
CERTIFICATE INSURER
o [__________________].
We refer you to "THE CERTIFICATE INSURER" in this prospectus supplement
for additional information.
CUT-OFF DATE
o ____________, 199_.
CLOSING DATE
o ________________, 199_.
DISTRIBUTION DATE
o The [25th] day of each month, or if that day is not a business day, the
next business day. The first distribution date is ___________ 199_.
DUE PERIOD
o The calendar month immediately preceding a determination date or a
distribution date, as applicable.
REGISTRATION OF OFFERED CERTIFICATES
We will issue the offered certificates in book-entry form. You will hold
your interests either through a depository in the United States or through
one of two depositories in Europe. While the certificates are book-entry,
they will be registered in the name of a depository, or in the name of a
depository's nominee.
We refer you to "RISK FACTORS--Consequences on Liquidity and Payment Delay
Because of Owning Book-Entry Certificates" and "DESCRIPTION OF THE
CERTIFICATES--Book-Entry Certificates" in this prospectus supplement
for additional information.
TRUST PROPERTY
The trust property is held by the trustee for the benefit of the
certificateholders. The trust property includes:
o a pool of closed-end fixed rate mortgage loans, secured by first and
second deeds of trust or mortgages on one- to four-family residential
properties;
o payments on the mortgage loans received on and after the cut-off date;
o property that secured a mortgage loan which has been acquired by
foreclosure or deed in lieu of foreclosure;
o rights under any hazard insurance policies covering the mortgaged
properties; and
o amounts on deposit in accounts described in this prospectus supplement.
THE MORTGAGE LOANS
On the closing date, the trust will acquire a pool of fixed rate home
equity loans, or "mortgage loans" with an aggregate principal balance as
of the cut-off date of $____________.
The mortgage loans will have the following characteristics as of the
cut-off date:
o number of mortgage loans: _______
o aggregate principal balance: $____________
o mortgaged property location: __ states and the District of Columbia
o average principal balance: $___________
o maximum principal balance: $___________
o interest rates range: _____% to ____%
o weighted average interest rate: _________% (approximate)
o weighted average remaining term to stated maturity, based on principal
balance: ___ months (approximate)
o term to stated maturity range: __ months to 360 months
o combined loan-to-value ratio range: ____% to _____% (approximate)
o balloon loans - loans with amortization schedules that do not fully
amortize by their maturity date: _____% (approximate)
We refer you to "DESCRIPTION OF THE MORTGAGE LOANS" in this prospectus
supplement for additional information.
MONTHLY ADVANCES
If the servicer reasonably believes that cash advances can be recovered
from future payments or collections on the mortgage loans, the servicer
will make cash advances to the trust to cover delinquent mortgage loan
payments. The servicer will make advances only to maintain a regular flow
of scheduled interest and principal payments on the certificates, not to
guarantee or insure against losses.
We refer you to "DESCRIPTION OF THE CERTIFICATES--Advances" in this
prospectus supplement for additional information.
THE CERTIFICATES
1. General
o Each month the trustee will calculate the amount you are owed.
o If you hold a certificate on the last day of a calendar month, you will
be entitled to receive payments on the distribution date in the next
month.
We refer you to "DESCRIPTION OF THE CERTIFICATES" in this prospectus
supplement for additional information.
2. Interest Distributions
o Interest accrues on the certificates from the first day of a calendar
month through the last day of that calendar month.
On each distribution date, you will be entitled to the following:
o interest at the certificate rate that accrued during the interest
period; and
o any interest that was due on a prior distribution date and not paid. In
addition, interest will have accrued on the amount of interest which
was previously due and not paid.
We refer you to "DESCRIPTION OF THE CERTIFICATES--Interest" in this
prospectus supplement for additional information.
3. Principal Distributions
o Principal distributions are payable on each distribution date. However,
no class of certificates will receive a principal distribution until
the other classes with a lower numerical class designation are paid in
full.
o Shortfalls in available funds may result in a class receiving less than
what is due.
o The calculation of the amount a class is entitled to receive on each
distribution date and the priority of principal distributions among the
certificates is described in this prospectus supplement under
"DESCRIPTION OF THE CERTIFICATES--Principal."
We refer you to "DESCRIPTION OF THE CERTIFICATES--Principal" in this
prospectus supplement for additional information.
CREDIT ENHANCEMENTS
1. The Certificate Insurance Policy: The policy guarantees the payment of:
o accrued and unpaid interest on the offered certificates;
o principal losses on the mortgage loans; and
o any principal amounts owed to the certificateholders on the last
scheduled distribution date.
We refer you to "THE CERTIFICATE INSURER" in this prospectus supplement
for additional information.
2. Overcollateralization: Certain receipts in excess of the amounts due on
the certificates will be applied as principal payments to the
certificates. This will result in an acceleration of principal payments on
the certificates relative to the amortization of the related mortgage
loans, increasing the amount of credit support for the certificates.
We refer you to "DESCRIPTION OF THE CERTIFICATES--Overcollateralization"
in this prospectus supplement for additional information.
PRE-FUNDING ACCOUNT
On the closing date, the sponsor shall deposit cash to the trust, which
the trust will use to acquire additional mortgage loans from the seller.
The trustee may only acquire such additional mortgage loans until
_________________.
If any amounts are left in the pre-funding accounts on [date], holders of
the certificates will receive such amounts as an early payment of
principal.
We refer you to "DESCRIPTION OF THE CERTIFICATES--Pre-Funding Account" in
this prospectus supplement for additional information.
CAPITALIZED INTEREST ACCOUNT
On the closing date, the trustee shall deposit cash to the trust which
will be used to cover interest shortfalls on the certificates expected to
occur prior to the trust's purchase of the additional mortgage loans.
Until the trust purchases the additional mortgage loans or prepays the
certificates, interest payments on the mortgage loans will not cover the
amount of interest due on the certificates.
Any amounts left in the capitalized interest account after [date] will be
paid to seller.
We refer you to "DESCRIPTION OF THE CERTIFICATES--Capitalized Interest
Account" in this prospectus supplement for additional information.
OPTIONAL TERMINATION
If the total pool balance declines below __% of the total pool balance as
of the cut-off date, then the sponsor may purchase all of the trust assets
and terminate the trust. In this event, you will receive a final
distribution.
We refer you to "DESCRIPTION OF THE CERTIFICATES--Termination; Purchase of
Mortgage Loans" in this prospectus supplement for more detail.
FEDERAL TAX CONSIDERATIONS
For federal income tax purposes:
o An election will be made to treat the trust as a REMIC
o The offered certificates will be regular interests in the REMIC and
will be treated as debt instruments of the REMIC
o The Class R certificates will represent the beneficial ownership of the
sole class of residual interest in the REMIC.
We refer you to "FEDERAL INCOME TAX CONSIDERATIONS" in this prospectus
supplement and in the prospectus for additional information.
ERISA CONSIDERATIONS
The fiduciary responsibility provisions of ERISA, can limit investments by
certain pension and other employee benefit plans. If you are a fiduciary
of a pension or other employee benefit plan which is subject to ERISA, you
should consult with your counsel regarding the applicability of the
provisions of ERISA and the tax code before purchasing a certificate.
We refer you to "ERISA CONSIDERATIONS" in this prospectus supplement and
the prospectus for additional information.
LEGAL INVESTMENT CONSIDERATIONS
The certificates are not eligible under the Secondary Mortgage Market
Enhancement Act of 1984. Consequently, some institutions will be unable to
invest in the certificates.
We refer you to "LEGAL INVESTMENT CONSIDERATIONS" in this prospectus
supplement and "LEGAL INVESTMENT" in the prospectus for additional
information.
CERTIFICATE RATING
The trust will not issue the offered certificates unless they receive the
following ratings:
___ by _________________
___ by _________________
A rating is not a recommendation to buy, sell or hold securities and may
be subject to revision or withdrawal by either rating agency.
We refer you to "RATING" and "RISK FACTORS--Rating of the Securities Does
Not Assure Payment" in the prospectus for additional information.
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS PRIOR TO ANY
PURCHASE OF CERTIFICATES. YOU SHOULD ALSO CAREFULLY CONSIDER THE INFORMATION SET
FORTH UNDER "RISK FACTORS" IN THE PROSPECTUS.
BALLOON LOANS INCREASE RISK OF LOSS
Balloon loans pose a risk because a borrower must pay a large lump sum
payment of principal at the end of the loan term. If the borrower is unable to
pay the lump sum or refinance such amount, you will suffer a loss if the insurer
fails to perform its obligations under the policy and the other forms of credit
enhancement are insufficient to cover the loss. Approximately ___% of the
mortgage loans are balloon loans.
PREPAYMENTS AFFECT TIMING AND RATE OF RETURN ON YOUR INVESTMENT
The yield to maturity on your certificates will be directly related to
the rate of principal payments on the mortgage loans. Please consider the
following:
o Mortgagors may fully or partially prepay their mortgage loan at
any time. However, some mortgage loans require that the mortgagor
pay a fee with any prepayments in full within five years of
origination, except that generally no fee is required for any
prepayment in full made within twelve months of a loan's maturity
date. This may result in the rate of prepayments being slower than
would otherwise be the case.
o All the mortgage loans contain due-on-sale provisions. Due-on-sale
provisions require the mortgagor to fully pay the mortgage loan
when the mortgaged property is sold. Generally, the servicer will
enforce the due-on-sale provision unless prohibited by applicable
law.
o Home equity loans generally are not viewed by borrowers as
permanent financing. Accordingly, the mortgage loans may
experience a higher rate of prepayment than purchase money first
lien mortgage loans.
We refer you to "RISK FACTORS - Prepayments are Unpredictable and
Affect Yield" in the prospectus.
RATINGS BASED PRIMARILY ON CLAIMS-PAYING ABILITY OF THE INSURER
The rating on the certificates depends primarily on an assessment by
the rating agencies of the mortgage loans and upon the claims-paying ability of
the insurer. Any reduction of the rating assigned to the claims-paying ability
of the insurer may cause a corresponding reduction on the ratings assigned to
the notes. A reduction in the rating assigned to the notes will reduce the
market value of the notes and may affect your ability to sell them. In general,
the rating on your notes addresses credit risk and does not address the
likelihood of prepayments.
We refer you to "Ratings" in this prospectus supplement.
INTEREST PAYMENTS ON THE MORTGAGE LOANS MAY BE REDUCED
o Prepayments of Principal May Reduce Interest Payments. If a
mortgagor prepays a mortgage loan in full, the mortgagor is
charged interest only up to the date of the prepayment, instead of
a full month. The servicer is obligated to reduce its servicing
fee in the month of such prepayment so that one month's interest
is paid with such prepayment in full. If the servicing fee is
insufficient to pay such interest shortfalls attributed to
prepayments, a shortfall in interest due on the notes may result.
The insurer is required to cover this shortfall. If the insurer
fails to perform its obligations under the policy, you may incur a
loss.
o Certain Interest Shortfalls Are Not Covered by the Servicer or the
Insurance Policy. The Soldiers' and Sailors' Civil Relief Act of
1940 permits certain modifications to the payment terms for
mortgage loans, including a reduction in the amount of interest
paid by the borrower, under certain circumstances. Neither the
servicer nor the insurer will pay for any interest shortfalls
created by the Soldiers' and Sailors' Civil Relief Act of 1940.
RISK OF LOSSES AS A RESULT OF GEOGRAPHIC CONCENTRATION
The mortgaged properties are located in __ states. However, __% of the
mortgaged properties (by principal balance as of the cut-off date) are located
in ______. If ____________ experiences weaker economic conditions or greater
rates of decline in real estate values than the United States generally, then
the pool of mortgage loans may experience higher rates of delinquencies,
defaults and foreclosures than if the pool were more diversified.
RISK OF INCREASED DELINQUENCY, DEFAULT AND FORECLOSURE EXPERIENCE DUE TO LESS
STRINGENT UNDERWRITING STANDARDS
The seller's underwriting standards are generally less stringent than
those of Fannie Mae or the Freddie Mac with respect to credit history and
certain other items. If a borrower has a poor credit history, the seller may
still make a loan to the borrower. This approach to underwriting may result in
higher rates of delinquencies, defaults and foreclosures than for mortgage loans
underwritten in a more traditional manner.
[RISK OF PREPAYMENT DUE TO SUBSEQUENT MORTGAGE LOANS
The trust will buy additional mortgage loans from the seller until
_______. The seller will sell mortgage loans to the trust if it has mortgage
loans to sell. The ability of the seller to originate and acquire additional
mortgage loans is affected by a variety of factors, including interest rates,
unemployment levels, the rate of inflation and consumer perception of economic
conditions generally. If the full amount deposited in the pre-funding accounts
for the purpose of purchasing additional mortgage loans cannot be used for that
purpose within [three] months from the closing date, any remaining amounts will
be paid to you as a prepayment on the certificates.]
RISKS ASSOCIATED WITH YEAR 2000 COMPLIANCE
Some computer programs use two digits to define the applicable year. In
performing date calculations, a two-digit program could recognize a date ending
in "00" as the year 1900, rather than the year 2000. This could result in a
failure to properly calculate dates before and after December 31, 1999,
including dates such as February 29, 2000, and this could also cause the
computer running the program to stop operating properly. The servicer is testing
for potential problems from two-digit programs, and it plans to correct or
replace its affected computer programs and systems on a timely basis. The
servicer also requested that the subservicers undertake similar testing,
correction and replacement.
If the servicer, any subservicer or any of their suppliers, customers
or agents do not timely implement effective procedures to deal with computer
programs that rely on two-digit year calculations, the servicer's performance of
its obligations under the pooling and servicing agreement could be adversely
affected. This could result in delays in processing payments on the mortgage
loans, which could cause a delay in distributions to you.
<PAGE>
THE CERTIFICATE INSURER
The information set forth in this section have been provided by the
certificate insurer. No representation is made by the underwriter, the sponsor,
the seller, the servicer or any of their affiliates as to the accuracy or
completeness of any such information.
[DESCRIPTION OF THE CERTIFICATE INSURER]
[HEADLANDS MORTGAGE COMPANY
[GENERAL
Headlands Mortgage Company, the seller and servicer, is California
corporation which was organized in 1981. Headlands Mortgage Company is a wholly
owned subsidiary of Greenpoint Financial Corp. Greenpoint Financial Corp. is
listed on the New York Stock Exchange under the symbol "GPT".
The seller 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. As of December 31, 199_ and 199_, the
seller had total assets of $___ million and $___ million, respectively and
shareholders equity of $__ million and $__ million, respectively.
The seller is headquartered in Northern California, and has production
branches in California, Washington, Oregon, Idaho, Florida, Virginia,
Pennsylvania, New Mexico, New Jersey and Arizona. Loans are originated primarily
through the seller's wholesale division, through a network of independent
mortgage loan brokers approved by the seller, and also through its retail
lending division and correspondent lending division. The mortgage loans were
acquired by the seller in one of the three following methods: (1) originated by
an independent broker and purchased by the seller, (2) originated by a broker
and funded by the seller, or (3) originated and funded by the seller in the
ordinary course of business.
The seller's executive offices are located at 1100 Larkspur Landing
Circle, Suite 101, Larkspur, California 94939.
[SERVICING OVERVIEW
The servicer will service the mortgage loans pursuant to the pooling
and servicing agreement. All of the mortgage loans are currently serviced by the
servicer substantially in accordance with the procedures described below and in
the accompanying prospectus. The company has originated home equity mortgage
loans since ___________________________.
As of December 31, 199_, the servicer's mortgage loan servicing
portfolio consisted of ______ one to four family residential mortgage loans with
an aggregate principal balance of $___billion. The servicer's primary source of
mortgage servicing rights is from mortgage loans originated through mortgage
brokers.
The servicer's servicing center was established in January 1994. As of
December 31, 199_, it had a staff of __ employees. Prior to January 1994, the
company's 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 and 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 the company's mortgage banking operations and included in the servicer's
servicing portfolio at the dates indicated. As of December 31, 199_, 199_ and
199_ and __________, 199_ the total principal balance of loans serviced was (in
millions) $_____, $_____, $____ and $____, respectively. The total portfolio has
been reduced by the number of loans pending servicing release or that have been
foreclosed.
<TABLE>
<CAPTION>
HEADLANDS MORTGAGE COMPANY
OVERALL MORTGAGE PORTFOLIO
DELINQUENCY AND FORECLOSURE EXPERIENCE
-------------------------------------------------------------------------------------------------------
Percent of Percent of Percent of Percent of
Number Servicing Number of Servicing Number Servicing Number Servicing
of Loans Portfolio of Loans Portfolio of Loans Portfolio of Loans Portfolio
---------- ------------ ----------- ------------ ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Number
========== ============ =========== ============ ========== ============ ========== ============
Period of
Delinquency
========== ============ =========== ============ ========== ============ ========== ============
(excluding
Foreclosures)
Foreclosures
Pending
</TABLE>
The following table summarizes the delinquency, foreclosure and loss
experience on Headlands' "Second Lien Securities" servicing portfolio only. This
portfolio consists of second-lien mortgage loans, but not high loan-to-value
second lien mortgage loans, and home equity lines of credit mortgage loans
originated or acquired by Headlands and included in a securitization transaction
(either pursuant to the sponsor's securitization program or one sponsored by a
third-party conduit). The total portfolio has been reduced by the number of
loans that have been foreclosed.
<TABLE>
<CAPTION>
HEADLANDS MORTGAGE COMPANY
HELOC AND SECOND LIEN MORTGAGE PORTFOLIO
DELINQUENCY, FORECLOSURE AND LOSS EXPERIENCE
-----------------------------------------------------------------------------
December 31, 199_ December 31, 199_ ___________, 199_
------------------------ ------------------------ ------------------------
Percent of Percent of Percent of
Number Servicing Number Servicing Number Servicing
of Loans Portfolio of Loans Portfolio of Loans Portfolio
---------- ------------ ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Total Number
========== ============ ========== ============ ========== ============
Period of Delinquency
========== ============ ========== ============ ========== ============
(excluding Foreclosures)
Foreclosures Pending
Losses sustained
</TABLE>
<PAGE>
HEADLANDS' MORTGAGE LOAN PROGRAM
The mortgage loans will have been purchased by Headlands Mortgage
Company, either directly or through affiliates, from mortgage loan brokers or
originated by its retail division. The mortgage loans have been originated in
accordance with the underwriting criteria specified below under "Underwriting
Standards."
UNDERWRITING STANDARDS
The seller believes that the mortgage loans originated were
underwritten in accordance with standards consistent with those utilized by
mortgage 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 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 acquire 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. For 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. For loans on a two-to-four unit property, the appraisal must specify
whether an income analysis, a market analysis or a cost analysis was used. The
income analysis evaluates a two-to-four unit project's cash flow, expenses,
capitalization and other operational information in determining the property's
value. The market analysis to evaluate 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 properties and the multifamily project being
appraised. In the cost analysis, in the appraiser makes an estimate of land
value and then determines 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 currently supports and should support in the
future, the outstanding loan balance. For property values to $650,000 appraisers
may use either a full appraisal (FNMA 1004/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%, a full appraisal is required; for values between
$650,001 to $1,000,000 with a combined loan-to-value of greater than 75%, a full
appraisal and one field review ordered by the company is required; and for loans
with values greater than $1,000,000 with a combined loan-to-value greater than
65%, two full appraisals are required. The company may order discretionary
reviews at any time to ensure the value of the properties.
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,
which is 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,
other financial obligations and monthly living expenses. The underwriting
standards applied by the company may be varied in appropriate cases where
factors such as low loan-to-value ratios or other favorable credit exist.
However, maximum combined loan-to-value ratios and maximum loan amounts are
limited by credit score and total debt-to-income ratios.
The seller requires title insurance for all mortgage loans. Fire and
extended hazard insurance and flood insurance, when applicable, are also
required.
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, more emphasis is
placed on credit score and property underwriting than on certain credit
underwriting documentation concerning income. Further, employment verification
is waived.
For mortgage loans secured by a leasehold interest in a real property,
the company 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.
THE SPONSOR
The sponsor is a company incorporated in Delaware on November 18, 1996.
The sponsor is a special purpose corporation organized for limited purposes,
with limited assets and a limited operating history.
DESCRIPTION OF THE MORTGAGE LOANS
GENERAL
The statistical information presented in this prospectus supplement is
only with respect to the mortgage loans included in the trust and is based on
the characteristics of the mortgage loans as of _______, 199_, (the "Cut-Off
Date").
The mortgage loans to be purchased by the trust will be originated or
purchased by the seller and sold by the seller to the sponsor and transferred by
the sponsor to the trust.
The mortgage pool consists of mortgage loans with an aggregate
principal balance, or "pool balance", as of the Cut-Off Date of $_________. 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 minus all collections
applied in reduction of the Cut-Off Date principal balance of such mortgage
loan.
In no event will more than 5% of the Cut-Off Date pool balance deviate
from the characteristics of the mortgage loans described below.
The mortgage loans provide that interest is charged to the borrowers
and payments are due from the borrowers, as of a scheduled day of each month
which is fixed at the time of origination. Scheduled monthly payments made by
the borrowers on the mortgage loans either earlier or later than the scheduled
due dates will not affect the amortization schedule or the application of the
payments to principal and interest.
The sum of the columns below may not equal the total indicated due to
rounding. In addition, unless otherwise set forth herein, all percentages set
forth herein with respect to the mortgage loans are percentages of the Cut-Off
Date pool balance.
<PAGE>
CUT-OFF DATE PRINCIPAL BALANCES
Range of Cut-Off
Date Principal Number of Cut-Off Date % of Cut-Off Date
Balances Mortgage Loans Pool Balance Pool Balance
-------- -------------- ------------ -------------
GEOGRAPHIC DISTRIBUTION BY STATE
Number of Cut-Off Date % of Cut-Off Date
State Mortgage Loans Pool Balance Pool Balance
----- -------------- ------------ ------------
LOAN-TO-VALUE RATIOS
Number of Cut-Off Date of Cut-Off Date
Loan-to-Value Ratio Mortgage Loans Pool Balance Pool Balance
------------------- -------------- ------------ ------------
LOAN RATES
Number of Cut-Off Date % of Cut-Off Date
Loan Rates Mortgage Loans Pool Balance Pool Balance
---------- -------------- ------------ ------------
ORIGINAL TERM TO STATED MATURITY
Original Term to Number of Cut-Off Date % of Cut-Off Date
Stated Maturity Mortgage Loans Pool Balance Pool Balance
--------------- -------------- ------------ ------------
<PAGE>
REMAINING MONTHS TO STATED MATURITY
Remaining Term to Number of Cut-Off Date % of Cut-Off Date
Stated Maturity Mortgage Loans Pool Balance Pool Balance
--------------- -------------- ------------ ------------
MONTHS SINCE ORIGINATION
Months Since Number of Cut-Off Date % of Cut-Off Date
Origination Mortgage Loans Pool Balance Pool Balance
----------- -------------- ------------ ------------
PROPERTY TYPE
Number of Cut-Off Date % of Cut-Off Date
Property Type Mortgage Loans Pool Balance Pool Balance
------------- -------------- ------------ ------------
OCCUPANCY TYPE
Number of Cut-Off Date % of Cut-Off Date
Occupancy Type Mortgage Loans Pool Balance Pool Balance
-------------- -------------- ------------ ------------
<PAGE>
[CONVEYANCE OF SUBSEQUENT MORTGAGE LOANS
The pooling and servicing agreement permits the trust to purchase from
the seller, subsequent to the Cut-Off Date and prior to _______, 19__,
subsequent mortgage loans in an amount not to exceed approximately $________ in
aggregate principal balance for inclusion in the trust. Each subsequent mortgage
loan will have been originated or purchased by the seller in accordance with the
underwriting guidelines set forth above under "Underwriting and Credit
Guidelines." Accordingly, the statistical characteristics of the pool set forth
above are based exclusively on the initial mortgage loans and the statistical
characteristics of the pool after giving effect to the acquisition of any
subsequent mortgage loans will likely differ from the information provided in
this prospectus supplement. The date on which the seller transfers a subsequent
mortgage loan to the trust shall be referred to in this prospectus supplement as
the Subsequent Transfer Date.
Each conveyance of subsequent mortgage loans will be subject to, among
other things, the following conditions:
o the subsequent mortgage loans must:
o satisfy the eligibility criteria set forth in the
prospectus under "The Loan Program--Representations by
Sellers; Repurchases" and
o comply with each representation and warranty for the
mortgage loans set forth in the pooling and servicing
agreement;
o subsequent mortgage loan must not have been selected by the seller
in a manner that it believes is adverse to the interests of the
certificateholders,
o no subsequent mortgage loan may be ___ or more days contractually
delinquent as of the applicable Cut-Off Date;
o no subsequent mortgage loan may have a remaining term to maturity
in excess of ___ years;
o no subsequent mortgage loan may have a loan rate less than ____%;
o following the purchase of the subsequent mortgage loans by the
trust, the mortgage loans
o will have a weighted average loan rate of at least ____%;
o will have a weighted average loan-to-value ratio of not
more than ____%;
o will not have a weighted average remaining term to stated
maturity of more than ____ months; and
o will, in each case, have a principal balance in excess of
$_______ as of the Cut-Off Date;
o the seller, [the sponsor and the trustee shall not have been
notified by either rating agency that the conveyance of the
subsequent mortgage loans will result in a qualification,
modification or withdrawal of its then-current rating of any class
of certificates] [shall have notified each rating agency of such
conveyance as required by the pooling and servicing agreement];
and
o the trustee shall have received certain opinions of counsel as to,
among other things, the enforceability and validity of the
transfer agreements relating to such conveyance of such subsequent
mortgage loans.] All subsequent mortgage loans shall be added from
a specified group of mortgage loans.]
PREPAYMENT AND YIELD CONSIDERATIONS
GENERAL
The rate of principal payments, the aggregate amount of distributions
and the yield to maturity of the offered certificates will be related to the
rate and timing of payments of principal on the mortgage loans. The rate of
principal payments on the mortgage loans will in turn be affected by the
amortization schedules of the mortgage loans and by the rate of principal
prepayments, including for this purpose prepayments resulting from refinancing,
liquidations of the mortgage loans due to defaults, casualties, condemnations
and repurchases by the seller. The mortgage loans may be prepaid by the
mortgagors at any time. However, approximately __% of the mortgage loans are
subject to prepayment penalties which vary from jurisdiction to jurisdiction.
Prepayments, liquidations and purchases of the mortgage loans including
any optional purchase by the sponsor of the remaining mortgage loans in
connection with the termination of the trust, will result in distributions on
the related offered certificates of principal amounts which would otherwise be
distributed over the remaining terms of such mortgage loans. Since the rate of
payment of principal of the mortgage loans will depend on future events and a
variety of factors, no assurance can be given as to such rate or the rate of
principal prepayments. The extent to which the yield to maturity of an offered
certificate may vary from the anticipated yield will depend upon the degree to
which a certificate is purchased at a discount or premium, and the degree to
which the timing of payments thereon is sensitive to prepayments, liquidations
and purchases of such mortgage loans.
The rate of prepayment on the mortgage loans cannot be predicted. The
prepayment experience of the trust with respect to the mortgage loans may be
affected by a wide variety of factors, including economic conditions, prevailing
interest rate levels, the availability of alternative financing and homeowner
mobility and changes affecting the deductibility for federal income tax purposes
of interest payments on loans. All of the mortgage loans contain "due-on-sale"
provisions, and the servicer is required by the pooling and servicing agreement
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 LOANS--Due-on-Sale Clauses" in the prospectus.
As with fixed rate obligations generally, the rate of prepayment on a
pool of mortgage loans with fixed rates such as the mortgage loans is affected
by prevailing market rates for mortgage loans of a comparable term and risk
level. When the market interest rate is below the interest rate on a mortgage,
mortgagors may have an increased incentive to refinance their mortgage loans.
Depending on prevailing market rates, the future outlook for market rates and
economic conditions generally, some mortgagors may sell or refinance mortgaged
properties in order to realize their equity in the mortgaged properties, to meet
cash flow needs or to make other investments.
In addition to the foregoing factors affecting the weighted average
life of the offered certificates, any use of Excess Spread to pay principal of
the offered certificates will result in the acceleration of the certificates,
relative to the amortization of the mortgage loans. This acceleration feature
creates overcollateralization which results from the excess of the aggregate
principal balance of mortgage loans over the Aggregate Class A Principal
Balance. Once the required level of overcollateralization is reached, the
acceleration feature will cease, unless necessary to maintain the required level
of overcollateralization. See "DESCRIPTION OF THE CERTIFICATES--
Overcollateralization."
WEIGHTED AVERAGE LIVES
Generally, greater than anticipated prepayments of principal will
increase the yield on the offered certificates purchased at a price less than
par and will decrease the yield on the offered certificates purchased at a price
greater than par. The effect on an investor's yield due to principal prepayments
on the mortgage loans occurring at a rate that is faster (or slower) than the
rate anticipated by the investor in the period immediately following the
issuance of the certificates will not be entirely offset by a subsequent like
reduction (or increase) in the rate of principal payments. The weighted average
life of the offered certificates will also be affected by the amount and timing
of delinquencies and defaults on the mortgage loans and the recoveries, if any,
on defaulted mortgage loans and foreclosed properties.
The "weighted average life" of a certificate refers to the average
amount of time that will elapse from the date of issuance to the date each
dollar in respect of principal of such certificate is repaid. The weighted
average life of any class of offered certificates will be influenced by, among
other factors, the rate at which principal payments are made on the mortgage
loans, including final payments made upon the maturity of balloon loans. The
weighted average life of a certificate of any class is determined by:
o multiplying the amount of each distribution in reduction of the
related Class A Principal Balance by the number of years from the
date of issuance of the certificate to the related Distribution
Date,
o adding the results, and
o dividing the sum by the highest related Class Principal Balance of
the certificate.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this prospectus supplement is
the prepayment assumption, which represents an assumed rate of prepayment each
month relative to the then outstanding principal balance of the pool of mortgage
loans for the life of such mortgage loans. A 100% prepayment assumption assumes
a conditional prepayment rate ("CPR") of [ ]% per annum. As used in the table
below, 0% prepayment assumption assumes a conditional prepayment rate equal to
0% of the prepayment assumption, i.e., no prepayments. Correspondingly, [200]%
prepayment assumption assumes prepayment rates equal to [200]% of the prepayment
assumption, and so forth. The prepayment assumption does not purport to be a
historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of mortgage loans, including the
mortgage loans. The sponsor believes that no existing statistics of which it is
aware provide a reliable basis for holders of the offered certificates to
predict the amount or the timing of receipt of prepayments on the mortgage
loans.
Since the tables were prepared on the basis of the assumptions in the
following paragraph, there are discrepancies between characteristics of the
actual mortgage loans and the characteristics of the mortgage loans assumed in
preparing the tables. Any such discrepancy may have an effect upon the
percentages of the Class Principal Balances outstanding and weighted average
lives of the offered certificates set forth in the tables. In addition, since
the actual mortgage loans in the trust have characteristics which differ from
those assumed in preparing the tables set forth below, the distributions of
principal on the offered certificates may be made earlier or later than as
indicated in the tables.
