<PAGE>
Prospectus Supplement
(To Prospectus Dated June 14, 1999)
$245,645,000
(APPROXIMATE)
[Logo of GreenPoint Mortage Securities Inc.]
SPONSOR
GREENPOINT MORTGAGE FUNDING, INC.
SELLER AND SERVICER
GREENPOINT HOME EQUITY LOAN TRUST 1999-2
HOME EQUITY LOAN ASSET-BACKED NOTES, SERIES 1999-2
$193,275,000 CLASS A-1 VARIABLE RATE ASSET-BACKED NOTES
$52,370,000 CLASS A-2 VARIABLE RATE ASSET-BACKED NOTES
- --------------------------------------------------------------------------------
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-10 OF THIS PROSPECTUS
SUPPLEMENT AND ON PAGE 4 OF THE ACCOMPANYING PROSPECTUS.
The notes represent obligations of the trust only and do not represent an
interest in or obligation of GreenPoint Mortgage Securities Inc., GreenPoint
Mortgage Funding, Inc., Bank One, National Association, Wilmington Trust
Company, or any of their affiliates.
This prospectus supplement may be used to offer and sell the notes only if
accompanied by the prospectus.
- --------------------------------------------------------------------------------
[Logo of Ambac]
THE TRUST WILL ISSUE:
o Two series of senior Class A Notes.
o A certificate representing the beneficial ownership
interest in the entire Trust.
THE CLASS A NOTES:
o Represent debt obligations of a Delaware business trust
supported primarily by two separate pools:
o The first pool consists of adjustable rate, revolving
home equity lines of credit mortgage loans and
fixed-rate closed-end second lien mortgage loans, all
of which substantially conform to certain loan
origination standards with respect to loan balances
as of the date of origination set forth by the
Federal National Mortgage Association; and
o The second pool consists of adjustable rate,
revolving home equity lines of credit mortgage loans
which may not so conform.
o Currently have no trading market.
o Receive distributions on the 15th day of each month (or
if such day is not a business day, the next business
day), beginning on January 18, 2000.
o Will have the benefit of an insurance policy from Ambac
Assurance Corporation which will guarantee timely payment
of interest and the ultimate payment of principal, as
described in this prospectus supplement.
o Are offered pursuant to this prospectus and prospectus
supplement and are listed on the table on page S-4.
Greenwich Capital Markets, Inc., as underwriter, will buy the offered notes
from GreenPoint Mortgage Securities Inc. at a price equal to approximately
99.75% of their face value. GreenPoint Mortgage Securities Inc. will pay the
expenses related to the issuance of the notes from these proceeds. The
certificate will not be offered and will be retained by GreenPoint Mortgage
Securities Inc. The underwriter proposes to sell the offered notes purchased by
it from time to time in negotiated transactions or otherwise, at prices
determined at the time of sale. GreenPoint Mortgage Securities Inc. has agreed
to indemnify the underwriter against certain liabilities, including liabilities
under the Securities Act of 1933.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS SUPPLEMENT IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
GREENWICH CAPITAL
- --------------------------------------------------------------------------------
- -----------------
December 15, 1999
<PAGE>
IMPORTANT NOTICE ABOUT THE INFORMATION PRESENTED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS
We tell you about the notes in two separate documents that
progressively provide more detail: (1) the accompanying prospectus, which
provides general information, some of which may not apply to your series of
notes, and (2) this prospectus supplement, which describes the specific terms of
your series of notes and may be different from the information in the
prospectus.
If the terms of your series of notes and any other information
contained herein vary between this prospectus supplement and the accompanying
prospectus, you should rely on the information in this prospectus supplement.
We include cross-references in this prospectus supplement and the
accompanying prospectus to captions in these materials where you can find
further related discussions. The following table of contents and the table of
contents included in the accompanying prospectus provide the pages on which
these captions are located.
You can find a listing of the pages where capitalized terms used in
this prospectus supplement are defined under "Index of Defined Terms" beginning
on page S-72 in this prospectus supplement.
The underwriter may engage in transactions that stabilize, maintain, or
in some way affect the price of the notes. These types of transactions may
include stabilizing the purchase of notes to cover syndicate short positions and
the imposition of penalty bids. For a description of these activities, please
read the section entitled "Underwriting" in this prospectus supplement.
TABLE OF CONTENTS
Prospectus Supplement
SUMMARY...................................................................S-4
RISK FACTORS.............................................................S-10
FORMATION OF THE TRUST...................................................S-15
THE TRUST PROPERTY.......................................................S-15
THE INSURER AND THE POLICY...............................................S-16
GREENPOINT MORTGAGE FUNDING, INC.........................................S-19
THE COMPANY'S MORTGAGE LOAN PROGRAM......................................S-21
THE SPONSOR..............................................................S-23
DESCRIPTION OF THE MORTGAGE LOANS........................................S-23
YIELD, MATURITY AND PREPAYMENT CONSIDERATIONS............................S-42
POOL FACTOR AND TRADING INFORMATION......................................S-48
DESCRIPTION OF THE CLASS A NOTES.........................................S-48
CERTAIN PROVISIONS OF THE SALE AND SERVICING AGREEMENT...................S-58
USE OF PROCEEDS..........................................................S-66
CERTAIN FEDERAL INCOME TAX CONSEQUENCES..................................S-66
STATE TAXES..............................................................S-68
ERISA CONSIDERATIONS.....................................................S-69
LEGAL INVESTMENT CONSIDERATIONS..........................................S-69
UNDERWRITING.............................................................S-70
LEGAL MATTERS............................................................S-70
EXPERTS..................................................................S-70
RATINGS..................................................................S-71
INDEX OF DEFINED TERMS...................................................S-72
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 CONSIDERATIONS........................................38
THE AGREEMENTS.............................................................41
CERTAIN LEGAL ASPECTS OF THE LOANS.........................................58
FEDERAL INCOME TAX CONSEQUENCES............................................69
STATE TAX CONSIDERATIONS...................................................96
ERISA CONSIDERATIONS.......................................................96
LEGAL INVESTMENT .........................................................101
METHOD OF DISTRIBUTION....................................................102
LEGAL MATTERS.............................................................103
FINANCIAL INFORMATION.....................................................103
AVAILABLE INFORMATION.....................................................103
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE...........................104
RATING....................................................................104
S-2
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
Federal securities law requires the filing of certain information with
the Securities and Exchange Commission (the "SEC"), including annual, quarterly
and special reports, proxy statements and other information. You can read and
copy these documents at the public reference facility maintained by the SEC at
Judiciary Plaza, 450 Fifth Street, NW, Room 1024, Washington, DC 20549. You can
also copy and inspect such reports, proxy statements and other information at
the following regional offices of the SEC:
New York Regional Office Chicago Regional Office
Seven World Trade Center Citicorp Center
Suite 1300 500 West Madison Street, Suite 1400
New York, NY 10048 Chicago, Illinois 60661
Please call the SEC at 1-800-SEC-0330 for further information on the
public reference rooms. SEC filings are also available to the public on the
SEC's web site at http://www.sec.gov.
The SEC allows us to "incorporate by reference" the information we file
with it, which means that we can disclose important information to you by
referring you to those documents. The information that we incorporate by
reference is considered to be part of this prospectus supplement, and later
information that we file with the SEC will automatically update and supersede
this information.
In addition to the documents described in the accompanying prospectus
under "Incorporation of Certain Documents by Reference," the financial
statements of Ambac Assurance Corporation included in, or as exhibits to, the
following documents, which have been filed by Ambac Assurance Corporation with
the SEC are hereby incorporated by reference:
o Annual report on Form 10-K for the year ended December 31,
1998, and
o Quarterly Report on Form 10-Q for the quarter ended September
30, 1999.
All financial statements of Ambac Assurance Corporation and
subsidiaries included in documents filed by Ambac Financial Group, Inc. with the
SEC pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act
of 1934 after the filing of this prospectus supplement and prior to the
termination of the offering of the notes shall be deemed to be incorporated by
reference into this prospectus supplement and to be a part hereof.
This prospectus supplement and the accompanying prospectus are part of
a registration statement filed by the Sponsor with the SEC (Registration No.
333-79833). You may request a free copy of any of the above filings by writing
or calling:
GreenPoint Mortgage Securities Inc.
700 Larkspur Landing Circle
Suite 240
Larkspur, CA 94939
Attention: Peter T. Paul
(415) 925-5442
You should rely only on the information provided in this prospectus
supplement or the accompanying prospectus or incorporated by reference herein.
We have not authorized anyone else to provide you with different information.
You should not assume that the information in this prospectus supplement or the
accompanying prospectus is accurate as of any date other than the date on the
cover page of this prospectus supplement or the accompanying prospectus or that
the information incorporated by reference herein is accurate as of any date
other than the date stated therein.
S-3
<PAGE>
SUMMARY
o This summary highlights selected information from this prospectus
supplement and does not contain all of the information that you need to
consider in making your investment decision. To understand all of the
terms of the offering of the notes, read carefully this entire prospectus
supplement and the accompanying prospectus.
o This summary provides an overview of certain calculations, cash flows and
other information to aid your understanding and is qualified by the full
description of these calculations, cash flows and other information in
this prospectus supplement and the accompanying prospectus.
-------------------------------
GreenPoint Home Equity Loan Trust 1999-2
Home Equity Loan Asset-Backed Notes,
Series 1999-2
Class A-1 Notes and Class A-2 Notes
Initial Rating
of Offered
Class A
Notes(1)
Initial Interest Final
Principal Rate (per Scheduled S&P Moody's
Class Balance annum) Payment Date Rating Rating
----- ------- ------ ------------ ------ ------
Class A-1 $193,275,000 Variable December, 2025 AAA Aaa
Class A-2 $ 52,370,000 Variable December, 2025 AAA Aaa
- ------------
(1) A description of the ratings of the Class A Notes is set forth
under the heading "Ratings" in this prospectus supplement.
The Trust will issue the Class A Notes in book-entry form through the
facilities of The Depository Trust Company.
We refer you to "Description of the Class A Notes -- General" and
"--Book-Entry Securities" in this prospectus supplement for more detail.
------------------------------------------
Trust: GreenPoint Home Equity Loan Trust 1999-2.
Sponsor: GreenPoint Mortgage Securities Inc. (formerly known as
Headlands Mortgage Securities Inc.)
Servicer: GreenPoint Mortgage Funding, Inc. (formerly known as Headlands
Mortgage Company).
Owner Trustee: Wilmington Trust Company.
Indenture
Trustee: Bank One, National Association.
Insurer: Ambac Assurance Corporation.
------------------------------------------
S-4
<PAGE>
Initial
Cut-Off Date: The close of business on November 30, 1999.
Closing Date: On or about December 22, 1999.
Payment Date: The 15th day of each month or if such day is not a business
day, the next business day. The first payment date will be
January 18, 2000.
Record Date: The last business day preceding a payment date unless
the notes are no longer book-entry notes in which case the
record date is the last business day of the month preceding
the month of a payment date.
------------------------------------------
Mortgage Loans
On December 22, 1999, the trust will acquire two pools of mortgage loans.
Pool I
The mortgage loans in pool I will consist of:
o Home equity lines of credit mortgage loans secured by first or second
lien deeds of trust on residential properties located in 31 states and in the
District of Columbia. We expect these initial home equity lines of credit
mortgage loans in pool I to have an aggregate principal balance of approximately
$141,422,871 as of November 30, 1999. After the closing date, GreenPoint
Mortgage Securities Inc. will also transfer one or more groups of subsequent
home equity lines of credit mortgage loans to the trust prior to January 18,
2000 for assignment to pool I. We expect these groups of subsequent home equity
lines of credit mortgage loans to have an aggregate principal balance of
approximately $38,739,074. As of November 30, 1999, the initial home equity
lines of credit mortgage loans in pool I had the following characteristics:
Number of Mortgage Loans: 3,861
Range of Outstanding Principal Balances(1): $0 to $351,688
Average Outstanding Principal Balance(1): $37,582
Range of Remaining Term to Stated Maturity: 166 to 300 months
Weighted Average Remaining Term to Stated Maturity(1): 209 months
Range of Mortgage Rates: 5.625%- 15.500%
Weighted Average Mortgage Rate(1): 6.690%
Weighted Average Net Mortgage Rate(1): 6.190%
Geographic Concentrations in Excess of 5%(1):
California 74.46%
- --------------
(1) Approximate
S-5
<PAGE>
o Fixed-rate closed-end mortgage loans secured by second lien mortgages
on residential property located in 23 states. We expect these initial closed end
second lien mortgage loans in pool I to have an aggregate principal balance of
approximately $13,113,557 as of November 30, 1999. As of November 30, 1999, the
initial closed end second lien mortgage loans in pool I had the following
characteristics:
Number of Mortgage
Loans: 347
Range of Outstanding
Principal $10,000 to
Balances(1): $112,500
Average Outstanding
Principal Balance(1): $37,791
Range of Remaining
Term to Stated 176 to 180
Maturity: months
Weighted Average
Remaining Term to
Stated Maturity(1): 180 months
Range of Mortgage 8.500% -
Rates: 13.875%
Weighted Average
Mortgage Rate(1): 11.328%
Weighted Average Net
Mortgage Rate(1): 10.828%
Geographic Concentrations in Excess of 5%(1):
California 69.58%
Washington 7.96%
- --------------
(1) Approximate
o The home equity lines of credit mortgage loans and fixed-rate
closed-end mortgage loans in pool I will substantially conform to certain loan
origination standards with respect to loan balances as of the date of
origination set forth by the Federal National Mortgage Association. These
criteria have been used solely in selecting pool I mortgage loans. Information
on pool I is set forth herein and no representation or warranty is made that
individual mortgage loans in pool I would be eligible for purchase by the
Federal National Mortgage Association.
Pool II
The mortgage loans in pool II will consist of home equity lines of credit
mortgage loans secured by first or second lien deeds of trust on residential
properties located in 19 states. Pool II will not contain any fixed rate
closed-end mortgage loans. We expect these initial home equity lines of credit
mortgage loans in pool II to have an aggregate principal balance of
approximately $41,109,718 as of November 30, 1999. After the closing date,
GreenPoint Mortgage Securities Inc. will also transfer one or more groups of
subsequent home equity lines of credit mortgage loans to the trust prior to
January 18, 2000 for assignment to pool II. We expect these groups of subsequent
home equity lines of credit mortgage loans to have an aggregate principal
balance of approximately $11,260,926. As of November 30, 1999, the initial home
equity lines of credit mortgage loans in pool II had the following
characteristics:
Number of Mortgage
Loans: 388
Range of Outstanding
Principal $0 to
Balances(1): $500,000
Average Outstanding
Principal Balance(1): $110,214
Range of Remaining
Term to Stated 170 to 300
Maturity: months
Weighted Average
Remaining Term to
Stated Maturity(1): 209 months
Range of Mortgage 5.875% -
Rates: 14.500%
Weighted Average
Mortgage Rate(1): 6.451%
Weighted Average Net
Mortgage Rate(1): 5.951%
Geographic Concentrations in Excess of 5%(1):
California 86.57%
- ----------------
(1) Approximate
o The home equity lines of credit mortgage loans in pool II may not
substantially conform to loan origination standards with respect to loan
balances as of the date of origination set forth by the Federal National
Mortgage Association.
We refer you to "Description of the Mortgage Loans" in this prospectus
supplement for more detail on these two pools of mortgage loans.
Trust Property
In addition to pool I and pool II, the trust property will also include cash on
deposit in certain accounts and other assets as described in detail elsewhere in
this prospectus supplement. The Class A-1 Notes will relate to pool I and the
Class A-2 Notes will relate to pool II.
We refer you to "The Trust Property" in this prospectus supplement for more
detail.
S-6
<PAGE>
Pre-Funding Account
o As indicated above, GreenPoint Mortgage Securities Inc. expects to
sell additional groups of home equity lines of credit mortgage loans to the
trust during a period beginning on or about December 22, 1999 and ending not
later than January 18, 2000. On or about December 22, 1999, approximately
$50,000,000 will be deposited in a pre-funding account set up in the name of the
indenture trustee from the proceeds from the sale of the notes. The funds in
this pre-funding account will be used to purchase the subsequent groups of home
equity lines of credit mortgage loans for inclusion in pool I and pool II.
GreenPoint Mortgage Securities Inc. expects to sell groups of subsequent home
equity lines of credit mortgage loans for inclusion in pool I with an aggregate
principal balance of approximately $38,739,074. GreenPoint Mortgage Securities
Inc. expects to sell groups of subsequent home equity lines of credit mortgage
loans for inclusion in pool II with an aggregate principal balance of
approximately $11,260,926. Any monies remaining in the pre-funding account after
the time period has expired will be paid to the noteholders of the related Class
A Notes as a principal payment. Prior to being used to purchase these additional
groups of mortgage loans or paid to you, funds on deposit in the pre-funding
account will be invested from time to time in eligible investments.
We refer you to "Description of the Class A Notes -- Pre-Funding Account" in
this prospectus supplement for more detail.
Removal of Certain Mortgage Loans
On any payment date, GreenPoint Mortgage Securities Inc. will have a limited
right to elect to remove from the trust certain mortgage loans without providing
notice to you. GreenPoint Mortgage Securities Inc. must comply with certain
conditions, which include obtaining the consent of Ambac Assurance Corporation,
in order to exercise this option.
We refer you to "Description of the Class A Notes--Optional Retransfers of
Mortgage Loans to the Sponsor" in this prospectus supplement for more detail.
Priority of Distributions
Funds available from payments and other amounts received on the mortgage loans
and any amounts available as property of the trust on any payment date will be
distributed in accordance with the priority of distributions set forth elsewhere
in this prospectus supplement.
We refer you to "Description of the Class A Notes--Priority of Distributions" in
this prospectus supplement for more detail.
Interest Distributions
On each payment date and for each class of notes, you will be entitled to
interest at the applicable interest rate that accrued during the accrual period.
Class A-1 Interest Rate
o Interest accrues on the Class A-1 Notes from the preceding payment
date to the date immediately preceding the next payment date (or from December
22, 1999, in the case of the first payment date).
o For each interest period, interest will generally accrue on the Class
A-1 Notes at an annual rate of interest equal to one-month LIBOR plus 0.30% (for
each interest period ending on or prior to the date on which the sponsor could
exercise its option to redeem the Class A-1 Notes) or one-month LIBOR plus 0.60%
(for each interest period ending after such date), but only as described in
"Description of the Class A Notes--Payment of Interest--Class A-1 Notes" and
subject to a maximum rate and other limitations contained therein.
Class A-2 Interest Rate
o Interest accrues on the Class A-2 Notes from the preceding payment
date to the date immediately preceding the next payment date (or from December
22, 1999, in the case of the first payment date).
o For each interest period, interest will generally accrue on the Class
A-2 Notes at an annual rate of interest equal to one-month LIBOR plus 0.38% (for
each interest period ending on or prior to the date on which the sponsor could
exercise its option to redeem the Class A-2 Notes) or one-month LIBOR plus 0.76%
(for each interest period ending after such date), but only as described in
"Description of the Class A Notes--Payment of Interest--Class A-2 Notes" and
subject to a maximum rate and other limitations contained therein.
We refer you to "Description of the Class A Notes--Payment of Interest" in this
prospectus supplement for more information.
S-7
<PAGE>
Principal Distributions
o Principal will be paid on the notes on each payment date in reduction
of the outstanding principal balance of the notes.
o The amount of principal payable with respect to the Class A-1 Notes
will be determined by the period of amortization described below and in
accordance with a formula that takes into account the principal collections
received on the home equity lines of credit mortgage loans in pool I each month
plus the principal collections on the fixed-rate closed-end mortgage loans in
pool I each month minus the total principal balance of additional draws made by
the borrower on such home equity lines of credit mortgage loans for such month
minus any excess cash not needed to maintain certain required levels of
overcollateralization for the Class A-1 Notes. As a result of the revolving
nature of the home equity lines of credit mortgage loans, the terms of the
amortization of the Class A-1 Notes have been divided into two periods, the
managed amortization period and the rapid amortization period, as described in
detail elsewhere in this prospectus supplement.
o The amount of principal payable with respect to the Class A-2 Notes
will be determined by the period of amortization described below and in
accordance with a formula that takes into account the principal collections
received on the home equity lines of credit mortgage loans in pool II each month
minus the total principal balance of additional draws made by the borrower on
such home equity lines of credit mortgage loans for such month minus any excess
cash not needed to maintain certain required levels of overcollateralization for
the Class A-2 Notes. As a result of the revolving nature of the home equity
lines of credit mortgage loans, the terms of the amortization of the Class A-2
Notes have been divided into two periods, the managed amortization period and
the rapid amortization period, as described in detail elsewhere in this
prospectus supplement.
o During certain periods, additional amounts collected from the
underlying mortgage loans for each of the pools will be distributed to the
holders of the related notes as a principal payment in order to maintain certain
required levels of overcollateralization.
We refer you to "Description of the Class A Notes -- Payment of Principal" in
this prospectus supplement for more information regarding the calculation as to
the amount of principal each class of notes is entitled to receive on each
payment date.
Credit Enhancement
Credit enhancement reduces the harm caused to the holders of notes from
shortfalls in payments received from and losses incurred on the underlying pools
of mortgage loans. The credit enhancement provided for the benefit of the notes
consists of the following:
o Subordination of the Certificates. The trust is issuing a certificate
representing the entire beneficial ownership interest in the underlying pools of
mortgage loans. Payments on the certificate are subordinated to payments due on
the notes as described elsewhere in this prospectus supplement. This
subordination of the certificate provides credit enhancement to the notes.
o Overcollateralization and Limited Crosscollateralization. Additional
credit enhancement will result from the fact that the size of the pools of
underlying mortgage loans is expected to eventually be greater than the
principal balance of the notes secured by each pool. In addition, the cash flow
provisions of the trust require the acceleration of principal payments on the
notes in order to maintain a certain overcollateralization level for each pool.
Once the required level of overcollateralization is reached for a pool, the
acceleration feature for the related class of notes will cease, unless it is
necessary to maintain the required level of overcollateralization.
The Indenture allows excess cash on any payment date by a class of
notes to be applied to the funding of certain deficiencies in interest and
principal with respect to the other class of notes.
o Application of Excess Cashflow. Generally, because more interest is paid by
the borrowers than is necessary to pay the interest earned on the notes, there
probably will be excess cashflow each month. Some of the excess cashflow will be
used as principal payments on the related notes to create overcollateralization
until the required level of overcollateralization has been reached. The actual
level of overcollateralization required on any date for the Class A-1 Notes or
the Class A-2 Notes may decrease following the payment date in December 2002.
o The Insurance Policy. GreenPoint Mortgage Securities Inc. will obtain
a noncancellable insurance policy from Ambac Assurance Corporation with respect
to both classes of notes. This insurance policy will unconditionally and
irrevocably guarantee to you timely payments of interest and the ultimate
payment of principal on the notes, but subject to
S-8
<PAGE>
specific terms and conditions set forth under the heading "The Insurer and the
Policy" in this prospectus supplement.
o Reserve Fund. On December 22, 1999, an account will be set up in the
name of the indenture trustee on behalf of the noteholders, which will be used
to deposit excess cashflow from either pool until certain levels of
overcollateralization have been reached with respect to both pools. The level of
overcollateralization required will be determined by Ambac Assurance Corporation
and may decrease following the payment date in December 2002.
We refer you to "Description of the Class A Notes--Overcollateralization and
Crosscollateralization Feature" in this prospectus supplement for more detail.
Optional Redemption
On any payment date after the total note principal balance of either class of
notes declines below 10% of the total note principal balance of such class of
notes as of December 22, 1999, GreenPoint Mortgage Securities Inc. may elect to
redeem such class of notes subject to certain conditions herein. If such an
event occurs for your class of notes, you will receive a final distribution on
such payment date.
We refer you to "Certain Provisions of the Sale and Servicing
Agreement--Termination; Retirement of the Class A Notes" in this prospectus
supplement for more detail.
Final Scheduled Payment Date
If the notes have not already been paid in full, the outstanding principal
amount of the Class A-1 Notes will be paid in full on the payment date in
December 2025 and the outstanding principal amount of the Class A-2 Notes will
be paid in full on the payment date in December 2025. Because principal
prepayments on the mortgage loans will probably occur, the disposition of the
last remaining mortgage loan may be earlier than the final scheduled payment
date for the related class of notes.
Federal Income Tax Consequences
For federal income tax purposes Dewey Ballantine LLP, special tax counsel to
GreenPoint Mortgage Securities Inc. and counsel to Greenwich Capital Markets,
Inc., is of the opinion that the notes will be characterized as debt. By your
acceptance of a note, you agree to treat the notes as debt.
We refer you to "Certain Federal Income Tax Consequences" in this prospectus
supplement and to "Federal Income Tax Consequences" in the prospectus for more
detail.
ERISA Considerations
Subject to the considerations and conditions described under "ERISA
Considerations" in this prospectus supplement and prospectus, we expect that
pension, profit-sharing and other employee benefit plans, as well as individual
retirement accounts and certain types of Keogh Plans, may purchase the notes.
You should consult with your counsel regarding the applicability of the
provisions of ERISA before purchasing a note.
We refer you to "ERISA Considerations" in this prospectus supplement and in the
prospectus.
Legal Investment
The notes will not be "mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984.
We refer you to "Legal Investment Considerations" in this prospectus supplement
and to "Legal Investment" in the prospectus for more detail.
Ratings
o The trust will not issue the notes unless they have been assigned the
ratings designated on page S-71.
o You must not assume that the ratings initially assigned to the notes
will not subsequently be lowered, qualified or withdrawn by the rating agencies.
We refer you to "Ratings" in this prospectus supplement for more detail.
S-9
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors (as well as
the factors set forth under "Risk Factors" in the prospectus) in connection with
the purchase of the notes.
Junior Lien Because certain of the mortgage loans in the trust are
Mortgage Loans secured by a junior lien subordinate to the rights of the
mortgagee or beneficiary under the related senior mortgage
or deed of trust, the proceeds from any liquidation,
insurance or condemnation proceedings will be available to
satisfy the outstanding balance of such a junior mortgage
loan only to the extent that the claims of such senior
mortgagee or beneficiary have been satisfied in full,
including any related foreclosure costs. In addition, a
junior mortgagee may not foreclose on the property securing
a junior mortgage unless it forecloses subject to the senior
mortgage, in which case it must either pay the entire amount
due on the senior mortgage to the senior mortgagee at or
prior to the foreclosure sale or undertake the obligation to
make payments on the senior mortgage in the event the
mortgagor is in default thereunder. In servicing a junior
mortgage in its portfolio, it is generally the servicer's
practice to satisfy the senior mortgage at or prior to the
foreclosure sale.
Information is provided under "Description of the Mortgage
Loans" in this prospectus supplement with respect to the
combined loan-to-value ratios of the mortgage loans as of
November 30, 1999. As discussed in the prospectus under
"Risk Factors," the value of the mortgaged properties
underlying such loans could be adversely affected by a
number of factors. As a result, despite the amortization of
the junior and senior mortgage loans on such mortgaged
properties, there can be no assurance that the combined
loan-to-value ratios of such loans, determined as of a date
subsequent to the origination date, will be the same or
lower than the combined loan-to-value ratios for such loans,
determined as of the origination date.
Delays Upon Even assuming that the mortgaged properties provided
Liquidation adequate security for the mortgage loans, substantial delay
could be encountered in connection with the liquidation of
defaulted mortgage loans and corresponding delays in the
receipt of such proceeds by the trust could occur. Further,
the servicer will be entitled to deduct from liquidation
proceeds received in respect of a fully liquidated mortgage
loan all expenses incurred in attempting to recover amounts
due on such mortgage loan and not yet repaid, including
payments to senior mortgagees, legal fees, real estate
taxes, and maintenance and preservation expenses, thereby
reducing collections available to the trust.
Liquidation Liquidation expenses with respect to defaulted mortgage
Expenses 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 larger principal balance, the amount
realized after expenses of liquidation would be smaller as a
percentage of the outstanding principal balance of the
smaller mortgage loan than would be the case with a larger
loan. Because the average outstanding principal balances of
the mortgage loans are small relative to the size of the
loans in a typical pool of purchase-money first lien
residential mortgages, recoveries after the satisfaction of
liquidation expenses on defaulted mortgage loans may also be
smaller as a percentage of the principal amount of the
mortgage loans than would be the case if such loans were a
typical pool of purchase-money first residential mortgages.
S-10
<PAGE>
Prepayment The rate of principal distributions and yield to maturity
Considerations on your notes will be directly related to the rate of
principal payments on the mortgage loans. Mortgagors may
prepay a closed end second lien mortgage loan at any time
without any prepayment penalty. All of the home equity lines
of credit mortgage loans are subject to prepayment penalties
for three years after origination except in those states
where prepayment penalties are prohibited by law. The rate
of principal payments on the mortgage loans will be affected
by the following:
o the amortization schedules of the mortgage loans;
o the rate of principal prepayments (including partial
prepayments and prepayments in full) by mortgagors;
o liquidations of defaulted mortgage loans by the
servicer;
o repurchases of mortgage loans by the sponsor as a
result of defective documentation or breaches of
representations and warranties; and
o the optional redemption by the sponsor of either pool
of mortgage loans.
The rate of principal payments on pools of mortgage loans is
influenced by a variety of economic, geographic, social and
other factors. For example, if mortgage rates for similar
mortgage loans fall below the mortgage rates on the mortgage
loans, the rate of prepayment would generally be expected to
increase. Conversely, if mortgage rates on similar mortgage
loans rise above the mortgage rates on the mortgage loans,
the rate of prepayment would generally be expected to
decrease.
We cannot predict the rate at which borrowers will repay
their mortgage loans. Please consider the following:
o If you are purchasing a note at a discount, your yield
may be lower than expected if principal payments on the
mortgage loans occur at a slower rate than you expected.
o If you are purchasing a note at a premium, your yield
may be lower than expected if principal payments on the
mortgage loans occur at a faster rate than you expected.
o The earlier a payment of principal occurs, the greater
the impact on your yield. For example, if you purchase a
note 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.
We refer you to "Yield, Maturity and Prepayment
Considerations" in this prospectus supplement for more
detail.
Eligibility of Each subsequent group of mortgage loans transferred to the
Subsequent Groups trust after December 22, 1999 must satisfy certain
of Mortgage Loans eligibility criteria at the time of its addition to the
trust including the consent of Ambac Assurance Corporation
to the transfer. Following the transfer of these subsequent
groups of mortgage loans, the aggregate characteristics of
the pool of mortgage loans then held in the trust may vary
from the pool conveyed on December 22, 1999.
See "Description of the Mortgage Loans" in this prospectus
supplement.
S-11
<PAGE>
Balloon Payment Balloon loans pose a special payment risk because the
Mortgage Loans borrower must pay a large lump sum payment of principal at
Present Special the end of the loan term. If the borrower is unable to pay
Payment Risks the lump sum or refinance such amount, you will suffer a
loss if the collateral for such loan is insufficient, the
other forms of credit enhancement are insufficient to cover
the loss and the insurer fails to perform its obligations
under the insurance policy. Approximately 4.22% of the
initial pool I mortgage loans (by aggregate principal
balance) and approximately 0.30% of the initial pool II
mortgage loans (by aggregate principal balance) are mortgage
loans with balloon payments.