For the purpose of the tables below, it is assumed that:
o the mortgage loans consist of pools of loans with the level-pay
and balloon amortization characteristics set forth below,
o the closing date is ________________,
o distributions on the certificates are made on the 25th day of each
month regardless of the day on which the Distribution Date
actually occurs, commencing in _____________ and are made in
accordance with the priorities described herein,
o the scheduled monthly payments of principal and interest on the
mortgage loans will be timely delivered on the first day of each
month (with no defaults), commencing in _______________,
o the mortgage loans' prepayment rates are a multiple of the
prepayment assumption,
o all prepayments are prepayments in full received on the last day
of each month (commencing ______________) and include 30 days'
interest thereon,
o no optional termination is exercised,
o the certificates of each class have the respective certificate
rates and initial Class Principal Balances as set forth herein,
o the overcollateralization levels are set initially as specified in
the pooling and servicing agreement, and thereafter decrease in
accordance with the provisions of the pooling and servicing
agreement,
o [with respect to pools of loans with an assumed Cut-Off Date of
_________________, interest will be calculated at a rate of % per
annum for one month],
Original Original Remaining
Amortization Term to Term to
Amortization Principal Term Maturity Maturity
Methodology Balance Loan Rate (months) (months) (months)
- ------------ --------- --------- ------------ -------- ---------
Balloon........ $
Level Pay...... $
Level Pay...... $
Subject to the foregoing discussion and assumptions, the following
table indicates the weighted average life of each class of offered certificates,
and sets forth the percentages of the initial Class Principal Balance of each
offered certificate that would be outstanding after each of the dates shown at
various percentages of the prepayment assumption.
<PAGE>
PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS A-1 CLASS A-2
--------- ---------
DISTRIBUTION DATE % % % % % % % %
- ----------------- - - - - - - - -
Initial
Percentage....... 100 100 100 100 100 100 100 100
Weighted Average
Life (years).....
These tables have been prepared based on the assumptions described
above (including the assumptions regarding the characteristics and performance
of the mortgage loans, which differ from the actual characteristics and
performance thereof) and should be read in conjunction with these tables.
<PAGE>
DESCRIPTION OF THE CERTIFICATES
The Home Equity Loan Asset-Backed Certificates, Series 199_-_ will be
issued pursuant to the pooling and servicing agreement. The form of the pooling
and servicing agreement has been filed as an exhibit to the registration
statement of which this prospectus supplement and the prospectus are a part. The
following summaries describe certain provisions of the pooling and servicing
agreement. The summaries do not purport to be complete and are subject to, and
are qualified in their entirety by reference to, all of the provisions of the
pooling and servicing agreement. Wherever particular sections or defined terms
of the pooling and servicing agreement are referred to, these sections or
defined terms are incorporated into this prospectus supplement by reference.
GENERAL
The offered certificates will be issued in denominations of $1,000 and
multiples of $1 in excess of $1,000 and will evidence specified undivided
interests in the trust. The property of the trust will consist of, to the extent
provided in the pooling and servicing agreement:
o the mortgage loans;
o payments on the mortgage loans received on and after the Cut-Off
Date (exclusive of amounts that were due prior to the Cut-Off
Date);
o mortgaged properties relating to the mortgage loans that are
acquired by foreclosure or deed in lieu of foreclosure;
o the Collection Account and the Distribution Account and funds on
deposit in these accounts, but not including any interest earned
on these accounts; and
o rights under hazard insurance policies covering the mortgaged
properties.
In addition, the seller has caused the certificate insurer to issue an
irrevocable and unconditional certificate guaranty insurance policy (the
"Policy") for the benefit of the holders of the Class A certificates, pursuant
to which the certificate insurer will guarantee payments to the Class A
certificateholders. Definitive certificates will be transferable and
exchangeable at the corporate trust office of the trustee, which will initially
act as certificate registrar. 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 Class A-1 and Class A-2 certificates will represent undivided
ownership interests in the mortgage loans, all collections on these mortgage
loans (exclusive of interest payments due prior to the Cut-Off Date) and the
proceeds of these mortgage loans. The principal amount of a class of
certificates on any Distribution Date is equal to the balance on the closing
date minus the aggregate of amounts actually distributed as principal to the
holders of that class. On any date, the Aggregate Class A Principal Balance is
the aggregate of the Class A Principal Balances of the Class A-1 and Class A-2
certificates.
The person in whose name a certificate is registered as such in the
certificate register is referred to herein as a certificateholder.
The percentage interest of a Class A certificate as of any date of
determination will be equal to the percentage obtained by dividing the
denomination of such certificate by the Class A Principal Balance for the
related class as of the Cut-Off Date.
The certificates will not be listed on any securities exchange.
BOOK-ENTRY CERTIFICATES
The offered certificates will be issued in book-entry form. Persons
acquiring beneficial ownership interests in the offered certificates
("Certificate Owners") will hold their offered certificates through The
Depository Trust Company ("DTC") in the United States, or Cedelbank or the
Euroclear System ("Euroclear") in Europe if they are participants of such
systems, or indirectly through organizations which are participants in such
systems. Investors may hold beneficial interests in the certificates in minimum
denominations representing Certificate Principal Balances of $1,000 and in
multiples of $1 in excess of $1,000. Except under limited circumstances, no
person acquiring a book-entry certificate will be entitled to receive a physical
certificate representing such certificate. Unless and until physical
certificates are issued, it is anticipated that the only "certificateholder" of
the offered certificates will be Cede & Co., as nominee of DTC. Certificate
Owners will not be certificateholders as that term is used in the pooling and
servicing agreement. Certificate Owners are only permitted to exercise their
rights indirectly through the DTC system.
Neither the sponsor, the seller, the servicer nor the trustee will have
any responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the book-entry certificates, or for
maintaining, supervising or reviewing any records relating to such beneficial
ownership interests.
ASSIGNMENT OF MORTGAGE LOANS
On ______________, the closing date, the sponsor will transfer to the
trust all of its right, title and interest in and to each mortgage loan, the
mortgage notes, mortgages and other documents (collectively, the "Related
Documents"), including all payments received on or with respect to each mortgage
loan on or after the applicable Cut-Off Date, but not including interest
payments due prior to the Cut-Off Date. The trustee, concurrently with this
transfer, will deliver the certificates to the sponsor. Each mortgage loan
transferred to the trust will be identified on a mortgage loan schedule
delivered to the trustee pursuant to the pooling and servicing agreement. The
mortgage loan schedule will include information about the principal balance of
each mortgage loan as of the Cut-Off Date, its loan rate as well as other
information.
Within 90 days of the closing date, the trustee will review the
mortgage loans and the Related Documents pursuant to the pooling and servicing
agreement and if any mortgage loan or Related Document is found to be defective
in any material respect and that defect is not cured within 90 days following
notification of the defect to the sponsor, the sponsor will be obligated to
either replace the defective mortgage loan with an Eligible Substitute Mortgage
Loan or to repurchase the defective mortgage loan. A substitution is permitted
only within two years of the closing date and may not be made unless an opinion
of counsel is provided stating that such substitution will not disqualify the
trust as a REMIC or result in a prohibited transaction tax under the Code. The
sponsor may purchase the defective mortgage loan at a price equal to the
outstanding principal balance of that mortgage loan as of the date of purchase,
plus all accrued and unpaid interest on the defective mortgage loan, computed at
the loan rate, net of the servicing fee (if the seller is the servicer), plus
the amount of any unreimbursed servicing advances made by the servicer. The
purchase price will be deposited in the Collection Account on or prior to the
next succeeding Determination Date after the substitutions or repurchase
obligation arises. The Determination Date is the [ ] day of each month. The
obligation of the sponsor to repurchase or substitute 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.
In connection with the substitution of an Eligible Substitute Mortgage
Loan, the sponsor will be required to deposit in the Collection Account on or
prior to the next succeeding Determination Date after the substitution or
repurchase obligation arises an amount (the "Substitution Adjustment") equal to
the excess of the principal balance of the related defective mortgage loan over
the Principal Balance of the Eligible Substitute Mortgage Loan.
An Eligible Substitute Mortgage Loan is a mortgage loan substituted by
the sponsor for a defective mortgage loan which must, on the date of the
substitution:
o 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), equal to or less
than the principal balance of the defective mortgage loan;
o 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
a defective mortgage loan;
o have a mortgage of the same or higher level of priority as the
defective mortgage loan at the time substitution;
o have a remaining term to maturity not more than six months earlier
and not later than the remaining term to maturity of the defective
mortgage loan;
o comply with each representation and warranty set forth in the
pooling and servicing agreement (deemed to be made as of the date
of substitution);
o have an original loan-to-value ratio not greater than that of the
defective mortgage loan;
o be of the same type of mortgaged property as the defective
mortgage loan or a detached single family residence.
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 insurer.
The sponsor 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 sponsor will represent and warrant, on the
closing date, that, among other things:
o at the time of transfer to the trust, the sponsor has transferred
or assigned all of its right, title and interest in each mortgage
loan and the Related Documents, free of any lien; and
o each mortgage loan complied, at the time of origination, in all
material respects with applicable state and federal laws.
Upon discovery of a breach of any representation and warranty which
materially and adversely affects the interests of the trust, 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 sponsor will be obligated to substitute for the defective
mortgage loan with an Eligible Substitute Mortgage Loan or purchase the
defective mortgage loan from the trust. The same procedure and limitations that
are set forth above for the substitution or purchase of defective mortgage loans
as a result of deficient documentation relating will apply to the substitution
or purchase of a defective mortgage loan as a result of a breach of a
representation or warranty in the pooling and servicing agreement that
materially and adversely affects the interests of the certificateholders or the
certificate insurer.
Pursuant to the pooling and servicing agreement, the servicer will
service and administer the mortgage loans as more fully set forth above.
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO COLLECTION ACCOUNT AND DISTRIBUTION
ACCOUNT
The servicer shall establish and maintain in the name of the trustee a
separate Collection Account for the benefit of the holders of the certificates.
The Collection Account will be an Eligible Account. Subject to the investment
provision described in the following paragraphs, upon receipt by the servicer of
amounts in respect of the mortgage loans (excluding amounts representing the
servicing fee), the servicer will deposit these amounts in the Collection
Account. Amounts deposited may be invested in Eligible Investments maturing no
later than two Business Days prior to the next succeeding date on which amounts
on deposit in the Collection Amount are required to be deposited in the
Distribution Account.
The trustee will establish a Distribution Account into which amounts
withdrawn from the Collection Account for distribution to certificateholders on
a Distribution Date will be deposited. The Distribution Account will be an
Eligible Account. Amounts on deposited in the Distribution Account may be
invested in Eligible Investments maturing on or before the Business Day prior to
the related Distribution Date.
An Eligible Account is 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, and whose accounts are
fully insured by either the Savings Association Insurance Fund or the Bank
Insurance Fund of the FDIC established by such fund with a minimum long-term
unsecured debt rating of "A2" by Moody's and "A" by S&P, 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 pooling and servicing
agreement and are limited to investments which meet the criteria of the rating
agencies from time to time as being consistent with their then current ratings
of the certificates. "Eligible Investments" are limited to:
o direct obligations of, or obligations fully guaranteed as to
timely payment of principal and interest by, the United States or
any agency or instrumentality of the United States, provided that
such obligations are backed by the full faith and credit of the
United States;
o repurchase agreements on obligations specified in the prior clause
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;
o 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
incorporated 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 the rating agencies in its highest unsecured
short-term debt rating category;
o commercial paper (having original maturities of not more than 90
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 the rating agencies in their highest short-term
rating categories;
o short term investment funds sponsored by any trust company or bank
incorporated under the laws of the United States or any state
thereof which on the date of acquisition has been rated by the
rating agencies in their respective highest rating category of
long term unsecured debt;
o interests in any money market fund which at the date of
acquisition of the interests in such fund and throughout the time
as the interest is held in such fund has the rating specified by
each rating agency; and
o other obligations or securities that are acceptable to each rating
agency as an Eligible Investment hereunder and will not result in
a reduction in the then current rating of the certificates, as
evidenced by a letter to such effect from such rating agency and
with respect to which the sponsor 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
o only interest with respect to the obligations underlying
such instrument or
o 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
o 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.
ADVANCES
Not later than two Business Days prior to each Distribution Date, the
servicer will remit to the trustee for deposit in the Distribution Account an
amount to be distributed on that Distribution Date, equal to the sum of the
interest accrued and principal due on each mortgage loan through the related Due
Date but not received by the servicer as of the close of business on the last
day of the related Due Period (net of the servicing fee) (the "Monthly
Advance"). Such obligation of the servicer continues with respect to each
mortgage loan until a mortgage loan becomes a liquidated mortgage loan.
In the course of performing its servicing obligations, the servicer
will pay all reasonable and customary "out-of-pocket" costs and expenses
incurred in the performance of its servicing obligations, including, but not
limited to, the cost of
o the preservation, restoration and protection of the mortgaged
properties,
o any enforcement or judicial proceedings, including foreclosures,
and
o the management and liquidation of mortgaged properties acquired in
satisfaction of the related mortgage.
Each such expenditure will constitute a "Servicing Advance."
The servicer's right to reimbursement for Servicing Advances is limited
to late collections on the related mortgage loan, including Liquidation
Proceeds, Insurance Proceeds and other amounts as may be collected by the
servicer from the related mortgagor or that relate to these unreimbursed
amounts. The servicer's right to reimbursement for Monthly Advances shall be
limited to late collections of interest on any mortgage loan and to Liquidation
Proceeds and Insurance Proceeds on the related mortgage loan. The servicer's
right to these reimbursements is prior to the rights of certificateholders.
If in the good faith judgment and sole discretion of the servicer it
determines that an advance will not be ultimately recoverable from the related
mortgagor or other collections from that mortgage, the servicer will not be
required to make an advance for that mortgage loan. If the servicer determines
that an advance will not be recoverable from the related Mortgagor or the other
collections from the mortgage then the servicer may be reimbursed from other
amounts on deposit in the Collection Account.
DISTRIBUTION DATES
On each Distribution Date, which is the [25th] day of each month, or if
such day is not a Business Day, then the next Business Day, commencing in
______________________, the holders of the offered certificates will be entitled
to receive, from amounts then on deposit in the Distribution Account, to the
extent of funds available therefor in accordance with the priorities and in the
amounts described below under "Priority of Distributions," an aggregate amount
equal to the sum of (a) the Class Interest Distribution for each class of
offered certificates and (b) the Class A Principal Distribution. Distributions
will be made (1) in immediately available funds to holders of offered
certificates, the aggregate principal balance of which is at least $1,000,000,
by wire transfer or to the account of such certificateholder at a domestic bank
or other entity having appropriate facilities therefor, if such
certificateholder has so notified the trustee in accordance with the pooling and
servicing agreement, or (2) by check mailed to the address of the person as it
appears on the certificate register maintained by the trustee as certificate
registrar.
DEPOSITS TO THE DISTRIBUTION ACCOUNT
No later than one Business Day prior to each Distribution Date, the
following amounts for the previous Due Period shall be deposited into the
Distribution Account and shall constitute the Available Funds for that
Distribution Date:
o payments of principal and interest on the mortgage loans (net of
amounts representing the servicing fee with respect to each
mortgage loan and reimbursement for related Monthly Advances and
Servicing Advances);
o Net Liquidation Proceeds and Insurance Proceeds with respect to
the mortgage loans (net of amounts applied to the restoration or
repair of a mortgaged property);
o the purchase price for repurchased defective mortgage loans and
any related Substitution Adjustment Amounts;
o payments from the servicer in connection with
o Monthly Advances,
o Prepayment Interest Shortfalls and
o the termination of the trust as provided in the pooling
and servicing agreement; and
o any amounts paid under the Policy.
PRIORITY OF DISTRIBUTIONS
A. On each Distribution Date the trustee shall withdraw from
the Distribution Account the Available Funds and make distributions as
described below and to the extent of Available Funds in the following
order of priority:
(1) to the trustee, the trustee fee for that Distribution
Date;
(2) to holders of each class of Class A certificates, an
amount equal to the related Class Interest
Distribution for that Distribution Date;
(3) sequentially, to the Class A-1 and the Class A-2
certificateholders, in that order, until the
respective Class A Principal Balance of each of these
classes is reduced to zero, the related Class A
Principal Distribution (other than the portion
constituting the Distributable Excess Spread) for such
Distribution Date; provided, however, that after the
occurrence and continuance of an Insurer Default, this
portion of the Class A Principal Distribution will be
distributed pro rata to the holders of these certificates
based on the respective Class A Principal Balances;
(4) to the certificate insurer, the amount owing to the
certificate insurer under the Insurance Agreement for the
premium;
(5) sequentially, to the Class A-1 and Class A-2
certificateholders, in that order, until the
respective Class A Principal Balance of each of these
classes is reduced to zero, the related Distributable
Excess Spread for such Distribution Date; provided,
however, that after the occurrence and continuance of an
Insurer Default, the Distributable Excess Spread will be
distributed pro rata to the holders of these certificates
based on the respective Class A Principal Balances.
(6) to the servicer, the amount of any accrued and unpaid
servicing fee;
(7) to the certificate insurer, amounts owing to the
certificate insurer for reimbursement for prior draws
made on the Policy;
(8) to the servicer, the amount of Nonrecoverable Advances not
previously reimbursed;
(9) to the certificate insurer, any other amounts owing to the
certificate insurer under the Insurance Agreement; and
(10) to the Class R certificateholders, the balance.
THE CERTIFICATE RATE
The Certificate Rate for any interest accrual period with respect to
the Class A-1 certificates will be ___% per annum, and the Class A-2
certificates will be ___% per annum. Interest accrual period means the period
from the first day of the calendar month preceding the month of that
Distribution Date through the last day of that calendar month.
Interest will accrue on the certificates on the basis of a 360-day year
consisting of twelve 30-day months.
INTEREST
On each Distribution Date, if there are sufficient funds available, the
Class Interest Distribution will be distributed for each class of Class A
certificates. The Class Interest Distribution is equal to the sum of (a) one
month's interest at the Certificate Rate on the related Class A Principal
Balance immediately prior to that Distribution Date (the "Class Monthly Interest
Distributable Amount") and (b) any Class Interest Carryover Shortfall for such
Class of Class A certificates for that Distribution Date. As to any Distribution
Date and class of Class A certificates, the Class Interest Carryover Shortfall
is the sum of (x) the excess of the related Class Monthly Interest Distributable
Amount for the preceding Distribution Date and any outstanding Class Interest
Carryover Shortfall with respect to that class on the preceding Distribution
Date, over the amount in respect of interest that is actually distributed to
that class on the prior Distribution Date plus (y) one month's interest on the
excess, to the extent permitted by law, at the related Certificate Rate. The
interest entitlement described in (a) above will be reduced by such class' pro
rata share of Civil Relief Act Interest Shortfalls, if any, for that
Distribution Date. Civil Relief Act Interest Shortfalls will not be covered by
payments under the Policy.
On each Distribution Date, the Class Interest Distribution for each
class of Class A certificates will be distributed on an equal priority and any
shortfall in the amount required to be distributed as interest to each class
will be allocated between the classes pro rata based on the amount each class
would have been distributed in the absence of such shortfall.
PRINCIPAL
On each Distribution Date, if there are sufficient funds available in
accordance with the priorities described above under "--Priorities of
Distributions," principal will be distributed to the holders of Class A
certificates then entitled to distributions of principal in an amount equal to
the lesser of (A) the related Aggregate Class A Principal Balance and (B) the
related Class A Principal Distribution for such Distribution Date. "Class A
Principal Distribution" means the sum of the related Class A Monthly Principal
Distributable Amount for a Distribution Date and any outstanding Class A
Principal Carryover Shortfall as of the close of business on the preceding
Distribution Date.
Class A Monthly Principal Distributable Amount means to the extent that
funds are available, the amount equal to the sum of the following amounts,
without duplication, for the immediately preceding Due Period:
o each payment of principal on a mortgage loan received by the
servicer during the Due Period, including all full and partial
principal prepayments,
o the principal balance as of the end of the immediately preceding
Due Period of each mortgage loan that became a liquidated mortgage
loan for the first time during that Due Period,
o the portion of the purchase price allocable to principal of all
repurchased defective mortgage loans with respect to that Due
Period,
o any Substitution Adjustment Amounts received on or prior to the
previous Determination Date and not yet distributed and
o the portion of Excess Spread, if any, required to be distributed
on such Distribution Date to satisfy the required level of
overcollateralization for such Distribution Date (the
"Distributable Excess Spread") but not greater than 100%.
"Class A Principal Carryover Shortfall" means, with respect to any
Distribution Date, the excess of the sum of the related Class A Monthly
Principal Distributable Amount for the preceding Distribution Date and any
outstanding Class A Principal Carryover Shortfall on the preceding Distribution
Date over the amount in respect of principal that is actually distributed to the
Class A certificateholders on the preceding Distribution Date.
If the required level of overcollateralization is reduced below the
then existing amount of overcollateralization or if the required level of
overcollateralization is satisfied, the amount of the related Class A Monthly
Principal Distributable Amount on the following Distribution Date will be
correspondingly reduced by the amount of the reduction in overcollateralization
an by the amount necessary so that the overcollateralization will not exceed the
required level of overcollateralization after giving effect to the principal
distribution to be made on that Distribution Date.
The application of Distributable Excess Spread is intended to create
overcollateralization to provide a source of additional cashflow to cover losses
on the mortgage loans. If the amount of losses in a particular Due Period
exceeds the amount of the related Excess Spread for the related Distribution
Date, the amount distributed in respect of principal will be reduced. A draw on
the Policy for the payment of principal will not be made until the Class A
Principal Balance exceeds the pool balance. See "--The Policy" herein.
Accordingly, there may be Distribution Dates on which Class A certificateholders
receive little or no principal distributions.
So long as an Insurer Default has not occurred and is continuing,
distributions of the Class A Principal Distribution with respect to the offered
certificates will be applied, sequentially, so that no class of offered
certificates having a higher numerical designation is entitled to distributions
of principal until each class of certificates having a lower numerical
designation has been reduced to zero. If on any Distribution Date, an Insurer
Default has occurred and is continuing, the Class A Principal Distribution for
the offered certificates will be applied to the distribution of principal of
each class outstanding on a pro rata basis in accordance with the Class A
Principal Balance of each class.
On each Distribution Date following an Insurer Default, net losses
realized on liquidated mortgage loans (if the net losses realized is not covered
by Available Funds) will reduce the amount of any overcollateralization.
Due Period means, with respect to any Determination Date or
Distribution Date, the calendar month immediately preceding that Determination
Date or Distribution Date.
A liquidated mortgage loan, for any Distribution Date, is a mortgage
loan that the servicer has determined that all Liquidation Proceeds which it
expects to recover with respect to such mortgage loan (including disposition of
the related REO Property) have been recovered. This determination shall be in
accordance with the servicing procedures in the pooling and servicing agreement
and shall be made at the end of the proceeding Due Period.
"Excess Spread" means, with respect to any Distribution Date, the
positive excess, if any, of (A) Available Funds for such Distribution Date over
(B) the amount required to be distributed pursuant to subclause items (1)
through (4), in each case set forth under the heading "DESCRIPTION OF THE
CERTIFICATES--Priority of Distributions" on the Distribution Date.
An Insurer Default will occur in the event the certificate insurer
fails to make a payment required under the Policy or if certain events of
bankruptcy or insolvency occur with respect to the certificate insurer.
THE POLICY
The following information has been supplied by the certificate insurer
for inclusion in this prospectus supplement. Accordingly, neither the sponsor
nor the servicer makes any representation as to the accuracy and completeness of
such information.
[To be provided by the certificate insurer.]
OVERCOLLATERALIZATION
The credit enhancement provisions of the trust result in a limited
acceleration of the Class A certificates relative to the amortization of the
mortgage loans in the early months of the transaction. The accelerated
amortization is achieved by the application of Distributable Excess Spread to
principal distributions on the Class A certificates. This acceleration feature
creates overcollateralization (i.e., the excess of the pool balance over the
related Aggregate Class A Principal Balance). Once the required level of
overcollateralization is reached, and subject to the provisions described in the
next paragraph, the acceleration feature will cease, until necessary to maintain
the required level of overcollateralization.
The pooling and servicing agreement provides that, subject to certain
floors, caps and triggers, the required level of overcollateralization may
increase or decrease over time. Any decrease in the required level of
overcollateralization will occur only at the sole discretion of the certificate
insurer. This decrease will have the effect of reducing the amortization of the
Class A certificates below what it otherwise would have been.
[PRE-FUNDING ACCOUNT
On the closing date, ($__________) will be deposited in a pre-funding
account. The pre-funding account shall be part of the trust and will be used to
acquire additional mortgage loans in accordance with the pooling and servicing
agreement. The funding period will begin on the closing date and terminate on
_____________, 19__. Any funds remaining at the end of the funding period will
be distributed to holders of the classes of certificates entitled to receive
principal on the Distribution Date in ______________, 19__ in reduction of the
related Certificate Principal Balances. This will result in a partial principal
prepayment of the related certificates on that date.
Amounts on deposit in the pre-funding account will be invested in
Permitted Investments. All interest and any other investment earnings on amounts
on deposit in the pre-aunding account will be deposited in the capitalized
interest account. The pre-funding account shall not be an asset of the REMIC.
All reinvestment earnings on the pre-funding account shall be owned by, and be
taxable to, the seller.
CAPITALIZED INTEREST ACCOUNT
On the closing date, a portion of the proceeds from the sale of the
certificates will be deposited in a capitalized interest account. The
capitalized interest account shall be maintained with and in the name of the
trustee on behalf of the trust a portion of the proceeds of the sale of the
certificates. The amount deposited therein will be used by the trustee on the
Distribution Dates in __________________ 19__, _____________ 19__ and
______________, 19__ to cover shortfalls in interest on the certificates that
may arise as a result of interest shortfalls on the certificates during the
funding period. Any amounts remaining in the capitalized interest account at the
end of the funding period which are not needed to cover shortfalls on the
Distribution Date in ___________ 19__ are required to be paid directly to the
seller.] The capitalized interest account shall not be an asset of the REMIC.
All reinvestment earnings on the capitalized interest account shall be owned by,
and be taxable to, the seller.]
REPORTS TO CERTIFICATEHOLDERS
Concurrently with each distribution to the certificateholders, the
trustee will forward to each certificateholder a statement (based solely on
information received from the servicer) setting forth among other items with
respect to each Distribution Date:
(1) the aggregate amount of the distribution to each class of
certificateholders on such Distribution Date;
(2) the amount of distribution set forth in paragraph (1)
above in respect of interest and any Class Interest Carryover
Shortfall, and the amount of any Class Interest Carryover Shortfall
remaining;
(3) the amount of distribution set forth in paragraph (1)
above in respect of principal and the Class A Principal Carryover
Shortfall, and any remaining Class A Principal Carryover Shortfall;
(4) the amount of Excess Spread and the amount applied as to a
distribution on the certificates;
(5) the Guaranteed Principal Amount, if any, for such
Distribution Date;
(6) the amount paid under the Policy for such Distribution
Date in respect of the Class Interest Distribution to each class of
certificates;
(7) the servicing fee;
(8) the pool balance, as of the close of business on the last
day of the preceding Due Period;
(9) the Aggregate Class A Principal Balance after giving
effect to payments allocated to principal above;
(10) the amount of overcollateralization as of the close of
business on the Distribution Date, after giving effect to distributions
of principal on that Distribution Date;
(11) 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 Due Period;
(12) the book value of any real estate which is acquired by the
trust through foreclosure or of deed in lieu of foreclosure;
(13) the aggregate amount of prepayments received on the
mortgage loans during the previous Due Period; and
(14) the weighted average loan rate on the mortgage loans as of
the first day of the month prior to the Distribution Date.
In the case of information furnished pursuant to clauses (2) and (3)
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, the trustee will
forward to each person, if requested in writing by such person, who was a
certificateholder during the prior calendar year a statement containing the
information set forth in clauses (2) and (3) above aggregated for such calendar
year.
LAST SCHEDULED DISTRIBUTION DATE
The last scheduled Distribution Date for each class of offered
certificates is as follows: Class A-1 certificates, ________; and Class A-2
certificates, _________. It is expected that the actual last Distribution Date
for each class of offered certificates will occur significantly earlier than the
last scheduled Distribution Dates. See "PREPAYMENT AND YIELD CONSIDERATIONS".
Such last scheduled Distribution Dates are based on a [ ]% prepayment
assumption with no payments of Distributable Excess Spread and the assumptions
set forth above under "PREPAYMENT AND YIELD CONSIDERATIONS--Weighted Average
Lives".
COLLECTION AND OTHER SERVICING PROCEDURES ON MORTGAGE LOANS
The servicer will make reasonable efforts to collect all payments
called for under the mortgage loans and will, consistent with the pooling and
servicing agreement, follow such collection procedures as it follows from time
to time with respect to the loans in its servicing portfolio comparable to the
mortgage loans. Consistent with the above, the 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 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 servicer's policies
with respect to the mortgage loans it owns or services.
HAZARD INSURANCE
The servicer will cause to be maintained for each mortgage loan and
each 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
o the outstanding principal balance on the mortgage loan and any
related senior lien(s); and
o the maximum insurable value of the improvements securing the
mortgage loan.
Generally, if the mortgaged property is located in a federally designated flood
area, the hazard insurance to be maintained for the mortgage loan shall include
flood insurance in such amounts as are required under applicable guidelines of
the Federal Flood Emergency Act. Any amounts collected by the servicer under any
such policies will be deposited in the Collection Account, net of certain
amounts as indicated in the sale and servicing agreement. 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, other than pursuant to
applicable laws and regulations. If the servicer obtains and maintains 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.
<PAGE>
We refer you to "The Agreements -Hazard Insurance" in the prospectus
for further information.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
The 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 sale
and servicing agreement, no satisfactory arrangements can be made for the
collection of delinquent payments. In connection with such foreclosure or other
conversion, the 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 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 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 noteholders or the certificateholders.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
With respect to each Due Period, the 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 [ ]% per annum, or
the servicing fee rate, on the aggregate principal balances of the mortgage
loans as of the first day of the related Due Period. All assumption fees, late
payment charges and other fees and charges, to the extent collected from
borrowers, will be retained by the servicer as additional servicing
compensation.
The servicer will pay certain ongoing expenses associated with the
trust and incurred by it in connection with its responsibilities under the sale
and servicing agreement. In addition, the 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 noteholders to receive
any related Net Liquidation Proceeds.
EVIDENCE AS TO COMPLIANCE
The pooling and servicing agreement provides for delivery on or before
March 31 of each year, beginning on March 31, [year], to the indenture trustee
and the insurer of an annual statement signed by an officer of the servicer to
the effect that the servicer has fulfilled its material obligations under the
pooling and servicing agreement throughout the preceding fiscal year, except as
specified in such statement.
On or before March 31 of each year, beginning March 31, [year], the
servicer will furnish a report prepared by a nationally recognized independent
public accountants (who may also render other services to the servicer or the
sponsor) to the trustee, the certificate insurer and the rating agencies to the
effect that such firm has examined certain documents and the records relating to
servicing of the mortgage loans under the pooling and servicing agreement and
that, on the basis of such examination, such firm believes that such servicing
was conducted in compliance with the pooling and servicing agreement except for
(a) such exceptions as such firm believes to be immaterial and (b) such other
exceptions as shall be set forth in such report.