Risks Associated The servicer is faced with the task of completing its goals
With Year 2000 for compliance in connection with the year 2000 issue. The
Compliance year 2000 issue is the result of prior computer programs
being written using two digits to define the applicable
year. Any computer programs that have time-sensitive
software may recognize a date using "00" as the year 1900
rather than the year 2000. Any such occurrence could result
in major computer system failure or miscalculations.
Although the servicer has been assured by its third party
computer system provider that such servicing system will be
year 2000 compliant prior to the year 2000, it is presently
engaged in various procedures to determine if the computer
systems and software of this and other suppliers, customers,
brokers and agents will be year 2000 compliant. The servicer
believes that this will be the case.
In the event that the servicer, any subservicer or any of
their suppliers, customers, brokers or agents do not
successfully and timely achieve year 2000 compliance, the
servicer's performance of its obligations under the Sale and
Servicing Agreement could be adversely affected. This could
result in delays in processing payments on the mortgage
loans and could cause a delay in distributions to you.
Insolvency Related The sale of the mortgage loans from GreenPoint Mortgage
Matters Funding, Inc. to the sponsor will be treated as a sale of
the mortgage loans. However, if GreenPoint Mortgage Funding,
Inc. becomes insolvent, the trustee in bankruptcy of
GreenPoint Mortgage Funding, Inc. may attempt to
recharacterize the sale of the mortgage loans as a borrowing
by GreenPoint Mortgage Funding, Inc., secured by a pledge of
the applicable mortgage loans. If the trustee in bankruptcy
decided to do this, and if the mortgage loans have not been
delivered to the indenture trustee, the interest of the
trust in the mortgage loans may be an unperfected security
interest. Even if the mortgage loans have been delivered to
the indenture trustee, delays in the payments of the notes
and reductions in the amounts of the notes could occur. The
sponsor will state in the Sale and Servicing Agreement that
the transfer of the mortgage loans by it to the trust is a
valid transfer and assignment of such mortgage loans to the
trust.
If a conservator, receiver or trustee were appointed for the
sponsor, or if certain other events relating to the
bankruptcy or insolvency of either GreenPoint Mortgage
Funding, Inc. or the sponsor were to occur, this would be an
event of default and the indenture trustee may attempt to
sell the mortgage loans (unless noteholders evidencing more
than 50% of the principal balance of the related class of
notes instruct otherwise), and cause early payment of the
principal of the notes. The net proceeds of such sale will
first be paid to Ambac Assurance Corporation under the
policy and the insurance agreement. Any remaining amounts
will be distributed to satisfy the noteholders first and
then the certificateholder. Such amount may not be enough to
pay the full amount of principal and interest of the notes.
Subject to the prior written consent of Ambac Assurance
Corporation as to the terms of such sale of the mortgage
loans, the policy will be available to cover such
shortfalls.
In the event of a bankruptcy or insolvency of the servicer,
the bankruptcy trustee or receiver may have the power to
prevent the indenture trustee or the noteholders from
appointing a successor servicer.
S-12
<PAGE>
Geographic As of November 30, 1999, approximately 77.92% of the
Concentration initial home equity lines of credit mortgage loans in pool I
by original pool balance were secured by properties that are
located in the state of California and approximately 69.57%
and 7.96% of the initial closed-end fixed-rate mortgage
loans in pool I by original pool balance were secured by
properties that are located in the states of California and
Washington, respectively. As of November 30, 1999,
approximately 85.85% of the initial home equity lines of
credit mortgage loans in pool II by original pool balance
were secured by properties that are located in the state of
California. An overall decline in the residential real
estate markets in these states could reduce the values of
the properties securing such mortgage loans such that the
principal balances of the related mortgage loans, together
with any primary financing on the properties underlying
these mortgage loans, could equal or exceed the value of
such properties. Since the residential real estate market is
influenced by many factors, including the general condition
of the economy and interest rates, there is no guaranty that
the residential real estate markets in these states will not
weaken. If these residential real estate markets should
weaken after the dates of origination of the mortgage loans,
losses on such mortgage loans will probably increase
substantially. In the event of a natural disaster, such as
an earthquake, fire or flood, the values of the properties
may decline. Neither the mortgages, the Sale and Servicing
Agreement nor the loan agreements require natural disaster
insurance that would cover earthquake damage.
Servicer's Ability The servicer may agree to changes in the terms of a home
to Change the equity line of credit mortgage loan, provided that these
Terms of the Home changes (i) do not adversely affect the interests of the
Equity Lines of noteholders or Ambac Assurance Corporation, and (ii) are
Credit Mortgage consistent with prudent business practice. There is no
Loans guaranty that changes in applicable law or the marketplace
for home equity lines of credit mortgage loans or prudent
business practice will not result in changes to the terms of
the home equity lines of credit mortgage loans. In addition,
the Sale and Servicing Agreement permits the servicer,
within certain limitations described therein, to increase
the credit limit of the related home equity line of credit
mortgage loans or reduce the margin for such home equity
line of credit mortgage loan.
Financial Strength The rating on the notes depends primarily on an assessment
of the Insurer by the rating agencies of the mortgage loans and upon the
financial strength of the insurer. Any reduction of the
rating assigned to the financial strength 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.
We refer you to "Ratings" in this prospectus supplement for
more detail.
Maximum Interest The notes are subject to a maximum rate on their note
Rate interest rate, which is equal to the weighted average
coupon rate on the mortgage loans minus certain fees of the
trust. This means that the interest that is payable to the
investors on the notes may be limited to the interest the
trust receives on the mortgage loans minus such fees. If the
weighted average interest rate of the mortgage loans was
reduced significantly, under a relatively high prepayment
scenario, or if the interest rate index for the mortgage
loans decreased without a corresponding decrease in the
index for the notes, the note interest rate could be subject
to the limitation imposed by the maximum rate. This
limitation may reduce the amount of interest you, as an
investor in the notes, receive.
S-13
<PAGE>
The Trust Assets The notes will be non-recourse obligations solely of the
and the Insurance trust and will not represent an obligation of or an
Policy are the interest in GreenPoint Mortgage Funding, Inc., Wilmington
Only Source of Trust Company, Bank One, National Association, GreenPoint
Payments on the Mortgage Securities Inc. or Ambac Assurance Corporation, or
Notes in any of their respective affiliates, except as described
in this prospectus supplement. The assets included in the
trust and the payments under the insurance policy will be
the sole source of payments on the notes, and there will be
no recourse to GreenPoint Mortgage Funding, Inc., Wilmington
Trust Company, Bank One, National Association, GreenPoint
Mortgage Securities Inc. or Ambac Assurance Corporation
(other than as provided in the insurance policy), or any of
their respective affiliates, or any other entity, in the
event that the assets included in the trust and the payments
under the insurance policy are insufficient or otherwise
unavailable to make all payments provided for under the
notes.
S-14
<PAGE>
FORMATION OF THE TRUST
General
GreenPoint Home Equity Loan Trust 1999-2 (the "Trust") is a business
trust formed under the laws of the State of Delaware pursuant to the Trust
Agreement dated as of December 1, 1999 and entered into between the Sponsor and
the Owner Trustee (the "Trust Agreement"). Pursuant to the Trust Agreement, the
Trust will issue certificates (the "Certificates") representing the beneficial
ownership interest in the Trust on or about December 22, 1999 (the "Closing
Date"). Prior to the sale and assignment of the Initial Mortgage Loans (as
defined herein) to the Trust, the Trust will have no assets or obligations or
any operating history. The Trust will not engage in any business other than (i)
acquiring, holding and managing the Mortgage Loans, the other assets of the
Trust and any proceeds therefrom, (ii) issuing the Class A Notes and the
Certificates, (iii) making payments on the Class A Notes and the Certificates
and (iv) engaging in other activities that are necessary, suitable or convenient
to accomplish the foregoing or are incidental thereto.
The Trust will not acquire any assets other than the property of the
Trust described below under the heading "The Trust Property" (the "Trust
Property"), and it is not anticipated that the Trust will have any need for
additional capital resources. Because the Trust will have no operating history
upon its establishment and will not engage in any business other than the duties
discussed above, no historical or pro forma financial statements or ratios of
earnings to fixed charges with respect to the Trust have been included herein.
Certain Activities
The Trust will not, except as expressly provided in the Trust Agreement
and the Indenture dated as of December 1, 1999 between the Trust and the
Indenture Trustee (the "Indenture"): (i) borrow money; (ii) make loans; (iii)
invest in securities for the purpose of exercising control; (iv) underwrite
securities; (v) engage in the purchase and sale (or turnover) of investments;
(vi) offer securities in exchange for property; or (vii) repurchase or otherwise
reacquire its securities.
The Owner Trustee
Wilmington Trust Company, (the "Owner Trustee") under the Trust
Agreement, is a Delaware banking corporation and its principal offices are
located at Rodney Square North, 1100 North Market Street, Wilmington, Delaware
19890-0001, Attention: Corporate Trust Administration. The Owner Trustee will
perform limited administrative functions under the Trust Agreement. The Owner
Trustee's duties in connection with the issuance and sale of the Class A Notes
and the Certificates are limited solely to the express obligations of the Owner
Trustee set forth in the Trust Agreement, the Indenture and the Sale and
Servicing Agreement dated as of December 1, 1999 among the Sponsor, the
Servicer, the Trust and the Indenture Trustee (the "Sale and Servicing
Agreement").
The Indenture Trustee
Bank One, National Association, a national banking association, is the
Indenture Trustee ("Indenture Trustee") under the Indenture. The principal
offices of the Indenture Trustee are located in Chicago, Illinois. The Indenture
Trustee's duties in connection with the Class A Notes are limited solely to its
express obligations under the Indenture and the Sale and Servicing Agreement.
THE TRUST PROPERTY
As of the Closing Date, the Trust Property will include:
o a pool ("Pool I") of certain adjustable rate revolving home
equity lines of credit mortgage loans conveyed to the Trust on
the Closing Date (the "Initial HELOC Mortgage Loans")
(including any additional balances thereto as a result of new
advances made pursuant to the applicable Credit Line
Agreements (the "Additional Balances" with respect to such
Initial HELOC Mortgage Loans in Pool I)), and certain
fixed-rate closed end second lien residential mortgage loans
conveyed to the Trust on the Closing Date (the "Initial Closed
End Mortgage Loans", and together with the Initial HELOC
Mortgage Loans, the "Initial Mortgage Loans "), all of which
substantially conform to certain loan
S-15
<PAGE>
origination standards with respect to loan balance as of the
date of origination set forth by the Federal National Mortgage
Association ("FNMA") conveyed to the Trust on the Closing Date
(the "Initial Pool I Mortgage Loans");
o a pool ("Pool II") containing certain Initial HELOC Mortgage
Loans (including any Additional Balances with respect to such
Initial HELOC Mortgage Loans in Pool II) which may not so
conform with respect to loan balance as of the date of
origination, conveyed to the Trust on the Closing Date (the
"Initial Pool II Mortgage Loans" and together with the Initial
Pool I Mortgage Loans, the "Initial Mortgage Loans");
o the collections in respect of such Initial Mortgage Loans
conveyed to the Trust and received after November 30, 1999
(the "Initial Cut-Off Date") (except Interest Collections due
on or before the Initial Cut-Off Date);
o the subsequent HELOC Mortgage Loans conveyed to the Trust
after the Closing Date (the "Subsequent Mortgage Loans" and
together with the Initial Mortgage Loans, the "Mortgage
Loans") (including any Additional Balances with respect to
such Subsequent Mortgage Loans) and collections with respect
to such Subsequent Mortgage Loans received after the related
Cut-Off Date (as defined below);
o property that secured a Mortgage Loan that has been acquired
by foreclosure or deed in lieu of foreclosure;
o amounts on deposit in the Pre-Funding Account (as defined
below);
o rights of the Sponsor (as defined below) under hazard
insurance policies covering the Mortgaged Properties (as
defined below);
o amounts on deposit in the Reserve Fund (as defined below);
o certain rights of GreenPoint Mortgage Securities Inc. (the
"Sponsor") under the Purchase Agreement dated as of December
1, 1999 (the "Purchase Agreement") between the Sponsor and
GreenPoint Mortgage Funding, Inc. (the "Servicer"); and
o certain other property.
The Mortgage Loans are secured by first or second mortgages or deeds of
trust on residential properties that are primarily one-to-four family properties
and also include planned unit developments and condominiums (the "Mortgaged
Properties"). During the Pre-Funding Period (as defined below), the Trust shall
have the right to purchase Subsequent Mortgage Loans from amounts on deposit in
the Pre-Funding Account. The "Cut-Off Date" for any Subsequent Mortgage Loan is
the later of opening of business on the first day of the calendar month in which
such Subsequent Mortgage Loan is transferred to the Trust and the date of
origination of such Subsequent Mortgage Loan.
THE INSURER AND THE POLICY
The information set forth in this section has been provided by Ambac
Assurance Corporation (the "Insurer") for inclusion in this Prospectus
Supplement. No representation is made by the Underwriter, the Sponsor, the
Servicer or any of their affiliates as to the accuracy or completeness of such
information.
The Insurer is a Wisconsin-domiciled stock insurance corporation
regulated by the Office of the Commissioner of Insurance of the State of
Wisconsin and licensed to do business in 50 states, the District of Columbia,
the Commonwealth of Puerto Rico and the Territory of Guam. The Insurer primarily
insures newly issued municipal and structured finance obligations. The Insurer
is a wholly-owned subsidiary of Ambac Financial Group, Inc. (formerly AMBAC
Inc.), a 100% publicly-held company. Moody's Investors Service ("Moody's"),
Standard & Poor's Ratings Service, a division of The McGraw-Hill Companies Inc.
("S&P"), and Fitch IBCA, Inc. have each assigned a triple-A financial strength
rating to the Insurer.
S-16
<PAGE>
The consolidated financial statements of the Insurer and subsidiaries
as of December 31, 1998 and December 31, 1997 and for each of the years in the
three-year period ended December 31, 1998, prepared in accordance with generally
accepted accounting principles, included in the Annual Report on Form 10-K of
Ambac Financial Group, Inc. (which was filed with the SEC on March 30, 1999,
Commission File No. 1-10777) and the unaudited consolidated financial statements
of the Insurer and subsidiaries as of September 30, 1999 and for the periods
ending September 30, 1999 and September 30, 1998, included in the Quarterly
Report on Form 10-Q of Ambac Financial Group, Inc. for the period ended
September 30, 1999 (which was filed with the SEC on November 12, 1999) are
hereby incorporated by reference into this Prospectus Supplement and shall be
deemed to be a part of this Prospectus Supplement. Any statement contained in a
document incorporated in this Prospectus Supplement by reference shall be
modified or superseded for the purposes of this Prospectus Supplement to the
extent that a statement contained in this Prospectus Supplement by reference in
this Prospectus Supplement also modifies or supersedes the statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus Supplement.
All financial statements of the Insurer and subsidiaries included in
documents filed by Ambac Financial Group, Inc. with the SEC pursuant to Section
13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended,
subsequent to the date of this Prospectus Supplement and prior to the
termination of the offering of the Class A Notes shall be deemed to be
incorporated by reference into this Prospectus Supplement and to be a part of
this Prospectus Supplement from the respective dates of filing of the documents.
The following table sets forth the capitalization of the Insurer as of
December 31, 1996, December 31, 1997, December 31, 1998 and September 30, 1999,
respectively, in conformity with generally accepted accounting principles.
<TABLE>
Ambac Assurance Corporation
Consolidated Capitalization Table
(Dollars in Millions)
<CAPTION>
September 30, 1999
December 31, 1996 December 31, 1997 December 31, 1998 (Unaudited)
----------------- ----------------- ----------------- -----------
<S> <C> <C> <C> <C>
Unearned premiums............... $ 995 $ 1,184 $ 1,303 $ 1,376
Other liabilities............... 259 562 548 465
----------- ----------- ----------- -----------
Total liabilities............... $ 1,254 $ 1,746 $ 1,851 $ 1,841
=========== =========== =========== ===========
Stockholder's equity: (1)
Common stock................ 82 82 82 82
Additional paid-in capital.. 515 521 541 643
Accumulated other
comprehensive income (loss) 66 118 138 (23)
Retained earnings........... 992 1,180 1,405 1,600
----------- ----------- ----------- -----------
Total stockholder's equity...... $ 1,655 $ 1,901 $ 2,166 $ 2,302
----------- ----------- ----------- -----------
Total liabilities and
stockholder's equity........ $ 2,909 $ 3,647 $ 4,017 $ 4,143
=========== =========== =========== ===========
</TABLE>
- --------------------------
(1) Components of stockholder's equity have been restated for all periods
presented to reflect "accumulated other comprehensive income" in accordance
with the Statement of Financial Accounting Standards No. 130 "Reporting
Comprehensive Income" adopted by the Insurer effective January 1, 1998. As
this new standard only requires additional information in the financial
statements, it does not affect the Insurer's financial
position or results of operations.
S-17
<PAGE>
For additional financial information concerning the Insurer, see the
audited and unaudited financial statements of the Insurer incorporated by
reference herein. Copies of the financial statements of the Insurer incorporated
herein by reference and copies of the Insurer's annual statement for the year
ended December 31, 1998 prepared in accordance with statutory accounting
standards are available, without charge, from the Insurer. The address of the
Insurer's administrative offices and its telephone number are One State Street
Plaza, 17th Floor, New York, New York, 10004 and (212) 668-0340.
The Insurer makes no representation regarding the Class A Notes or the
advisability of investing in the Class A Notes and makes no representation
regarding, nor has it participated in the preparation of, this Prospectus
Supplement other than the information supplied by the Insurer and presented
under the heading "The Insurer and the Policy" and in the financial statements
incorporated herein by reference.
The Policy
The following summary of the Policy is qualified in its entirety by
reference to the Policy and the Indenture.
The Insurer will issue an insurance policy (the "Policy") to the
Indenture Trustee with respect to the Class A-1 Notes and the Class A-2 Notes.
The Policy unconditionally guarantees the payment of Insured Payments with
respect to the Class A Notes. The Insurer will make each required Insured
Payment, other than Preference Amounts, to the Indenture Trustee on the later of
(i) the Payment Date on which such Insured Payment is distributable to the
related Holders pursuant to the Indenture; and (ii) the next Business Day
following the day on which the Insurer shall have received telephonic or
telegraphic notice, subsequently confirmed in writing, or written notice by
registered or certified mail, from the Indenture Trustee, specifying that an
Insured Payment is due in accordance with the terms of the Policy. The Insurer
will pay any Preference Amount on the Payment Date next following receipt on a
Business Day of a certified copy of a final non-appealable order requiring the
return of a Preference Amount, and such other documentation as is reasonably
required by the Insurer, such documentation being in a form satisfactory to the
Insurer, provided that if such documents are received after 12:00 noon New York
City time on such Business Day, they will be deemed to be received on the
following Business Day.
The Insurer's obligation under the Policy will be discharged to the
extent that funds are received by the Indenture Trustee for distribution to the
Holders, whether or not such funds are properly distributed by the Indenture
Trustee.
For purposes of the Policy, "Holder" as to a particular Class A Note
does not and may not include the Trust, the Servicer or the Sponsor.
"Insured Payment" means (x) with respect to either Class of Class A
Notes and for any Payment Date the excess, if any, of (i) the sum of (a) the
related Interest Payment Amount (excluding any Relief Act Shortfalls and any
Deferred Interest), (b) the related Overcollateralization Deficit and (c) the
related Preference Amount (without duplication) over (ii) the Total Available
Funds for such Pool and (y) on the related Final Scheduled Payment Date, the
outstanding Note Principal Balance of each Class of Class A Notes then
outstanding, to the extent not otherwise paid on such Payment Date.
"Pool" means Pool I or Pool II, as applicable.
"Note Principal Balance" means as of any date of determination and with
respect to each Class of Class A Notes, the principal balance of the related
Class of Class A Notes on the Closing Date less any amounts actually distributed
as principal thereon on all prior Payment Dates.
"Overcollateralization Deficit" with respect to either Class of Class A
Notes is equal to the amount, if any, by which the Note Principal Balance
exceeds the Pool Balance for the related Class of Class A Notes.
"Preference Amount" means any payment of principal or interest on a
Class A Note which is made to a Holder of a Class A Note by or on behalf of the
Indenture Trustee which has been deemed to be a preferential transfer and is
therefore recovered from such Holder by a trustee in bankruptcy pursuant to the
United States
S-18
<PAGE>
Bankruptcy Code (11 U.S.C.) as amended from time to time, in accordance with a
final non-appealable order of a court having competent jurisdiction.
"Relief Act Shortfalls" are interest shortfalls resulting from the
application of the Soldiers' and Sailors' Civil Relief Act of 1940, as amended.
See "Certain Legal Aspects of Loans--Soldiers' and Sailors' Civil Relief Act" in
the Prospectus.
"Total Available Funds" with respect to each Class of Class A Notes and
on any Payment Date is the sum of (i) the Available Funds for the related Class
of Class A Notes (excluding the fees of the Indenture Trustee and the premium
amount payable to the Insurer for the related Pool), (ii) any Crossover Amounts
available from the other Pool, (iii) any amounts that may be realized from the
Overcollateralization Amount for the related Class of Class A Notes and (iv)
amounts on deposit in the Reserve Fund (but only to the extent that Available
Funds with respect to the related Class, plus any Crossover Amount available
from the other Class, are insufficient to pay the amounts specified in clauses
(iii), (v) and (vi) of "Description of the Class A Notes--Priority of
Distributions" with respect to the related Class).
To the extent that the Insurer makes Insured Payments, either directly
or indirectly (as by paying through the Indenture Trustee), to the related
Holders, the Insurer will be subrogated to the rights of such Holders with
respect to such Insured Payments and shall be deemed to the extent of the
payments so made to be a registered Holder of the Class A Notes for purposes of
payment.
Payments under the Policy will be made only at the times set forth in
the Policy. No accelerated payments shall be made on the Policy, regardless of
any acceleration of any of the Class A Notes, unless such accelerated payments
are made at the sole option of the Insurer.
The Policy does not guarantee to the Class A Noteholders any rate of
principal payments on the Class A Notes. The Policy does not cover any Deferred
Interest on the Class A Notes.
The Policy is non-cancelable. The Policy expires and terminates without
any action on the part of the Insurer or any other person on the date that is
one year and one day following the date on which the Class A Notes have been
paid in full.
The Policy is issued under and pursuant to and shall be construed
under, the laws of the State of New York, without giving effect to the conflict
of laws principles thereof.
THE POLICY IS NOT COVERED BY THE PROPERTY/CASUALTY INSURANCE SECURITY
FUND SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW.
Drawings Under the Policy
On each Determination Date, the Indenture Trustee shall determine, with
respect to the immediately following Payment Date, the Total Available Funds for
such Payment Date. With respect to each Payment Date, the "Determination Date"
is the third Business Day next preceding such Payment Date or such earlier day
as shall be agreed to by the Insurer and the Indenture Trustee.
If the Indenture Trustee determines that an Insured Payment is required
to be paid for a Class of Class A Notes for any Payment Date, the Indenture
Trustee shall complete a Notice in the form of Exhibit A to the Policy and
submit such notice to the Insurer no later than 12:00 noon New York City time on
the second Business Day preceding such Payment Date as a claim for an Insured
Payment.
GREENPOINT MORTGAGE FUNDING, INC.
General
GreenPoint Mortgage Funding, Inc. (the "Company" or the "Servicer") 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. The Company originates loans through a nationwide network of
production branches. Loans are originated primarily
S-19
<PAGE>
through the Company's wholesale division, through a network of independent
mortgage loan brokers approved by the Company, and also through its retail
lending division and correspondent lending division. The Mortgage Loans were
acquired by the Company in one of the three following manners: (i) originated by
an independent broker and purchased by the Company, (ii) originated by a broker
and funded by the Company, or (iii) originated and funded by the Company in the
ordinary course of business.
The Company is a wholly-owned subsidiary of GreenPoint Financial Corp.
("GreenPoint Financial"), a national specialty housing finance company.
GreenPoint Financial's other subsidiaries include GreenPoint Bank, a New York
State chartered savings bank with $11 billion in deposits and 73 branch offices
in the greater New York area, and GreenPoint Credit Corp., the nation's second
largest manufactured housing lender. GreenPoint Financial is listed on the New
York Stock Exchange under the symbol "GPT."
The Company's present business operations were formed through the
transfer to the Company effective October 1, 1999 of the assets and liabilities
of Headlands Mortgage Company ("Headlands"). Simultaneously with this transfer,
GreenPoint Mortgage Corp. ("GreenPoint Mortgage"), a subsidiary of GreenPoint
Financial specializing in non-conforming, no documentation loans, was merged
into the Company. All of the mortgage operations of GreenPoint Financial are now
conducted through the Company.
The Company's executive offices are located at 1100 Larkspur Landing
Circle, Suite 101, Larkspur, CA 94939.
Servicing Overview
The Company (in its capacity as servicer) will act as servicer for the
Mortgage Loans pursuant to the Sale and Servicing Agreement. All of the Mortgage
Loans are currently serviced by the Company substantially in accordance with the
procedures described herein and in the accompanying Prospectus.
As of October 31, 1999, the Company's mortgage loan servicing portfolio
consisted of 141,770 one to four family residential mortgage loans with an
aggregate principal balance of $14.0 billion. The Company's primary source of
mortgage servicing rights is from mortgage loans it has originated.
In connection with the consolidation of GreenPoint Financial's mortgage
operations in the Company as described above, the servicing operations formerly
maintained by Headlands at its servicing center in Santa Rosa, California are
being transferred to the servicing center formerly maintained by GreenPoint
Mortgage in Columbus, Georgia. The Company expects this transfer to be completed
during the first quarter of 2000, at which time all of the Company's servicing
operations will be located in Columbus. The Company will continue to use the
servicing procedures described herein and in the accompanying Prospectus to
service the Mortgage Loans; however the personnel who service the Mortgage Loans
at the Columbus facility will principally be former GreenPoint Mortgage
employees rather than former Headlands employees. Until the transfer is
complete, a portion of the Mortgage Loans will continue to be serviced at the
Santa Rosa facility.
The following table contains servicing portfolio information with
respect to dates and periods prior to the consolidation of GreenPoint
Financial's mortgage operations in the Company on October 1, 1999. The first
table below summarizes the delinquency, foreclosure and loss experience on
Headlands' HELOC Mortgage Loan and Closed End Mortgage Loan servicing portfolio.
This portfolio consists of second-lien 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 second table below summarizes the
available delinquency, foreclosure and loss experience of GreenPoint Mortgage
with respect to second-lien and home equity lines of credit mortgage loans
originated or acquired by GreenPoint Mortgage. GreenPoint Mortgage did not
originate second-lien or home equity lines of credit mortgage loans using
underwriting standards comparable to those used by Headlands and which were used
to originate the Mortgage Loans. GreenPoint Mortgage only had limited experience
in servicing second-lien or home equity loans.
S-20
<PAGE>
<TABLE>
<CAPTION>
HEADLANDS' HELOC AND SECOND LIEN MORTGAGE PORTFOLIO
DELINQUENCY, FORECLOSURE AND LOSS EXPERIENCE
--------------------------------------------------------------------------------------------
December 31, 1996** December 31, 1997** December 31, 1998 September 30, 1999
------------------- ------------------- ----------------- ------------------
Percent Percent Percent
Percent of of of of
Number of Servicing Number of Servicing Number of Servicing Number of Servicing
Loans Portfolio Loans Portfolio Loans Portfolio Loans Portfolio
----- --------- ----- --------- ----- --------- ----- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Number* 3,711 100% 8,671 100% 18,178 100% 21,332 100%
Period of Delinquency
30-59 days 15 0.4% 174 2.0% 209 1.1% 254 1.2%
60-89 days 0 0.0 27 0.3 36 0.2 41 0.2
90 days or more 0 0.0 6 0.1 26 0.1 34 0.2
----- --------- ----- --------- ----- --------- ----- ---------
Total Delinquencies 15 0.4% 207 2.4% 271 1.5% 329 1.6%
===== ========= ===== ========= ===== ========= ===== =========
(excluding Foreclosures)
Foreclosures Pending 0 0.0% 8 0.1% 37 0.2% 58 0.3%
Losses sustained $0 $293,111 $703,930 $1,159,593
</TABLE>
* The total portfolio has been reduced by the number of loans that have been
foreclosed.
** Figures do not include loans held by Headlands in any of its warehouse
facilities.
GREENPOINT MORTGAGE'S HELOC AND SECOND LIEN MORTGAGE PORTFOLIO
DELINQUENCY, FORECLOSURE AND LOSS EXPERIENCE
<TABLE>
<CAPTION>
December 31, 1998 September 30, 1999
----------------- ------------------
Percent of Percent of
Number of Servicing Number of Servicing
Loans Portfolio Loans Portfolio
----- --------- ----- ---------
<S> <C> <C> <C> <C>
Total Number* 1,673 100.00% 1,722 100.00%
Period of Delinquency
30-59 days 44 2.6% 25 1.5%
60-89 days 17 1.0 10 0.6
90 days or more 2 0.1 2 0.1
------- ------- ------- -------
Total Delinquencies 63 3.8% 37 2.1%
======= ======= ======= =======
(excluding Foreclosures)
Foreclosures Pending 11 0.7% 20 1.2%
Losses sustained $0 $0
</TABLE>
* The total portfolio has been reduced by the number of loans that have been
foreclosed.
THE COMPANY'S MORTGAGE LOAN PROGRAM
The Mortgage Loans will have been originated or purchased by the
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."
S-21
<PAGE>
Underwriting Standards
The Company 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. With respect to single family
loans, the appraisal is based on the market value of comparable homes, the
estimated rental income (if considered applicable by the appraiser) and the cost
of replacing the home. With respect to a loan on a two-to-four unit property,
the appraisal must specify whether an income analysis, a market analysis or a
cost analysis, was used. An appraisal employing the income approach to value
analyzes a two-to-four unit project's cash flow, expenses, capitalization and
other operational information in determining the property's value. The market
approach to value focuses its analysis on the prices paid for the purchase of
similar properties in the two-to-four unit project's area, with adjustments made
for variations between these other properties and the multifamily project being
appraised. The cost approach calls for the appraiser to make an estimate of land
value and then determine the current cost of reproducing the building less any
accrued depreciation. In any case, the value of the property being financed, as
indicated by the appraisal, must be such that it currently supports, and is
anticipated to support in the future, the outstanding loan balance. For property
values up 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
(determined on the basis of the monthly payments due in the year of origination)
and other expenses related to the mortgaged property (such as property taxes and
hazard insurance) and (b) to meet monthly housing expenses and other financial
obligations and monthly living expenses. The underwriting standards applied by
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 Company 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. These reduced documentation programs include an "EZ Documentation"
program, a "No Employment/Income Documentation" program and a "No Ratio
Documentation" program. A reduced documentation program is designed to
streamline the loan approval process and thereby improve the lender's
competitive position among other loan originators. Under a reduced documentation
program, relatively more emphasis is placed on credit score and property
underwriting than on certain credit underwriting documentation concerning income
and employment verification is waived.