CERTAIN MATTERS REGARDING THE SPONSOR AND SERVICER
The pooling and servicing agreement provides that the servicer may not
resign from its obligations and duties thereunder:
o unless such duties and obligations are no longer permissible under
applicable law or are in material conflict by reason of applicable
law with any other activities of a type and nature presently
carried on by it or its subsidiaries or affiliates or
o upon the satisfaction of the following conditions:
o the servicer has proposed a successor servicer to the
trustee and the certificate insurer in writing and such
proposed successor servicer is reasonably acceptable to
the trustee and the certificate insurer; and
o the rating agencies have confirmed to the trustee and the
certificate insurer that the appointment of such proposed
successor servicer as the servicer will not result in the
reduction or withdrawal of the then current rating of the
certificates.
No such resignation will become effective until the trustee or a successor
servicer has assumed the servicer's obligations and duties under the pooling and
servicing agreement.
The servicer may perform any of its duties and obligations under the
pooling and servicing agreement through one or more subservicers or delegates,
which may be affiliates of the servicer. Notwithstanding any such arrangement,
the servicer will remain liable and obligated to the trustee and the
certificateholders for the servicer's duties and obligations under the pooling
and servicing agreement, without any diminution of such duties and obligations
and as if the servicer itself were performing such duties and obligations.
Under the pooling and servicing agreement, the sponsor will indemnify
an injured party for the entire amount of any losses, claims, damages or
liabilities arising out of or based on the pooling and servicing agreement
(other than losses resulting from defaults under the mortgage loans). The
pooling and servicing agreement provides that neither the sponsor nor the
servicer nor their directors, officers, employees or agents will be under any
other liability to the trust, the trustee, the certificateholders, the
certificate insurer or any other person for any action taken or for refraining
from taking any action pursuant to the pooling and servicing agreement. However,
neither the sponsor nor the 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 or the servicer in the performance of its duties
under the pooling and servicing agreement or by reason of reckless disregard of
its obligations thereunder. In addition, the pooling and servicing agreement
provides that the 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 pooling and servicing agreement and which in its
opinion may expose it to any expense or liability. The servicer may, in its sole
discretion, undertake any such legal action which it may deem necessary or
desirable with respect to the pooling and servicing agreement and the rights and
duties of the parties thereto and the interest of the certificateholders and the
certificate insurer thereunder.
Any corporation into which the servicer may be merged or consolidated,
or any corporation resulting from any merger, conversion or consolidation to
which the servicer shall be a party, or any corporation succeeding to the
business of the servicer shall be the successor of the servicer hereunder,
without the execution or filing of any paper or any further act on the part of
any of the parties.
EVENTS OF DEFAULT
Events of Default will consist of:
(1) any failure by the servicer to deposit in the Collection Account
any deposit required to be made under the pooling and servicing
agreement or to make any payment required to be made under the
Insurance Agreement, which failure continues unremedied for two
Business Days after written notice is given of that failure to the
servicer by the trustee, or to the servicer and the trustee by the
certificate insurer or Class A certificateholders evidencing an
aggregate, of at least 25% of the voting rights;
(2) any failure by the servicer duly to observe or perform in any
material respect any other of its covenants or agreements in the
pooling and servicing agreement which, in each case, materially
and adversely affects the interests of the Class A
certificateholders or the certificate insurer and continues
unremedied for 60 days after the written notice is given of such
failure to the servicer by the trustee, or to the servicer and the
trustee by the certificate insurer or Class A certificateholders
evidencing an aggregate of at least 25% of the voting rights;
(3) any Insolvency Event which includes certain events of insolvency,
readjustment of debt, marshalling of assets and liabilities or
similar proceedings relating to the servicer and certain actions
by the servicer indicating insolvency, reorganization or inability
to pay its obligations; or
(4) any Event of Default, as defined in the Insurance Agreement, has
occurred and is continuing.
Under certain other circumstances, the certificate insurer may deliver
written notice to the servicer terminating all the rights and obligations of the
servicer under the pooling and servicing agreement.
Notwithstanding the foregoing, a delay in or failure of performance
referred to under clause (1) above for a period of five Business Days or under
clause (2) above for a period of 60 days, shall not constitute an Event of
Default if such delay or failure could not be prevented by the exercise of
reasonable diligence by the servicer and the delay or failure was caused by an
act of God or other similar occurrence. Upon the occurrence of any such event,
the 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 pooling and
servicing agreement and the servicer shall provide the trustee, the sponsor, the
certificate insurer and the Class A 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 DEFAULT
So long as an Event of Default remains unremedied, either (1) the
trustee, or Class A certificateholders evidencing an aggregate of at least 51%
of the voting rights, in each case with the consent of the certificate insurer,
or (2) the certificate insurer may terminate all of the rights and obligations
of the servicer under the pooling and servicing agreement and in and to the
mortgage loans. In these circumstances, the trustee will succeed to all the
responsibilities, duties and liabilities of the servicer under the pooling and
servicing agreement and will be entitled to similar compensation arrangements.
In the event that the trustee would be obligated to succeed the 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 pooling and servicing agreement.
The appointed servicer must have a net worth of at least $[ ] and must be
acceptable to the certificate insurer to act as successor to the servicer under
the pooling and servicing agreement. Pending such appointment, the trustee will
be obligated to act as servicer unless prohibited by law. The successor will be
entitled to receive the same compensation that the servicer would otherwise have
received (or such lesser compensation as the trustee and such successor may
agree). A receiver or conservator for the servicer may be empowered to prevent
the termination and replacement of the servicer if the only Event of Default
that has occurred is an Insolvency Event.
AMENDMENT
The pooling and servicing agreement may be amended from time to time by
the sponsor, the servicer and the trustee and with the consent of the
certificate insurer, but without the consent of the Class A certificateholders,
to cure any ambiguity, to correct or supplement any provisions therein which may
be inconsistent with any other provisions of the pooling and servicing
agreement, to add to the duties of the sponsor or the servicer or to add or
amend any provisions of the pooling and servicing agreement as required by the
rating agencies in order to maintain or improve any rating of the Class A
certificates (it being understood that, after obtaining the ratings in effect on
the Closing Date, neither the sponsor, the trustee nor the 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 pooling and servicing
agreement or the Policy which shall not be inconsistent with the provisions of
the pooling and servicing agreement or to comply with any requirement imposed by
the Code; provided that such action will not, as evidenced by an opinion of
counsel, adversely affect in any material respect the interests of any
certificateholder or the certificate insurer; provided, that any such amendment
will not be deemed to materially and adversely affect the Class A
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 Class A certificates, without regard to the Policy. The
pooling and servicing agreement may also be amended from time to time by the
sponsor, the servicer, and the trustee, with the consent of Class A
certificateholders evidencing an aggregate of at least 51% of the voting rights
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 pooling and
servicing agreement or of modifying in any manner the rights of the Class A
certificateholders; provided that no such amendment will:
o reduce in any manner the amount of, or delay the timing of,
collections of payments on the Class A certificates or
distributions or payments under the Policy which are required to
be made on any Class A certificate without the consent of the
holder of such Class A certificate;
o reduce the percentage required to consent to any such amendment,
without the consent of the holders of all Class A certificates
then outstanding; or
o adversely affect in any material respect the interest of the
certificate insurer.
TERMINATION; PURCHASE OF MORTGAGE LOANS
The trust will terminate on the Distribution Date following 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 (1) the
Distribution Date on which the Aggregate Class A Principal Balance has been
reduced to zero, (2) the final payment or other liquidation of the last mortgage
loan in the trust, (3) the optional purchase by the servicer of the mortgage
loans, and (4) the Distribution Date in [ ] on which date the Policy will be
available to pay the outstanding principal balance of the Class A certificates.
Subject to provisions in the pooling and servicing agreement regarding
a plan of complete liquidation, the servicer may, at its option, terminate the
pooling and servicing agreement on any date on which the pool balance is less
than 5% of the sum of the Cut-Off Date pool balance by purchasing, on the next
succeeding Distribution Date, all of the outstanding mortgage loans at a price
equal to the sum of the outstanding pool balance (subject to reduction as
provided in the pooling and servicing agreement if the purchase price is based
in part on the appraised value of any REO Property included in the trust and
that appraised value is less than the Principal Balance of the mortgage loan)
and accrued and unpaid interest thereon at the weighted average of the loan
rates through the end of the Due Period preceding the final Distribution Date
together with all amounts due and owing to the certificate insurer.
The purchase shall be accomplished by deposit into the Distribution
Account of the purchase price specified above.
VOTING RIGHTS
Under the pooling and servicing agreement, the voting rights (the
"Voting Rights") will be allocated to the Class A certificates among the classes
in proportion to their respective Class Principal Balances. Voting rights
allocated to a class of certificates will be further allocated among the
certificates of that class on the basis of their respective percentage
interests. [So long as no Insurer Default is continuing, the certificate insurer
will be entitled to exercise the voting rights of the Class A certificates].
THE TRUSTEE
________________________________________, has been named trustee
pursuant to the pooling and servicing agreement.
The trustee may have normal banking relationships with the sponsor and
the servicer.
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
An election will be made to treat the trust as a REMIC for federal
income tax purposes under the Code. In the opinion of Tax Counsel, the Class A
certificates will be designated as regular interests in the REMIC and the Class
R certificates will be designated as the sole class of residual interests in the
REMIC. See "FEDERAL INCOME TAX CONSEQUENCES--Taxation of the REMIC and its
Holders" in the prospectus.
The offered certificates generally will be treated as debt instruments
issued by the REMIC for federal income tax purposes. Income on such certificates
must be reported under an accrual method of accounting.
Depending on their issue price, the offered certificates may be issued
with original issue discount ("OID") for federal income tax purposes. Holders of
certificates issued with OID will be required to include OID in income as it
accrues under a constant yield method, in advance of the receipt of cash
attributable to such income. The OID Regulations do not contain provisions
specifically interpreting Code Section 1272(a)(6) which applies to prepayable
securities such as the Offered certificates. Until the Treasury issues guidance
to the contrary, the trustee intends to base its OID computation on Code Section
1272(a)(6) and the OID Regulations as described in the 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 yield used to calculate accruals of OID with respect to the offered
certificates with OID will be the original yield to maturity of the
certificates, determined by assuming that the mortgage loans will prepay in
accordance with ____% of the prepayment assumption. No representation is made as
to the actual rate at which the mortgage loans will prepay.
In the opinion of Tax Counsel, the offered certificates will be treated
as regular interests in a REMIC under section 860G of the Code. Accordingly, the
offered certificates will be treated as assets described in section
7701(a)(19)(C) of the Code, and "real estate assets" within the meaning of
section 856(c)(4)(A) of the Code, in each case to the extent described in the
prospectus. Interest on the offered certificates will be treated as interest on
obligations secured by mortgages on real property within the meaning of section
856(c)(3)(B) of the Code to the same extent that the offered certificates are
treated as real estate assets. See "Federal Income Tax Consequences" in the
prospectus.
BACKUP WITHHOLDING
Certain Certificate Owners may be subject to backup withholding at the
rate of 31% with respect to interest paid on the offered certificates if the
Certificate Owners, upon issuance, fail to supply the trustee or their broker
with their taxpayer identification number, furnish an incorrect taxpayer
identification number, fails to report interest, dividends, or other "reportable
payments" (as defined in the Code) properly, or, under certain circumstances,
fails to provide the trustee or their broker with a certified statement, under
penalty of perjury, that they are not subject to backup withholding.
The trustee will be required to report annually to the IRS, and to each
offered certificateholder of record, the amount of interest paid (and OID
accrued, if any) on the offered certificates (and the amount of interest
withheld for 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 &
Co., as nominee for DTC, Certificate Owners and the IRS will receive tax and
other information including the amount of interest paid on such certificates
owned from participants and indirect participants of the DTC system 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.
Such amounts will be deemed distributed to the affected Certificate
Owner for all purposes of the certificates, the pooling and servicing agreement
and the Policy.
Final regulations dealing with withholding tax on income paid to
foreign persons, backup withholding and related matters (the "New Withholding
Regulations") were issued by the Treasury Department on October 6, 1997. The New
Withholding Regulations generally will be effective for payments made after
December 31, 2000, subject to certain transition rules. Prospective Certificate
Owners are strongly urged to consult their own tax advisors with respect to the
New Withholding Regulations.
FEDERAL INCOME TAX CONSEQUENCES TO FOREIGN INVESTORS
The following information describes the United States federal income
tax treatment of holders that are not United States persons ("Foreign
Investors"). The term "Foreign Investor" means any person other than:
o a citizen or resident of the United States,
o a corporation, partnership or other entity organized in or under
the laws of the United States, any state thereof or the District
of Columbia, (other than a partnership that is not treated as a
United States person under any applicable Treasury regulations),
o an estate the income of which is includible in gross income for
United States federal income tax purposes, regardless of its
source,
o a trust if a court within the United States is able to exercise
primary supervision over the administration of the trust and one
or more United States persons have authority to control all
substantial decisions of the trust, or
o certain trusts treated as United States persons before August 20,
1996 that elect to continue to be so treated to the extent
provided in regulations.
The Code and Treasury regulations generally subject interest paid to a
Foreign Investor to a withholding tax at a rate of 30% (unless such rate were
changed by an applicable treaty). The withholding tax, however, is eliminated
with respect to certain "portfolio debt investments" issued to Foreign
Investors. Portfolio debt investments include debt instruments issued in
registered form for which the United States payor receives a statement that the
beneficial owner of the instrument is a Foreign Investor. The offered
certificates will be issued in registered form, therefore if the information
required by the Code is furnished (as described below) and no other exceptions
to the withholding tax exemption are applicable, no withholding tax will apply
to the offered certificates.
For the offered certificates to constitute portfolio debt investments
exempt from the United States withholding tax, the withholding agent must
receive from the Certificate Owner an executed IRS Form W-8 or similar form
signed under penalty of perjury by the Certificate Owner stating that the
Certificate Owner is a Foreign Investor and providing such Certificate Owner's
name and address. The statement must be received by the withholding agent in the
calendar year in which the interest payment is made, or in either of the two
preceding calendar years.
A Certificate Owner that is a nonresident alien or foreign corporation
will not be subject to United States federal income tax on gain realized on the
sale, exchange, or redemption of such offered certificate, provided that:
o such gain is not effectively connected with a trade or business
carried on by the Certificate Owner in the United States,
o in the case of a Certificate Owner that is an individual, such
Certificate Owner is not present in the United States for 183 days
or more during the taxable year in which such sale, exchange or
redemption occurs and
o in the case of gain representing accrued interest, the conditions
described in the immediately preceding paragraph are satisfied.
In addition, prospective Certificate Owners are strongly urged to
consult their own tax advisors with respect to the New Withholding Regulations.
See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES - Backup Withholding".
STATE TAXES
The sponsor makes no representations regarding the tax consequences of
purchase, ownership or disposition of the offered 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
offered 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 Plan's acquisition and
ownership of such certificates. See "ERISA CONSIDERATIONS" in the prospectus.
The U.S. Department of Labor (the "DOL") has granted to
________________. (the "Underwriter") Prohibited Transaction Exemption [ ],
Application No. _____, __ Fed. Reg. _____ (____) (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 __________________ 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 Class A certificates by a Plan, provided
that certain conditions (certain of which are described below) are met.
Among the conditions which must be satisfied for the Exemption to apply
are the following:
(1) The acquisition of the Class A certificates by a Plan is on
terms (including the price for such certificates) that are at least as
favorable to the investing Plan as they would be in an arm's-length
transaction with an unrelated party;
(2) The rights and interests evidenced by the Class A
certificates acquired by the Plan are not subordinated to the rights and
interests evidenced by other certificates of the trust;
(3) The Class A certificates acquired by the Plan have received
a rating at the time of such acquisition that is in one of the three
highest generic rating categories from S&P, Moody's, DCR or Fitch;
(4) The sum of all payments made to and retained by the
underwriter in connection with the distribution of the Class A
certificates represents not more than reasonable compensation for
underwriting such certificates; the sum of all payments made to and
retained by the seller pursuant to the sale of the mortgage loans to the
trust represents not more than the fair market value of such mortgage
loans; the sum of all payments made to and retained by such servicer
represents not more than reasonable compensation for any servicer's
services under the pooling and servicing agreement and reimbursement of
such servicer's reasonable expenses in connection therewith;
(5) The trustee is not an affiliate of any underwriter, the
seller, any servicer, the certificate insurer, any borrower whose
obligations under one or more mortgage loans constitute more than 5% of
the aggregate unamortized principal balance of the assets in the trust,
or any of their respective affiliates; and
(6) The Plan investing in the Class A certificates is an
"accredited investor" as defined in Rule 501(a)(1) of Regulation D of
the SEC under the Securities Act of 1933, as amended.
On July 21, 1997, the DOL published in the Federal Register an
amendment to the Exemption, which extends exemptive relief to certain
mortgage-backed and asset-backed securities transactions using pre-funding
accounts for trusts issuing pass-through certificates. The amendment generally
allows mortgage loans or other secured receivables (the "Obligations")
supporting payments to certificateholders, and having a value equal to no more
than twenty-five percent (25%) of the total principal amount of the certificates
being offered by the trust, to be transferred to the trust within a 90-day or
three-month period following the closing date (the "Pre-Funding Period"),
instead of requiring that all such Obligations be either identified or
transferred on or before the closing date. The relief is available when the
following conditions are met:
(1) The ratio of the amount allocated to the pre-funding
account to the total principal amount of the certificates being offered
(the "Pre-Funding Limit") must not exceed twenty-five percent (25%).
(2) All Obligations transferred after the Closing Date (the
"Additional Obligations") must meet the same terms and conditions for
eligibility as the original Obligations used to create the trust, which
terms and conditions have been approved by a rating agency.
(3) The transfer of such Additional Obligations to the trust
during the Pre-Funding Period must not result in the certificates to be
covered by the Exemption receiving a lower credit rating from a rating
agency upon termination of the Pre-Funding Period than the rating that
was obtained at the time of the initial issuance of the certificates by
the trust.
(4) Solely as a result of the use of pre-funding, the weighted
average annual percentage interest rate for all of the Obligations in
the trust at the end of the Pre-Funding Period must not be more than
100 basis points lower than the average interest rate for the
Obligations transferred to the trust on the closing date.
(5) In order to insure that the characteristics of the
Additional Obligations are substantially similar to the original
Obligations which were transferred to the trust:
(i) the characteristics of the Additional Obligations
must be monitored by an insurer or other credit support
provider that is independent of the sponsor; or
(ii) an independent accountant retained by the
sponsor must provide the sponsor with a letter (with copies
provided to each rating agency rating the certificates, the
related underwriter and the related trustee) stating whether
or not the characteristics of the Additional Obligations
conform to the characteristics described in the related
prospectus or prospectus supplement and/or pooling and
servicing agreement. In preparing such letter, the independent
accountant must use the same type of procedures as were
applicable to the Obligations transferred to the trust as of
the closing date.
(6) The Pre-Funding Period must end no later than three months
or 90 days after the closing date or earlier in certain circumstances
if the pre-funding account falls below the minimum level specified in
the pooling and servicing agreement or an Event of Default occurs.
(7) Amounts transferred to any pre-funding account and/or
capitalized interest account used in connection with the pre-funding
may be invested only in certain permitted investments.
(8) The related prospectus or prospectus supplement must
describe:
(i) any pre-funding account and/or capitalized interest
account used in connection with a pre-funding account;
(ii) the duration of the Pre-Funding Period;
(iii) the percentage and/or dollar amount of the
Pre-Funding Limit for the trust; and
(iv) that the amounts remaining in the pre-funding
account at the end of the Pre-Funding Period will be remitted
to certificateholders as repayments of principal.
(9) The related pooling and servicing agreement must describe
the Permitted Investments for the pre-funding account and/or
capitalized interest account and, if not disclosed in the related
prospectus or prospectus supplement, the terms and conditions for
eligibility of Additional Obligations.
The underwriter believes that the Exemption as amended will apply to
the acquisition and holding of the Class A 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 Class A
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 Class A 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
The offered certificates will not constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA").
Institutions whose investment activities are subject to review by
federal or state regulatory authorities should consult with their counsel or the
applicable authorities to determine whether an investment in the offered
certificates complies with applicable guidelines, policy statements or
restrictions. See "LEGAL INVESTMENT" in the prospectus.
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting
agreement, dated ____________________, between the sponsor and the underwriter,
the sponsor has agreed to sell to the underwriter and the underwriter has agreed
to purchase from the sponsor the Class A certificates.
Distributions of the offered certificates will be made from time to
time in negotiated transactions or otherwise at varying prices to be determined
at the time of sale. Proceeds to the sponsor from the sale of the offered
certificates will be approximately $________, plus accrued interest, before
deducting expenses payable by the sponsor, estimated to be $_______ in the
aggregate. In connection with the purchase and sale of the offered certificates,
the underwriter may be deemed to have received compensation from the sponsor in
the form of underwriting discounts.
The sponsor has been advised by the underwriter that it presently
intends to make a market in the offered certificates; 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 offered certificates
will develop.
The underwriting agreement provides that the sponsor will indemnify the
underwriter against certain civil liabilities, including liabilities under the
Securities Act of 1933, as amended.
EXPERTS
[__________]
LEGAL MATTERS
Certain legal matters with respect to the Class A certificates will be
passed upon for the sponsor by [ ], New York, New York, and for the underwriter
by ____________________.
RATINGS
The Class A certificates must receive ratings of "AAA" by _______
and "Aaa" by ______ prior to their issuance.
A securities rating addresses the likelihood of the receipt by a
certificateholder of distributions on the mortgage loans. The rating takes into
consideration the characteristics of the mortgage loans and the structural,
legal and tax aspects for the certificates. However, the ratings on the
certificates do not 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
financial strength 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 corresponding
reduction 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.
<PAGE>
THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS
IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY
THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION JUNE 2, 1999
Prospectus Supplement
(To Prospectus dated _____________, _____)
$___________ (approximate)
HOME EQUITY LOAN TRUST 199_-_
HOME EQUITY LOAN ASSET-BACKED NOTES, SERIES 199_-_
HEADLANDS MORTGAGE SECURITIES INC.
SPONSOR
[LOGO] [HEADLANDS MORTGAGE COMPANY]
as Seller and Servicer
The notes represent non-recourse obligations of the trust only and do not
represent an interest in or obligation of the sponsor, the master servicer, the
trustee or any of their affiliates.
This prospectus supplement may be used to offer and sell the notes only if
accompanied by the prospectus.
THE TRUST
o will issue a single class of senior notes, which are offered
hereby
o will issue a certificate, representing the beneficial ownership in
the trust, which is not offered hereby
THE NOTES
o are principally secured by the assets of the trust which consist
of a pool of adjustable rate home equity revolving credit line
loan agreements
o currently have no trading market
CREDIT ENHANCEMENT
o The certificates will absorb up to a certain percentage of all
losses on the mortgage loans.
o An irrevocable and unconditional guaranty insurance policy issued
by [________] will guarantee payments on the notes.
o If defaults, certain payments to the holder of the certificates
will only be paid after payments due on the notes are made.
REVIEW THE INFORMATION IN "RISK FACTORS" ON PAGE S-9 IN THIS PROSPECTUS
SUPPLEMENT AND ON PAGE 4 IN THE PROSPECTUS.
o For complete information about the notes, read both this prospectus
supplement and the prospectus.
o _________________, the underwriter, will buy the notes from the sponsor at
the price specified below.
PER $1,000 OF
NOTES TOTAL
Price to Public................................ $ $
Underwriting Discount.......................... $ $
Proceeds, before expenses, to the sponsor...... $ $
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE NOTES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
[Underwriter]
_________________, 199_
<PAGE>
TABLE OF CONTENTS
Page
PROSPECTUS SUPPLEMENT
Summary...........................................................S-4
Risk Factors......................................................S-9
The Insurer......................................................S-12
The Trust........................................................S-12
The Seller and Servicer..........................................S-13
Description of the Mortgage Loans................................S-16
Description of the Notes.........................................S-20
Maturity and Prepayment Considerations...........................S-30
Description of the Agreements....................................S-32
Use of Proceeds..................................................S-42
Certain Federal Income Tax Consequences..........................S-42
State Taxes......................................................S-46
ERISA Considerations.............................................S-46
Legal Investment Considerations..................................S-48
Underwriting.....................................................S-48
Legal Matters....................................................S-49
Experts..........................................................S-49
Ratings..........................................................S-49
PROSPECTUS
Risk Factors........................................................4
The Trust...........................................................8
Use of Proceeds....................................................14
The Sponsor........................................................14
Loan Program.......................................................14
Description of the Securities......................................17
Credit Enhancement.................................................31
Yield and Prepayment Consideration.................................38
The Agreements.....................................................41
Certain Legal Aspects of the Loans.................................58
Federal Income Tax Consequences....................................69
State Tax Considerations...........................................95
ERISA Considerations...............................................96
Legal Investment..................................................100
Method of Distribution............................................102
Legal Matters.....................................................103
Financial Information.............................................103
Available Information.............................................103
Incorporation of Certain Documents by Reference...................103
Rating............................................................104
Index of Defined Terms............................................105
<PAGE>
SUMMARY
This summary highlights selected information from this document and
does not contain all of the information that you need to consider in making
your investment decision. Please read this entire prospectus supplement and the
accompanying prospectus for additional information about the notes.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
HOME EQUITY LOAN ASSET-BACKED NOTES, SERIES 199_-_
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class/Interest Note Rate Initial Note Maturity
Balance Date Rating Rating Type
- --------------- -------------- --------------- ----------- ---------- ---------- --------
- --------------- -------------- --------------- ----------- ---------- ---------- --------
Notes LIBOR + ___% $____________
- --------------- -------------- --------------- ----------- ---------- ---------- --------
- --------------- -------------- --------------- ----------- ---------- ---------- --------
Certificates N.A. N.A.
- --------------- -------------- --------------- ----------- ---------- ---------- --------
</TABLE>
The initial note balance is subject to a variance of ___%. Under
certain interest rate scenarios, you may receive less interest than indicated.
We refer you to "Description of the Notes--Payments on the Notes" for more
information regarding the limitations on the payment of interest on the notes.
The certificates are not being offered.
THE SELLER AND SERVICER
o [Headlands Mortgage Company].
o [Headlands Mortgage Company] maintains its principal office at 1100
Larkspur Landing Circle, Suite 101, Larkspur, California 94939]. Its
telephone number is [(415) 925-5442].
o The servicer will receive a monthly fee from the interest payments on the
mortgage loans equal to ___% per annum on the principal balance of each
mortgage loan.
WE REFER YOU TO "THE SELLER AND SERVICER" IN THIS PROSPECTUS SUPPLEMENT
FOR ADDITIONAL INFORMATION.
THE SPONSOR
o Headlands Mortgage Securities Inc.
o Headlands Mortgage Securities Inc. maintains its principal office at 700
Larkspur Landing Circle, Suite 240, Larkspur, California 94939. Its
telephone number is (415) 925-5442.
WE REFER YOU TO "THE SPONSOR" IN THE PROSPECTUS FOR ADDITIONAL
INFORMATION.
TRUST
o Home Equity Loan Trust, 199_-_.
INDENTURE TRUSTEE
o [__________________________]
OWNER TRUSTEE
o [__________________________]
INSURER
o [________________________]
WE REFER YOU TO "THE INSURER" IN THIS PROSPECTUS SUPPLEMENT FOR ADDITIONAL
INFORMATION.
CUT-OFF DATE
o ______________, 199_.
CLOSING DATE
o ______________, 199_.
PAYMENT DATE
o The __th day of each month, or if such day is not a business day, the next
business day. The first payment date is ____________, 199_.
COLLECTION PERIOD
o The calendar month preceding the month of a payment date.
REGISTRATION OF NOTES
We will issue the notes in book-entry form. You will hold your interests
either through a depository in the United States or through one of two
depositories in Europe. While the notes are book-entry, they will be
registered in the name of the applicable depository, or in the name of the
depository's nominee.
Transfers within any depository system will be made in accordance with the
usual rules and operating procedures of that system. Cross-market
transfers between two different depository systems may be made through a
third-party bank and/or the related depositories. The limited
circumstances under which definitive notes will replace the book-entry
notes are described in this prospectus supplement.
WE REFER YOU TO "RISK FACTORS-- CONSEQUENCES ON OWNING BOOK-ENTRY NOTES"
AND "DESCRIPTION OF THE SECURITIES.
ASSETS OF THE TRUST
The trust assets include:
o a pool of adjustable rate home equity revolving credit line loan
agreements, which we call "mortgage loans", secured by either first or
junior deeds of trust or mortgages on one- to four-family residential
properties;
o payments of interest due on the mortgage loans on and after the cut-off
date and principal payments received on the mortgage loans on and after
the cut-off date;
o property that secured a mortgage loan which has been acquired by
foreclosure or deed in lieu of foreclosure; and
o rights under certain hazard insurance policies covering the mortgaged
properties.
During the life of the trust, all new advances made to mortgagors under
the mortgage loans will become assets of the trust. Due to such advances
and any principal payments on the mortgage loans, the pool balance will
generally fluctuate and differ from day to day.
THE MORTGAGE LOANS
1. Mortgage Loan Statistics
On the closing date, the mortgage loans will have the following
characteristics:
o number of mortgage loans: _____
o aggregate principal balance: $__________
o number of mortgage loans: _____
o mortgaged property locations: ___ states
o average credit limit: $_____
o credit limit range: $____ to $____
o interest rate range: _____% to ______%
o weighted average interest rate: _____%
o loan age range: ____ to ____months
o weighted average loan age: __ months
o credit limit utilization rate range: ___ to ___
o weighted average credit limit utilization rate: ___
o gross margin range: ___ to ___
o weighted average gross margin: __
o combined loan-to-value ratio range, of ____% to _____% (approximate)
o weighted average combined loan-to-value ratio ____% (approximate)
o all of the mortgage loans bear interest at an adjustable rate based on
[_________].
o balloon loans: ____% (approximate).
2. Payment Terms of Mortgage Loans
o Each borrower may borrow up to the maximum amount of that borrower's
line of credit. If borrowed amounts are repaid, they can again be
borrowed.
o INTEREST - Interest is payable monthly on the outstanding principal
balance of each mortgage loan for each day in the billing cycle.
PRINCIPAL - The mortgage loans have a [ ] year draw period during which
time amounts may be borrowed, followed by a ten year repayment period
during which the borrower must repay the outstanding principal of the
loan.
WE REFER YOU TO "DESCRIPTION OF THE MORTGAGE LOANS" IN THIS PROSPECTUS
SUPPLEMENT FOR ADDITIONAL INFORMATION.
THE NOTES
1. GENERAL
o The notes will be secured by the assets of the trust.
o Each month, the indenture trustee will calculate the amount you are
owed.
o If you hold a note on the day immediately preceding the related payment
date, you will be entitled to receive payments on that payment date.
2. INTEREST PAYMENTS: Interest on the notes accrues during the period
beginning on the prior payment date (or in the case of the first payment
date, beginning on the closing date) and ending on the day before the
applicable payment date. The indenture trustee will calculate interest
based on the actual number of days in the interest accrual period and a
year assumed to consist of 360 days. On each payment date, you will be
entitled to the following amounts from your portion of interest
collections on the mortgage loans:
o interest at the related note rate that accrued during the interest
accrual period on your invested amount; and
o any interest that was due on a prior payment date and not paid. In
addition, interest will have accrued on the amount of interest which
was previously due and not paid.