S-22
<PAGE>
In the case of a Mortgage Loan secured by a leasehold interest in a
real property, the title to which is held by a third party lessor, the 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
GreenPoint Mortgage Securities Inc. (the "Sponsor") is a Delaware
corporation which was incorporated on November 18, 1996. The Sponsor is a
special purpose corporation organized for limited purposes, with limited assets
and a limited operating history. The Sponsor is a wholly owned subsidiary of the
Company and maintains its principal office at 700 Larkspur Landing Circle, Suite
240, Larkspur, California 94939. Its telephone number is (415) 925-5442.
DESCRIPTION OF THE MORTGAGE LOANS
Mortgage Loans - General
The Mortgage Loans were originated pursuant to loan agreements and
promissory notes and the appropriate state disclosure statements and are secured
by first and second mortgages or deeds of trust, on Mortgaged Properties located
in 33 states and in the District of Columbia. The loan agreements with respect
to the HELOC Mortgage Loans are the "Credit Line Agreements" and with respect to
the Closed End Mortgage Loans are the "Mortgage Notes" (the Mortgage Notes,
together with the Credit Line Agreements, the "Loan Agreements"). The Mortgaged
Properties securing the Mortgage Loans consist primarily of residential
properties that are one- to four-family properties and also include planned unit
developments and condominiums. See "Mortgage Loan Terms" below.
The HELOC Mortgage Loans are adjustable rate revolving home equity
lines of credit mortgage loans, secured by first or second mortgages or deeds of
trust. The HELOC Mortgage Loans have monthly payments which may vary throughout
their term. The Closed End Mortgage Loans are generally fixed-rate, fully
amortizing second lien mortgages. The monthly payment remains constant
throughout the term of the Closed End Mortgage Loans and is applied to principal
and interest based on a predetermined actuarial paydown schedule.
Mortgage Loan Terms
The Mortgage Loans consist of loans originated under three different
loan term options: a 15-year HELOC Mortgage Loan, a 25-year HELOC Mortgage Loan
or a 15-year Closed End Mortgage Loan.
The HELOC loan programs originate mortgage loans that have either a
5-year or 15-year draw period, during which the borrower may make cash
withdrawals against the equity line and a 10-year repayment period, during which
the balance of the HELOC as of the end of the draw period is repaid. Generally,
the HELOC borrowers are subject to a $500 prepayment penalty for loans paid
prior to maturity.
A borrower may access a HELOC credit line at any time during the draw
period by writing a check. The minimum payment during the draw period of the
HELOC is the greatest of accrued finance charges on the daily balance of the
HELOC at the applicable Loan Rate, $100, or 1% of the outstanding principal
balance. The payment during the repayment period of the HELOC is calculated as
accrued interest plus 0.8333% of principal outstanding as of the last day of the
draw period. HELOC Mortgage Loans bear interest at a variable rate which changes
monthly with changes in the applicable "Index Rate" which is a variable per
annum rate based on the prime rate or base rate published in the Money Rates
table of the Wall Street Journal. Generally, the HELOC Mortgage Loans are
subject to a maximum rate equal to approximately 18% per annum and subject to
applicable usury limitations except that some HELOC Mortgage Loans may have a
maximum rate between 18% per annum and 25% per annum. The "Loan Rate" on the
HELOC Mortgage Loans is a per annum rate equal to the sum of the Index Rate plus
a margin, ranging from 0.00% to 6.25% (with respect to each HELOC Mortgage Loan,
the "Margin") (subject to "teaser periods") which generally ranges between
5.625% and 15.500%. The Pool I Mortgage Loans which are Initial HELOC Mortgage
Loans had a weighted average Loan Rate, as of the Initial Cut-Off Date of
approximately 6.690% and the Pool II Mortgage Loans which are Initial HELOC
Mortgage Loans had a weighted average Loan Rate as of the Initial Cut-Off Date
of approximately 6.451%.
S-23
<PAGE>
Unlike the HELOC Mortgage Loans, the Closed End Mortgage Loans are all
"closed-end" loans which do not permit additional borrowings thereunder. All of
the Closed End Mortgage Loans bear interest at a fixed-rate (the "Loan Rate"
with respect to the Closed End Loans).
Pool I Mortgage Loans - General
The aggregate Principal Balance of the Initial Pool I Mortgage Loans as
of the Initial Cut-Off Date was approximately $154,536,428 (the "Initial Pool I
Balance"). As of the Cut-Off Date, the Principal Balance of Initial Pool I
Closed End Mortgage Loans was approximately $13,113,557 (the "Initial Pool I
Closed End Balance") and the Principal Balance of Initial Pool I HELOC Mortgage
Loans was approximately $141,422,871 (the "Initial Pool I HELOC Balance"). As
of the Initial Cut-Off Date, the average Principal Balance of the Initial Pool I
Mortgage Loans was approximately $37,600, the minimum Principal Balance was $0,
the maximum Principal Balance was $351,688, the Loan Rates ranged from 5.625% to
15.500% per annum and the weighted average Loan Rate was approximately 7.084%
per annum. Each of the Initial Pool I HELOC Mortgage Loans is subject to a
maximum Loan Rate of 18%, except for three Initial Pool I HELOC Mortgage Loan
subject to a maximum rate of 24%, representing approximately 0.02% of the
Initial Pool I HELOC Balance. As of the Initial Cut-Off Date and with respect to
the Initial Pool I HELOC Mortgage Loans, the weighted average Credit Limit
Utilization Rate (weighted by Credit Limit) was approximately 88.93%, the
minimum Credit Limit Utilization Rate was 0% and the maximum Credit Limit
Utilization Rate was approximately 110%. The "Credit Limit Utilization Rate" is
determined by dividing the Principal Balance of a HELOC Mortgage Loan by the
Credit Limit of the related HELOC Mortgage Loan. The "Credit Limit" with respect
to a HELOC Mortgage Loan is the maximum dollar amount of draws permitted to be
made thereunder at any one time by the related Mortgagor. As of the Initial
Cut-Off Date, the remaining term to scheduled maturity for the Initial Pool I
Mortgage Loans ranged from 166 months to 300 months and the weighted average
remaining term to scheduled maturity was approximately 207 months. As of the
Initial Cut-Off Date, the Combined Loan-to-Value Ratio of the Initial Pool I
Mortgage Loans ranged from 4.98% to 100.00% and the weighted average Combined
Loan-to-Value Ratio of the Initial Pool I Mortgage Loans was approximately
84.27%. The "Combined Loan-to-Value Ratio" is (I) with respect to a HELOC
Mortgage Loan, the ratio (expressed as a percentage) of (A) the sum of (i) the
Credit Limit of such HELOC Mortgage Loan and (ii) any outstanding principal
balances of mortgage loans senior to such HELOC Mortgage Loan (calculated as of
the date of execution of the related Credit Line Agreement) to (B) the lesser of
(i) the appraised value of the related Mortgaged Property as set forth in the
loan files at such date of origination or (ii) in the case of a Mortgaged
Property purchased within one year of the origination of the related HELOC
Mortgage Loan, the purchase price of such Mortgaged Property and (II) with
respect to a Closed End Mortgage Loan, the ratio (expressed as a percentage) of
(A) the sum of (i) the original principal balance of such Closed End Mortgage
Loan and (ii) the outstanding principal balance of any mortgage loan or mortgage
loans that are senior or equal in priority to such Closed End Mortgage Loan
(calculated as of the date of execution of the related Mortgage Note) and that
is or are secured by the same Mortgaged Property to (B) the lesser of (i) the
appraised value of the related Mortgaged Property as set forth in the loan files
at such date of origination or (ii) in the case of a Mortgaged Property
purchased within one year of the origination of such Closed End Mortgage Loan,
the purchase price of such Mortgaged Property. Credit Limits of the Initial Pool
I HELOC Mortgage Loans ranged from $10,000 to $500,000 and averaged
approximately $52,380. The Weighted Average Second Mortgage Ratio for the
Initial Pool I Mortgage Loans was approximately 23.09%. The "Weighted Average
Second Mortgage Ratio" is (I) with respect to a HELOC Mortgage Loan in the
second lien position, the Credit Limit of such HELOC Mortgage Loan divided by
the sum of such Credit Limit and the outstanding principal balance of any
mortgage loan senior to such HELOC Mortgage Loan or (II) with respect to a
Closed End Mortgage Loan in the second lien position, the original loan balance
of such Closed End Mortgage Loan divided by the sum of the original loan balance
of such Closed End Mortgage Loan and the outstanding principal balance of any
mortgage loan senior to such Closed End Mortgage Loan. Substantially all of the
Initial Pool I Mortgage Loans represented second liens on the related Mortgaged
Properties. As of the Initial Cut-Off Date, 69.27% of the Initial Pool I
Mortgage Loans were secured by Mortgaged Properties which are single-family
residences and 95.79% of the Initial Pool I Mortgage Loans are secured by
Mortgaged Properties which are owner-occupied. As of the Initial Cut-Off Date,
74.05%, by Principal Balance, of the Initial Pool I Mortgage Loans are secured
by Mortgaged Properties which are located in California.
Real estate lenders in California are unable as a practical matter to
obtain a deficiency judgment against the borrower on a loan secured by one- to
four-unit real estate. See "Certain Legal Aspects of the Loans--Anti-Deficiency
Legislation; Bankruptcy Laws; Tax Liens" in the Prospectus.
S-24
<PAGE>
Set forth below is a description of certain characteristics of the
Initial Pool I Mortgage Loans as of the Initial Cut-Off Date. The sum of the
columns in each such table may not equal the total indicated due to rounding.
TYPE OF MORTGAGE LOAN
INITIAL POOL I MORTGAGE LOANS
Aggregate Percent of
Number of Initial Initial Initial
Pool I Mortgage Cut-Off Date Pool I
Type Loans Principal Balance Balance
- ----------------------------- ----------------- ----------------- ----------
Closed-End Mortgage Loans.... 347 $ 13,113,557.10 8.49%
HELOC Mortgage Loans......... 3,861 141,422,871.09 91.51
----------------- ----------------- ----------
Total..................... 4,208 $ 154,536,428.19 100.00%
================= ================= ==========
PRINCIPAL BALANCES
INITIAL POOL I MORTGAGE LOANS
Aggregate Percent of
Number of Initial Initial Initial
Range of Principal Balances Pool I Mortgage Cut-Off Date Pool I
($) Loans Principal Balance Balance
- ----------------------------- ----------------- ----------------- ----------
0.00...... 98 $ 0.00 0.00%
0.01 - 10,000.00...... 379 1,760,925.98 1.14
10,000.01 - 20,000.00...... 767 11,906,988.21 7.70
20,000.01 - 30,000.00...... 807 20,274,900.28 13.12
30,000.01 - 40,000.00...... 641 22,548,561.41 14.59
40,000.01 - 50,000.00...... 630 29,218,021.98 18.91
50,000.01 - 60,000.00...... 232 12,832,488.33 8.30
60,000.01 - 70,000.00...... 179 11,673,253.30 7.55
70,000.01 - 80,000.00...... 146 10,991,932.11 7.11
80,000.01 - 90,000.00...... 95 8,147,640.01 5.27
90,000.01 -100,000.00...... 158 15,424,113.07 9.98
100,000.01 -110,000.00...... 32 3,333,546.69 2.16
110,000.01 -120,000.00...... 22 2,549,273.63 1.65
120,000.01 -130,000.00...... 7 886,291.88 0.57
130,000.01 -140,000.00...... 1 137,279.71 0.09
140,000.01 -150,000.00...... 3 436,889.24 0.28
160,000.01 -170,000.00...... 1 164,500.00 0.11
180,000.01 -190,000.00...... 2 366,162.00 0.24
190,000.01 -200,000.00...... 5 997,859.14 0.65
240,000.01 -250,000.00...... 1 245,000.00 0.16
280,000.01 -290,000.00...... 1 289,113.29 0.19
350,000.01 -351,687.93...... 1 351,687.93 0.23
----------------- ----------------- ----------
Total..................... 4,208 $154,536,428.19 100.00%
================= ================= ==========
S-25
<PAGE>
GEOGRAPHIC DISTRIBUTION(1)
INITIAL POOL I MORTGAGE LOANS
Aggregate Percent of
Number of Initial Initial Initial
Pool I Mortgage Cut-Off Date Pool I
State Loans Principal Balance Balance
- ----------------------------- ----------------- ----------------- ----------
Arizona...................... 127 $ 3,362,481.81 2.18%
California................... 2,909 114,430,397.80 74.05
Colorado..................... 190 5,416,241.14 3.50
Connecticut.................. 19 841,249.11 0.54
Delaware..................... 1 37,935.00 0.02
District of Columbia......... 7 276,478.81 0.18
Florida...................... 88 2,032,405.66 1.32
Georgia...................... 31 1,167,637.54 0.76
Idaho........................ 34 689,986.95 0.45
Illinois..................... 48 1,403,720.83 0.91
Indiana...................... 1 30,600.00 0.02
Kansas....................... 3 209,443.84 0.14
Maine........................ 1 58,200.00 0.04
Maryland..................... 44 1,545,057.08 1.00
Massachusetts................ 90 3,247,740.01 2.10
Michigan..................... 6 177,176.22 0.11
Montana...................... 12 256,001.59 0.17
Nebraska..................... 1 70,000.00 0.05
Nevada....................... 73 2,071,679.90 1.34
New Hampshire................ 7 245,872.25 0.16
New Jersey................... 22 716,076.14 0.46
New Mexico................... 46 1,182,550.28 0.77
New York..................... 14 565,654.29 0.37
North Carolina............... 19 377,893.26 0.24
Oklahoma..................... 1 30,000.00 0.02
Oregon....................... 83 2,741,703.58 1.77
Pennsylvania................. 11 323,307.78 0.21
Rhode Island................. 4 77,698.95 0.05
South Carolina............... 4 110,009.84 0.07
Utah......................... 101 3,531,201.93 2.29
Virginia..................... 47 1,526,214.93 0.99
Washington................... 161 5,665,794.37 3.67
West Virginia................ 1 35,000.00 0.02
Wyoming...................... 2 83,017.30 0.05
------------------ ----------------- ----------
Total..................... 4,208 $154,536,428.19 100.00%
================== ================= ==========
- ------------------
(1)Geographic location is determined by the address of the Mortgaged Property
securing the related Mortgage Loans.