3. PRINCIPAL PAYMENTS: From the first payment date and ending on the payment
date in __________ and if certain events causing an acceleration of
payment of principal do not occur, you will be entitled to either (a) or
(b), whichever is the lesser amount:
(a) ___% of the principal collected during the prior due period; or
(b) the amount of principal collected during the prior due period minus
advances made to the borrowers during that due period.
On the payment date following ___________, or if certain events causing an
acceleration of principal occur, you will be entitled to receive the
amount described in (a) above.
WE REFER YOU TO "DESCRIPTION OF THE NOTES--PAYMENTS ON THE NOTES" IN THIS
PROSPECTUS SUPPLEMENT FOr ADDITIONAL INFORMATION.
CREDIT ENHANCEMENT
1. THE INSURANCE POLICY: [_______________] will issue an insurance policy
which unconditionally guarantees the payment of:
o accrued and unpaid interest due on the notes;
o principal losses on the mortgage loans; and
o any principal amounts owed to noteholders on the maturity date.
WE REFER YOU TO "DESCRIPTION OF THE NOTES--THE POLICY" IN THIS PROSPECTUS
SUPPLEMENT FOR ADDITIONAl INFORMATION.
2. LIMITED SUBORDINATION OF CERTIFICATES: Prior to a draw on the policy,
losses on the mortgage loans will be allocable to the certificates. up
to certain levels. In addition, if the insurer defaults, certain
payments to the holder of the certificates will be made after payments
to the notes.
WE REFER YOU TO "DESCRIPTION OF THE NOTES" IN THIS PROSPECTUS SUPPLEMENT
FOR ADDITIONAL INFORMATION.
OPTIONAL TERMINATION
The mortgage loans will be subject to an optional transfer to the sponsor
on any payment date after:
o the principal balance of the notes is reduced to any amount less than
or equal to _% of the original principal balance of the notes; and
o all amounts due and owing to the insurer and unreimbursed draws on the
insurance policy, with interest thereon have been paid.
WE REFER YOU TO "DESCRIPTION OF THE AGREEMENTS--TERMINATION; RETIREMENT OF
THE NOTES" IN THIS PROSPECTUs SUPPLEMENT FOR ADDITIONAL INFORMATION.
FEDERAL TAX CONSIDERATIONS
For federal income tax purposes:
o Tax counsel is of the opinion that the notes will be treated as debt
instruments.
o You must agree to treat your note as indebtedness for federal, state
and local income and franchise tax purposes.
WE REFER YOU TO "CERTAIN FEDERAL INCOME TAX CONSIDERATIONS" IN THIS
PROSPECTUS SUPPLEMENT AND IN THE PROSPECTUS FOR ADDITIONAL INFORMATION.
ERISA CONSIDERATIONS
The fiduciary responsibility provisions of ERISA can limit investments by
certain pension and other employee benefit plans. Pension and other
employee benefit plans should be able to purchase investments like the
notes so long as they are treated as debt under applicable state law and
have no "substantial equity features." Any plan fiduciary considering
whether to purchase the notes on behalf of a plan should consult with its
counsel regarding the applicability of the provisions of ERISA and the
Internal Revenue Code and the availability of any exemptions.
WE REFER YOU TO "ERISA CONSIDERATIONS" IN THIS PROSPECTUS SUPPLEMENT AND
THE PROSPECTUS FOR ADDITIONAL INFORMATION.
LEGAL INVESTMENT CONSIDERATIONS
The notes are not eligible under the Secondary Mortgage Market Enhancement
Act of 1984, and consequently some institutions will be unable to invest
in the notes.
WE REFER YOU TO "LEGAL INVESTMENT CONSIDERATIONS" IN THIS PROSPECTUS
SUPPLEMENT AND "LEGAL INVESTMENT" IN THE PROSPECTUS FOR ADDITIONAL
INFORMATION.
NOTE RATING
o The trust will not issue the notes unless they receive the ratings
specified in the table on page S-4. A rating is not a recommendation to
buy, sell or hold securities and may be subject to revision or
withdrawal by the rating agencies.
WE REFER YOU TO "RATINGS" AND "RISK FACTORS--NOTE RATING BASED PRIMARILY
ON CLAIMS-PAYING ABILITY OF THe INSURER" IN THIS PROSPECTUS SUPPLEMENT FOR
ADDITIONAL INFORMATION.
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS PRIOR TO ANY
PURCHASE OF NOTES. YOU SHOULD ALSO CAREFULLY CONSIDER THE INFORMATION SET FORTH
UNDER "RISK FACTORS" IN THE PROSPECTUS.
BALLOON LOANS INCREASE RISK OF LOSS
Balloon loans pose a risk because a borrower must pay a large lump sum
payment of principal at the end of the loan term. If the borrower is unable to
pay the lump sum or refinance such amount, you will suffer a loss if the
insurer fails to perform its obligations under the policy and the other forms
of credit enhancement are insufficient to cover the loss. Approximately ___% of
the mortgage loans are balloon loans.
PREPAYMENTS AFFECT TIMING AND RATE OF RETURN ON YOUR INVESTMENT
The yield to maturity on your notes will be directly related to the
rate of principal payments on the mortgage loans. Please consider the
following:
o Mortgagors may fully or partially prepay their mortgage loan at any time.
However, some mortgage loans require that the mortgagor pay a fee with any
prepayments in full within five years of origination, except that
generally no fee is required for any prepayment in full made within twelve
months of a loan's maturity date. This may result in the rate of
prepayments being slower than would otherwise be the case.
o During the initial draw period, the borrower is only required to make
payments of interest. In addition, during the draw period borrowers may
take out additional loans. As a result, the amount the trust receives in
any month (and in turn, the amount of principal paid to you) may change
significantly.
o All the mortgage loans contain due-on-sale provisions. Due-on-sale
provisions require the mortgagor to fully pay the mortgage loan when the
mortgaged property is sold. Generally, the servicer will enforce the
due-on-sale provision unless prohibited by applicable law.
o Home equity loans generally are not viewed by borrowers as permanent
financing. Accordingly, the mortgage loans may experience a higher rate of
prepayment than purchase money first lien mortgage loans.
WE REFER YOU TO "RISK FACTORS - PREPAYMENTS ARE UNPREDICTABLE AND
AFFECT YIELD" IN THE PROSPECTUS.
NOTE RATING BASED PRIMARILY ON CLAIMS-PAYING ABILITY OF THE INSURER
The rating on the notes depends primarily on an assessment by the
rating agencies of the mortgage loans and upon the claims-paying ability of the
insurer. Any reduction of the rating assigned to the claims-paying ability of
the insurer may cause a corresponding reduction on the ratings assigned to the
notes. A reduction in the rating assigned to the notes will reduce the market
value of the notes and may affect your ability to sell them. In general, the
rating on your notes addresses credit risk and does not address the likelihood
of prepayments.
WE REFER YOU TO "RATINGS" IN THIS PROSPECTUS SUPPLEMENT.
INTEREST PAYMENTS ON THE MORTGAGE LOANS MAY BE REDUCED
o PREPAYMENTS OF PRINCIPAL MAY REDUCE INTEREST PAYMENTS. If a mortgagor
prepays a mortgage loan in full, the mortgagor is charged interest only up
to the date of the prepayment, instead of a full month. The servicer is
obligated to reduce its servicing fee in the month of such prepayment so
that one month's interest is paid with such prepayment in full. If the
servicing fee is insufficient to pay such interest shortfalls attributed
to prepayments, a shortfall in interest due on the notes may result. The
insurer is required to cover this shortfall. If the insurer fails to
perform its obligations under the policy, you may incur a loss.
o CERTAIN INTEREST SHORTFALLS ARE NOT COVERED BY THE SERVICER OR THE
INSURANCE POLICY. The Soldiers' and Sailors' Civil Relief Act of 1940
permits certain modifications to the payment terms for mortgage loans,
including a reduction in the amount of interest paid by the borrower,
under certain circumstances. Neither the servicer nor the insurer will pay
for any interest shortfalls created by the Soldiers' and Sailors' Civil
Relief Act of 1940.
SERVICER'S ABILITY TO CHANGE THE TERMS OF THE MORTGAGE LOANS
Subject to certain limitations, the servicer may agree to changes in the
terms of a mortgage loan, if such changes are consistent with accepted servicing
practices. The servicer may also change its servicing procedures. These changes
could result in delays or reductions in payments on the mortgage loans, and
correspondingly, on the notes.
We refer you to "THE AGREEMENTS--Amendments to Credit Line Agreements" in
this prospectus supplement.
RISK OF LOSSES AS A RESULT OF GEOGRAPHIC CONCENTRATION
The mortgaged properties are located in __ states. However, __% of the
mortgaged properties (by principal balance as of the cut-off date) are located
in ______. If ____________ experiences weaker economic conditions or greater
rates of decline in real estate values than the United States generally, then
the pool of mortgage loans may experience higher rates of delinquencies,
defaults and foreclosures than if the pool were more diversified.
NOTEHOLDERS COULD BE ADVERSELY AFFECTED IN THE ABSENCE OF YEAR 2000 COMPLIANCE
As is the case with most companies using computers in their
operations, the servicer is faced with the task of preparing for year 2000. The
year 2000 issue is the result of prior computer programs being written using
two digits, rather than four digits, to define the applicable year. Any of the
servicer's computer programs that have time-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. Major computer
system failure or miscalculations may occur as a result. The servicer is
presently engaged in various procedures to ensure that their computer systems
and software will be year 2000 compliant.
However, if the servicer or any of its suppliers, customers, brokers
or agents do not successfully and timely achieve year 2000 compliance, the
performance of obligations of the servicer could be materially adversely
affected. This could result in delays in processing payments on the mortgage
loans and cause a related delay in payments to you.
RISK OF INCREASED DELINQUENCY, DEFAULT AND FORECLOSURE EXPERIENCE DUE TO LESS
STRINGENT UNDERWRITING STANDARDS
The seller's underwriting standards are generally less stringent than
those of Fannie Mae or the Freddie Mac with respect to credit history and
certain other items. If a borrower has a poor credit history, the seller may
still make a loan to the borrower. This approach to underwriting may result in
higher rates of delinquencies, defaults and foreclosures than for mortgage
loans underwritten in a more traditional manner.
<PAGE>
THE INSURER
The information set forth in this section have been provided by the
[________], the insurer. No representation is made by the underwriters, the
sponsor, the seller, the servicer or any of their affiliates as to the accuracy
of completeness of any such information.
[DESCRIPTION OF INSURER]
THE TRUST
GENERAL
Home Equity Loan Trust 199_-_ (the "trust") is a business trust formed
under the laws of the State of Delaware pursuant to a trust agreement for the
transactions described in this prospectus supplement. After its formation, the
trust will not engage in any activity other than:
o acquiring, holding and managing the mortgage loans and the other assets
of the trust and proceeds therefrom,
o issuing the notes and the certificates,
o making payments on the notes and the certificates and
o engaging in other activities that are necessary, suitable or convenient
to accomplish the foregoing or are incidental thereto or in connection
therewith.
The notes and the certificates will be delivered by the trust to the
sponsor as consideration for the mortgage loans pursuant to a sale and
servicing agreement.
On the Closing Date, the trust will purchase mortgage loans having an
aggregate principal balance of approximately $___________ as of [date] (the
"Cut-Off Date") from the sponsor pursuant to the sale and servicing agreement.
The assets of the trust will consist primarily of the mortgage loans,
which will be secured by first- or junior-lien mortgages on the mortgaged
properties. SEE "DESCRIPTION OF THE MORTGAGE LOANS" herein. The assets of the
trust will also include (1) payments in respect on the mortgage loans received
on or after the Cut-Off Date (exclusive of (1) certain payments in respect of
interest accrued on the mortgage loans during ______ and (2) payments in
respect of interest on the delinquent mortgage loans due prior to the Cut-Off
Date and received thereafter), (2) amounts on deposit in the Collection Account
and Distribution Account and (3) certain other ancillary or incidental funds,
rights and properties related to the foregoing.
The trust will include the unpaid principal balance of each mortgage
loan as of the opening of business on the Cut-Off Date. With respect to any
date, the "pool balance" will be equal to the aggregate principal balances of
all mortgage loans as of such date.
The assets of the trust will be pledged to the indenture trustee as
security for the notes pursuant to an indenture between the trust and the
indenture trustee.
The servicer is obligated to service the mortgage loans pursuant to
the sale and servicing agreement (collectively with the indenture and the trust
agreement, the "Agreements") and will be compensated for such services as
described under "DESCRIPTION OF THE AGREEMENTS--Servicing Compensation and
Payment of Expenses" herein.
The trust's principal offices are located in __________________, in
care of [____________________], as owner trustee, at the address set forth
below.
THE OWNER TRUSTEE
[__________________] will act as the owner trustee under the trust
agreement. [_________________] is a ____________________________ banking
corporation and its principal offices are located at
[_________________________________________________________].
THE SELLER AND SERVICER
[DESCRIPTION OF HEADLANDS MORTGAGE COMPANY]
[GENERAL
Headlands Mortgage Company, the seller and servicer, is California
corporation which was organized in 1981. Headlands Mortgage Company is a wholly
owned subsidiary of Greenpoint Financial Corp. Greenpoint Financial Corp. is
listed on the New York Stock Exchange under the symbol "GPT."
The seller 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. As of December 31, 199_ and 199_, the
seller had total assets of $___ million and $___ million, respectively and
shareholders equity of $__ million and $__ million, respectively.
The seller is headquartered in Northern California, and has production
branches in California, Washington, Oregon, Idaho, Florida, Virginia,
Pennsylvania, New Mexico, New Jersey and Arizona. Loans are originated
primarily through the seller's wholesale division, through a network of
independent mortgage loan brokers approved by the seller, and also through its
retail lending division and correspondent lending division. The mortgage loans
were acquired by the seller in one of the three following methods: (1)
originated by an independent broker and purchased by the seller, (2) originated
by a broker and funded by the seller or (3) originated and funded by the seller
in the ordinary course of business.
The seller's executive offices are located at 1100 Larkspur Landing
Circle, Suite 101, Larkspur, California 94939.
DELINQUENCY AND CHARGE-OFF EXPERIENCE
Headlands Mortgage Company, the servicer, will service the mortgage
loans pursuant to the sale and servicing agreement. All of the mortgage loans
are currently serviced by the servicer substantially in accordance with the
procedures described below and in the accompanying prospectus. The seller has
originated home equity mortgage loans since ___________________________.
As of December 31, 199_, the servicer's mortgage loan servicing
portfolio consisted of ______ one to four family residential mortgage loans
with an aggregate principal balance of $___billion. The servicer's primary
source of mortgage servicing rights is from mortgage loans originated through
mortgage brokers.
The servicer's Servicing Center was established in January 1994. As of
December 31, 199_, it had a staff of __ employees. Prior to January 1994, the
servicer's portfolio was subserviced by a third party.
Mortgage loan servicing includes:
o collecting payments from borrowers and remitting those funds to
investors,
o accounting for mortgage loan principal and interest,
o reporting to investors,
o holding custodial funds for payment of mortgage and mortgage
related expenses such as taxes and insurance,
o advancing funds to cover delinquent payments,
o inspecting foreclosures and property disposition in the event of
unremedied defaults, and
o otherwise administering the mortgages.
The following table summarizes the delinquency experience including
pending foreclosures on residential mortgage loans originated or acquired as
part of the servicer's mortgage banking operations and included in the
servicer's portfolio at the dates indicated. As of December 31, 199_, 199_ and
199_ and __________, 199_ the total principal balance of loans serviced by the
servicer was (in millions) $_____, $_____, $____ and $____, respectively. The
total portfolio has been reduced by the number of loans pending servicing
release or that have been foreclosed.
<TABLE>
<CAPTION>
HEADLANDS MORTGAGE COMPANY
OVERALL MORTGAGE PORTFOLIO
DELINQUENCY AND FORECLOSURE EXPERIENCE
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Percent of Percent of Percent of Percent of
Number of Servicing Number of Servicing Number of Servicing Number of Servicing
Loans Portfolio Loans Portfolio Loans Portfolio Loans Portfolio
- ----------------------
Total Number
- ----------------------
Period of Delinquency
- ----------------------
(excluding
Foreclosures)
Foreclosures Pending
- ----------------------
</TABLE>
The following table summarizes the delinquency, foreclosure and loss
experience on the servicer's "Second Lien Securities" servicing portfolio only.
This portfolio consists of second-lien mortgage loans, but not high
loan-to-value second lien mortgage loans, and home equity lines of credit
mortgage loans originated or acquired by the servicer and included in a
securitization transaction (either pursuant to the sponsor's securitization
program or one sponsored by a third-party conduit). The total portfolio has
been reduced by the number of loans that have been foreclosed.
<TABLE>
<CAPTION>
HEADLANDS MORTGAGE COMPANY
HELOC AND SECOND LIEN MORTGAGE PORTFOLIO
DELINQUENCY, FORECLOSURE AND LOSS EXPERIENCE
------------------------------------------------------------------------------
December 31, 199_ December 31, 199_ __________, 199_
------------------------- ---------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C>
Percent of Percent of Percent of
Number of Servicing Number of Servicing Number of Servicing
Loans Portfolio Loans Portfolio Loans Portfolio
Total Number
Period of Delinquency
(excluding Foreclosures)
Foreclosures Pending
Losses sustained
</TABLE>
<PAGE>
DESCRIPTION OF THE MORTGAGE LOANS
GENERAL
All statistical information concerning the mortgage loans is based
upon all of the mortgage loans included in the trust. All weighted averages
described below are weighted on the basis of the pool balance as of the Cut-Off
Date unless otherwise indicated.
The combined loan-to-value ratio, or "CLTV", of each mortgage loan is
the ratio, expressed as a percentage, of (a) the sum of (1) the greater of the
credit limit and the current balance as of the Cut-Off Date and (2) the
principal balance of any senior mortgage loan as of the origination of such
mortgage loan, over (b) the value (based on an appraised value or other
acceptable valuation method) for the related mortgaged property determined in
the origination of such mortgage loan. The average "Credit Limit Utilization
Rate" for the mortgage loans as of the Cut-Off Date is determined by dividing
the sum of the Cut-Off Date principal balances of the mortgage loans by the sum
of the credit limits of the mortgage loans.
MORTGAGE LOAN TERMS
The mortgage loans were originated pursuant to loan agreements (the
"Credit Line Agreements"). Under the Credit Line Agreements, the borrowers may
receive advances (an "Additional Balance" or a "Draw") at any time during a
specified period (the "Draw Period"). The minimum amount of any Draw that a
borrower may receive is $100. The maximum amount of each Draw with respect to
any mortgage loan is equal to the excess, if any, of the Credit Limit over the
principal balance outstanding under such Credit Line Agreement at the time of
such Draw.
Approximately ___% of the mortgage loans have original terms of 20
years, consisting of a Draw Period of 10 years and an amortization period of 10
years. During the amortization period, the borrower is obligated to make
monthly payments equal to the sum of 1/120 of the unpaid balance of the
mortgage loan at the end of the Draw Period plus accrued finance charges. The
loan rate for each mortgage loan adjusts monthly. Minimal monthly principal
payments may be required to be made by the borrowers during the Draw Period,
but such payments will not be sufficient to fully amortize the mortgage loan.
The borrower's right to make a Draw under a mortgage loan may be
suspended, or the credit limit may be reduced under a number of circumstances,
including, but not limited to:
o a material adverse change in the borrower's financial
circumstances
o a significant decline in the appraised value of the mortgaged
property
o or a default by the borrower of any material obligation under the
Credit Line Agreement.
Generally, such suspension or reduction will not affect the payment
terms for previously drawn balances. In the event of default under a mortgage
loan, the right of the borrower to make a Draw may be terminated and the entire
outstanding principal balance of such mortgage loan may be declared immediately
due and payable. A "default" includes, but is not limited to, the borrower's
failure to make any payment as required, any action or inaction by the borrower
that adversely affects the mortgaged property or the rights in the mortgaged
property or any fraud or material misrepresentation by the borrower in
connection with the mortgage loan. The credit limit may also be increased, upon
completion of satisfactory underwriting review, as described below.
Interest accrues on each mortgage loan, payable monthly, on the
related average daily outstanding principal balance for each month at the
related loan rate. The loan rate for each month is adjusted quarterly and is
equal to the Index on the last day of the most recently ended March, June,
September or December plus a fixed percentage amount (the "gross margin")
specified in the related Credit Line Agreement, computed on the basis of a 365
day year times actual days elapsed.
The "due date" for payments under each mortgage loan is the [ ]th day
of each month.
The interest accrued each month is calculated based on
[_________________] (the "Index") on the related adjustment date. Substantially
all of the mortgage loans are subject to a maximum loan rate of at least __%
per annum. The mortgage loans have a minimum loan rate equal to the greater of
zero and the gross margin. [No mortgage loan is subject to a periodic rate
cap.]
Payments made by or on behalf of the borrower for each mortgage loan
are generally required to be applied, first, to any unpaid interest and second,
to the principal.
MORTGAGE LOAN POOL STATISTICS
The servicer has computed the following additional information as of
the Cut-Off Date.
<PAGE>
COMBINED LOAN-TO-VALUE RATIOS
Combined Number of Cut-Off Date Percent of
Loan -to-Value Ratios Mortgage Loans Principal Balance Cut-Off Date
Pool Balance
LIEN PRIORITY
Lien Priority Number of Cut-Off Date Percent of
Mortgage Loans Principal Balance Cut-Off Date
Pool Balance
PROPERTY TYPE
Property Type Number of Cut-Off Date Percent of
Mortgage Loans Principal Balance Cut-Off Date
Pool Balance
OWNER OCCUPANCY STATUS
Owner Occupancy Status Number of Cut-Off Date Percent of
Mortgage Loans Principal Balance Cut-Off Date
Pool Balance
GEOGRAPHIC DISTRIBUTION(1)
Owner Occupancy Status Number of Cut-Off Date Percent of
Mortgage Loans Principal Balance Cut-Off Date
Pool Balance
PRINCIPAL BALANCES
Principal Balances Number of Cut-Off Date Percent by
Mortgage Loans Principal Cut-Off Date Pool
Balance Balance
CREDIT LIMITS
Credit Limits Number of Mortgage Cut-Off Date Percent by
Loans Principal Cut-Off Date Pool
Balance Balance
CREDIT LIMIT UTILIZATION RATES
Credit Limit Utilization Rates Number Cut-Off Date Percent by
Mortgage Loans Principal Balance Cut-Off Date
Pool Balance
LOAN AGE
Loan Age Number of Cut-Off Date Percent by
Mortgage Loans Principal Balance Cut-Off Date
Pool Balance
LOAN RATES AS OF THE CUT-OFF DATE
Loan Rates Number of Cut-Off Date Percent by
Mortgage Loans Principal Cut-Off Date
Balance Pool Balance
GROSS MARGIN
Gross Margin Number of Mortgage Cut-Off Date Percent by
Loans Principal Balance Cut-Off Date
Pool Balance
MAXIMUM RATES FOR MORTGAGE LOANS
Maximum Rates Number of Mortgage Cut-Off Date Percent by
Loans Principal Cut-Off Date
Balance Pool Balance
ORIGINATION YEAR
Origination Year Number of Cut-Off Date Percent by
Mortgage Loans Principal Cut-Off Date
Balance Pool Balance
STATUS
Number of Days Delinquent Number of Cut-Off Date Percent by
Mortgage Loans Principal Cut-Off Date
Balance Pool Balance
DESCRIPTION OF THE NOTES
The Home Equity Loan Trust 199__-__ , the "trust", will issue one
class of Home Equity Loan Asset-Backed Notes pursuant to the indenture between
the trust and ________, as indenture trustee. The trust will also issue the
certificates pursuant to the terms of a trust agreement between the trust and
__________, as owner trustee. The notes will be secured by the assets of the
trust pursuant to the indenture. In addition, the sponsor will enter into a
sale and servicing agreement among ____________, as seller, the trust, the
indenture trustee and the servicer. The indenture, the trust agreement and the
sale and servicing agreement are collectively referred to as the "Agreements"
herein. The forms of the Agreements have been filed as exhibits to the
registration statement of which this prospectus supplement and the prospectus
are a part. The following summaries describe certain provisions of the
Agreements. The summaries do not purport to be complete and are subject to, and
are qualified in their entirety by reference to, all of the provisions of the
Agreements. Wherever particular sections or defined terms of the Agreements are
referred to, such sections or defined terms are hereby incorporated herein by
reference.
GENERAL
The notes will be issued in minimum denominations of $1,000 and
multiples of $1 in excess thereof and will evidence specified undivided
interests in the trust. The property of the trust will consist of: (1) each of
the mortgage loans that from time to time are subject to the sale and servicing
agreement and the mortgage files; (2) collections on the mortgage loans
received on and after the Cut-Off Date (exclusive of certain payments in
respect of interest accrued on the mortgage loans during ______ and (2)
payments in respect to interest on the delinquent mortgage loans due prior to
the Cut-Off Date and received thereafter); (3) mortgaged properties relating to
the mortgage loans that are acquired by foreclosure or deed in lieu of
foreclosure; (4) the Collection Account and the Distribution Account; and (5)
the Policy. Notes, if issued in physical form will be transferable and
exchangeable at the corporate trust office of the indenture trustee, which will
initially act as note registrar. See "-- Book-Entry Notes" below. No service
charge will be made for any registration of exchange or transfer of notes, but
the indenture trustee may require payment of a sum sufficient to cover any tax
or other governmental charge.
The aggregate undivided interest in the trust represented by the notes
as of the closing date will equal $____________ (the "Original Invested
Amount") which represents ___% of the Cut-Off Date pool balance. The original
note balance will equal $__________ (subject to a permitted variance in the
aggregate of plus or minus 5%). Following the closing date, the "Invested
Amount" with respect to any Payment Date will be an amount equal to the
Original Invested Amount minus (1) the amount of Investor Principal Collections
previously distributed to noteholders, and minus (2) an amount equal to the
product of the Investor Floating Allocation Percentage and the Liquidation Loss
Amounts not allocated to the certificates (each, as defined herein). The
principal amount of the outstanding notes (the "note balance") on any Payment
Date is equal to the original note balance minus the aggregate of amounts
actually distributed as principal to the noteholders. See "-- Payments on the
Notes" below. Each note represents the right to receive payments of interest at
the note rate and payments of principal as described below.
BOOK-ENTRY NOTES
The notes will be issued in book-entry form. Beneficial owners may
elect to hold their notes through The Depository Trust Company ("DTC") in the
United States, or Cedelbank or the Euroclear System in Europe if they are
participants of such systems, or indirectly through organizations which are
participants in such systems. Investors may hold beneficial interests in notes
in minimum denominations representing note balances of $1,000 and in multiples
of $1 in excess thereof.
See "Description of the Securities - Book-Entry Registration of
Securities" in the prospectus.
ASSIGNMENT OF MORTGAGE LOANS
At the time of issuance of the notes, the sponsor will transfer to the
trust all of its right, title and interest in and to each mortgage loan
(including any Additional Balances arising in the future), related Credit Line
Agreements and mortgage notes, as applicable, and the mortgages and other
related documents (collectively, the "Related Documents"), including all
collections received on or with respect to each such mortgage loan on or after
the Cut-Off Date (exclusive of certain payments in respect of payments in
respect of interest on the delinquent mortgage loans due prior to the Cut-Off
Date and received thereafter) . The trust, concurrently with such transfer,
will deliver or cause to be delivered the notes to the sponsor. Each mortgage
loan transferred to the trust will be identified on the mortgage loan schedule
which will be attached as an exhibit to the indenture. 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.
The indenture trustee will review or cause to be reviewed the mortgage
notes and the Related Documents within 90 days of the closing date. If any
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
sponsor by the owner trustee, the trust or the insurer, the sponsor will be
obligated to accept the transfer of such mortgage loan from the trust. Upon
such transfer, the sponsor will be obligated to either substitute for the
defective mortgage loan with an Eligible Substitute Mortgage Loan or to
purchase such mortgage loan at a purchase price equal to the principal balance
of the defective mortgage loan plus an amount equal to all accrued but unpaid
interest on the defective mortgage loan. The obligation of the sponsor to
accept a defective mortgage loan and to convey an Eligible Substitute Mortgage
Loan or to repurchase the defective mortgage loan is the sole remedy available
to the indenture trustee and the noteholders regarding any defects in the
mortgage loans or the Related Documents.
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:
o 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) that is equal to or
less than the principal balance of the defective mortgage loan;
o 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;
o have a loan rate based on the same Index with adjustments to such
loan rate made on the same adjustment date as that of the
defective mortgage loan;
o have a gross margin that is not less than the gross margin of the
defective mortgage loan and not more than [ ] basis points higher
than the gross margin for the defective mortgage loan;
o have a mortgage of the same or higher level of priority as the
mortgage relating to the defective mortgage loan;
o comply with each representation and warranty as to the mortgage
loans set forth in the sale and servicing agreement (deemed to be
made as of the date of substitution);
o have an original CLTV not greater than that of the defective
mortgage loan; and
o satisfy certain other conditions specified in the sale and
servicing agreement.
The sponsor will make certain representations and warranties as to the
accuracy in all material respects of certain information furnished to the
indenture trustee with respect to each mortgage loan (e.g., Cut-Off Date
principal balance and the loan rate). In addition, the sponsor will represent
and warrant on the closing date that, among other things: (1) at the time of
transfer to the trust, the sponsor has transferred or assigned all of its
rights, title and interest in or granted a security interest in each mortgage
loan and the Related Documents, free of any lien (subject to certain
exceptions) and (2) each mortgage loan complied, at the time or origination, in
all material respects with applicable state and federal laws. Upon discovery of
a breach of any such representation and warranty which materially and adversely
affects the interests of the noteholders or the insurer in the related mortgage
loan and Related Documents, the sponsor 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 sponsor will be obligated to accept a
transfer of the defective mortgage loan from the trust. The same procedure and
limitations that are set forth in the two preceding paragraphs 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 sale and servicing agreement that materially and adversely
affects the interests of the noteholders.
AMENDMENTS TO CREDIT LINE AGREEMENTS
Subject to applicable law, the servicer may change the terms of the
Credit Line Agreements at any time provided that such changes do not adversely
affect the interest of the noteholders or the insurer, and are consistent with
prudent business practice. In addition, the sale and servicing agreement
permits the servicer, within certain limitations described therein, to increase
or reduce the credit limit of the related mortgage loan and reduce the gross
margin for such mortgage loan.
OPTIONAL TRANSFERS OF MORTGAGE LOANS TO THE SPONSOR
Subject to the conditions specified in the sale and servicing
agreement, on any payment date the sponsor may remove from the trust, certain
mortgage loans without notice to the noteholders. The mortgage loans to be
removed designated will only be removed upon satisfaction of certain conditions
specified in the sale and servicing agreement, including:
o the [overcollateralization targets have been met];
o the sponsor shall have delivered to the indenture trustee and the
insurer a mortgage loan schedule containing a list of all mortgage
loans remaining in the trust after such removal;
o the sponsor shall represent and warrant that no selection
procedures which the sponsor reasonably believes are adverse to
the interests of the noteholders or the insurer were used by the
sponsor in selecting such mortgage loans;
o in connection with each such retransfer of mortgage loans, the
rating agencies shall have been notified of the proposed transfer
and the rating agencies shall have notified the sponsor, the
indenture trustee and the insurer in writing that such transfer
will not result in a reduction or withdrawal of the ratings
assigned to the notes without regard to the Policy;
o the proposed transfer will not cause a Rapid Amortization Event to
occur;
o the Rapid Amortization Period shall not have commenced; and
o the sponsor shall have delivered to the indenture trustee and the
insurer an officer's certificate confirming the satisfaction of
the first three conditions.
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO COLLECTION ACCOUNT AND
DISTRIBUTION ACCOUNT
The servicer shall establish and maintain in the name of the indenture
trustee an account (the "Collection Account") for the benefit of the
noteholders, the insurer and the sponsor, as their interests may appear. The
Collection Account will be an Eligible Account (as defined herein). Subject to
the investment provisions described in the following paragraphs, upon receipt
by the servicer of amounts in respect of the mortgage loans (excluding amounts
representing the servicing fee) the servicer will deposit such amounts in the
Collection Account. Not later than the third business day prior to each Payment
Date (the "Determination Date"), the servicer will notify the indenture trustee
of the amount of such deposit to be included in funds available for the related
Payment Date. Amounts so deposited may be invested in Eligible Investments (as
described in the sale and servicing agreement) maturing no later than one
Business Day prior to the date on which amounts on deposit therein are required
to be deposited in the Distribution Account.
The indenture trustee will establish an account (the "Distribution
Account") into which will be deposited amounts withdrawn from the Collection
Account for payment to noteholders on a Payment Date. The Distribution Account
will be an Eligible Account. Amounts on deposit therein may be invested in
Eligible Investments maturing on or before the Business Day prior to the
related Payment Date. Net investment earnings on the funds in the Distribution
Account will be paid to ____________.
An "Eligible Account" is a segregated account that is:
o 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 and whose accounts are fully insured
by either the Savings Association Insurance Fund or the Bank
Insurance Fund of the Federal Deposit Insurance Corporation with a
minimum long-term unsecured debt rating of "A1" by Moody's and "A"
by S&P and Fitch, and
o which is any of (as approved in writing by the insurer):
o a federal savings and loan association duly organized, validly
existing and in good standing under the applicable banking laws
of any state,
o an institution or association duly organized, validly existing
and in good standing under the applicable banking laws of any
state,
o a national banking association duly organized, validly existing
and in good standing under the federal banking laws, or
o a principal subsidiary of a bank holding company
o a segregated trust account maintained with the corporate trust
department of a federal or state chartered depository institution
or trust company,, having capital and surplus of not less than
$50,000,000, acting in its fiduciary capacity, or
o otherwise acceptable to each rating agency and the insurer as
evidenced by a letter from each rating agency and the insurer to
the indenture trustee, without reduction or withdrawal of their
then current ratings of the notes without regard to the Policy.
Eligible Investments are specified in the sale and servicing agreement
and are limited to investments which are acceptable to the insurer and meet the
criteria of the rating agencies from time to time as being consistent with
their then current ratings of the notes.
ALLOCATIONS AND COLLECTIONS
All collections on the mortgage loans will generally be allocated in
accordance with the Credit Line Agreements or the mortgage notes, as
applicable, between amounts collected in respect of interest and amounts
collected in respect of principal. As to any payment date, "Interest
Collections" will be equal to the amounts collected during the related
Collection Period, including such portion of Net Liquidation Proceeds allocated
to interest pursuant to the terms of the Credit Line Agreements or the mortgage
notes, as applicable, less servicing fees for the related Collection Period.
As to any Payment Date, "Principal Collections" will be equal to the
sum of the amounts collected during the related Collection Period, including
such portion of Net Liquidation Proceeds allocated to principal pursuant to the
terms of the Credit Line Agreements or mortgage notes, as applicable, and any
Transfer Deposit Amounts. "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. "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 sum of 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.
With respect to any payment date, the portion of Interest Collections
allocable to the notes ("Investor Interest Collections") will equal the product
of (a) Interest Collections for such Payment Date and (b) the Investor Floating
Allocation Percentage. With respect to any Payment Date, the "Investor Floating
Allocation Percentage" is the percentage equivalent of a fraction determined by
dividing (a) the Invested Amount at the close of business on the preceding
Payment Date (or the Closing Date in the case of the first Payment Date) by (b)
the pool balance at the beginning of the related Collection Period. The
remaining amount of Interest Collections will be allocated to the certificates.
Principal Collections will be allocated between the noteholders and
the sponsor ("Investor Principal Collections" and "Sponsor Principal
Collections", respectively) as described herein.
The indenture trustee will deposit any amounts drawn under the Policy
into the Distribution Account.
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 (1) any Additional Balances in respect of such mortgage loan
minus (2) all collections credited against the principal balance of such
mortgage loan in accordance with the related Credit Line Agreement or mortgage
note prior to such day. The principal balance of a liquidated mortgage loan
after final recovery of related Liquidation Proceeds shall be zero.
"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 received in connection therewith.
The "Investor Loss Amount" shall be the product of the Investor Floating
Allocation Percentage and the aggregate of the Liquidation Loss Amounts for
such Payment Date. A "liquidated mortgage loan" is any mortgage loan in respect
of which the servicer has determined, based on the servicing procedures
specified in the sale and servicing 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.
As, to any Payment Date, the "Collection Period" is the calendar month
preceding each Payment Date.
PAYMENTS ON THE NOTES
Beginning with the first Payment Date (which will occur on _________
__, 199__), payments on the notes will be made by the indenture trustee or the
Paying Agent based upon aggregate information provided by the servicer on each
Payment Date to the persons in whose names such notes are registered at the
close of business on the day prior to each Payment Date or, if the notes are no
longer in book-entry form, at the close of business on the last day of the
month preceding such Payment Date (the "Record Date"). The term "Payment Date"
means the twenty-fifth day of each month or, if such day is not a Business Day,
then the next succeeding Business Day. Payments will be made by check or money
order mailed (or upon the request of a noteholder owning notes having
denominations aggregating at least $1,000,000, by wire transfer or otherwise)
to the address of the person entitled thereto (which, in the case of book-entry
notes, will be DTC or its nominee) as it appears on the note register in
amounts calculated as described herein on the Determination Date. However, the
final payment in respect of the notes will be made only upon presentation and
surrender thereof at the office or the agency of the indenture trustee
specified in the notice to noteholders of such final payment. For purposes of
the Agreements, a "Business Day" is any day other than (1) a Saturday or Sunday
or (2) a day on which the insurer or banking institutions in the States of
California, ___________ or __________ are required or authorized by law to be
closed.
APPLICATION OF INTEREST COLLECTIONS. On each Payment Date, the
indenture trustee or the paying agent will apply the Investor Interest
Collections in the following manner and order of priority:
o as payment to the indenture trustee for its fee for services
rendered pursuant to the sale and servicing agreement and as
payment to the owner trustee for its fee for services rendered
pursuant to the trust agreement;
o as payment for the premium for the Policy;
o to the noteholders, as payment for the accrued interest due and
any overdue accrued interest (with interest thereon to the extent
permitted by law) on the note balance of the notes; and
o to the holder of the certificates, the amount to which it is
entitled in accordance with the provisions of the sale and
servicing agreement;
CALCULATION OF THE NOTE RATE. Interest will be distributed on each
Payment Date at the Note Rate for the related interest accrual period on the
note balance as of the first day of such interest accrual period (reduced by
any Civil Relief Act Interest Shortfalls for such Payment Date). The "Note
Rate" for a Payment Date will generally equal the sum of (a) LIBOR, determined
as specified herein, as of the second LIBOR Business Day prior to the
immediately preceding Payment Date (or as of two LIBOR Business Days prior to
the closing date, in the case of the first Payment Date) plus (b) ___% per
annum. Notwithstanding the foregoing, in no event will the amount of interest
required to be distributed in respect of the notes on any Payment Date exceed
the amount calculated at a rate (the "Net WAC") equal to the weighted average
of the loan rates (net of the Servicing Fee Rate, the fee payable to the
indenture trustee and the owner trustee (expressed as a rate) and the rate at
which the premium payable to the insurer is calculated) weighted on the basis
of the daily balance of each mortgage loan during the calendar month preceding
the Collection Period relating to such Payment Date or in the case of the first
Payment Date, the weighted average loan rate as of the Cut-Off Date.
Interest on the notes in respect of any Payment Date will accrue on
the note balance from the preceding Payment Date (or in the case of the first
Payment Date, from the closing date) through the day preceding such Payment
Date (each such period, an "interest accrual period") on the basis of the
actual number of days in the interest accrual period and a 360-day year.
Interest payments on the notes will be funded from Investor Interest
Collections and, if necessary, from the Policy pursuant to the terms thereof.
Interest for any Payment Date due but not paid on such Payment Date will be due
on the next succeeding Payment Date together with additional interest on such
amount at a rate equal to the applicable Note Rate.
CALCULATION OF THE LIBOR RATE. On each Payment Date, LIBOR shall be
established by the indenture trustee and as to any interest accrual period,
LIBOR will equal the rate for United States dollar deposits for one month which
appears on the Telerate Screen Page 3750 as of 11:00 A.M., London time, on the
second LIBOR Business Day prior to the first day of such Interest accrual
period. "Telerate Screen Page 3750" means the display designated as page 3750
on the Telerate Service (or such other page as may replace page 3750 on that
service for the purpose of displaying London interbank offered rates of major
banks). If such rate does not appear on such page (or such other page as may
replace that page on that service, or if such service is no longer offered,
such other service for displaying LIBOR or comparable rates as may be selected
by the sponsor after consultation with the indenture 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 indenture trustee) as of 11:00 A.M., London time, on the
day that is two LIBOR Business Days prior to the immediately preceding Payment
Date to prime banks in the London interbank market for a period of one month in
amounts approximately equal to the principal amount of the notes then
outstanding. The indenture 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 two or
more major banks in New York City, selected by the sponsor after consultation
with the indenture 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 notes then
outstanding. If no such quotations can be obtained, the rate will be LIBOR for
the prior Payment Date. "LIBOR Business Day" means any day other than (1) a
Saturday or a Sunday or (2) 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.
PAYMENTS OF PRINCIPAL COLLECTIONS. For the period beginning on the
first Payment Date and, unless a Rapid Amortization Event shall have earlier
occurred, ending immediately after the Payment Date in _____________ (such
period, the "Managed Amortization Period"), the amount of Principal Collections
payable to noteholders as of each Payment Date during the Managed Amortization
Period will equal, to the extent funds are available therefor, the Scheduled
Principal Collections Payment Amount for such Payment Date. On any Payment Date
during the Managed Amortization Period, the "Scheduled Principal Collections
Payment Amount" shall equal the lesser of the Maximum Principal Payment and the
Alternative Principal Payment (as defined herein). With respect to any Payment
Date, the "Maximum Principal Payment" will equal the product of the Investor
Fixed Allocation Percentage and Principal Collections for such Payment Date.
With respect to any Payment Date, the "Alternative Principal Payment" will
equal the amount, but not less than zero, of Principal Collections for such
Payment Date less the aggregate of Additional Balances created during the
related Collection Period. The "Rapid Amortization Period" is the period
beginning at the earlier of (1) the occurrence of a Rapid Amortization Event
and (2) immediately following the Payment Date in __________ and continuing
until the later of when (1) the note balance has been reduced to zero and all
amounts then due and owing to the insurer have been paid and (2) the trust is
terminated. See "-- Termination; Retirement of the Notes."
Beginning with the first Payment Date following the end of the Managed
Amortization Period, the amount of Principal Collections payable to noteholders
on each Payment Date will be equal to the Maximum Principal Payment.
Payments of Principal Collections based upon the Investor Fixed
Allocation Percentage may result in payments of principal to noteholders 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 noteholders will be
allocated to the certificates. The aggregate payments of principal to the
noteholders will not exceed the initial note balance.
In addition, to the extent of funds available therefor (including
funds available under the Policy), on the Payment Date in __________,
noteholders will be entitled to receive as a payment of principal an amount
equal to the outstanding note balance.
THE PAYING AGENT. The paying agent shall initially be the indenture
trustee, together with any successor thereto in such capacity. The paying agent
shall have the revocable power to withdraw funds from the Distribution Account
for the purpose of making payments to the noteholders.
RAPID AMORTIZATION EVENTS
As described above, the Managed Amortization Period will continue
through the Payment Date in __________, unless a Rapid Amortization Event
occurs prior to such date in which case the Rapid Amortization Period will
commence prior to such date. The "Rapid Amortization Period" is the period
commencing on the earlier of:
o the end of the Managed Amortization Period and
o the day, if any, upon which a Rapid Amortization Event occurs and
concluding upon the later of:
o termination of the trust and
o all amounts due and owing to the insurer and the noteholders
have been paid.
"Rapid Amortization Event" refers to any of the following events:
(a) failure on the part of the sponsor:
o to make a payment or deposit required under the Agreements or
o to observe or perform in any material respect any other
covenants or agreements of the sponsor set forth in the
Agreements, which failure continues unremedied for a period of
30 days after written notice;
(b) any representation or warranty made by the sponsor in the
Agreements proves to have been incorrect in any material respect
when made and continues to be incorrect in any material respect
for a period of 30 days after written notice and as a result of
which the interests of the noteholders or the insurer are
materially and adversely affected; provided, however, that a Rapid
Amortization Event shall not be deemed to occur with respect to a
breach of representation and warranty relating to a mortgage loan
if the sponsor 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
indenture trustee and the insurer) in accordance with the
provisions of the sale and servicing agreement;
(c) the occurrence of certain events of bankruptcy, insolvency or
receivership relating to the sponsor;
(d) the trust becomes subject to regulation by the SEC as an
investment company within the meaning of the Investment Company
Act, of 1940, as amended; or
(e) the aggregate of all draws under the Policy exceeds __% of the
Cut-Off Date pool balance.
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
indenture trustee or noteholders holding notes evidencing more than 51% of the
Percentage Interests (in either case, with the consent of the insurer) or the
insurer (so long as there is no default by the insurer in the performance of
its obligations under the Policy), by written notice to the sponsor and the
servicer (and to the indenture trustee, if given by the noteholders) declare
that a Rapid Amortization Event has occurred as of the date of such notice. In
the case of any event described in clause (c), (d) or (e) a Rapid Amortization
Event will be deemed to have occurred without any notice or other action on the
part of the indenture trustee, the insurer or the noteholders immediately upon
the occurrence of such event.
In addition to the consequences of a Rapid Amortization Event
discussed above, if the sponsor voluntarily files a bankruptcy petition or goes
into liquidation or any person is appointed a receiver or bankruptcy trustee of
the sponsor, on the day of any such filing or appointment no further Additional
Balances will be transferred to the trust, the sponsor will immediately cease
to transfer Additional Balances to the trust and the sponsor will promptly give
notice to the indenture trustee and the insurer of any such filing or
appointment.
Notwithstanding the foregoing, if a conservator or
trustee-in-bankruptcy is appointed for the sponsor and no Rapid Amortization
Event exists other than such conservatorship, receivership or insolvency of the
sponsor, the conservator or receiver may have the power to prevent the
commencement of the Rapid Amortization Period or the sale of mortgage loans
described above.
THE POLICY
[Description of the Policy]
MATURITY AND PREPAYMENT CONSIDERATIONS
The Agreements, except as otherwise described herein, provides that
the noteholders will be entitled to receive on each Payment Date payments of
principal, in the amounts described herein, until the note balance is reduced
to zero. During the Managed Amortization Period, noteholders will receive
amounts from Principal Collections based upon the Investor Fixed Allocation
Percentage subject to reduction as described below. During the Rapid
Amortization Period, noteholders will receive amounts from Principal
Collections based solely upon the Investor Fixed Allocation Percentage. Because
prior payments of Investor Principal Collections to noteholders reduce the
Investor Floating Allocation Percentage but do not change the Fixed Allocation
Percentage, allocations of Principal Collections based on the Fixed Allocation
Percentage may result in payments of principal to the noteholders 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 noteholders. This is especially true during the Rapid
Amortization Period when the noteholders are entitled to receive Investor
Principal Collections and not a lesser amount. In addition, to the extent of
losses allocable to the noteholders, noteholders may also receive as payment of
principal the Investor Floating Allocation Percentage of the amount of such
losses from draws under the Policy. The level of losses may therefore affect
the rate of payment of principal on the notes. For a description of the defined
terms used in this section, See "DESCRIPTION OF THE NOTES."
Because during the Rapid Amortization Period the noteholders' share of
Principal Collections is based upon the Investor Fixed Allocation Percentage
(without reduction), an increase in the pool balance due to additional draws
may also result in noteholders receiving principal at a greater rate than would
otherwise occur if the Investor Floating Allocation Percentage were used to
determine the percentage of Principal Collections distributed to noteholders.
The sale and servicing agreement permits the sponsor, at its option, but
subject to the satisfaction of certain conditions specified in the sale and
servicing agreement, including the conditions described below, to remove
certain mortgage loans from the trust at any time during the life of the trust,
so long as the pool balance (after giving effect to such removal) exceeds [ ].
Such removals may affect the rate at which principal is distributed to
noteholders by reducing the overall pool balance and thus the amount of
Principal Collections. See "DESCRIPTION OF THE NOTES--Optional Transfers of
Mortgage Loans to the Sponsor."
The prepayment experience with respect to the mortgage loans will
affect the weighted average life of the notes.
The rate of prepayment on the mortgage loans cannot be predicted. The
sponsor is not aware of any publicly available studies or statistics that
accurately predict or forecast the rate of prepayment of mortgage loans such as
the mortgage 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 first mortgage loans. Because the mortgage
loans generally do not amortize during the Draw Period, rates of principal
payment on the mortgage loans will generally be slower than those of
traditional fully-amortizing first mortgages in the absence of prepayments on
such mortgage loans. The prepayment experience of the trust with respect to the
mortgage loans may be affected by a wide variety of factors, including general
economic conditions, prevailing interest rate levels, the availability of
alternative financing, homeowner mobility, the frequency and amount of any
future draws on the Credit Line Agreements and changes affecting the
deductibility for federal income tax purposes of interest payments on home
equity loans. Substantially all of the mortgage loans contain "due-on-sale"
provisions, and the 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 LOANS--Due-on-Sale
Clauses" in the prospectus.
The yield to an investor who purchases the notes 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 notes were purchased.
Collections on the mortgage loans may vary because, among other
things, borrowers may make payments during any month as low as the minimum
monthly payment for such month which may be zero, 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 but it can be expected that a portion of borrowers
will not prepay their mortgage loans to any significant degree.
DESCRIPTION OF THE AGREEMENTS
The following summary describes certain terms of the sale and
servicing agreement, the trust agreement and the indenture. Such summary does
not purport to be complete and is subject to, and qualified in its entirety by
reference to, the respective provisions of the sale and servicing agreement,
the trust agreement and the indenture. Whenever particular defined terms in the
indenture are referred to, such defined terms are thereby incorporated herein
by reference. See "The Agreements" in the prospectus.
REPORTS TO NOTEHOLDERS
Concurrently with each payment to the noteholders, the servicer will
forward to the indenture trustee for mailing to such noteholder and the insurer
a statement setting forth among other items:
o the Investor Floating Allocation Percentage for the preceding
Collection Period;
o the amount being distributed to noteholders;
o the amount of interest included in such payment and the related
Note Rate;
o the amount, if any, of overdue accrued interest included in such
payment;
o the amount, if any, of the remaining overdue accrued interest
after giving effect to such payment;
o the amount, if any, of principal included in such payment;
o the amount, if any, of the reimbursement of previous Liquidation
Loss Amounts included in such payment;
o the amount, if any, of the aggregate unreimbursed Liquidation Loss
Amounts after giving effect to such payment;
o the servicing fee for such Payment Date;
o the Invested Amount and the note balance, each after giving effect
to such payment;
o the pool balance as of the end of the preceding Collection Period;
o the number and aggregate principal balances of the mortgage loans
as to which the minimum monthly payment is delinquent to 30-59
days, 60-89 days and 90 or more days, respectively, as of the end
of the Collection Period;
o the book value of any real estate which is acquired by the trust
through foreclosure or grant of deed in lieu of foreclosure; and
o the amount of any draws on the Policy.
COLLECTION AND OTHER SERVICING PROCEDURES ON MORTGAGE LOANS
The servicer will make reasonable efforts to collect all payments
called for under the mortgage loans and will, consistent with the sale and
servicing 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 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 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 servicer's policies
with respect to the home equity mortgage loans it owns or services. In
accordance with the terms of the sale and servicing agreement, the servicer may
consent under certain circumstances to the placing of a subsequent senior lien
in respect of a mortgage loan.
HAZARD INSURANCE
The servicer will cause to be maintained for each mortgage loan and
each 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
o the outstanding principal balance on the mortgage loan and any
related senior lien(s); and
o the maximum insurable value of the improvements securing the
mortgage loan.
Generally, if the mortgaged property is located in a federally designated flood
area, the hazard insurance to be maintained for the mortgage loan shall include
flood insurance in such amounts as are required under applicable guidelines of
the Federal Flood Emergency Act. Any amounts collected by the servicer under
any such policies will be deposited in the Collection Account, net of certain
amounts as indicated in the sale and servicing agreement. 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, other than pursuant to
applicable laws and regulations. If the servicer obtains and maintains 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.
We refer you to "The Agreements-Hazard Insurance" in the prospectus
for further information.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
The 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 sale
and servicing agreement, no satisfactory arrangements can be made for the
collection of delinquent payments. In connection with such foreclosure or other
conversion, the 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 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 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 noteholders or the certificateholders.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
With respect to each Collection Period, the 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 [ ]% per
annum on the aggregate principal balances of the mortgage loans as of the first
day of the related Collection Period (or as of 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
servicer as additional servicing compensation.
The servicer will pay certain ongoing expenses associated with the
trust and incurred by it in connection with its responsibilities under the sale
and servicing agreement. In addition, the 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 noteholders to receive
any related Net Liquidation Proceeds.
EVIDENCE AS TO COMPLIANCE
The sale and servicing agreement provides for delivery on or before
March 31 of each year, beginning on March 31, [year], to the indenture trustee
and the insurer of an annual statement signed by an officer of the servicer to
the effect that the servicer has fulfilled its material obligations under the
sale and servicing agreement throughout the preceding fiscal year, except as
specified in such statement.
On or before March 31 of each year, beginning March 31, [year], the
servicer will furnish a report prepared by a nationally recognized independent
public accountants (who may also render other services to the servicer or the
sponsor) to the indenture trustee, the 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 sale and servicing agreement and
that, on the basis of such examination, such firm believes that such servicing
was conducted in compliance with the sale and servicing agreement except for
(a) such exceptions as such firm believes to be immaterial and (b) such other
exceptions as shall be set forth in such report.
CERTAIN MATTERS REGARDING THE SERVICER AND THE SPONSOR
The sale and servicing agreement provides that the servicer may not
resign from its obligations and duties thereunder:
o unless such duties and obligations are no longer permissible under
applicable law or are in material conflict by reason of applicable
law with any other activities of a type and nature presently
carried on by it or its subsidiaries or affiliates or
o upon the satisfaction of the following conditions:
o the servicer has proposed a successor servicer to the indenture
trustee and the insurer in writing and such proposed successor
servicer is reasonably acceptable to the indenture trustee and the
insurer; and
o the rating agencies have confirmed to the indenture trustee and
the insurer that the appointment of such proposed successor
servicer as the servicer will not result in the reduction or
withdrawal of the then current rating of the notes.
No such resignation will become effective until the indenture trustee or a
successor servicer has assumed the servicer's obligations and duties under the
sale and servicing agreement.
The servicer may perform any of its duties and obligations under the
sale and servicing agreement through one or more subservicers or delegates,
which may be affiliates of the servicer. Notwithstanding any such arrangement,
the servicer will remain liable and obligated to the indenture trustee and the
noteholders for the servicer's duties and obligations under the sale and
servicing agreement, without any diminution of such duties and obligations and
as if the servicer itself were performing such duties and obligations.
Under the sale and servicing agreement, the sponsor will indemnify an
injured party for the entire amount of any losses, claims, damages or
liabilities arising out of or based on the sale and servicing agreement (other
than losses resulting from defaults under the mortgage loans). The sale and
servicing agreement provides that neither the sponsor nor the servicer nor
their directors, officers, employees or agents will be under any other
liability to the trust, the indenture trustee, the noteholders, the insurer or
any other person for any action taken or for refraining from taking any action
pursuant to the sale and servicing agreement. However, neither the sponsor nor
the 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 or the servicer in the performance of its duties under the sale and
servicing agreement or by reason of reckless disregard of its obligations
thereunder. In addition, the sale and servicing agreement provides that the
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 sale and servicing agreement and which in its opinion may expose it to any
expense or liability. The servicer may, in its sole discretion, undertake any
such legal action which it may deem necessary or desirable with respect to the
sale and servicing agreement and the rights and duties of the parties thereto
and the interest of the noteholders and the insurer thereunder.
Any corporation into which the servicer may be merged or consolidated,
or any corporation resulting from any merger, conversion or consolidation to
which the servicer shall be a party, or any corporation succeeding to the
business of the servicer shall be the successor of the servicer hereunder,
without the execution or filing of any paper or any further act on the part of
any of the parties.
EVENTS OF SERVICING TERMINATION
"Events of Servicing Termination" will consist of:
(a) any failure by the servicer to deposit in the Collection Account
any deposit required to be made under the sale and servicing
agreement or to make any payment required to be made under the
insurance agreement, which failure continues unremedied for two
Business Days after the giving of written notice of such failure
to the servicer by the indenture trustee, or to the servicer and
the indenture trustee by the insurer or noteholders evidencing an
aggregate, of at least 25% of the voting rights;
(b) any failure by the servicer duly to observe or perform in any
material respect any other of its covenants or agreements in the
sale and servicing agreement which, in each case, materially and
adversely affects the interests of the noteholders or the insurer
and continues unremedied for 60 days after the giving of written
notice of such failure to the servicer by the indenture trustee,
or to the servicer and the indenture trustee by the insurer or
noteholders evidencing an aggregate of at least 25% of the voting
rights;
(c) certain events of insolvency, readjustment of debt, marshalling
of assets and liabilities or similar proceedings relating to the
servicer and certain actions by the servicer indicating
insolvency, reorganization or inability to pay its obligations
(each an "Insolvency Event"); or
(d) any Event of Servicing Termination under the terms of the Policy,
has occurred and is continuing. Under certain other
circumstances, the insurer may deliver written notice to the
servicer terminating all the rights and obligations of the
servicer under the sale and servicing agreement.
Notwithstanding the foregoing, a delay in or failure of performance
referred to under clause (a) above for a period of five Business Days or
referred to under clause (b) above for a period of 60 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 other similar occurrence. Upon
the occurrence of any such event the 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 sale and servicing agreement and the servicer shall
provide the indenture trustee, the sponsor, the insurer and the noteholders
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:
o the indenture trustee, or noteholders evidencing an aggregate of
at least 51% of the Voting Rights in each case with the consent of
the insurer or
o the insurer, may terminate all of the rights and obligations of
the servicer under the sale and servicing agreement and in and to
the mortgage loans, whereupon the indenture trustee will succeed
to all the responsibilities, duties and liabilities of the
servicer under the sale and servicing agreement and will be
entitled to similar compensation arrangements. In the event that
the indenture trustee would be obligated to succeed the 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 sale and servicing agreement
and having a net worth of at least $[ ] and acceptable to the
insurer to act as successor to the servicer under the sale and
servicing agreement. Pending such appointment, the indenture
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 servicer would otherwise have received
(or such lesser compensation as the indenture trustee and such
successor may agree). A receiver or conservator for the servicer
may be empowered to prevent the termination and replacement of the
servicer where the only Event of Servicing Termination that has
occurred is an Insolvency Event.
EVENTS OF DEFAULT UNDER THE INDENTURE
"Events of Default" under the indenture include:
(a) a default in the payment of any interest or principal
payment when the same becomes due and payable and continuance of such
default for a period of five days;
(b) failure on the part of the trust to perform in any
material respect any covenant or agreement under the indenture (other
than a covenant covered in clause (a) hereof) which continues for a
period of thirty days after notice thereof is given; and
(c) certain events of bankruptcy, insolvency, receivership or
liquidation of the trust.
REMEDIES ON EVENT OF DEFAULT UNDER THE INDENTURE
If an Event of Default under the indenture has occurred and is
continuing, either the indenture trustee or the majority of the then
outstanding amount of the notes may declare the principal amount of the notes
due and payable immediately. Such a declaration may be rescinded by a majority
of the then outstanding amount of the notes.
If the principal of the notes has been declared due and payable as
described in the preceding paragraph, the indenture trustee may elect not to
liquidate the assets of the trust provided that the assets are generating
sufficient cash to pay interest and principal as it becomes due and payable to
the noteholders.
However, the indenture trustee may not sell or otherwise liquidate the
assets of the trust following an Event of Default (other than one described in
clause (a) of the definition of "Event of Default"), unless
(a) the holders of 100% of the notes and the insurer consents to such
sale,
(b) the proceeds of such sale or liquidation are sufficient to pay all
amounts due and owing to the noteholders and the insurer, or
(c) the trustee determines that the assets of the trust would not be
sufficient on an ongoing basis to make all payments on the notes as they become
due and payable and the trustee obtains the consent of the holders of 66-2/3%
of the Percentage Interests of the notes agree.
CERTAIN MATTERS REGARDING THE INDENTURE TRUSTEE AND THE OWNER TRUSTEE
Neither the indenture trustee nor any director, officer or employee of
the indenture trustee will be under any liability to the trust of the
noteholders for taking any action or for refraining from the taking of any
action in good faith pursuant to the indenture, or for errors in judgment;
provided, that none of the indenture trustee or any director, officer or
employee thereof will be protected against any liability that would otherwise
be imposed on it by reason of willful malfeasance, bad faith or negligence in
the performance of its duties or by reason of its reckless disregard of its
obligations and duties under the indenture. Subject to certain limitations set
forth in the indenture, the indenture trustee and any director, officer,
employee or agent thereof will be indemnified by the trust and held harmless
against any loss, liability or expense incurred in connection with
investigating, preparing to defend or defending any legal action, commenced or
threatened, relating to the indenture, other than any loss, liability or
expense incurred by reason of its own willful malfeasance, bad faith or
negligence in the performance of its duties under the indenture, or by reason
of its reckless disregard of its obligations and duties under the indenture.
All persons into which the indenture trustee may be merged or with which it may
be consolidated, or any person resulting from such merger or consolidation,
will be the successor to the indenture trustee under the indenture.