S-26
<PAGE>
COMBINED LOAN-TO-VALUE RATIOS(1)
INITIAL POOL I MORTGAGE LOANS
Aggregate Percent of
Range of Number of Initial Initial Initial
Combined Loan-to-Value Ratios Pool I Mortgage Cut-Off Date Pool I
(%) Loans Principal Balance Balance
- ----------------------------- ----------------- ----------------- ----------
4.98 to 10.00............... 16 $ 417,856.05 0.27%
10.01 to 20.00............... 32 1,022,511.73 0.66
20.01 to 30.00............... 28 1,049,121.44 0.68
30.01 to 40.00............... 25 865,391.61 0.56
40.01 to 50.00............... 45 2,263,124.47 1.46
50.01 to 60.00............... 97 3,781,461.17 2.45
60.01 to 70.00............... 203 9,015,697.41 5.83
70.01 to 80.00............... 763 30,898,714.15 19.99
80.01 to 90.00............... 1,719 56,172,521.96 36.35
90.01 to 100.00.............. 1,280 49,050,028.20 31.74
----------------- ----------------- ----------
Total..................... 4,208 $154,536,428.19 100.00%
================= ================= ==========
- ------------------
(1) The "Combined Loan-to-Value Ratio" is (I) with respect to a HELOC Mortgage
Loan, the ratio (expressed as a percentage) of (A) the sum of (i) the Credit
Limit of such HELOC Mortgage Loan and (ii) any outstanding principal balances of
mortgage loans senior to such HELOC Mortgage Loan (calculated as of the date of
execution of the related Credit Line Agreement) to (B) the lesser of (i) the
appraised value of the related Mortgaged Property as set forth in the loan files
at such date of origination or (ii) in the case of a Mortgaged Property
purchased within one year of the origination of the related HELOC Mortgage Loan,
the purchase price of such Mortgaged Property and (II) with respect to a Closed
End Mortgage Loan, the ratio (expressed as a percentage) of (A) the sum of (i)
the original principal balance of such Closed End Mortgage Loan and (ii) the
outstanding principal balance of any mortgage loan or mortgage loans that are
senior or equal in priority to such Closed End Mortgage Loan (calculated as of
the date of execution of the related Mortgage Note) and that is or are secured
by the same Mortgaged Property to (B) the lesser of (i) the appraised value of
the related Mortgaged Property as set forth in the loan files at such date of
origination or (ii) in the case of a Mortgaged Property purchased within one
year of the origination of the related Closed End Mortgage Loan, the purchase
price of such Mortgaged Property.
PROPERTY TYPE
INITIAL POOL I MORTGAGE LOANS
Aggregate Percent of
Number of Initial Initial Initial
Pool I Mortgage Cut-Off Date Pool I
Property Type Loans Principal Balance Balance
- ----------------------------- ----------------- ----------------- ----------
2-4 Units.................... 232 $ 10,147,304.39 6.57%
Condominium.................. 414 12,426,623.95 8.04
PUD.......................... 637 24,908,337.11 16.12
Single Family................ 2,925 107,054,162.74 69.27
----------------- ----------------- ----------
Total.................. 4,208 $ 154,536,428.19 100.00%
================= ================= ==========
S-27
<PAGE>
CURRENT LOAN RATES
INITIAL POOL I HELOC MORTGAGE LOANS
Aggregate Percent of
Number of Initial Initial Initial Pool
Range of Current Loan Rates Pool I HELOC Cut-Off Date I HELOC
(%) Mortgage Loans Principal Balance Balance
- ----------------------------- ---------------- ----------------- ------------
5.62 - 6.00............... 3,298 $ 120,245,506.39 85.03%
6.51 - 7.00............... 2 19,275.54 0.01
7.01 - 7.50............... 9 484,410.01 0.34
8.01 - 8.50............... 27 819,340.23 0.58
8.51 - 9.00............... 6 266,312.40 0.19
9.01 - 9.50............... 10 562,436.47 0.40
9.51 - 10.00............... 27 755,187.65 0.53
10.01 - 10.50............... 47 1,678,821.09 1.19
10.51 - 11.00............... 79 2,764,176.79 1.95
11.01 - 11.50............... 147 5,051,492.20 3.57
11.51 - 12.00............... 98 4,683,020.44 3.31
12.01 - 12.50............... 60 2,136,422.05 1.51
12.51 - 13.00............... 32 1,324,109.47 0.94
13.01 - 13.50............... 11 395,732.51 0.28
13.51 - 14.00............... 4 167,013.12 0.12
14.01 - 14.50............... 3 49,814.73 0.04
15.01 - 15.50............... 1 19,800.00 0.01
---------------- ----------------- ------------
Total.................. 3,861 $ 141,422,871.09 100.00%
================ ================= ============
LOAN RATES
INITIAL POOL I CLOSED END MORTGAGE LOANS
Aggregate
Initial Percent of
Number of Initial Cut-Off Date Initial Pool
Pool I Closed End Principal I Closed End
Range of Loan Rates (%) Mortgage Loans Balance Balance
- ----------------------------- ----------------- --------------- -------------
5.62 - 8.50............... 1 $ 61,307.19 0.47%
8.51 - 9.00............... 9 281,816.70 2.15
9.01 - 9.50............... 26 1,143,500.00 8.72
9.51 - 10.00............... 42 1,300,168.64 9.91
10.01 - 10.50............... 36 1,470,635.49 11.21
10.51 - 11.00............... 41 1,384,224.08 10.56
11.01 - 11.50............... 41 1,576,435.44 12.02
11.51 - 12.00............... 47 1,842,872.75 14.05
12.01 - 12.50............... 31 1,304,350.00 9.95
12.51 - 13.00............... 40 1,435,817.65 10.95
13.01 - 13.50............... 27 1,087,254.16 8.29
13.51 - 15.50............... 6 225,175.00 1.72
------------------ --------------- ------------
Total.................. 347 $13,113,557.10 100.00%
================== =============== ============
S-28
<PAGE>
MARGIN
INITIAL POOL I HELOC MORTGAGE LOANS
Aggregate Percent of
Number of Initial Initial Initial Pool
Pool I HELOC Cut-Off Date I HELOC
Range of Margins (%) Mortgage Loans Principal Balance Balance
- ----------------------------- ------------------ ----------------- ----------
less than 0.50............... 299 $ 8,769,489.30 6.20%
0.51 - 1.00.................. 235 7,514,561.32 5.31
1.01 - 1.50.................. 144 4,754,488.80 3.36
1.51 - 2.00.................. 234 8,455,368.59 5.98
2.01 - 2.50.................. 352 15,154,311.98 10.72
2.51 - 3.00.................. 330 13,537,630.72 9.57
3.01 - 3.50.................. 401 14,024,024.54 9.92
3.51 - 4.00.................. 586 19,946,220.77 14.10
4.01 - 4.50.................. 616 22,763,744.42 16.10
4.51 - 5.00.................. 519 20,951,234.07 14.81
5.01 - 5.50.................. 127 4,729,416.59 3.34
5.51 - 6.00.................. 16 772,833.36 0.55
6.01 - 6.25.................. 2 49,546.63 0.04
------------------ ---------------- -----------
Total..................... 3,861 $141,422,871.09 100.00%
================== ================ ===========
CREDIT LIMIT UTILIZATION RATES(1)
INITIAL POOL I HELOC MORTGAGE LOANS
Percent of
Number of Initial Aggregate Initial Initial Pool
Range of Utilization Rates Pool I HELOC Cut-Off Date I HELOC
(%) Mortgage Loans Principal Balance Balance
- ----------------------------- ----------------- ----------------- -----------
less than 0.00.............. 98 $ 0.00 0.00%
0.01 -10.00................ 226 603,990.57 0.43
10.01 -20.00................ 75 846,697.45 0.60
20.01 -30.00................ 109 1,861,243.72 1.32
30.01 -40.00................ 136 2,911,226.12 2.06
40.01 -50.00................ 147 4,191,947.67 2.96
50.01 -60.00................ 174 6,191,338.59 4.38
60.01 -70.00................ 170 6,708,158.76 4.74
70.01 -80.00................ 160 6,540,092.86 4.62
80.01 -90.00................ 184 7,660,954.16 5.42
90.01 -100.00............... 2,381 103,855,051.94 73.44
100.01 -109.83............... 1 52,169.25 0.04
----------------- ----------------- -----------
Total..................... 3,861 $141,422,871.09 100.00%
================= ================= ===========
- -------------------
(1)The "Credit Limit Utilization Rate" of a HELOC Mortgage Loan is determined
by dividing the Principal Balance of a HELOC Mortgage Loan as of the Initial
Cut-Off Date by the Credit Limit of the related HELOC Mortgage Loan.
S-29
<PAGE>
CREDIT LIMITS
INITIAL POOL I HELOC MORTGAGE LOANS
Number of Initial Aggregate Initial Percent of
Pool I HELOC Cut-Off Date Initial Pool I
Range of Credit Limits ($) Mortgage Loans Principal Balance HELOC Balance
- ---------------------------- ---------------- ----------------- -------------
10,000.00 - 25,000.00...... 841 $ 13,620,971.24 9.63%
25,000.01 - 50,000.00...... 1,808 56,445,348.53 39.91
50,000.01 - 75,000.00...... 471 23,808,795.82 16.84
75,000.01 - 100,000.00...... 550 34,087,306.67 24.10
100,000.01 - 125,000.00...... 51 4,373,459.45 3.09
125,000.01 - 150,000.00...... 55 3,576,119.23 2.53
150,000.01 - 175,000.00...... 15 768,381.98 0.54
175,000.01 - 200,000.00...... 48 3,343,109.29 2.36
200,000.01 - 225,000.00...... 3 51,229.80 0.04
225,000.01 - 250,000.00...... 9 576,478.75 0.41
275,000.01 - 300,000.00...... 1 613.66 0.00
300,000.01 - 325,000.00...... 2 110,133.75 0.08
350,000.01 - 375,000.00...... 2 355,192.93 0.25
375,000.01 - 400,000.00...... 1 0.00 0.00
425,000.01 - 450,000.00...... 1 289,113.29 0.20
450,000.01 - 475,000.00...... 1 7,149.20 0.01
475,000.01 - 500,000.00...... 2 9,467.50 0.01
---------------- ---------------- -------------
Total..................... 3,861 $141,422,871.09 100.00%
================ ================ =============
ORIGINAL TERMS
INITIAL POOL I MORTGAGE LOANS
Percent of
Number of Initial Aggregate Initial Initial
Pool I Mortgage Cut-Off Date Pool I
Original Term (in months) Loans Principal Balance Balance
- ----------------------------- ----------------- ----------------- ----------
180........................... 3,142 $118,341,371.46 76.58%
300........................... 1,066 36,195,056.73 23.42
----------------- ----------------- ----------
Total...................... 4,208 $154,536,428.19 100.00%
================= ================= ==========
MONTHS REMAINING TO SCHEDULED MATURITY
INITIAL POOL I MORTGAGE LOANS
Percent of
Number of Initial Aggregate Initial Initial
Range of Remaining Terms Pool I Mortgage Cut-Off Date Pool I
(in months) Loans Principal Balance Balance
- ---------------------------- ------------------ ----------------- -----------
166 - 170................... 19 $ 669,337.12 0.43%
171 - 175................... 38 1,469,260.11 0.95
176 - 180................... 3,086 116,204,529.72 75.20
286 - 290................... 1 22,071.48 0.01
291 - 295................... 12 370,336.08 0.24
296 - 300................... 1,052 35,800,893.68 23.17
------------------ ----------------- -----------
Total.................... 4,208 $154,536,428.19 100.00%
================== ================= ===========
S-30
<PAGE>
TYPE OF OCCUPANCY
INITIAL POOL I MORTGAGE LOANS
Percent of
Number of Initial Aggregate Initial Initial
Pool I Mortgage Cut-Off Date Pool I
Occupancy Loans Principal Balance Balance
- ----------------------------- ----------------- ----------------- -----------
Non-Owner.................... 163 $ 5,595,921.28 3.62%
Primary...................... 4,013 148,025,752.38 95.79
Second Home (1).............. 32 914,754.53 0.59
----------------- ----------------- -----------
Total..................... 4,208 $154,536,428.19 100.00%
================= ================= ===========
- -------------------
(1) Includes vacation and second homes
CREDIT SCORES
INITIAL POOL I MORTGAGE LOANS
Percent of
Number of Initial Aggregate Initial Initial
Pool I Mortgage Cut-Off Date Pool I
Range of Credit Scores (1) Loans Principal Balance Balance
- ----------------------------- ----------------- ----------------- -----------
less than 0.................. 8 $ 270,964.62 0.18%
501 - 550.................... 1 27,500.00 0.02
551 - 600.................... 4 187,687.31 0.12
601 - 650.................... 599 21,742,655.51 14.07
651 - 700.................... 1,822 69,869,532.37 45.21
701 - 750.................... 1,301 46,052,308.83 29.80
751 - 800.................... 463 16,039,180.47 10.38
801 - 818.................... 10 346,599.08 0.22
---------------- ----------------- -----------
Total..................... 4,208 $154,536,428.19 100.00%
================ ================= ===========
- --------------------
(1) "Credit Scores" are statistical credit scores obtained by many mortgage
lenders in connection with the loan application to help assess a
borrower's credit worthiness. Credit Scores are generated by models
developed by a third party and are made available to lenders through three
national credit bureaus. The models were derived by analyzing data on
consumers in order to establish patterns which are believed to be
indicative of the borrower's probability of default. The Credit Score is
based on a borrower's historical credit data, including, among other
things, payment history, delinquencies on accounts, levels of outstanding
indebtedness, length of credit history, types of credit, and bankruptcy
experience. Credit Scores range from approximately 250 to approximately
900, with higher scores indicating an individual with a more favorable
credit history compared to an individual with a lower score. However, a
Credit Score purports only to be a measurement of the relative degree of
risk a borrower represents to a lender, i.e., that a borrower with a
higher score is statistically expected to be less likely to default in
payment than a borrower with a lower score. In addition, it should be
noted that Credit Scores were developed to indicate a level of default
probability over a two-year period, which does not correspond to the life
of a mortgage loan. Furthermore, Credit Scores were not developed
specifically for use in connection with mortgage loans, but for consumer
loans in general. Therefore, a Credit Score does not take into
consideration the effect of mortgage loan characteristics on the
probability of repayment by the borrower. The Credit Scores set forth in
the table above were obtained at either the time of origination of the
Pool I Mortgage Loan or more recently. Neither the Sponsor nor the Company
make any representations or warranties as to the actual performance of any
Pool I Mortgage Loan or that a particular Credit Score should be relied
upon as a basis for an expectation that the borrower will repay the
mortgage loan according to its terms.
S-31
<PAGE>
DOCUMENTATION
INITIAL POOL I MORTGAGE LOANS
Percent of
Number of Initial Aggregate Initial Initial
Pool I Mortgage Cut-Off Date Pool I
Documentation Loans Principal Balance Balance
- ----------------------------- ----------------- ----------------- -----------
Full Documentation........... 1,765 $ 63,862,968.36 41.33%
No Employment/Income......... 2,244 82,663,542.77 53.49
No Ratio..................... 199 8,009,917.06 5.18
----------------- ----------------- -----------
Total..................... 4,208 $154,536,428.19 100.00%
================= ================= ===========
LOAN PURPOSE
INITIAL POOL I MORTGAGE LOANS
Percent of
Number of Initial Aggregate Initial Initial
Pool I Mortgage Cut-Off Date Pool I
Purpose Loans Principal Balance Balance
- ----------------------------- ----------------- ----------------- -----------
Cash Out Refinance........... 2,946 $111,257,679.77 71.99%
Purchase..................... 1,117 38,762,770.93 25.08
Rate/Term Refinance.......... 145 4,515,977.49 2.92
----------------- ----------------- -----------
Total..................... 4,208 $154,536,428.19 100.00%
================= ================= ===========
AMORTIZATION
INITIAL POOL I MORTGAGE LOANS
Percent of
Number of Initial Aggregate Initial Initial
Pool I Mortgage Cut-Off Date Pool I
Amortization Loans Principal Balance Balance
- ----------------------------- ----------------- ----------------- ----------
Closed End Second............ 203 $ 6,772,165.19 4.38%
Closed End Second Balloon.... 144 6,341,391.91 4.10
HELOC........................ 3,854 141,236,034.93 91.39
HELOC Balloon................ 7 186,836.16 0.12
----------------- ----------------- ----------
Total..................... 4,208 $154,536,428.19 100.00%
================= ================= ==========
Pool II - General
Pool II consists exclusively of HELOC Mortgage Loans. The aggregate
Principal Balance of the Initial Pool II Mortgage Loans as of the Initial
Cut-Off Date was approximately $41,109,718 (the "Initial Pool II Balance"). As
of the Initial Cut-Off Date, the average Principal Balance of the Initial Pool
II Mortgage Loans was approximately $110,214, the minimum Principal Balance was
$0, the maximum Principal Balance was $500,000, the Loan Rates ranged from
5.875% to 14.500% per annum and the weighted average Loan Rate was approximately
6.451% per annum. Each of the Initial Pool II Mortgage Loans is subject to a
maximum Loan Rate of 18%. As of the Initial Cut-Off Date, the weighted average
Credit Limit Utilization Rate (weighted by Credit Limit) was approximately
93.64%, the minimum Credit Limit Utilization Rate was 0% and the maximum Credit
Limit Utilization Rate was approximately 100%. As of the Initial Cut-Off Date,
the remaining term to scheduled maturity for the Initial Pool II Mortgage Loans
ranged from 170 months to 300 months and the weighted average remaining term to
scheduled maturity was approximately 209 months. As of the Initial Cut-Off Date,
the Combined Loan-to-Value Ratio of the Initial Pool II Mortgage Loans ranged
from 16.67% to 100.00% and the weighted average
S-32
<PAGE>
Combined Loan-to-Value Ratio of the Initial Pool II Mortgage Loans was
approximately 78.48%. Credit Limits of the Initial Pool II Mortgage Loans ranged
from $15,000 to $500,000 and averaged approximately $127,774. The Weighted
Average Second Mortgage Ratio for the Initial Pool II Mortgage Loans was
approximately 32.50%. Substantially all of the Initial Pool II Mortgage Loans
represented second liens on the related Mortgaged Properties. As of the Initial
Cut-Off Date, 78.83% of the Initial Pool II Mortgage Loans were secured by
Mortgaged Properties which are single-family residences and 99.04% of the
Initial Pool II Mortgage Loans are secured by Mortgaged Properties which are
owner-occupied. As of the Initial Cut-Off Date, 86.57%, by Principal Balance, of
the Initial Pool II Mortgage Loans are secured by Mortgaged Properties which are
located in California.