The owner trustee, the indenture trustee and any of their respective
affiliates may hold notes in their own names or as pledgees. For the purpose of
meeting the legal requirements of certain jurisdictions, the servicer, the
owner trustee and the indenture trustee acting jointly (or in some instances,
the owner trustee or the indenture trustee acting alone) will have the power to
appoint co-trustees or separate trustees of all or any part of the trust. In
the event of such an appointment, all rights, powers, duties and obligations
conferred or imposed upon the owner trustee by the sale and servicing agreement
and the trust Agreement and the indenture trustee by the indenture will be
conferred or imposed upon the owner trustee and the indenture trustee,
respectively, and in each such case such separate trustee or co-trustee
jointly, or, in any jurisdiction in which the owner trustee or indenture
trustee will be incompetent or unqualified to perform certain acts, singly upon
such separate trustee or co-trustee who will exercise and perform such rights,
powers, duties and obligations solely at the direction of the owner trustee or
the indenture trustee, respectively.
The indenture trustee may resign at any time, in which event the owner
trustee will be obligated to appoint a successor thereto. The owner trustee may
resign at any time, in which event the co-owner trustee will be obligated to
appoint a successor thereto. The servicer may also remove the owner trustee or
the indenture trustee if either ceases to be eligible to continue as such under
the trust agreement or the indenture, as the case may be, or becomes legally
unable to act or becomes insolvent. Any resignation or removal of the owner
trustee or indenture trustee and appointment of a successor thereto will not
become effective until acceptance of the appointment by such successor.
DUTIES OF THE OWNER TRUSTEE AND INDENTURE TRUSTEE
The owner trustee will make no representations as to the validity or
sufficiency of the trust agreement, the notes (other than the execution and
authentication thereof), or of any mortgage loans or related documents, and
will not be accountable for the use or application by the sponsor or the
servicer of any funds paid to the sponsor or the servicer in respect of the
notes, or the mortgage loans, or the investment of any monies by the servicer
before such monies are deposited into the Collection Account or the
Distribution Account. So long as no Event of Default has occurred and is
continuing, the owner trustee will be required to perform only those duties
specifically required of it under the trust agreement. Generally, those duties
will be limited to the receipt of the various certificates, reports or other
instruments required to be furnished to the owner trustee under the trust
agreement, in which case it will only be required to examine them to determine
whether they conform to the requirements of the trust agreement. The owner
trustee will not be charged with knowledge of a failure by the servicer to
perform its duties under the trust agreement or sale and servicing agreement
which failure constitutes an Event of Default unless the owner trustee obtains
actual knowledge of such failure as will be specified in the trust agreement.
The indenture trustee will make no representations as to the validity
or sufficiency of the indenture, the notes (other than the execution and
authentication thereof) or of any mortgage loans or related documents, and will
not be accountable for the use or application by the sponsor or the servicer of
any funds paid to the sponsor or the servicer in respect of the notes or the
mortgage loans, or the use or investment of any monies by the servicer before
such monies are deposited into the Collection Account or the Distribution
Account. So long as no Event of Default has occurred and is continuing, the
indenture trustee will be required to perform only those duties specifically
required of it under the indenture. Generally, those duties will be limited to
the receipt of the various certificates, reports or other instruments required
to be furnished to the indenture trustee under the indenture, in which case it
will only be required to examine them to determine whether they conform to the
requirements of the indenture. The indenture trustee will not be charged with
knowledge of a failure by the servicer to perform its duties under the trust
agreement or sale and servicing agreement which failure constitutes an Event of
Default unless the indenture trustee obtains actual knowledge of such failure
as will be specified in the indenture.
The indenture trustee will be under no obligation to exercise any of
the rights or powers vested in it by the indenture 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 noteholders, unless such noteholders have offered to the indenture trustee
reasonable security or indemnity against the costs, expenses and liabilities
that may be incurred therein or thereby.
AMENDMENT
The sale and servicing agreement may be amended from time to time by
the sponsor, the servicer and the indenture trustee and with the consent of the
insurer, but without the consent of the noteholders, to cure any ambiguity, to
correct or supplement any provisions therein which may be inconsistent with any
other provisions of the sale and servicing agreement, to add to the duties of
the sponsor or the servicer or to add or amend any provisions of the sale and
servicing agreement as required by the rating agencies in order to maintain or
improve any rating of the notes (it being understood that, after obtaining the
ratings in effect on the closing date, neither the sponsor, the indenture
trustee nor the 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 sale and servicing agreement or the Policy which shall not be
inconsistent with the provisions of the sale and servicing agreement or to
comply with any requirement imposed by the Code; provided that such action will
not, as evidenced by an opinion of counsel, adversely affect in any material
respect the interests of any noteholder or the insurer; provided, that any such
amendment will not be deemed to materially and adversely affect the noteholders
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
notes, without regard to the Policy. The sale and servicing agreement may also
be amended from time to time by the sponsor, the servicer, and the indenture
trustee, with the consent of noteholders evidencing an aggregate of at least
51% of the Voting Rights and the insurer for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions of
the sale and servicing agreement or of modifying in any manner the rights of
the noteholders; provided that no such amendment will:
o reduce in any manner the amount of, or delay the timing of,
collections of payments on the notes or distributions or payments
under the Policy which are required to be made on any note without
the consent of the holder of such note,
o reduce the aforesaid percentage required to consent to any such
amendment, without the consent of the holders of all notes then
outstanding or
o adversely affect in any material respect the interest of the
insurer.
TERMINATION; RETIREMENT OF THE NOTES
The trust will generally terminate on the later of (A) the Payment
Date immediately following the payment in full of all amounts owing to the
insurer and (B) the earliest of:
o the Payment Date on which the note balance of all of the notes
have been reduced to zero and all other amounts due and owing to
the noteholders have been paid in full,
o the Payment Date immediately following the final payment or other
liquidation of the last mortgage loan in the trust,
o the Payment Date immediately following the optional redemption by
the sponsor of the notes, as described below and
o the Payment Date in [ ].
The notes will be subject to optional redemption on any Payment Date
after the note balance is reduced to an amount less than or equal to [ ]% of
the initial note balance. Any such optional repurchase will cause a redemption
of the notes outstanding at the time. Such redemption will only occur if the
purchase price is at least equal to the sum of the outstanding note balance and
accrued and unpaid interest, together with all amounts due and owing to the
insurer and unreimbursed draws on the Policy. The sponsor may not exercise its
right to redeem any notes if such redemption would result in a draw on the
Policy without the prior consent of the insurer. In no event, however, will the
trust created by the trust agreement continue for more than 21 years after the
death of certain individuals named in the trust agreement. Written notice of
termination of the trust agreement will be given to each noteholder, and the
final distribution will be made only upon surrender and cancellation of the
notes at an office or agency designated by the indenture trustee which will be
specified in the notice of termination.
In addition, the trust may be liquidated as a result of certain events
of bankruptcy, insolvency or receivership relating to the sponsor. See "Rapid
Amortization Events" and "Events of Default" herein.
No holder of a note will have any right under the indenture to
institute any proceeding with respect to the indenture unless such holder
previously has given to the indenture trustee written notice of default and
unless noteholders evidencing an aggregate, undivided interest in the trust of
at least 51% of the note balance have made written requests upon the indenture
trustee to institute such proceeding in its own name as indenture trustee
thereunder and have offered to the indenture trustee reasonable indemnity and
the indenture trustee for 60 days has neglected or refused to institute any
such proceeding. The indenture trustee will be under no obligation to exercise
any of the trusts or powers vested in it by the indenture 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 noteholders, unless such noteholders have offered to
the indenture trustee reasonable security or indemnity against the cost,
expenses and liabilities which may be incurred therein or thereby.
THE INDENTURE TRUSTEE
____________, a ___________________ with its principal place of
business in ____________, has been named indenture trustee pursuant to the
indenture.
The commercial bank or trust company serving as indenture trustee may
own notes and have normal banking relationships with the sponsor, the servicer
and the insurer and/or their affiliates.
USE OF PROCEEDS
The net proceeds to be received from the sale of the notes will be
applied by the sponsor to purchase the mortgage loans.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following discussion, which summarizes certain U.S. federal income
tax aspects of the purchase, ownership and disposition of the notes, 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 noteholders in light of
their personal investment circumstances or to certain types of noteholders
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 notes.
CHARACTERIZATION OF THE NOTES AS INDEBTEDNESS
Based on the application of existing law to the facts as set forth in
the Agreements and other relevant documents and assuming compliance with the
terms of the Agreements as in effect on the date of issuance of the notes, [ ],
special tax counsel to the trust ("Tax Counsel") and counsel to the
Underwriters, is of the opinion that the notes will be treated as debt
instruments for federal income tax purposes as of such date and the trust will
not be characterized as an association (or publicly traded partnership) taxable
as a corporation or as a taxable mortgage pool within the meaning of Section
7701 (i). Accordingly, upon issuance, the notes will be treated as "Debt
Securities" as described in the prospectus. See "FEDERAL INCOME TAX
CONSEQUENCES" in the prospectus.
The sponsor and the noteholders express in the sale and servicing
agreement their intent that, for applicable tax purposes, the notes will be
indebtedness secured by the mortgage loans. The sponsor and the noteholders, by
accepting the notes, and each beneficial owner by its acquisition of an
interest in a note, have agreed to treat the notes 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
sponsor 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 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 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 sponsor and has not been
transferred to the noteholders.
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 notes as debt or otherwise
makes the rationale of those cases inapplicable to this situation.
TAXATION OF INTEREST INCOME OF NOTE OWNERS
Assuming that the beneficial owners of notes, or "Note Owners", are
holders of debt obligations for U.S. federal income tax purposes, the notes
generally will be taxable as Debt Securities. See "FEDERAL INCOME TAX
CONSEQUENCES" in the prospectus.
While it is not anticipated that the notes will be issued at a greater
than DE MINIMIS discount, under Treasury regulations (the "OID Regulations") it
is possible that the notes could nevertheless be deemed to have been issued
with original issue discount ("OID") if the interest were not treated as an
unconditionally payable under the OID Regulations. If such regulations were to
apply, all of the taxable income to be recognized with respect to the notes
would be includible in income of Note 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 notes 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 notes will be treated as
Pay-Through Securities.
POSSIBLE CLASSIFICATION OF THE NOTES 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 notes
constitutes a sale of the mortgage loans (or an interest therein) to the Note
Owners and that the proper classification of the legal relationship between the
sponsor and the Note Owners resulting from this transaction is that of a
partnership (including a publicly traded partnership), a publicly traded
partnership treated as a corporation, or an association taxable as a
corporation. Since Tax Counsel has advised that the notes will be treated as
indebtedness in the hands of the noteholders for U.S. federal income tax
purposes, the sponsor will not attempt to comply with U.S. federal income tax
reporting requirements applicable to partnerships or corporations as such
requirements would apply if the notes were treated as indebtedness.
If it were determined that this transaction created an entity
classified as a corporation (including a publicly traded partnership taxable as
a corporation), the trust would be subject to U.S. federal income tax at
corporate income tax rates on the income it derives from the mortgage loans,
which would reduce the amounts available for payment to the Note Owners. Cash
payments to the Note 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 Note Owners and
the sponsor, 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 sponsor and each Note 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 Note Owner could differ if the notes were held to
constitute partnership interests rather than indebtedness.
POSSIBLE CLASSIFICATION AS A TAXABLE MORTGAGE POOL
In relevant part, Section 7701 (i) of the Code provides that any
entity (or a portion of an entity) that is a "taxable mortgage pool" will be
classified as a taxable corporation and will not be permitted to file a
consolidated U.S. federal income tax return with another corporation. Subject
to a grandfather provision for existing entities, any entity (or a portion of
any entity) will be a taxable mortgage pool if
o substantially all of its assets consist of debt instruments, more
than 50% of which are real estate mortgages
o the entity is the obligor under debt obligations with two or more
maturities, and
o 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 Agreements, as in effect on
the date of issuance, are complied with, Tax Counsel is of the opinion that the
arrangement created by the Agreements 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 Agreements 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 payments to Note Owners. The amount of such a tax
would depend upon whether payments to Note 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 note 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 Note 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 Note Owners were deemed to be partnership
interests, the partnership, if it were considered to be engaged in a U.S. trade
or business, 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 were taxable as a corporation, payments to foreign
persons, to the extent treated as dividends (or if the trust were characterized
as a partnership that was not engaged in a trade or business, all interest
payments), would generally be subject to withholding at the rate of 30%, unless
such rate were reduced by an applicable tax treaty.
If, contrary to the opinion of Tax Counsel, the notes are
recharacterized as equity interests in a partnership, or in an association or
publicly traded partnership taxable as a corporation, any taxes required to be
so withheld will be treated for all purposes of the notes and the Policy as
having been paid to the related noteholder.
BACKUP WITHHOLDING
Certain Note Owners may be subject to backup withholding at the rate
of 31% with respect to interest paid on the notes if the Note Owners, upon
issuance, fail to supply the indenture 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) property, or, under certain circumstances, fail to provide the
indenture trustee or his broker with a certified statement, under penalty of
perjury, that he is not subject to backup withholding.
The indenture trustee will be required to report annually to the IRS,
and to each noteholder of record, the amount of interest paid (and OID accrued,
if any) on the notes (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 "noteholder" of record is Cede, as nominee
for DTC, Note Owners and the IRS will receive tax and other information
including the amount of interest paid on the notes from participants and
indirect participants of the DTC system rather than from the indenture trustee.
(The indenture 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 Note 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 Note 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.
Final regulations dealing with withholding tax on income paid to
foreign persons, backup withholding and related matters (the "New Withholding
Regulations") were issued by the Treasury Department on October 6, 1997. The
New Withholding Regulations generally will be effective for payments made after
December 31, 2000, subject to certain transition rules. Prospective Certificate
Owners are strongly urged to consult their own tax advisors with respect to the
New Withholding Regulations.
TAX-EXEMPT ENTITIES
A tax-exempt Note Owner would be subject to less favorite tax
treatment because an interest in a partnership would generate "unrelated
business taxable income" and thereby subject the Note Owner to the "unrelated
business, taxable income" provisions of the Code.
STATE TAXES
The sponsor makes no representations regarding the tax consequences of
purchase, ownership or disposition of the notes under the tax laws of any
state. Investors considering an investment in the notes should consult their
own tax advisors regarding such tax consequences.
All investors should consult their own tax advisors regarding the
federal, state, local, foreign or any other income tax consequences of the
purchase, ownership and disposition of the notes.
ERISA CONSIDERATIONS
Section 406 of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and/or Section 4975 of the Code prohibit pension,
profit-sharing and other employee benefit plans, as well as individual
retirement accounts and certain types of Keogh Plans that are subject to ERISA
or to Section 4975 of the Code ("Benefit Plans") from engaging in certain
transactions with persons that are "parties in interest" under ERISA or
"disqualified persons under the Code with respect to such Benefit Plans. A
violation of these "prohibited transaction" rules may result in an excise tax
or other penalties and liabilities under ERISA and the Code for such persons.
Title I of ERISA also requires that fiduciaries of a Benefit Plan subject to
ERISA make investments that are prudent, diversified (except if prudent not to
do so) and in accordance with governing plan documents.
Certain transactions involving the trust might be deemed to constitute
prohibited transactions under ERISA and the Code if assets of the trust were
deemed to be assets of a Benefit Plan. Under a regulation issued by the United
States Department of Labor (the "Plan Assets Regulation"), the assets of the
trust would be treated as plan assets of a Benefit Plan for the purposes of
ERISA and the Code only if the Benefit Plan acquires an "equity interest" in
the trust and none of the exceptions contained in the Plan Assets Regulation is
applicable. An equity interest is defined under the Plan Assets Regulation as
an interest other than an instrument which is treated as indebtedness under
applicable local law and which has no substantial equity features. Although
there is little guidance on the subject, the sponsor believes that the notes
should be treated as indebtedness without substantial equity features for
purposes of the Plan Assets Regulation. This determination is based in part
upon the traditional debt features of the notes, including the reasonable
expectation of purchasers of notes that the notes will be repaid when due, as
well as the absence of conversion rights, warrants and other typical equity
features. The debt treatment of the notes for ERISA purposes could change if
the trust incurred losses. However, even if the notes are treated as
'indebtedness without substantial equity features', the acquisition or holding
of notes by or on behalf of a Benefit Plan could be considered to give rise to
a prohibited transaction if the trust or any of its affiliates is or becomes a
party in interest or a disqualified person with respect to such Benefit Plan.
In such case, certain exemptions from the prohibited transaction rules could be
applicable, depending on the type and circumstances of the plan fiduciary
making the decision to acquire a note. Included among these exemptions are:
Prohibited Transaction Class Exemption ("PTCE") 90-l, regarding investments by
insurance company pooled separate accounts; PTCE 95-60, regarding investments
by insurance company general accounts; PTCE 91-38, regarding investments by
bank collective investment funds; PTCE 96-23, regarding transactions affected
by in-house asset managers; and PTCE 84-14, regarding transactions effected by
"qualified professional asset managers."
Employee benefit plans that are governmental plans (as defined in
Section 3(32) of ERISA) and certain church plans (as defined in Section 3(33)
of ERISA) are not subject to ERISA requirements; however, such plans may be
subject to comparable state law restrictions.
A plan fiduciary considering the purchase of notes should consult its
tax and/or legal advisors regarding whether the assets of the trust would be
considered plan assets, the possibility of exemptive relief from the prohibited
transaction rules and other issues and their potential consequences.
LEGAL INVESTMENT CONSIDERATIONS
Although, as a condition to their issuance, the notes will be rated in
the highest rating category of the rating agencies, the notes 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 notes, 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__, between the sponsor and ___________, the
sponsor has agreed to sell to the underwriter, and the underwriter has agreed
to purchase from the sponsor the notes offered hereby.
In the underwriting agreement, the underwriter has agreed, subject to
the terms and conditions set forth therein, to purchase all the notes offered
hereby if any of the notes are purchased.
The sponsor has been advised by the underwriter that they propose
initially to offer the notes to the public in Europe and the United States at
the underwriting price set forth herein and to certain dealers at such, price,
less a discount not in excess of ____% of the note denominations. The
underwriter may allow and such dealers may reallow a discount not in excess of
___% of the note 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 they presently
intend to make a market in the notes offered hereby; however, the underwriter
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 notes will
develop.
In connection with the offering, the underwriter may engage in
transactions that stabilize, maintain or otherwise affect the price of the
notes. Specifically, the underwriter may overallot the offering, crating a
syndicate short position. In addition, the underwriter may bid for, and
purchase, the notes in the open market to cover syndicate shorts or to
stabilize the price of the notes. Any of these activities may stabilize or
maintain the market price of the notes above independent market levels. The
underwriter is not required to engage in these activities, and if commenced,
such activities may be discontinued at any time.
The underwriting agreement provides that the sponsor will indemnify
the underwriter against certain civil liabilities, including liabilities under
the Securities Act of 1933, as amended.
LEGAL MATTERS
Certain legal matters with respect to the notes will be passed upon
for the sponsor by [ ] and for the underwriters by [ ].
[EXPERTS]
RATINGS
It is a condition to issuance that the notes be rated "____" by
__________ and _____ and "_____" by __________.
A securities rating addresses the likelihood of the receipt by
noteholders of payments 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 notes. The ratings on the notes do
not, however, constitute statements regarding the likelihood or frequency of
prepayments on the mortgage loans or the possibility that noteholders might
realize a lower than anticipated yield.
The ratings assigned to the notes will depend primarily upon the
creditworthiness of the insurer. Any reduction in a rating assigned to the
claims-paying ability of the insurer below the ratings initially assigned to
the notes may result in a reduction of one or more of the ratings assigned to
the notes.
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 INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN
OFFER TO SEL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY
PLEASE CAREFULLY CONSIDER OUR DISCUSSION OF SOME OF THE RISKS OF INVESTING IN
THE CERTIFICATES UNDER "RISK FACTORS" BEGINNING ON PAGE 4.
SUBJECT TO COMPLETION, DATED JUNE 2, 1999
PROSPECTUS
HEADLANDS MORTGAGE SECURITIES INC.
(SPONSOR)
ASSET BACKED SECURITIES
(ISSUABLE IN SERIES)
THE TRUSTS
Each trust will be established to hold the assets transferred to it by
Headlands Mortgage Securities Inc. The assets of each trust will be
specified in the prospectus supplement and may consist of:
o mortgage loans secured by senior and junior liens on one- to
four-family residential properties ;
o closed-end and/or revolving home equity loans or certain balances
thereof secured by senior and junior liens on one-to four- family
residential properties;
o home improvement installment sales contracts and installment loan
agreements that may be unsecured, secured by mortgages primarily on
one- to four- family residential properties, or secured by purchase
money security interests in the home improvements; and
o certain insurance policies, surety bonds, cash accounts, reinvestment
income, guaranties or letters of credit.
THE SECURITIES
Headlands Mortgage Securities Inc. will sell the securities pursuant to a
prospectus supplement. The securities will be grouped into one or more series,
each having its own distinct designation. Each series will be issued in one or
more classes and each class will evidence beneficial ownership of a specified
portion of future payments on the assets in the trust that the series relates
to. A prospectus supplement for a series will specify all of the terms of the
series and of each of the classes in the series.
OFFERS OF SECURITIES
The securities may be offered through several different methods, including
offerings through underwriters.
----------------
THE SEC AND STATE SECURITIES REGULATORS HAVE NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
______________ _____, 199[ ]
<PAGE>
TABLE OF CONTENTS
Risk Factors...................................................................4
The Trust......................................................................8
Use of Proceeds...............................................................14
The Sponsor...................................................................14
Loan Program..................................................................14
Description of the Securities.................................................17
Credit Enhancement............................................................31
Yield and Prepayment Consideration............................................38
The Agreements................................................................41
Certain Legal Aspects of the Loans............................................58
Federal Income Tax Consequences...............................................69
State Tax Considerations......................................................95
ERISA Considerations..........................................................96
Legal Investment.............................................................100
Method of Distribution.......................................................102
Legal Matters................................................................103
Financial Information........................................................103
Available Information........................................................103
Incorporation of Certain Documents by Reference..............................103
Rating.......................................................................104
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION IN THIS PROSPECTUS AND EACH
ACCOMPANYING PROSPECTUS SUPPLEMENT
Information about each series of securities is contained in two
separate documents:
o this prospectus, which provides general information, some of which may not
apply to a particular series; and
o the accompanying prospectus supplement for a particular series, which
describes the specific terms of the securities of that series.
The prospectus supplement will contain information about a particular series
that supplements the information contained in this prospectus, and you should
rely on that supplementary information in the prospectus supplement.
You should rely on the information in this prospectus and the accompanying
prospectus supplement. We have not authorized anyone to provide you with
information that is different from that contained in this prospectus and the
accompanying prospectus supplement.
<PAGE>
RISK FACTORS
Investors should consider the following factors in connection with the
purchase of securities. You should also consider the risk factors described in
your prospectus supplement.
ABILITY TO RESELL SECURITIES MAY BE LIMITED
No market for any of the securities will exist before they are issued.
We cannot assure you that a secondary market will develop, or if it does
develop, that it will continue. Consequently, you may not be able to sell your
securities readily or at prices that will enable you to realize your desired
yield. The market values of the securities are likely to fluctuate; these
fluctuations may be significant and could result in significant losses to you.
The secondary market for asset backed securities have experienced
periods of illiquidity and can be expected to do so in the future. Illiquidity
can have a severely adverse effect on the prices of securities that are
especially sensitive to prepayment, credit, or interest rate risk, or that have
been structured to meet the investment requirements of limited categories of
investors.
LIMITED SOURCE OF PAYMENTS - NO RECOURSE TO SPONSOR, SELLER, MASTER SERVICER
OR TRUSTEE
The assets of the trust are the sole source of distributions for the
securities. The securities do not represent an interest in or obligation of the
sponsor, the seller, the master servicer, the trustee or any of their
affiliates, except for the limited obligations of the seller with respect to
certain breaches of its representations and warranties and of the master
servicer with respect to its servicing obligations. Neither the securities nor
the trust assets will be guaranteed by or insured by any governmental agency or
instrumentality, the sponsor, the seller, the master servicer, the trustee or
any of their affiliates, unless so specified in the supplement. Consequently,
if payments on the trust assets are insufficient to make all payments required
on the certificates you may incur a loss on your investment.
CREDIT ENHANCEMENT MAY NOT BE SUFFICIENT TO PROTECT YOU FROM LOSSES
Credit enhancement is intended to reduce the effect of delinquent
payments or loan losses on those classes of securities that have the benefit of
the credit enhancement. However, the amount of any credit enhancement may
decline or be depleted before the securities are paid in full. As a result,
securityholders may suffer losses. In addition, credit enhancement may not
cover all potential sources of loss, such as a loss resulting from fraud or
negligence by a loan originator or other party.
WE REFER YOU TO "CREDIT ENHANCEMENT" IN THIS PROSPECTUS FOR MORE
DETAIL.
PREPAYMENTS ARE UNPREDICTABLE AND AFFECT YIELD
The rate of principal distributions and yield to maturity on the
securities will be directly related to the rate of principal payments on the
trust assets. For example, the rate of principal payments on the loans will be
affected by the following:
o the amortization schedules of the loans;
o the rate of principal prepayments (including partial prepayments and
prepayments resulting from refinancing) by borrowers;
o liquidations of defaulted loans by the master servicer;
o repurchases of loans by the seller as a result of defective
documentation or breaches of representations and warranties; and
o the optional purchase by the master servicer of all of the loans in
connection with the termination of the trust.
The rate of principal payments on loans is influenced by a variety of
economic, geographic, social and other factors. For example, if interest rates
for similar loans fall below the interest rates on the loans, the rate of
prepayment would generally be expected to increase. Conversely, if interest
rates on similar loans rise above the interest rates on the loans, the rate of
prepayment would generally be expected to decrease.
We cannot predict the rate at which borrowers will repay their loans.
Please consider the following:
o If you are purchasing a security at a discount, in particular, a
principal-only security, your yield may be lower than expected if
principal payments on the loans occur at a slower rate than you
expected;
o If you are purchasing a security at a premium, in particular, an
interest-only security, your yield may be lower than expected if
principal payments on the loans occur at a faster rate than you
expected and you could lose your initial investment; and
o The earlier a payment of principal occurs, the greater the impact on
your yield. For example, if you purchase a security at a premium,
although the average rate of principal payments is consistent with your
expectations, if the rate of principal payments occurs initially at a
rate higher than expected, which would adversely impact your yield, a
subsequent reduction in the rate of principal payments will not offset
any adverse yield effect.
DECLINE IN PROPERTY VALUES MAY INCREASE LOAN LOSSES.
Because your securities represent an interest in loans or are secured
by loans, your investment may be affected by a decline in property values. If
the outstanding balance of a loan and any secondary financing on the underlying
property is greater than the value of the property, there is an increased risk
of delinquency, default, foreclosure and loss. A decline in property values
could extinguish the value of a junior lien holder's interest in a property.
Losses on such loans that are not otherwise covered by the credit enhancement
described in the supplement will be borne by the holder of one or more classes
of securities.
DELAYS IN LIQUIDATION MAY ADVERSELY AFFECT YOU
Substantial delays may occur before defaulted loans are liquidated and
the proceeds forwarded to investors. Property foreclosure actions are regulated
by state statutes and rules and are subject to many of the delays and expenses
that characterize lawsuits if defenses or counterclaims are raised. As a
result, foreclosure actions can sometimes take several years to complete and
the liquidation proceeds may not cover the defaulted loan amount. In
particular, because the costs of liquidation do not vary based on the loan
amount, the risk of insufficient liquidation proceeds is greater with small
loans. Some states prohibit a mortgage lender from obtaining a judgment against
the borrower for amounts not covered by property proceeds if the property is
sold outside of a judicial proceeding.
JUNIOR LIEN PRIORITY COULD RESULT IN PAYMENT DELAYS AND LOSSES
Most of the mortgages and deeds of trust, if any, securing the loans
are junior in priority. Junior liens receive proceeds from a sale of the
related property only after the senior liens have been paid. If the remaining
proceeds are insufficient to satisfy the loans, then:
o there will be a delay in payments to you while a deficiency judgment
against the borrower is sought; and
o you may incur a loss if a deficiency judgment cannot be obtained or is
not realized upon.
STATE AND FEDERAL LAWS MAY LIMIT ABILITY TO COLLECT ON LOANS
Applicable federal and state laws regulate interest rates and other
charges and require certain disclosures. In addition, other laws, public policy
and general principles of equity relating to the protection of consumers,
unfair and deceptive practices and debt collection practices may apply to the
origination, servicing and collection of the mortgage loans. Depending on the
provisions of the applicable law and the specific facts involved, violations
may limit the ability to collect all or part of the principal of or interest on
the mortgage loans. In some cases, the borrower may be entitled to a refund of
amounts previously paid and, could subject the trust to damages and
administrative enforcement.
The home improvement contracts are also subject to federal and state
laws which protect a homeowner from defective craftmanship or incomplete work
by a contractor. These laws permit the borrower to withhold payment if the work
does not meet the quality and durability standards agreed to by the homeowner
and the contractor. These laws may have the effect of subjecting the trust to
all claims and defenses which the borrower had against the seller.
WE REFER YOU TO "CERTAIN LEGAL ASPECTS OF THE LOANS" IN THIS
PROSPECTUS FOR MORE DETAIL.
COSTS FOR CLEANING CONTAMINATED PROPERTY MAY RESULT IN LOSSES
Under certain state and federal laws, a contaminated property may give
rise to a lien on the property to assure the costs of cleanup. In addition
these laws may impute liability for clean-up costs to the lender if the lender
was involved in the operations of the borrower, even if the environmental
damage was caused by a prior owner. Any lien or costs attached to a
contaminated property could result in a loss to securityholders.
WE REFER YOU TO "CERTAIN LEGAL ASPECTS OF THE LOANS--ENVIRONMENTAL
RISKS" IN THIS PROSPECTUS FOR MORE DETAIL.
RATING OF THE SECURITIES DOES NOT ASSURE PAYMENT
It will be a condition to the issuance of the securities offered
hereby that they be rated in one of the four highest rating categories by the
rating agency identified in the supplement. The ratings of the securities will
be based on, among other things, the adequacy of the value of the trust assets
and any credit enhancement. The rating should not be deemed a recommendation to
purchase, hold or sell the securities, particularly since the ratings do not
address market price or suitability for an investor. There is no assurance that
the ratings will remain in effect over the life of the security, and may be
lowered or withdrawn.
WE REFER YOU TO "RATING" IN THIS PROSPECTUS FOR MORE DETAIL.
CONSEQUENCES OF OWNING BOOK-ENTRY SECURITIES
LIMIT ON LIQUIDITY OF SECURITIES. Issuance of the securities in
book-entry form may reduce their liquidity in the secondary trading market
because investors may be unwilling to purchase certificates for which they
cannot obtain physical securities.
LIMIT ON ABILITY TO TRANSFER OR PLEDGE. Since transactions in the
book-entry securities can be effected only though the DTC, participating
organizations, indirect participants and certain banks, your ability to
transfer or pledge a book-entry security to persons or entities that do not
participate in the DTC system or otherwise to take actions in respect of such
securities, may be limited due to lack of a physical security.
DELAYS IN DISTRIBUTIONS. You may experience some delay in the receipt
of distributions on book-entry securities because the distributions will be
forwarded by the trustee to DTC for DTC to credit the accounts of its
participants which will thereafter credit them to your account either directly
or indirectly through indirect participants, as applicable.
PLEASE REVIEW "DESCRIPTION OF THE SECURITIES" IN THE PROSPECTUS
SUPPLEMENT FOR MORE DETAIL.