Real estate lenders in California are unable as a practical matter to
obtain a deficiency judgment against the borrower on a loan secured by one- to
four-unit real estate. See "Certain Legal Aspects of the Loans--Anti-Deficiency
Legislation; Bankruptcy Laws; Tax Liens" in the Prospectus.
Set forth below is a description of certain characteristics of the
Initial Pool II Mortgage Loans as of the Initial Cut-Off Date. The sum of the
columns in each such table may not equal the total indicated due to rounding.
TYPE OF MORTGAGE LOAN
INITIAL POOL II MORTGAGE LOANS
Aggregate Percent of
Number of Initial Initial Initial
Pool II Mortgage Cut-Off Date Pool II
Type Loans Principal Balance Balance
- ------------------------------ ----------------- ----------------- ----------
HELOC Mortgage Loans.......... 388 $41,109,718.39 100.00%
----------------- ----------------- ----------
Total...................... 388 $41,109,718.39 100.00%
================= ================= ==========
S-33
<PAGE>
PRINCIPAL BALANCES
INITIAL POOL II MORTGAGE LOANS
Aggregate Percent of
Number of Initial Initial Initial
Range of Principal Balances Pool II Mortgage Cut-Off Date Pool II
($) Loans Principal Balance Balance
- ----------------------------- ----------------- ------------------ ----------
0.00......... 15 $ 0.00 0.00%
0.01 - 10,000.00...... 28 101,681.82 0.25
10,000.01 - 20,000.00...... 15 220,381.31 0.54
20,000.01 -30,000.00....... 30 762,261.86 1.85
30,000.01 -40,000.00....... 22 775,370.37 1.89
40,000.01 -50,000.00....... 40 1,846,869.18 4.49
50,000.01 -60,000.00....... 16 882,126.10 2.15
60,000.01 -70,000.00....... 13 852,381.73 2.07
70,000.01 -80,000.00....... 12 883,799.23 2.15
80,000.01 -90,000.00....... 4 344,031.76 0.84
90,000.01 -100,000.00...... 20 1,946,857.86 4.74
100,000.01 -110,000.00...... 2 213,354.73 0.52
110,000.01 -120,000.00...... 4 460,657.99 1.12
120,000.01 -130,000.00...... 18 2,276,141.52 5.54
130,000.01 -140,000.00...... 21 2,871,552.44 6.99
140,000.01 -150,000.00...... 22 3,230,940.70 7.86
150,000.01 -160,000.00...... 13 2,018,799.43 4.91
160,000.01 -170,000.00...... 10 1,651,063.58 4.02
170,000.01 -180,000.00...... 9 1,574,590.09 3.83
180,000.01 -190,000.00...... 9 1,667,826.12 4.06
190,000.01 -200,000.00...... 27 5,358,299.20 13.03
200,000.01 -210,000.00...... 3 612,287.14 1.49
220,000.01 -230,000.00...... 5 1,133,700.00 2.76
230,000.01 -240,000.00...... 4 946,862.42 2.30
240,000.01 -250,000.00...... 8 1,978,762.79 4.81
250,000.01 -260,000.00...... 1 257,600.00 0.63
260,000.01 -270,000.00...... 1 267,176.70 0.65
270,000.01 -280,000.00...... 3 818,559.78 1.99
290,000.01 -300,000.00...... 2 596,550.70 1.45
310,000.01 -320,000.00...... 2 628,300.00 1.53
340,000.01 -350,000.00...... 1 342,200.00 0.83
370,000.01 -380,000.00...... 1 374,428.00 0.91
380,000.01 -390,000.00...... 1 388,877.85 0.95
400,000.01 -410,000.00...... 1 403,912.19 0.98
430,000.01 -440,000.00...... 1 437,100.00 1.06
490,000.01 - 500,000.00..... 4 1,984,413.80 4.83
------------------ ----------------- ----------
Total..................... 388 $41,109,718.39 100.00%
================== ================= ==========
S-34
<PAGE>
GEOGRAPHIC DISTRIBUTION(1)
INITIAL POOL II MORTGAGE LOANS
Aggregate
Initial Percent of
Number of Initial Cut-Off Date Initial
Pool II Mortgage Principal Pool II
State Loans Balance Balance
- ----------------------------- ------------------ ---------------- -----------
Arizona...................... 6 $ 699,479.20 1.70%
California................... 328 35,587,326.96 86.57
Colorado..................... 20 1,261,861.57 3.07
Connecticut.................. 1 122,760.00 0.30
Florida...................... 1 98,364.06 0.24
Georgia...................... 2 351,600.00 0.86
Idaho........................ 1 22,449.82 0.05
Massachusetts................ 5 88,499.53 0.22
Nevada....................... 1 198,987.97 0.48
New Jersey................... 1 169,182.64 0.41
New Mexico................... 3 610,710.00 1.49
New York..................... 1 150,000.00 0.36
North Carolina............... 1 138,916.92 0.34
Oregon....................... 3 250,697.90 0.61
Pennsylvania................. 1 126,225.00 0.31
Utah......................... 2 333,867.71 0.81
Virginia..................... 1 88,852.50 0.22
Washington................... 9 809,936.61 1.97
Wyoming...................... 1 0.00 0.00
------------------- --------------- -----------
Total...................... 388 $41,109,718.39 100.00%
=================== =============== ===========
- ------------------
(1)Geographic location is determined by the address of the Mortgaged Property
securing the related Mortgage Loans.
S-35
<PAGE>
COMBINED LOAN-TO-VALUE RATIOS(1)
INITIAL POOL II MORTGAGE LOANS
Aggregate
Initial Percent of
Range of Number of Initial Cut-Off Date Initial
Combined Loan-to-Value Ratios Pool II Mortgage Principal Pool II
(%) Loans Balance Balance
- ----------------------------- ------------------ --------------- ------------
16.67 to 20.00............... 2 $ 205,995.47 0.50%
20.01 to 30.00............... 2 123,910.00 0.30
30.01 to 40.00............... 4 412,744.34 1.00
40.01 to 50.00............... 8 885,243.43 2.15
50.01 to 60.00............... 13 2,153,285.20 5.24
60.01 to 70.00............... 51 5,995,069.73 14.58
70.01 to 80.00............... 125 13,934,894.77 33.90
80.01 to 90.00............... 115 11,105,312.59 27.01
90.01 to 100.00.............. 68 6,293,262.86 15.31
------------------- -------------- ------------
Total..................... 388 $41,109,718.39 100.00%
=================== ============== ============
- ------------------
(1) The "Combined Loan-to-Value Ratio" with respect to a HELOC Mortgage Loan is
the ratio (expressed as a percentage) of (A) the sum of (i) the Credit Limit of
such HELOC Mortgage Loan and (ii) any outstanding principal balances of mortgage
loans senior to such HELOC Mortgage Loan (calculated as of the date of execution
of the related Credit Line Agreement) to (B) the lesser of (i) the appraised
value of the related Mortgaged Property as set forth in the loan files at such
date of origination or (ii) in the case of a Mortgaged Property purchased within
one year of the origination of the related HELOC Mortgage Loan, the purchase
price of such Mortgaged Property.
PROPERTY TYPE
INITIAL POOL II MORTGAGE LOANS
Aggregate
Initial Percent of
Number of Initial Cut-Off Date Initial
Pool II Mortgage Principal Pool II
Property Type Loans Balance Balance
- ----------------------------- ------------------- --------------- ----------
2-4 Units.................... 4 $292,180.15 0.71%
Condominium.................. 19 1,231,085.28 2.99
PUD.......................... 62 7,180,012.11 17.47
Single Family................ 303 32,406,440.85 78.83
------------------- --------------- ----------
Total.................. 388 $41,109,718.39 100.00%
=================== =============== ==========
S-36
<PAGE>
CURRENT LOAN RATES
INITIAL POOL II MORTGAGE LOANS
Aggregate
Initial
Number of Initial Cut-Off Date Percent of
Range of Current Loan Rates Pool II Mortgage Principal Initial Pool
(%) Loans Balance II Balance
- ----------------------------- ------------------ --------------- ------------
5.88 -.................6.00 337 $36,324,839.74 88.36%
7.01 -.................7.50 3 440,244.30 1.07
8.01 -.................8.50 1 31,185.00 0.08
8.51 -.................9.00 4 377,440.13 0.92
9.01 -.................9.50 5 671,345.48 1.63
9.51 -................10.00 2 179,000.00 0.44
10.01 -................10.50 4 153,792.47 0.37
10.51 -................11.00 5 455,129.98 1.11
11.01 -................11.50 7 393,891.72 0.96
11.51 -................12.00 13 1,514,942.85 3.69
12.01 -................12.50 2 99,525.14 0.24
12.51 -................13.00 2 113,529.46 0.28
13.01 -................13.50 2 265,999.62 0.65
14.01 -................14.50 1 88,852.50 0.22
------------------- -------------- ------------
Total..................... 388 $41,109,718.39 100.00%
=================== ============== ============
MARGIN
INITIAL POOL II MORTGAGE LOANS
Aggregate
Number of Initial Initial Percent of
Pool II Mortgage Cut-Off Date Initial Pool
Range of Margins (%) Loans Principal Balance II Balance
- ----------------------------- ------------------ ----------------- ----------
less than 0.50............... 36 $ 1,475,929.86 3.59%
0.51 - 1.00.................. 39 2,825,584.97 6.87
1.01 - 1.50.................. 12 1,012,072.73 2.46
1.51 - 2.00.................. 30 3,352,507.28 8.16
2.01 - 2.50.................. 74 10,490,017.20 25.52
2.51 - 3.00.................. 44 4,647,663.47 11.31
3.01 - 3.50.................. 34 3,496,671.50 8.51
3.51 - 4.00.................. 38 4,228,022.08 10.28
4.01 - 4.50.................. 35 4,098,285.10 9.97
4.51 - 5.00.................. 32 3,671,839.68 8.93
5.01 - 5.50.................. 12 1,672,272.02 4.07
5.51 - 6.00.................. 2 138,852.50 0.34
------------------- ---------------- ----------
Total..................... 388 $41,109,718.39 100.00%
=================== ================ ==========
S-37
<PAGE>
CREDIT LIMIT UTILIZATION RATES(1)
INITIAL POOL II MORTGAGE LOANS
Number of Initial Aggregate Initial Percent of
Range of Utilization Rates Pool II Mortgage Cut-Off Date Initial Pool
(%) Loans Principal Balance II Balance
- ----------------------------- ------------------ ----------------- ----------
less than 0.00.............. 15 $ 0.00 0.00%
0.01 -10.00................ 22 55,889.29 0.14
10.01 -20.00................ 5 39,602.07 0.10
20.01 -30.00................ 11 274,690.43 0.67
30.01 -40.00................ 8 296,024.71 0.72
40.01 -50.00................ 20 803,797.21 1.96
50.01 -60.00................ 11 550,063.95 1.34
60.01 -70.00................ 12 1,135,509.60 2.76
70.01 -80.00................ 16 1,833,925.07 4.46
80.01 -90.00................ 19 2,209,925.43 5.38
90.01 -100.00............... 249 33,910,290.63 82.49
------------------- ---------------- ----------
Total...................... 388 $41,109,718.39 100.00%
=================== ================ ==========
- -------------------
(1)The "Credit Limit Utilization Rate" of a HELOC Mortgage Loan is determined
by dividing the Principal Balance of a HELOC Mortgage Loan as of the Initial
Cut-Off Date by the Credit Limit of the related HELOC Mortgage Loan.