PAYMENTS TO AND RIGHTS OF INVESTORS ADVERSELY AFFECTED BY INSOLVENCY OF SELLER
The seller and the sponsor will treat the transfer of the loans from
the seller to the sponsor as a sale for accounting purposes. The sponsor and
the trust will treat the transfer of the loans from the sponsor to the trust as
a sale for accounting purposes. If these characterizations are correct, then if
the seller were to become bankrupt, the loans would not be part of the seller's
bankruptcy estate and would not be available to the seller's creditors. On the
other hand, if the seller becomes bankrupt, its bankruptcy trustee or one of
its creditors may argue that the transfer of the loans is a pledge of the loans
as security for a borrowing rather than a sale. Such an attempt, even if
unsuccessful, could result in delays in payments to you.
In the event of a bankruptcy of the master servicer, the bankruptcy
trustee or receiver may have the power to prevent the trustee or the
securityholders from appointing a successor master servicer, which could result
in a delay in payments to you.
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 master servicer to liquidate the
property, which could result in a delay in payments to you.
TRUST ASSETS MAY NOT BE SUFFICIENT TO PAY SECURITIES
There is no assurance that the market value of the trust assets at any
time will equal the principal amount of the securities. In addition, under any
situation in which the trust assets are required to be sold, the proceeds
generally will be paid to cover administrative costs before being paid to you.
The net proceeds may be insufficient to pay the principal and interest on the
securities.
THE TRUST
GENERAL
Headlands Mortgage Securities Inc., the sponsor, will establish a
trust for each series of asset backed securities and convey to the related
trustee certain assets, consisting of the pool of loans specified in the
prospectus supplement. Generally, the trust will be a business trust formed
pursuant to a trust agreement between the sponsor and the trustee. Each trust
will be created on the first day of the month in which the securities are
issued or another date which will be specified in the prospectus supplement
(the "Cut-off Date"). All references in this prospectus to "pool",
"certificates", "notes", "securities", or "securityholders", should be deemed
to apply to one specific series, trust and prospectus supplement, unless
otherwise noted.
The securities of each series will represent interests in the assets
of the trust and the notes of each series will be secured by the pledge of the
trust assets. The trust for each series will be held by the trustee for the
benefit of the related securityholders. The securities will be entitled to
payment from the assets of the trust or other assets pledged for the benefit of
the securityholders, as specified in the prospectus supplement and will not be
entitled to payments in respect of the assets of any other trust established by
the sponsor.
The trust assets will be acquired by the sponsor, either directly or
through affiliates, from originators or sellers which may be affiliates of the
sponsor, and conveyed without recourse by the sponsor to the trust. Loans
acquired by the sponsor will have been originated in accordance with the
underwriting criteria described under "Loan Program--Underwriting Standards" or
as otherwise described in the prospectus supplement.
See "Loan Program--Underwriting Standards".
The sponsor will cause the trust assets to be assigned to the trustee
named in the prospectus supplement for the benefit of the holders of the
securities. For a fee, the master servicer named in the prospectus supplement
will service the trust assets, either directly or through other servicing
institutions, or subservicers, pursuant to a pooling and servicing agreement
among the sponsor, the master servicer and the trustee in the case of a series
consisting of certificates, or a master servicing agreement between the trustee
and the master servicer with respect to a series consisting of certificates and
notes. See "Loan Program" and "The Agreements". With respect to loans serviced
by the master servicer through a subservicer, 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.
With respect to each trust, prior to the initial offering of the
securities, the trust will have no assets or liabilities. No trust is expected
to engage in any activities other than acquiring, managing and holding the
trust assets and other assets specified in the prospectus supplement and the
proceeds thereof, issuing securities and making payments and distributions
thereon and certain related activities. No trust is expected to have any source
of capital other than its assets and any related credit enhancement.
Generally, the only obligations of the sponsor will be to obtain
certain representations and warranties from the sellers and to assign them to
the trustee. See "The Agreements--Assignment of the Trust 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
subservicers or sellers, or both, as more fully described herein under "Loan
Program--Representations by Sellers; Repurchases" and "The
Agreements--Subservicing By Sellers" and "--Assignment of the Trust 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 prospectus supplement.
The following is a brief description of the assets expected to be
included in the trust. If specific information respecting the trust assets is
not known at the time the securities are offered, more general information of
the nature described below will be provided in the prospectus supplement, and
specific information will be set forth in a report on Form 8-K to be filed with
the SEC within fifteen days after the initial issuance of the securities. A
copy of the Agreements with respect to each series of securities will be
available for inspection at the corporate trust office of the trustee. A
schedule of the loans relating to each series will be attached to the Agreement
delivered to the trustee.
The Loans
GENERAL. The loans included in a trust will be mortgage loans, home
equity loans or home improvement contracts. The loans may be either closed-end
loans or revolving credit line loans. 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 will have monthly payments due on the first day of each
month or on such other day of the month specified in the prospectus supplement.
The payment terms of the loans to be included in a trust will be described in
the prospectus supplement and may include any of the following features (or
combination thereof):
o Interest may be payable at a fixed rate, a rate adjustable from time to
time in relation to an index (as specified in the 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 prospectus supplement.
o 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. These payments are called balloon payments.
Principal may include interest that has been deferred and added to the
principal balance of the loan.
o 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.
o 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. These
periods are called 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 may contain 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
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 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 that secures repayment of the loans is referred to
herein 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 prospectus
supplement. As specified in the 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. Such properties may include vacation and second
homes, investment properties and dwellings situated on leasehold estates. The
loans may include cooperative apartment loans secured by security interests in
shares issued by private, nonprofit, cooperative housing corporations and in
the related proprietary lease or occupancy agreements granting exclusive rights
to occupy specific dwelling units in the cooperatives' building. 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
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. The existence, extent and duration of any such coverage
will be described in the prospectus supplement.
The aggregate principal balance of loans secured by properties that
are owner-occupied may be disclosed in the 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 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 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 prospectus supplement, the trust 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 prospectus supplement,
interest on each closed-end loan is calculated on the basis of the outstanding
principal balance of such loan multiplied by the related 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 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 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 prospectus supplement, the home
improvement contracts will either be unsecured or secured by mortgages 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 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 in the prospectus supplement. The initial
loan-to-value ratio of a home improvement contract is computed in the manner
described in the 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 pool, including:
o the aggregate outstanding principal balance and the average outstanding
principal balance of the loans as of the applicable Cut-off Date;
o 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);
o the original terms to maturity of the loans;
o the largest principal balance;
o the smallest principal balance of any of the loans;
o the earliest origination date and latest maturity date of any of the
loans;
o the loan-to-value ratios or combined loan-to-value ratios, as
applicable, of the loans;
o the loan rates or annual percentage rates or range of loan rates or
annual percentage rates borne by the loans;
o the maximum and minimum per annum loan rates; and
o 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 prospectus
supplement, and specific information will be set forth in a report filed on
Form 8-K to be filed with the SEC within 15 days of initial issuance of the
securities.
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 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 a 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 securityholders.
SUBSTITUTION OF TRUST ASSETS
Substitution of trust assets may be permitted in the event of breaches
of representations and warranties with respect to certain trust assets or in
the event the documentation with respect to any trust asset is determined by
the trustee to be incomplete or as further specified in the prospectus
supplement. The period during which such substitution will be permitted
generally will be indicated in the 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 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
assets acquired by the sponsor, prevailing interest rates, availability of
funds and general market conditions.
THE SPONSOR
Headlands Mortgage Securities Inc., the sponsor, is a Delaware
corporation organized on November 18, 1996 for the limited purpose of
acquiring, owning and transferring trust assets and selling interests therein
or bonds secured thereby. The sponsor is a subsidiary of Headlands Mortgage
Company, a subsidiary of Greenpoint Financial Corp. Greenpoint Financial Corp.
is listed on the New York Stock Exchange under the symbol "GPT". 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 prospectus
supplement, the loans acquired by the sponsor will have been originated in
accordance with the underwriting criteria described below in "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 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:
o 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
o 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 CLTVs or other
favorable credit aspects exist.
If specified in the prospectus supplement, a portion of the loans in
the 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 will indicate the
types of limited documentation programs pursuant to which the 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 CLTVs 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 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 Fannie Mae or Freddie Mac. 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:
o 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;
o 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;
o 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;
o that there were no delinquent tax or assessment liens against the
property;
o that no required payment on a loan was delinquent more than the number
of days specified in the prospectus supplement; and
o 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 prospectus
supplement, if such seller cannot cure such breach within the time period
specified in the prospectus supplement following notice from the master
servicer or the trustee, as the case may be, then such seller will be obligated
either
o to repurchase such loan from the trust at a 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
o substitute for such loan a replacement loan that satisfies the criteria
specified in the prospectus supplement.
If a REMIC election is to be made with respect to a trust 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 to lose its status as a REMIC or otherwise subject the trust 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 either 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 between the related trust and the entity named in the
prospectus supplement as trustee, 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. The provisions of each Agreement will vary depending upon
the nature of the securities to be issued thereunder and the nature of the
trust. 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 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 prospectus supplement, the
securities of each series:
o will be issued in book-entry or fully registered form, in the
authorized denominations specified in the prospectus supplement,
o will, in the case of certificates, evidence specified beneficial
ownership interests in the assets of the trust,
o will, in the case of notes, be secured by, the assets of the trust; and
o will not be entitled to payments in respect of the assets included in
any other trust established by the sponsor.
Unless otherwise specified in the 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 prospectus supplement. Each trust will consist of, to the extent provided
in the related Agreement:
o the trust assets as are subject to the related Agreement, including all
payments of interest and principal received with respect to the loans
after the Cut-off Date;
o 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";
o property which secured a loan and which is acquired on behalf of the
securityholders by foreclosure or deed in lieu of foreclosure; and
o any insurance policies or other forms of credit enhancement required to
be maintained pursuant to the related Agreement. If so specified in the
prospectus supplement, a trust may also include one or more of the
following: reinvestment income on payments received on the trust
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 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 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 assets, in each case as specified in
the prospectus supplement. The timing and amounts of such distributions may
vary among classes or over time as specified in the 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 prospectus
supplement) in proportion to the percentages specified in the prospectus
supplement. Distributions will be made to the persons in whose names the
securities are registered at the close of business on the record date.
Distributions will be made in the manner specified in the prospectus supplement
to the persons entitled thereto at the address appearing in the register
maintained for securityholders; 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 specified in the 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 by or on behalf of any
employee benefit plan subject to provisions of ERISA or the Code of certain
classes of securities may result in prohibited transactions within the meaning
of ERISA and the Code. See "ERISA Considerations". Retirement arrangements
subject to these provisions include individual retirement accounts and
annuities, Keogh plans and collective investment funds in which the plans,
accounts or arrangements are invested. Unless otherwise specified in the
prospectus supplement, the transfer of securities will not be registered unless
the transferee:
o represents that it is not, and is not purchasing on behalf of or with
plan assets of, any such plan, account or arrangement; or
o provides an opinion of counsel satisfactory to the trustee and the
sponsor that the purchase of securities of such a class by, on behalf
of such plan or with plan assets, account or arrangement is permissible
under applicable law and will not subject the trustee, the master
servicer or the sponsor 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
or designated portions thereof as a REMIC as defined in the Code. The
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 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 REMIC. All
other classes of securities in such a series will constitute regular interests
in the REMIC. 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
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. As between securities of different classes and as between
distributions of principal (and, if applicable, between distributions of
principal prepayments and scheduled payments of principal) and interest,
distributions made on any distribution date will be applied as specified in the
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 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) 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 herein as accrual securities) will be
distributable on the distribution dates specified in the 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
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 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
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 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 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,
o in the case of accrual securities, as specified in the prospectus
supplement, increased by all interest accrued but not then
distributable on such accrual securities, and
o in the case of adjustable rate securities, subject to the effect of
negative amortization, if applicable.
If so provided in the prospectus supplement, one or more classes of
securities will be entitled to receive all or a disproportionate percentage of
the 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.
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 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
prospectus supplement if, due to substantial payments of principal (including
principal prepayments) on the trust 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 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 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 the prospectus supplement.
ADVANCES
To the extent provided in the prospectus supplement, the master
servicer will be required to advance on or before each distribution date (from
its own funds, funds advanced by subservicers 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 specified
in the prospectus supplement) and were not advanced by any subservicer, 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 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 subservicer or a seller
pursuant to the related Agreement). Advances by the master servicer (and any
advances by a subservicer) also will be reimbursable to the master servicer (or
subservicer) 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 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 prospectus supplement.
If specified in the prospectus supplement, in the event the master
servicer or a subservicer 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 subservicer
is entitled to be reimbursed for advances. See "Description of the
Securities--Distributions on Securities".
COMPENSATING INTEREST
If so specified in the prospectus supplement, the master servicer will
be required to remit to the trustee, with respect to each loan in the trust 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 (1) 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 (2) such other amount as described in the
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:
o the amount of such distribution allocable to principal, separately
identifying the aggregate amount of any principal prepayments and if so
specified in the prospectus supplement, any applicable prepayment
penalties included therein;
o the amount of such distribution allocable to interest;
o the amount of any advance;
o 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;
o 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;
o 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;
o the percentage of principal prepayments on the loans, if any, which
each such class will be entitled to receive on the following
distribution date;
o 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;
o the number and aggregate principal balances of loans
o delinquent (exclusive of loans in foreclosure) (A) 1 to 30 days,
(B) 31 to 60 days, (C) 61 to 90 days and (D) 91 or more days, and
o in foreclosure and delinquent (A) 1 to 30 days, (B) 31 to 60 days,
(C) 61 to 90 days and (D) 91 or more days, as of the close of
business on the last day of the calendar month preceding such
distribution date;
o the book value of any real estate acquired through foreclosure or grant
of a deed in lieu of foreclosure;
o 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;
o if applicable, the amount remaining in any reserve account at the close
of business on the distribution date;
o the pass-through rate or interest rate, as applicable, as of the day
prior to the immediately preceding distribution date; and
o any amounts remaining under letters of credit, pool insurance policies
or other forms of credit enhancement.
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
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 accreted interest
from specified accrual classes. An
accretion directed class also may
receive principal payments from
principal paid on the trust assets.
Component Certificates................ A class consisting of "components." The
components of a class of component
certificates may have different
principal and/or interest payment
characteristics but together constitute
a single class. Each component of a
class of component certificates may be
identified as falling into one or more
of the categories in this chart.
Notional Amount Certificates.......... 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 or 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 trust
assets. These two rates are the
endpoints for the "structuring range"
for the planned principal class. The
planned principal classes in any series
of certificates 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 trust
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 trust assets.
The constant proportion of such
principal payments may or may not vary
for each trust asset included in the
trust and will be calculated in the
manner described in the prospectus
supplement. Such classes may also
receive payments of interest.
Support Class (or companion class).... 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 ............. 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 trust
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 on
each applicable distribution date. Such
accretion may continue until some
specified event has occurred or until
such 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 or IO................... Securities that receive some or all of
the interest payments made on the trust
assets and little or no principal.
Interest only certificates have either
a nominal principal balance or a
notional amount. A nominal principal
balance represents actual principal
that will be paid on such securities.
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 security that is not
entitled to any 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 class is retired.
Principal Only or PO.................. A class that does not bear interest and
is entitled to receive only
distributions in respect of principal.
Variable Rate......................... A class with a pass-through 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 loans in the trust).
BOOK-ENTRY REGISTRATION OF SECURITIES
As described in the prospectus supplement, if not issued in fully
registered form, each class of securities will be registered as book-entry
securities. Persons acquiring beneficial ownership interests in the securities,
or "beneficial owners", will hold their securities through The Depository Trust
Company, commonly referred to as DTC, in the United States, or Cedelbankbank 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,
Cedelbank and Euroclear will hold omnibus positions on behalf of their
participants through customers' securities accounts in Cedelbank's and
Euroclear's names on the books of their respective depositaries which in turn
will hold such positions in customers' securities accounts in the depositaries'
names on the books of DTC. Citibank, N.A., will act as depositary for Cedelbank
and The Chase Manhattan Bank will act as depositary for Euroclear (in such
capacities, individually the "Relevant Depositary" and collectively the
"European Depositaries"). Except as described below, no beneficial owner will
be entitled to receive a physical certificate representing their security.
Unless and until physical securities are issued, it is anticipated that the
only securityholder of record will be Cede & Co., as nominee of DTC. Beneficial
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 that maintains the beneficial owner's account for
such purpose. In turn, the financial intermediary's ownership of a 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 Cedelbank or
Euroclear, as appropriate).
Beneficial 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 DTC system, DTC is required to make book-entry transfers
among its participants 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 beneficial owners
have accounts with respect to the securities are similarly required to make
book-entry transfers and receive and transmit such distributions on behalf of
their clients. Accordingly, although beneficial owners will not possess
physical securities, the DTC system provide a mechanism by which beneficial
owners will receive distributions and will be able to transfer their interest.
Beneficial owners will not receive or be entitled to receive physical
certificates representing their interests in the securities, except under the
limited circumstances described below. Unless and until physical securities are
issued, beneficial owners who are not DTC participants may transfer ownership
of securities only through the DTC system
Because of time zone differences, credits of securities received in
Cedelbank or Euroclear as a result of a transaction with a participant will be
made during subsequent securities settlement processing and dated the business
day following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or Cedelbank participants on such business day. Cash received in
Cedelbank or Euroclear as a result of sales of securities by or through a
Cedelbank participant or Euroclear participant to a DTC participant will be
received with value on the DTC settlement date but will be available in the
relevant Cedelbank or Euroclear cash account only as of the business day
following settlement with DTC.
Transfers between participants will occur in accordance with the DTC
system. Transfers between Cedelbank participants and Euroclear participants
will occur in accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedelbank
participants or Euroclear participants, on the other, will be effected in DTC
in accordance with the DTC system 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. Cedelbank participants and Euroclear participants may not deliver
instructions directly to the European Depositaries.
Cedelbank is incorporated under the laws of Luxembourg as a
professional depository. Cedelbank holds securities for its participating
organizations and facilitates the clearance and settlement of securities
transactions between Cedelbank participants through electronic book-entry
changes in accounts of Cedelbank participants, thereby eliminating the need for
physical movement of securities. Transactions may be settled in Cedelbank in
any of 28 currencies, including United States dollars. Cedelbank provides to
its Cedelbank participants, among other things, services for safekeeping,
administration, clearance and settlement of internationally traded securities
and securities lending and borrowing. Cedelbank interfaces with domestic
markets in several countries. As a professional depository, Cedelbank is
subject to regulation by the Luxembourg Monetary Institute. Cedelbank
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 Cedelbank is
also available to others, such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a Cedelbank
participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for its 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 securities 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 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 Cedelbank or Euroclear
will be credited to the cash accounts of Cedelbank participants or Euroclear
participants in accordance with the relevant system's rules and procedures, to
the extent received by the Relevant Depositary. Such distributions will be
subject to tax reporting in accordance with relevant United States tax laws and
regulations. See "Federal Income Tax Consequences -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 DTC system may be limited due to the
lack of physical certificates. In addition, issuance of the 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 DTC, and to the financial intermediaries to whose DTC
accounts the book-entry securities are credited.
DTC has advised the trustee that, unless and until physical securities
are issued, DTC will take any action permitted to be taken by the
securityholders 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. Cedelbank 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
Cedelbank participant or Euroclear participant only in accordance with its
relevant rules and procedures and subject to the ability of the Relevant
Depositary to effect such actions on its behalf through DTC. DTC may take
actions, at the direction of its 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
physical securities. Upon surrender by DTC of the certificates representing the
book-entry securities and instructions for re-registration, the trustee will
issue physical securities, and thereafter the trustee will recognize the
holders of such physical securities as securityholders under the applicable
Agreement.
Although DTC, Cedelbank and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of securities among participants of
DTC, Cedelbank and Euroclear, they are under no obligation to perform or
continue to perform such procedures and such procedures may be discontinued at
any time.
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 assets. Credit
enhancement may be in the form of:
o a limited financial guaranty policy issued by an entity named in the
prospectus supplement,
o the subordination of one or more classes of the securities of such
series,
o the establishment of one or more reserve accounts,
o the use of a cross-collateralization feature,
o use of a mortgage pool insurance policy,
o FHA insurance or VA guarantee,
o bankruptcy bond,
o special hazard insurance policy,
o surety bond,
o letter of credit,
o guaranteed investment contract,
o overcollateralization,
o or another method of credit enhancement contemplated herein and
described in the prospectus supplement, or any combination of the
foregoing.
Unless otherwise specified in the 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 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 trusts. If applicable, the
prospectus supplement will identify the trusts to which such credit enhancement
relates and the manner of determining the amount of coverage provided to such
trusts thereby and of the application of such coverage to the identified
trusts.
SUBORDINATION
If so specified in the 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 senior securities to receive distributions in respect of scheduled
principal, principal prepayments, interest or any combination thereof that
otherwise would have been payable to holders of subordinate securities under
the circumstances and to the extent specified in the prospectus supplement.
Protection may also be afforded to the holders of senior securities by (a)
reducing the ownership interest (if applicable) of the related subordinate
securities; (b) a combination of the immediately preceding sentence and clause
(a) above; or (c) as otherwise described in the prospectus supplement.
If so specified in the 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 subordinate securities and thereafter by the
various classes of senior securities, in each case under the circumstances and
subject to the limitations specified in the 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 subordinate securities by virtue of
subordination and the amount of the distributions otherwise distributable to
the subordinate securityholders that will be distributable to senior
securityholders on any distribution date may be limited as specified in the
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 prospectus supplement, holders of senior
securities would experience losses.
As specified in the prospectus supplement, all or any portion of
distributions otherwise payable to holders of subordinate 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 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 the prospectus supplement.
If specified in the prospectus supplement, various classes of senior
securities and subordinate securities may themselves be subordinate in their
right to receive certain distributions to other classes of senior and
subordinate securities, respectively, through a cross-collateralization
mechanism or otherwise. As between classes of senior securities and as between
classes of subordinate securities, distributions may be allocated among such
classes:
o in the order of their scheduled final distribution dates,
o in accordance with a schedule or formula,
o in relation to the occurrence of events, or
o otherwise, as specified in the prospectus supplement.
As between classes of subordinate 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 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 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
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 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 prospectus supplement or the termination of the
trust. See "The Agreements--Termination: Optional Termination." A copy of the
letter of credit for a series, if any, will be filed with the SEC 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, deficiencies in amounts
otherwise payable on the 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, 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
prospectus supplement. In addition, if specified in the prospectus supplement,
a trust may also include bankruptcy bonds, special hazard insurance policies,
other insurance or guaranties for the purpose of:
o maintaining timely payments or providing additional protection against
losses on the assets included in such trust,
o paying administrative expenses, or
o 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 the prospectus supplement. A copy of any
such instrument for a series will be filed with the SEC 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.
OVER-COLLATERALIZATION
If so provided in the prospectus supplement, 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.
RESERVE ACCOUNTS
If specified in the 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 prospectus supplement will specify
whether or not any such reserve accounts will be included in the trust for such
series.
The reserve account for a series will be funded:
o 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
prospectus supplement,
o by the deposit therein from time to time of certain amounts, as
specified in the prospectus supplement to which the subordinate
securityholders, if any, would otherwise be entitled, or
o in such other manner as may be specified in the 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 ("Permitted 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 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
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 prospectus supplement.
POOL INSURANCE POLICIES
If specified in the prospectus supplement, a separate pool insurance
policy will be obtained for the pool and issued by the pool insurer named in
the 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:
o any required primary mortgage insurance policy is in effect for
the defaulted loan and a claim thereunder has been submitted and
settled;
o hazard insurance on the related property has been kept in force
and real estate taxes and other protection and preservation
expenses have been paid;
o 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
o 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:
o 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
o 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 (a) such restoration will increase
the proceeds to securityholders on liquidation of the loan after reimbursement
of the master servicer for its expenses and (b) 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:
o 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
o 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 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 prospectus supplement, the beneficial ownership of
separate groups of assets included in a trust may be evidenced by separate
classes of the related series of securities. In such case, credit support may
be provided by a cross support feature which requires that distributions be
made to securities evidencing a beneficial ownership interest in, or secured
by, one or more asset groups within the same trust prior to distributions to
subordinate securities evidencing a beneficial ownership interest in, or
secured by, one or more other asset groups within such trust. 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 prospectus supplement, a trust may also include
insurance, guaranties, letters of credit or similar arrangements for the
purpose of:
o maintaining timely payments or providing additional protection
against losses on the assets included in such trust,
o paying administrative expenses, or
o 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 assets. 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
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
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 trust may be affected by a wide variety of factors,
including:
o general economic conditions,
o prevailing interest rate levels,
o the availability of alternative financing,
o homeowner mobility,
o the frequency and amount of any future draws on any revolving
credit line loans,
o the amounts of, and interest rates on, the underlying senior
mortgage loans,
o 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, the 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 due-on-sale provision 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:
o 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
o 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 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 "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 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 prospectus
supplement may have the option to purchase the assets of a trust 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 assets at any time or over the lives of the
securities.
The prospectus supplement 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
the 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 ASSETS
ASSIGNMENT OF THE LOANS. At the time of issuance of the securities,
the sponsor will assign the loans 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 amounts specified
in the prospectus supplement. The trustee will, concurrently with such
assignment, deliver the 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 annual
percentage rate, the maturity of the loan, the LTVs or CLTVs, as applicable, at
origination and certain other information.
Unless otherwise specified in the prospectus supplement, the related
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:
o the mortgage note or contract endorsed without recourse in blank
or to the order of the trustee,
o the mortgage, deed of trust or similar instrument with evidence of
recording indicated thereon, except that 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,
o an assignment of the mortgage to the trustee, which assignment
will be in recordable form in the case of a mortgage assignment,
and
o such other security documents, including those relating to any
senior interests in the property, as may be specified in the
prospectus supplement or the related Agreement.
Unless otherwise specified in the prospectus supplement, the sponsor
will promptly cause the assignments of the loans to be recorded in the
appropriate public office for real property records. If specified in the
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
prospectus supplement.
Unless otherwise specified in the 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 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 an appointed custodian will review the loan documents
within the time period specified in the 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 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 prospectus supplement after receipt of such notice,
such seller will be obligated to either purchase the related loan from the
trust at the Purchase Price or if so specified in the prospectus supplement,
remove such loan from the trust 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 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 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 trust 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 each trust a separate account or
accounts for the collection of payments on the trust assets in the trust (the
"Security Account"). The prospectus supplement may provide for other
requirements for the Security Account, but if it does not, then the Security
Account must be either:
o maintained 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,
o an account or accounts the deposits in which are fully insured by
the FDIC,
o 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
o 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, to the extent applicable and unless otherwise
specified in the prospectus supplement and provided in the related 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 any excluded amounts):
o all payments on account of principal and interest (which may be
net of the applicable servicing compensation), including principal
prepayments and, if specified in the prospectus supplement, any
applicable prepayment penalties, on the loans;
o all net insurance proceeds, less any incurred and unreimbursed
advances made by the master servicer, 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;
o all proceeds received in connection with the liquidation of
defaulted loans, less any expenses of liquidation and any
unreimbursed advances made by the master servicer;
o 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;
o all advances as described herein under "Advances";
o 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 Assets" above and all proceeds of any loan repurchased as
described under "--Termination; Optional Termination" below;
o 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;
o 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 prospectus supplement, any payments
required to be made by the master servicer in connection with
prepayment interest shortfalls; and
o all other amounts required to be deposited in the Security Account
pursuant to the related 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:
o to pay to the master servicer the servicing fees described in the
prospectus supplement and, as additional servicing compensation,
earnings on or investment income with respect to funds in the
Security Account credited thereto;
o 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;
o to reimburse the master servicer for any advances previously made
which the master servicer has determined to be nonrecoverable;
o to reimburse the master servicer from insurance proceeds for
expenses incurred by the master servicer and covered by insurance
policies;
o 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;
o 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,
o to reimburse the master servicer or the sponsor for expenses
incurred and reimbursable pursuant to the Agreement;
o to withdraw any amount deposited in the Security Account and not
required to be deposited therein; and
o to clear and terminate the Security Account upon termination of
the Agreement.
In addition, unless otherwise specified in the 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.
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 prospectus supplement, the master servicer will
establish and maintain, in the name of the trustee on behalf of the
securityholders, a pre-funding account into which the sponsor will deposit cash
on the Closing Date. The pre-funding account will be maintained with the
trustee. The deposit will not exceed 50% of the initial aggregate principal
amount of the securities. The money will be used by the trustee to purchase
additional loans from the sponsor from time to time during the funding period.
Monies on deposit in the pre-funding account will not be available to cover
losses on or in respect of the loans. The funding period for a trust will begin
on the Closing Date and will end on the date specified in the prospectus
supplement, which will not be later than one year after the Closing Date.
Monies on deposit in the pre-funding account may be invested in Permitted
Investments as specified in the related Agreement. Earnings on investment of
funds in the pre-funding account will be applied as specified in the 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 securityholders as a
prepayment of principal, in the manner and priority specified in the prospectus
supplement.
In addition, if so provided in the prospectus supplement, on the
related Closing Date the sponsor will make a deposit to a capitalized interest
account, which will be maintained with the trustee. The funds on deposit in the
capitalized interest account will be used solely to cover shortfalls in
interest that may arise as a result of utilization of the pre-funding account.
Monies on deposit in the capitalized interest account will not be available to
cover losses on or in respect of the loans. To the extent that the entire
amount on deposit in the capitalized interest account has not been used to
cover shortfalls in interest by the end of the funding period, any remaining
amounts will be paid to the sponsor.
SUBSERVICING BY SELLERS
The master servicer may enter into subservicing agreements with any
servicing entity which will act as the subservicer for the loans, which will
not contain any terms inconsistent with the related Agreement. While each
subservicing agreement will be a contract solely between the master servicer
and the subservicer, 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 loans, the trustee or any
successor master servicer must recognize the subservicer's rights and
obligations under such subservicing agreement. Notwithstanding any such
subservicing arrangement, unless otherwise provided in the 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 subservicers,
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:
o waive any prepayment charge, assumption fee, late payment or other
charge in connection with a loan, and
o 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 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:
o the maximum insurable value of the improvements securing such loan
from time to time and
o the greater of
o the combined principal balance owing on such loan and any
mortgage loan senior to such loan and
o 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, 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 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:
o war,
o revolution,
o governmental actions,
o floods and other water-related causes,
o earth movement, including earthquakes, landslides and mud flows,
o nuclear reactions,
o wet or dry rot,
o vermin, rodents, insects or domestic animals,
o 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 the principal balance of the
loan and 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 (a) the replacement costs of the improvements less
physical depreciation and (b) 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
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 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:
o 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,
o 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,
o amounts expended but not approved by the insurer of the related
primary mortgage insurance policy,
o claim payments previously made by the insurer, and
o 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:
o 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;
o failure to construct the property subject to the loan in
accordance with specified plans;
o physical damage to the property; and
o the related subservicer not being approved as a servicer by the
insurer.
Evidence of each primary mortgage insurance policy will be provided to
the trustee simultaneously with the transfer to the trustee of the 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 (a) that such restoration
will increase the proceeds to securityholders on liquidation of the loan after
reimbursement of the master servicer for its expenses and (b) that such
expenses will be recoverable by it from related insurance proceeds or
liquidation proceeds.
If recovery on a defaulted loan under any 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 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 prospectus supplement. 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
subservicer, if any, will be entitled to a monthly servicing fee as described
in the prospectus supplement. In addition, the master servicer or subservicer
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 prospectus supplement).
The master servicer will pay or cause to be paid certain ongoing
expenses associated with each trust and incurred by it in connection with its
responsibilities under the related Agreement, including, without limitation,
and if so specified in the 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 subservicers and sellers. The
master servicer will be entitled to reimbursement of expenses incurred in
enforcing the obligations of subservicers and sellers under certain limited
circumstances.
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 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
applicable rating agency that such resignation and appointment will not result
in a downgrade of the securities or (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 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 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 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 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, Fannie Mae or Freddie Mac 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 prospectus supplement, events of default under each
Agreement will consist of:
o any failure by the master servicer to make an Advance which
continues unremedied for one business day
o 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;
o 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
o 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 prospectus supplement, the Agreement will permit
the trustee to sell the trust assets and the other assets of the trust
described under "Credit Enhancement" herein in the event that payments in
respect thereto are insufficient to make payments required in the Agreement.
The trust assets will be sold only under the circumstances and in the manner
specified in the prospectus supplement.
Unless otherwise provided in the 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 and in and to the related trust 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 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 Fannie
Mae or Freddie Mac 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 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 prospectus
supplement, events of default under the indenture for each series of notes
include:
o a default in the payment of any principal of or interest on any
note which continues unremedied for five days after the giving of
written notice of such default is given as specified in the
prospectus supplement;
o failure to perform in any material respect any other covenant of
the sponsor or the trust 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 prospectus
supplement;
o certain events of bankruptcy, insolvency, receivership or
liquidation of the sponsor or the trust; or
o 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 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 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 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 prospectus supplement, unless:
o the holders of 100% of the aggregate voting rights of the notes of
such series consent to such sale,
o 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
o 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 five days
after written notice of such default is given as specified in the 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 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 prospectus supplement, each
Agreement may be amended by the sponsor, the master servicer and the trustee,
without the consent of any of the securityholders:
o to cure any ambiguity;
o to correct a defective provision or correct or supplement any
provision therein which may be inconsistent with any other
provision therein;
o to make any other revisions with respect to matters or questions
arising under the Agreement which are not inconsistent with the
provisions thereof; or
o to comply with any requirements imposed by the Code or any
regulation thereunder, provided, however, that no such amendments
(except those pursuant to this clause) will adversely affect in
any material respect the interests of any securityholder.
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 (a) 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 (b) 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, 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 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:
(a) the final payment of or other liquidation of the last of the
trust assets subject thereto or the disposition of all property
acquired upon foreclosure of any such trust assets remaining in
the trust, and
(b) the purchase by the master servicer or, if REMIC treatment has
been elected and if specified in the prospectus supplement, by
the holder of the residual interest or any other party specified
to have such rights (see "Federal Income Tax Consequences"
below), from the related trust of all of the remaining trust
assets and all property acquired in respect of such trust assets.
Unless otherwise specified by the prospectus supplement, any such
purchase of trust assets and property acquired in respect of trust 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 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 assets being less than
the percentage specified in the prospectus supplement of the aggregate
principal balance of the trust 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, any repurchase pursuant to clause (b) 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 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 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 rise 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 the federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA"), the United States Environmental Protection Agency ("EPA") may
impose a lien on property where the 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
mortgaged 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 (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 a third party), or
fails to market the property in a timely fashion.
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 holders of security
interests in underground tanks. It should be noted, however, that liability for
cleanup of petroleum contamination may be governed by state law, which may not
provide for any specific protection for secured creditors.
Except as otherwise specified in the applicable supplement, at the
time the mortgage loans were originated, no environmental assessment or a very
limited environmental assessment of the mortgaged properties was conducted.
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 exemption 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
exemption only if it exercises decision-making control over the borrower's
environmental compliance and hazardous substance handling and disposal
practices, or assumes day-to-day management of all operational functions of the
mortgaged property.
Except as otherwise specified in the 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 (a) 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 (b) originated by lenders other than
national banks, federal savings institutions and federal credit unions. Freddie
Mac 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 Garn-St Germain 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's ownership of the contracts. Unless otherwise specified in
the 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'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 the seller (referred to in this section as the "lender")
retains legal title to the property and enters into an agreement with the
purchaser (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 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 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 (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.
The priority of the lien securing any advance made under a future advance
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 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 those changes 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 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
o the securities are classified as indebtedness;
o an election is made to treat the trust as a REMIC or a FASIT under
the Internal Revenue Code of 1986, as amended (the "Code");
o the securities represent an ownership interest in some or all of
the trust assets; or
o an election is made to treat the trust as a partnership.
The prospectus supplement will specify how the securities will be
treated for federal income tax purposes and will discuss whether a REMIC or
FASIT election will be made.
TAXATION OF DEBT SECURITIES
STATUS AS REAL PROPERTY LOANS. Except to the extent otherwise provided
in the prospectus supplement, tax counsel will have advised the sponsor that:
o 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
o 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 these 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 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 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 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 those securities will be set forth under
the heading "Federal Income Tax Consequences" in the prospectus supplement.
Debt securities that are compound interest securities will, and other
debt securities may, be issued with original issue discount, which we refer to
as "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 on February 2, 1994, which we refer to as "OID Regulations".
A holder should be aware, however, that the OID Regulations do not adequately
address some issues relevant to prepayable securities, such as the debt
securities.
In general, OID, 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 OID in gross income as ordinary interest income
as it accrues under an accrual method of accounting. 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 closing date, the issue price for the class will be treated as
the fair market value of the class on the 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 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, which we
describe below, and those 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. Some debt securities may provide for default
remedies in the event of late payment or nonpayment of interest. The interest
on those 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 on which
deferred interest will accrue will not constitute qualified stated interest
payments and will be part of the stated redemption price at maturity of those
debt securities. 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 the 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 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,
o the interest is unconditionally payable at least annually,
o the issue price of the debt instrument does not exceed the total
noncontingent principal payments and
o 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 the debt security.
In the case of compound interest securities, some interest weighted securities,
and 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 IRS recently issued final regulations governing the calculation of
OID on instruments having contingent interest payments. The 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 this 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 the debt
security, the sum of the "daily portions" of the 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, which generally is 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 the 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, that is subject to acceleration due to prepayments on other debt
obligations securing such instruments, is computed by taking into account the
anticipated rate of prepayments assumed in pricing the debt instrument. The
amount of OID that will accrue during an accrual period on a this type of
security is the excess, if any, of the sum of
o the present value of all payments remaining to be made on the
security as of the close of the accrual period and
o the payments during the accrual period of amounts included in the
stated redemption price of the security, over the adjusted issue
price of the 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:
o the original yield to maturity of the pay-through security, which
is determined on the basis of compounding at the end of each
accrual period and properly adjusted for the length of the accrual
period,
o events which have occurred before the end of the accrual period,
and
o 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 this type of 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 these 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.
Some classes of regular interest securities may represent more than
one class of REMIC regular interests. Unless otherwise provided in the
prospectus supplement, the trustee intends, based on the OID Regulations, to
calculate OID on these 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 a holder who purchases that 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 the excess.
EFFECTS OF DEFAULTS AND DELINQUENCIES. Holders will be required to
report income with respect to the 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 those amounts are uncollectible. As a result, the amount of
income, including OID, reported by a holder of that security in any period
could significantly exceed the amount of cash distributed to the 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 the 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,
which we define under "--Tax Status as a Grantor Trust; General", 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 which we refer to interest weighted securities and
define below. The sponsor 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 the holder for the 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.
That 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
o the yield to maturity of those debt securities and
o in the case of pay-through securities, the present value of all
payments remaining to be made on those debt securities, should be
calculated as if the interest index remained at its value as of
the issue date of those 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, which generally is 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. Market
discount would accrue in a manner to be provided in Treasury regulations but,
until regulations are issued, market discount would in general accrue either:
o on the basis of a constant yield, in the case of a security
subject to prepayment, taking into account a prepayment
assumption, or
o in the ratio of (a) in the case of securities or the loans
underlying pass-through security that have not been 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 the loans underlying
pass-through 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 the loans for a pass-through security, the excess
of interest paid or accrued to purchase or carry a security or the underlying
loans for a pass-through security with market discount over interest received
on the security is allowed as a current deduction only to the extent excess is
greater than the market discount that accrued during the taxable year in which
interest expense was incurred. In general, the deferred portion of any interest
expense will be deductible when market discount is included in income,
including upon the sale, disposition, or repayment of the security or an
underlying loan for a pass-through security. A holder may elect to include
market discount in income currently as it accrues, on all market discount
obligations acquired by holder during the taxable year the election is made and
after, 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. If a holder makes
an election to amortize premium on a debt security, the election will apply to
all taxable debt instruments, including all REMIC regular interests and all
pass-through securities 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 after
by the 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. Recently, the IRS issued final 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 these 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 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 for 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 for a debt security is irrevocable.
TAXATION OF THE REMIC AND ITS HOLDERS
GENERAL. In the opinion of 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 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,
o 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
o securities held by a real estate investment trust will constitute
"real estate assets" within the meaning of Code Section
856(c)(5)(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 above, then
a security will qualify for the tax treatment described above in the proportion
that 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, which we define below, 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 real estate investment trusts, expenses will be deductible
only to the extent that expenses, plus other "miscellaneous itemized
deductions" of the holder, exceed 2% of the 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:
o 3% of the excess of adjusted gross income over the applicable
amount, or
o 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:
o 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
o is similar to a trust and which is structured with the principal
purpose of avoiding the single class REMIC rules.
Unless otherwise specified in the 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
o the gross income produced by the REMIC's assets, including stated
interest and any OID or market discount on loans and other assets,
and
o 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
day that the interests are issued, which we refer to as the "start up day". The
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 the 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 that date, it is possible that
the 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:
o subject to limited exceptions, the sale or other disposition of
any qualified mortgage transferred to the REMIC;
o subject to limited exceptions, the sale or other disposition of a
cash flow investment;
o the receipt of any income from assets not permitted to be held by
the REMIC pursuant to the Code; or
o 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, taxes will
be paid out of the trust 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 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 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 that 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 the 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 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 the 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 the 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 the holder's
adjusted basis in the residual interest security at the time of the 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 the 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 the
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, the holder's excess inclusion income will
be treated as unrelated business taxable income of the holder. In addition,
under Treasury regulations yet to be issued, if a real estate investment trust,
a regulated investment company, a common trust, 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 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 the quarterly
period of:
o 120% of the long term applicable federal rate on the startup day
multiplied by
o the adjusted issue price of the residual interest security at the
beginning of the 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 of the United States, 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 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 the 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, a transfer of the 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:
o 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
o 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 regulations which provide that a residual
interest security acquired after January 3, 1995 cannot be marked-to-market.
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 prospectus supplement if a REMIC election
is not made, in the opinion of tax counsel, the trust 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. 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, i.e. 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
trustee fees and the servicing fees, at the same time and in the same manner as
those 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, the 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, the
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 servicing fees under
Section 162 or Section 212 of the Code to the extent that the servicing fees
represent reasonable compensation for the services rendered by the trustee and
the master 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 the holder's regular tax
liability only to the extent that the fees, when added to other miscellaneous
itemized deductions, exceed 2% of adjusted gross income and may not be
deductible to any extent in computing the 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 will be adjusted for inflation, will be reduced by the
lesser of:
o 3% of the excess of adjusted gross income over the applicable
amount or
o 80% of the amount of itemized deductions otherwise allowable for
the 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 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 on the loans underlying the Certificate, rather than on 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 the 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. That 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 such as
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 the stripped interest.
Servicing fees in excess of reasonable servicing fees will be treated
under the stripped bond rules. If the excess servicing fees are less than 100
basis points or 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 prepayment securities or 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 the 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
the securities, and it is expected that OID will be reported on that basis
unless otherwise specified in the 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:
o in some 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;
o the non-interest weighted securities are subject to the contingent
payment provisions of the Contingent Regulations; or
o 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. 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)(5)(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. In addition, 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 trusts 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 the amount that would
have been includible in the holder's income if the yield on the regular
interest security had equaled 110% of the applicable federal rate as of the
beginning of the holder's holding period, over the amount of ordinary income
actually recognized by the holder on the regular interest security.
MISCELLANEOUS TAX ASPECTS
BACKUP WITHHOLDING. Subject to the discussion below with respect to
trusts 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
o fails to furnish the trustee with its taxpayer identification
number ("TIN");
o furnishes the trustee an incorrect TIN;
o fails to report properly interest, dividends or other "reportable
payments" as defined in the Code; or
o under some 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, to some payments made to holders,
including payments to certain exempt recipients, such as exempt organizations,
and to certain nonresidents which we define 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 master servicer for
each calendar year the amount of any reportable payments during the 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 trusts 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, which we define as "nonresident", those interest will normally
qualify as portfolio interest, except where the recipient is a holder, directly
or by attribution, of 10% or more of the capital or profits interest in the
issuer, or 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 the 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 that
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 the
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
that these 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 these 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."
On October 6, 1997, the Treasury Department issued new regulations
(the "New Regulations") which make certain modifications to the withholding and
information reporting rules described above. The New Regulations attempt to
unify certification requirements and modify reliance standards. The New
Regulations will generally be effective for payments made after December 31,
2000, subject to certain transition rules. Prospective investors are urged to
consult their own tax advisors regarding the New Regulations.
TAX CHARACTERIZATION OF THE TRUST AS A PARTNERSHIP
Tax counsel will deliver its opinion that a trust 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 related Agreement and related documents will be complied with, and on
counsel's conclusions that the nature of the income of the trust 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 will not be characterized
as a publicly traded partnership taxable as a corporation.
If the trust were taxable as a corporation for federal income tax
purposes, the trust would be subject to corporate income tax on its taxable
income. The trust'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 tax that is unpaid by the trust.
TAX CONSEQUENCES TO HOLDERS OF THE NOTES
TREATMENT OF THE NOTES AS INDEBTEDNESS. The trust will agree, and the
noteholders will agree by their purchase of notes, to treat the notes as debt
for federal income tax purposes. Tax counsel will, except as otherwise provided
in the 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 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
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 note which we refer to as 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 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
noteholder with respect to the 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
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:
o is not actually or constructively a "10 percent shareholder" of
the trust or the seller (including a holder of 10% of the
outstanding certificates) or a "controlled foreign corporation"
with respect to which the trust or the seller is a "related
person" within the meaning of the Code and
o provides the 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, if:
o the gain is not effectively connected with the conduct of a trade
or business in the United States by the foreign person and
o 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 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 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. If so treated, the trust 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 tax
counsel, the trust 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 some
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's expenses.
TAX CONSEQUENCES TO HOLDERS OF THE CERTIFICATES
TREATMENT OF THE TRUST AS A PARTNERSHIP. The trust and the master
servicer will agree, and the certificateholders will agree by their purchase of
certificates, to treat the trust 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, 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, the certificates, the notes, the trust and
the master 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. 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
prospectus supplement.
PARTNERSHIP TAXATION. As a partnership, the trust 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. The trust'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'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 related Agreement and
related documents. The Agreement will provide, in general, that the
certificateholders will be allocated taxable income of the trust for each month
equal to the sum of:
o the interest that accrues on the certificates in accordance with
their terms for the month, including interest accruing at the
pass-through rate for the month and interest on amounts previously
due on the certificates but not yet distributed;
o any trust income attributable to discount on the loans that
corresponds to any excess of the principal amount of the
certificates over their initial issue price;
o prepayment premium payable to the certificateholders for the
month; and
o any other amounts of income payable to the certificateholders for
the month.
The allocation will be reduced by any amortization by the trust 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 will be allocated to the sponsor. Based on the economic arrangement of
the parties, this approach for allocating trust 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 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 income even if they have not received cash from the trust to pay 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.
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 the holder under the Code.
An individual taxpayer's share of expenses of the trust including
servicing fees but not interest expense would be miscellaneous itemized
deductions. The deductions might be disallowed to the individual in whole or in
part and might result in the holder being taxed on an amount of income that
exceeds the amount of cash actually distributed to the holder over the life of
the trust.
The trust 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
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 should not have OID income. However, the
purchase price paid by the trust 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 will make this calculation on an aggregate basis,
but might be required to recompute it on a loan by loan basis.
If the trust acquires the loans at a market discount or premium, the
trust will elect to include any discount in income currently as it accrues over
the life of the loans or to offset any premium against interest income on the
loans. As indicated above, a portion of market discount income or premium
deduction may be allocated to certificateholders.
SECTION 708 TERMINATION. Pursuant to regulations under Code Section
708, a sale or exchange of 50% or more of the capital and profits in a
partnership would cause a deemed contribution of assets of the partnership
which we refer to as the "old partnership" to a new partnership which we refer
to as the "new partnership" in exchange for interests in the new partnership.
The interests would be deemed distributed to the partners of the old
partnership in liquidation thereof, which would not constitute a sale or
exchange. Accordingly, under these new regulations, if the Trust Fund were
characterized as a partnership and a sale of certificates terminated the
partnership under Code Section 708, the purchaser's basis in its ownership
interest would not change.
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 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. 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 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 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, the excess will generally give rise to
a capital loss upon the retirement of the certificates.
ALLOCATIONS BETWEEN TRANSFERORS AND TRANSFEREES. In general, the
trust'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 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 might be reallocated among the certificateholders. The trust'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 or loss, the purchasing certificateholder will have a
higher lower basis in the certificates than the selling certificateholder had.
The tax basis of the trust's assets will not be adjusted to reflect that higher
or lower basis unless the trust 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 will not make an election. As a
result, certificateholders might be allocated a greater or lesser amount of
trust income than would be appropriate based on their own purchase price for
certificates.
ADMINISTRATIVE MATTERS. The trustee is required to keep or have kept
complete and accurate books of the trust. Such books will be maintained for
financial reporting and tax purposes on an accrual basis and the fiscal year of
the trust 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 and will report each certificateholder's allocable share of items of
trust income and expense to holders and the IRS on Schedule K-1. The trust will
provide the Schedule K-l information to nominees that fail to provide the trust
with the information statement described below and nominees will be required to
forward 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 or be subject to penalties unless the holder notifies the
IRS of all 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
with a statement containing certain information on the nominee, the beneficial
owners and the certificates so held. The information includes:
o the name, address and taxpayer identification number of the
nominee and
o as to each beneficial owner
o the name, address and identification number of the person,
o whether the 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
o some information on certificates that were held, bought or sold
on behalf of the person throughout the year.
In addition, brokers and financial institutions that hold certificates through
a nominee are required to furnish directly to the trust 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. The information referred to above for any
calendar year must be furnished to the trust on or before the following January
31. Nominees, brokers and financial institutions that fail to provide the trust
with the information described above may be subject to penalties.
The sponsor will be designated as the tax matters partner in the
Agreement and 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 by the appropriate taxing authorities could result in an adjustment of
the returns of the certificateholders. In some circumstances, a
certificateholder may be precluded from separately litigating a proposed
adjustment to the items of the trust. 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.
TAX CONSEQUENCES TO FOREIGN CERTIFICATEHOLDERS. It is not clear
whether the trust 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 would be engaged in a trade or business in the United
States for such purposes, the trust will withhold as if it were so engaged in
order to protect the trust from possible adverse consequences of a failure to
withhold. The trust 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 to
change its withholding procedures. In determining a holder's withholding
status, the trust 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, any state of the United States or the
District of Columbia, other than a partnership that is not treated as a United
States person under any applicable Treasury regulation , 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 persons 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's income. Each foreign holder must obtain
a taxpayer identification number from the IRS and submit that number to the
trust 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 taking the
position that no taxes were due because the trust 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. 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 that 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 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. The prospectus supplement will indicate the anticipated treatment
under these regulations of securities issued by the trust.
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, regulatory or administrative exemption applies.
In Prohibited Transaction Exemption 83-1 ("PTE 83-1") 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 certificates that represent interests in a pool consisting of
mortgage loans secured by single family homes ("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 certificate or a security
which is not a Single Family Security may be made to a Plan unless specified in
the 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: (1)
certificates issued in a series consisting of only a single class of
certificates; and (2) senior certificates issued in a series in which there is
only one class of such certificates; provided that the certificates in the case
of clause (1), or the senior certificates in the case of clause (2), evidence
the beneficial ownership of both a specified percentage (greater than 0%) of
future interest payments and a specified percentage (greater than 0%) of future
principal payments on the loans. It is not clear whether a class of
certificates that evidences the beneficial ownership in a trust 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 certificates 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:
o the maintenance of a system of insurance or other protection for
the pooled mortgage loans and property securing such loans, and
for indemnifying certificateholders 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;
o the existence of a pool trustee who is not an affiliate of the
pool sponsor; and
o 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 certificates issued without a
subordination feature, or the senior certificates 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 certificates 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 certificates 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 certificates
is appropriate for the Plan, taking into account the overall investment policy
of the Plan and the composition of the Plan's investment portfolio.
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:
o 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;
o 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;
o the certificates acquired by the Plan have received a rating at
the time of such acquisition that is one of the three highest
generic rating categories from S&P, Moody's, DCR or Fitch;
o the trustee must not be an affiliate of any other member of the
Restricted Group as defined below;
o the sum of all payments made to and retained by the underwriters
in connection with the distribution of the certificates represents
not more than reasonable compensation for underwriting the
certificates; the sum of all payments made to and retained by the
seller pursuant to the assignment of the loans to the trust
represents not more than the fair market value of such loans; the
sum of all payments made to and retained by the servicer and any
other servicer represents not more than reasonable compensation
for such person's services under the agreement pursuant to which
the loans are pooled and reimbursements of such person's
reasonable expenses in connection therewith; and
o the Plan investing in the certificates is an accredited investor
as defined in Rule 501(a)(1) of Regulation D of the Securities Act
of 1933, as amended.
The trust must also meet the following requirements:
o the corpus of the trust must consist solely of assets of the type
that have been included in other investment pools;
o the 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 the securities; and
o 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 securities in a trust
holding receivables as to which the fiduciary (or its affiliate) is an obligor
provided that, among other requirements:
o in the case of an acquisition in connection with the initial
issuance of certificates, at least fifty percent of each class of
certificates in which Plans have invested is acquired by persons
independent of the Restricted Group (as defined below),
o such fiduciary (or its affiliate) is an obligor with respect to
five percent or less of the fair market value of the obligations
contained in the trust;
o the Plan's investment in certificates of any class does not exceed
twenty-five percent of all of the certificates of that class
outstanding at the time of the acquisition; and
o immediately after the acquisition, no more than twenty-five
percent of the assets of any 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, any underwriter of the certificates, the trustee, the master servicer,
any insurer with respect to the loans, any obligor with respect to loans
included in the trust constituting more than five percent of the aggregate
unamortized principal balance of the assets in the trust, or any affiliate of
such parties (the "Restricted Group").
On July 21, 1997, the U.S. Department of Labor published in the
Federal Register an amendment to the Underwriter Exemptions, which extends
exemptive relief to certain mortgage-backed and asset-backed certificates
transactions using pre-funding accounts for trusts issuing pass-through
certificates. The amendment generally allows mortgage loans or other secured
receivables supporting payments to securityholders, and having a value equal to
no more than twenty-five percent of the total principal amount of the
securities being offered by the trust, to be transferred to the trust within a
90-day or three-month pre-funding period following the closing date, instead of
requiring that all such obligations be either identified or transferred on or
before the closing date. The relief is available when certain conditions are
met.
The prospectus supplement will indicate the classes of securities, if
any, as to which it is expected that an Underwriter Exemption will apply.
Any Plan fiduciary that proposes to cause a Plan to purchase
securities is encouraged to consult with its counsel concerning the impact of
ERISA and the Code, the applicability of PTE 83-1, the availability and
applicability of any Underwriter Exemption or any other exemptions from the
prohibited transaction provisions of ERISA and the Code and the potential
consequences in their specific circumstances, before making the 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 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 NCUA 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, high-risk mortgage securities include securities not
entitled to distributions allocated to principal or interest and subordinate
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
The securities are being offered hereby in series from time to time
(each series evidencing or relating to a separate trust) through any of the
following methods:
o by negotiated firm commitment underwriting and public reoffering
by underwriters;
o by agency placements through one or more placement agents
primarily with institutional investors and dealers; and
o 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:
o the identity of any underwriters thereof,
o either:
o 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,
o or the method by which the price at which the underwriters will
sell the securities will be determined,
o information regarding the nature of the underwriters' obligations,
o any material relationship between the sponsor and any underwriter
and,
o 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 securities 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 securities will be passed
upon for the sponsor by Brown & Wood LLP, New York, New York. Brown & Wood LLP,
New York, New York or Dewey Ballantine LLP, New York, New York will act as
counsel for the underwriter.
FINANCIAL INFORMATION
A new trust will be formed with respect to each series of securities
and no trust 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 will be included
in this prospectus or in the prospectus supplement.
AVAILABLE INFORMATION
The sponsor has filed with the SEC 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
supplement relating to each series of securities contain information set forth
in the registration statement pursuant to the rules and regulations of the SEC.
For further information, reference is made to such registration statement and
the exhibits thereto, which may be inspected and copied at the facilities
maintained by the SEC at its Public Reference Section, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at its Regional Offices located as follows:
Chicago Regional Office, New York Regional Office
500 West Madison Street, Seven World Trade Center
Chicago, IL 60661 New York, NY 10048
The SEC maintains a website at http://www.sec.gov. that contains
reports, proxy and information statements and other information regarding
registrants including the sponsor, that file electronically with the SEC.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The SEC allows us to incorporate by reference some of the information
we file with it, which means that we can disclose important information to you
by referring you to those 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 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 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 SEC periodic reports with
respect to the related trust following completion of the reporting period
required by Rule 15d-1 or Regulation 15D under the Securities Exchange Act of
1934, as amended (the "Exchange Act").
All documents filed by or on behalf of the trust referred to in the
accompanying supplement with the SEC pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act on or after the date of such supplement and prior to
the termination of any offering of the securities issued by such trust 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.
The trust 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 specified in the accompanying supplement.
RATING
It is a condition to the issuance of the securities of each series
offered hereby and by the supplement that they shall be rated in one of the
four highest rating categories by the nationally recognized statistical rating
agency or agencies specified in the prospectus supplement.
Ratings on asset-backed securities address the likelihood of receipt
by securityholders of all distributions on the trust assets. These ratings
address the structural, legal and issuer- related aspects associated with such
securities, the nature of the trust assets and the credit quality of the credit
enhancer or guarantor, if any. Ratings on asset-backed securities do not
represent any assessment of the likelihood of principal prepayments by
mortgagors or of the degree by which such prepayments might differ from those
originally anticipated. As a result, securityholders might suffer a lower than
anticipated yield, and, in addition, holders of stripped securities in extreme
cases might fail to recoup their underlying investments.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Further, such ratings do not address the effect
of prepayments on the yield anticipated by the investor. Each security rating
should be evaluated independently of any other security rating.
<PAGE>
================================================================================
$
HEADLANDS HOME EQUITY LOAN TRUST 199_-_
[LOGO]
HEADLANDS MORTGAGE SECURITIES INC.
SPONSOR
- --------------------------------------------------------------------------------
PROSPECTUS SUPPLEMENT
- --------------------------------------------------------------------------------
[Underwriter]
[Date]
You should rely only on the information contained or incorporated by reference
in this prospectus supplement and the accompanying prospectus. We have not
authorized anyone to provide you with different information.
We are not offering the notes offered hereby in any state where such offer is
not permitted.
We represent the accuracy of the information in this prospectus supplement and
the accompanying prospectus only as of the dates on their respective covers.
Dealers will be required to deliver a prospectus supplement and prospectus when
acting as underwriters of the notes offered hereby and with respect to their
unsold allotments or subscriptions. In addition, all dealers selling the notes,
whether or not participating in this offering, may be required to deliver a
prospectus supplement and prospectus until ninety days after the date of this
prospectus supplement.
===============================================================================
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........................................... $ 141,820.60
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 (*)...................................................... $ 481,820.60
_______________
* 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 approximately $175,000,000 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 page II-4).
_______________
* Filed previously with the Commission as an exhibit to the Registration
Statement on Form S-3 (No. 333-28031)
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.
<PAGE>
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 this 27th day of
May, 1999.
HEADLANDS MORTGAGE SECURITIES INC.
By: /s/ Gilbert J. MacQuarrie
-----------------------------------
Name: Gilbert J. MacQuarrie
Title: Vice President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Directors and
Officers of Headlands Mortgage Securities Inc., a Delaware corporation, hereby
constitute and appoint Peter T. Paul and Gilbert J. MacQuarrie, each with full
power of substitution and resubstitution, their true and lawful attorneys and
agents to sign the names of the undersigned Directors and Officers in the
capacities indicated below to the registration statement to which this Power of
Attorney is attached as an exhibit, and all amendments (including post-effective
amendments) and supplements thereto, and all instruments or documents filed as a
part thereof or in connection therewith, and to file the same, with all exhibits
thereto, and all other instruments or documents in connection therewith, with
the Securities and Exchange Commission; and each of the undersigned hereby
ratifies and confirms all that said attorneys, agents or any of them shall do or
cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Peter T. Paul President and Director May 27, 1999
------------------------------------ (Principal Executive Officer
Peter T. Paul)
/s/ Gilbert J. MacQuarrie Vice President, Secretary, Treasurer May 27, 1999
------------------------------------ and Director (Principal Financial
Gilbert J. MacQuarrie Officer and Principal Accounting Officer)
/s/ Becky S. Poisson Director May 27, 1999
------------------------------------
Becky S. Poisson
/s/ Steve Abreu Director May 27, 1999
------------------------------------
Steve Abreu
/s/ Kenneth Siprelle Director May 27, 1999
------------------------------------
Kenneth Siprelle
/s/ John Edmonds Director May 27, 1999
------------------------------------
John Edmonds
</TABLE>
<PAGE>
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 Brown & Wood LLP (included in exhibit 8.1 hereof).
23.2 Consent of Tobin & Tobin (included in exhibit 5.1 hereof).
24.1 Power of Attorney (included at page II-4).
_______________
* Filed previously with the Commission as an exhibit to the Registration
Statement on Form S-3 (No. 333-28031).
Exhibit 5.1
<TABLE>
<CAPTION>
<S> <C> <C>
TOBIN & TOBIN
A PROFESSIONAL CORPORATION
500 SANSOME STREET
EIGHTH FLOOR
SAN FRANCISCO, CALIFORNIA 94111 RICHARD TOBIN (1852-1887)
PHILLIP R. POLLOCK FACSIMILE (415) 433-3883 ROBERT TOBIN (1875-1889)
(415) 433-1400 CYRIL R. TOBIN (1905-1977)
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June 1, 1999
Headlands Mortgage Securities Inc.
700 Larkspur Landing Circle
Suite 250
Larkspur, CA 94939
Re: Prospectus to Headlands Mortgage Securities, Inc.
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 $500,000,000. 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 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 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 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
as to certain tax matters
June 2, 1999
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
$500,000,000. 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 Securities or
the related Trust absent our express confirmation of our opinion for a
particular series 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