CREDIT LIMITS
INITIAL POOL II MORTGAGE LOANS
Number of Initial Aggregate Initial Percent of
Pool II Mortgage Cut-Off Date Initial Pool
Range of Credit Limits ($) Loans Principal Balance II Balance
- ----------------------------- ------------------ ----------------- ----------
8,500.00 - 25,000.00...... 7 $ 109,858.27 0.27%
25,000.01 - 50,000.00...... 96 2,898,351.07 7.05
50,000.01 - 75,000.00...... 41 1,948,998.45 4.74
75,000.01 - 100,000.00...... 55 3,135,446.77 7.63
100,000.01 - 125,000.00...... 9 1,071,113.82 2.61
125,000.01 - 150,000.00...... 56 7,087,589.09 17.24
150,000.01 - 175,000.00...... 25 3,865,529.65 9.40
175,000.01 - 200,000.00...... 48 8,119,828.88 19.75
200,000.01 - 225,000.00...... 9 1,691,807.63 4.12
225,000.01 - 250,000.00...... 16 3,229,937.32 7.86
250,000.01 - 275,000.00...... 4 1,067,374.41 2.60
275,000.01 - 300,000.00...... 9 1,985,445.58 4.83
300,000.01 - 325,000.00...... 2 628,300.00 1.53
325,000.01 - 350,000.00...... 2 478,988.07 1.17
375,000.01 - 400,000.00...... 1 388,877.85 0.95
400,000.01 - 425,000.00...... 1 403,912.19 0.98
425,000.01 - 450,000.00...... 1 437,100.00 1.06
450,000.01 - 475,000.00...... 1 374,428.00 0.91
475,000.01 - 500,000.00...... 5 2,186,831.34 5.32
------------------- ---------------- ----------
Total..................... 388 $41,109,718.39 100.00%
=================== ================ ==========
S-38
<PAGE>
ORIGINAL TERMS
INITIAL POOL II MORTGAGE LOANS
Percent of
Number of Initial Aggregate Initial Initial
Pool II Mortgage Cut-Off Date Pool II
Original Term (in months) Loans Principal Balance Balance
- ------------------------------ ----------------- ----------------- ----------
180........................... 249 $30,464,292.87 74.10%
300........................... 139 10,645,425.52 25.90
----------------- ----------------- ----------
Total...................... 388 $41,109,718.39 100.00%
================= ================= ==========
MONTHS REMAINING TO SCHEDULED MATURITY
INITIAL POOL II MORTGAGE LOANS
Percent of
Number of Initial Aggregate Initial Initial
Range of Remaining Terms (in Pool II Mortgage Cut-Off Date Pool II
months) Loans Principal Balance Balance
- ----------------------------- ------------------ ----------------- ----------
170.................... 1 $ 93,495.38 0.23%
171 - 175.................... 4 227,300.96 0.55
176 - 180.................... 244 30,143,496.53 73.32
286 - 290.................... 1 44,948.66 0.11
291 - 295.................... 1 195,201.08 0.47
296 - 300.................... 137 10,405,275.78 25.31
------------------- ---------------- ----------
Total..................... 388 $41,109,718.39 100.00%
=================== ================ ==========
TYPE OF OCCUPANCY
INITIAL POOL II MORTGAGE LOANS
Percent of
Number of Initial Aggregate Initial Initial
Pool II Mortgage Cut-Off Date Pool II
Occupancy Loans Principal Balance Balance
- ----------------------------- ------------------ ----------------- ----------
Non-Owner.................... 5 $ 244,621.84 0.60%
Primary...................... 382 40,715,096.55 99.04
Second Home (1).............. 1 150,000.00 0.36
------------------ ----------------- ----------
Total..................... 388 $41,109,718.39 100.00%
================== ================= ==========
- -------------------
(1) Includes vacation and second homes
S-39
<PAGE>
CREDIT SCORES
INITIAL POOL II MORTGAGE LOANS
Percent of
Number of Initial Aggregate Initial Initial
Pool II Mortgage Cut-Off Date Pool II
Range of Credit Scores (1) Loans Principal Balance Balance
- ----------------------------- ------------------ ----------------- ----------
607 - 650.................... 44 $ 4,801,946.84 11.68%
651 - 700.................... 170 19,562,240.61 47.59
701 - 750.................... 118 12,325,431.62 29.98
751 - 800.................... 54 4,221,270.70 10.27
801 - 809.................... 2 198,828.62 0.48
------------------ ----------------- ----------
Total..................... 388 $ 41,109,718.39 100.00%
================== ================= ==========
- -----------------
(1) "Credit Scores" are statistical credit scores obtained by many mortgage
lenders in connection with the loan application to help assess a
borrower's credit worthiness. Credit Scores are generated by models
developed by a third party and are made available to lenders through three
national credit bureaus. The models were derived by analyzing data on
consumers in order to establish patterns which are believed to be
indicative of the borrower's probability of default. The Credit Score is
based on a borrower's historical credit data, including, among other
things, payment history, delinquencies on accounts, levels of outstanding
indebtedness, length of credit history, types of credit, and bankruptcy
experience. Credit Scores range from approximately 250 to approximately
900, with higher scores indicating an individual with a more favorable
credit history compared to an individual with a lower score. However, a
Credit Score purports only to be a measurement of the relative degree of
risk a borrower represents to a lender, i.e., that a borrower with a
higher score is statistically expected to be less likely to default in
payment than a borrower with a lower score. In addition, it should be
noted that Credit Scores were developed to indicate a level of default
probability over a two-year period, which does not correspond to the life
of a mortgage loan. Furthermore, Credit Scores were not developed
specifically for use in connection with mortgage loans, but for consumer
loans in general. Therefore, a Credit Score does not take into
consideration the effect of mortgage loan characteristics on the
probability of repayment by the borrower. The Credit Scores set forth in
the table above were obtained at either the time of origination of the
Pool II Mortgage Loan or more recently. Neither the Sponsor nor the
Company make any representations or warranties as to the actual
performance of any Pool II Mortgage Loan or that a particular Credit Score
should be relied upon as a basis for an expectation that the borrower will
repay the mortgage loan according to its terms.
S-40
<PAGE>
DOCUMENTATION
INITIAL POOL II MORTGAGE LOANS
Percent of
Number of Initial Aggregate Initial Initial
Pool II Mortgage Cut-Off Date Pool II
Documentation Loans Principal Balance Balance
- ----------------------------- ------------------ ----------------- ----------
Full......................... 195 $15,303,532.11 37.23%
No Employment/Income......... 181 24,209,335.50 58.89
No Ratio..................... 12 1,596,850.78 3.88
------------------ ----------------- ----------
Total..................... 388 $41,109,718.39 100.00%
================== ================= ==========
LOAN PURPOSE
INITIAL POOL II MORTGAGE LOANS
Percent of
Number of Initial Aggregate Initial Initial
Pool II Mortgage Cut-Off Date Pool II
Purpose Loans Principal Balance Balance
- ----------------------------- ------------------ ----------------- ----------
Cash Out Refinance........... 340 $36,093,007.63 87.80%
Purchase..................... 43 4,530,510.76 11.02
Rate/Term Refinance.......... 5 486,200.00 1.18
------------------ ----------------- ----------
Total..................... 388 $41,109,718.39 100.00%
================== ================= ==========
AMORTIZATION
INITIAL POOL II MORTGAGE LOANS
Percent of
Number of Initial Aggregate Initial Initial
Pool II Mortgage Cut-Off Date Pool II
Amortization Loans Principal Balance Balance
- ----------------------------- ------------------ ----------------- ----------
HELOC........................ 385 $40,985,294.98 99.70%
HELOC Balloon................ 3 124,423.41 0.30
------------------ ----------------- ----------
Total..................... 388 $41,109,718.39 100.00%
================== ================= ==========
Conveyance of Subsequent Mortgage Loans
The Sale and Servicing Agreement permits the Trust to purchase
Subsequent Mortgage Loans during the Pre-Funding Period for pledge under the
Indenture subject to the consent of the Insurer and certain other conditions and
the availability of such Subsequent Mortgage Loans. Accordingly, the
characteristics of the Mortgage Loans will vary as of any Payment Date on which
the acquisition of these Subsequent Mortgage Loans occurs.
All of the Subsequent Mortgage Loans will be HELOC Mortgage Loans. The
obligation of the Trust to purchase all of the Subsequent Mortgage Loans is
subject to the following additional aggregate requirements: (i) the aggregate
weighted average Margin for the Subsequent Mortgage Loans is at least 3.10%;
(ii) the aggregate weighted average Combined Loan-to-Value Ratio of all of the
Subsequent Mortgage Loans is not more than 84.00%; (iii) the Subsequent Mortgage
Loans shall maintain a weighted average Credit Score of at least 691; (iv) no
Subsequent Mortgage Loans may be 60 or more days delinquent; and (v) no more
than 1.00% of the Subsequent Mortgage Loans shall be 30-59 days delinquent;
provided, however, any of the foregoing requirements may be waived upon the
consent of S&P and Moody's (together, the "Rating Agencies ") and the Insurer.
S-41
<PAGE>
YIELD, MATURITY AND PREPAYMENT CONSIDERATIONS
General
The weighted average life of, and, if purchased at other than par, the
effective yield of each Class of Class A Notes will be affected by the rate and
timing of payments of principal on the Mortgage Loans in the Pool relating to
such Class (including, for this purpose, prepayments and amounts received by
virtue of refinancings, liquidations of Mortgage Loans due to defaults,
casualties, condemnations and repurchases, whether optional or required, by the
Sponsor, and in the case of the HELOC Mortgage Loans, the rate at which related
Mortgagors make draws thereunder), the amount and timing of delinquencies and
defaults by Mortgagors in the related Pool, as well as by the application of
Accelerated Principal Payments on the Class A Notes. Such yield may be adversely
affected by a higher or lower than anticipated rate of principal payments
(including prepayments) on the Mortgage Loans in the Pool relating to such
Class. The rate of principal payments on such Mortgage Loans will in turn be
affected by the amortization schedules of the Mortgage Loans in such Pool, the
rate and timing of prepayments thereon by the Mortgagors, the enforcement (or
lack of enforcement) of "due on sale" clauses, liquidations of defaulted
Mortgage Loans in such Pool and optional or required repurchases of Mortgage
Loans in such Pool as described herein. The timing of changes in the rate of
prepayments, liquidations and repurchases of the Mortgage Loans may, and the
timing of losses could, significantly affect the yield to an investor, even if
the average rate of principal payments experienced over time is consistent with
an investor's expectation. Since the rate and timing of principal payments on
the Mortgage Loans in each Pool will depend on future events and on a variety of
factors (as described more fully herein), no assurance can be given as to such
rate or the timing of prepayments on the related Class of Class A Notes.
The Mortgage Loans generally may be prepaid in full or in part at any
time. However, all of the HELOC Mortgage Loans have prepayment penalties or fees
except for those Mortgage Loans which were originated in those states where
prepayment penalties or fees are prohibited by law. None of the Closed End
Mortgage Loans have prepayment penalties or fees. The prepayment experience with
respect to the Mortgage Loans will affect the weighted average life of each
Class of Class A Notes.
The actual rate of prepayments on pools of mortgage loans is influenced
by a variety of economic, tax, geographic, demographic, social, legal and other
factors and has fluctuated considerably in recent years. In addition, the rate
of prepayments may differ among pools of mortgage loans at any time because of
specific factors relating to the mortgage loans in the particular pool,
including, among other things, the age of the mortgage loans, the geographic
locations of the properties securing the loans and the extent of the mortgagors'
equity in such properties, and changes in the mortgagors' housing needs, job
transfers and unemployment.
No representation is made as to the rate of principal payments on the
Mortgage Loans in any Pool, or as to the yield to maturity of any Class of Class
A Notes. An investor is urged to make an investment decision with respect to the
Class A Notes based on the anticipated yield to maturity of such Class A Note
resulting from its price and such investor's own determination as to anticipated
Mortgage Loan prepayment rates. Prospective investors are urged to analyze fully
the effect of Mortgage Loan prepayments for the related Pool and market
conditions on the yield and value of the related Class of Class A Notes, before
acquiring any Class A Notes. In particular, investors that are required to
perform periodic valuations on their investment portfolios should consider the
effect of such fluctuations in value. In addition, investors should carefully
consider the factors discussed under "Risk Factors--Prepayment Considerations"
herein.
The terms of the Class A Notes provide for the amortization of the
Class A Notes into two periods, the Managed Amortization Period (as defined
herein) and the Rapid Amortization Period (as defined herein), which affects the
rate and timing of the payment of principal on the Class A Notes. Payments of
principal to Holders of the Class A Notes may reduce the percentage of the
related Pool Balance represented by the related Class A Principal Balance. This
may occur during the Managed Amortization Period but this is especially true
during the Rapid Amortization Period. In addition, the Holders of the Class A
Notes may receive a payment of Excess Cashflow (as defined herein) as an
Accelerated Principal Payment (as defined herein) on any Payment Date on which
the Specified Overcollateralization Amount (as defined herein) for the related
Class of Class A Notes exceeds the Overcollateralization Amount for the related
Class of Class A Notes.
S-42
<PAGE>
The "Overcollateralization Amount" with respect to each Class of Class
A Notes and the related Pool is equal to the amount, if any, by which the
related Pool Balance exceeds the Note Principal Balance for the related Class of
Class A Notes. The Insurer will require, based upon the terms and conditions
hereinafter described, that the Overcollateralization Amount with respect to
each Class of Class A Notes be maintained at the Specified Overcollateralization
Amount with respect to such Class.
In addition, to the extent obligors make more draws than principal
payments, the Principal Balance of HELOC Mortgage Loans in each Pool may
increase. Because during the Rapid Amortization Period, 100% of the Principal
Collections with respect to each Class of Class A Notes is distributed to the
related Class of Class A Notes, an increase in the Principal Balance of HELOC
Mortgage Loans in the related Pool due to additional draws may also result in
the related Class of Class A Notes receiving principal at a greater rate during
such period. 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, and upon notice to the Rating Agencies and the
Insurer, to remove Mortgage Loans from either Pool held by the Trust at any time
during the life of the Trust, so long as the related Overcollateralization
Amount (after giving effect to such removal) exceeds what is then the related
Specified Overcollateralization Amount. Such removals may affect the rate at
which principal is distributed to the Holders of the related Class of Class A
Notes by reducing the overall balance of Mortgage Loans in the related Pool and
thus the amount of related Principal Collections (as defined herein). See
"Description of the Class A Notes--Optional Retransfers of Mortgage Loans to the
Sponsor" herein.
The Closed End Mortgage Loans are fixed-rate mortgage loans. As with
fixed-rate obligations generally, the rate of prepayment on a pool of mortgage
loans with fixed rates is affected by prevailing market rates for mortgage loans
of a comparable term and risk level. When the market interest rate is below the
mortgage coupon, 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
properties, to meet cash flow needs or to make other investments.
The rate of prepayment on the Mortgage Loans cannot be predicted.
Neither the Servicer nor the Sponsor is aware of any relevant studies or
statistics on the rate of prepayment of such Mortgage Loans. Generally, home
equity lines of credit are not viewed by borrowers as permanent financing.
Accordingly, the HELOC Mortgage Loans may experience a higher rate of prepayment
than traditional first mortgage loans. On the other hand, because the HELOC
Mortgage Loans amortize as described herein, rates of principal payment on the
HELOC Mortgage Loans will generally be slower than those of traditional
fully-amortizing first mortgages with the same loan terms in the absence of
prepayments on such HELOC Mortgage Loans. The prepayment experience of the Trust
with respect to the HELOC 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, with respect to
the HELOC Mortgage Loans, 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. 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 the
Loans--Due-on-Sale Clauses" in the Prospectus.
Effect of Overcollateralization Feature
Because all or a portion of the Excess Cashflow (as defined below) with
respect to each Pool may be applied as an Accelerated Principal Payment in
reduction of the outstanding Note Principal Balance of the related Class of
Class A Notes to the extent of the excess of the related Specified
Overcollateralization Amount over the related Overcollateralization Amount, the
weighted average life of such Class of Class A Notes will also be influenced by
the amount of such Excess Cashflow so applied. "Excess Cashflow" with respect to
a Payment Date and a Class of Class A Notes means the amount on deposit in the
Collection Account in respect of Available Funds for the related Pool during the
related Collection Period, available after making the distributions with respect
to such Class specified in clauses (i) through (vii) under the caption
"Description of the Class A Notes - Priority of Distributions" on such Payment
Date. Because Excess Cashflow attributable to the overcollateralization feature
is derived, in part, from interest collections on the Mortgage Loans in the
related Pool and will be applied to reduce the
S-43
<PAGE>
outstanding Note Principal Balance of the related Class of Class A Notes, the
aggregate payments in reduction of the outstanding Note Principal Balance of the
related Class of Class A Notes on a Payment Date will usually be greater than
the aggregate amount of Principal Collections (including prepayments) on the
Mortgage Loans in the related Pool payable during the related Collection Period
until the Specified Overcollateralization Amount with respect to such Class is
reached. As a consequence, Excess Cashflow available for payment in reduction of
the outstanding Note Principal Balance of the related Class of Class A Notes
will increase in proportion to such outstanding Note Principal Balance over
time, to the extent such Excess Cash Flow is not applied to offset losses on the
Mortgage Loans in the related Pool.
Accelerated Principal Payments (as defined herein) will be paid on each
Class of Class A Notes in reduction of the Note Principal Balance of such Class
on each Payment Date to the extent the then applicable Specified
Overcollateralization Amount with respect to such Class exceeds the related
Overcollateralization Amount on such Payment Date. If a Class A Note is
purchased at other than par, its yield to maturity will be affected by the rate
at which Accelerated Principal Payments are paid to the related Class A
Noteholders. If the actual rate of Accelerated Principal Payments on a Class of
Class A Notes applied in reduction of the outstanding Note Principal Balance of
such Class is slower than the rate anticipated by an investor who purchases such
Class A Note at a discount, the actual yield to such investor will be lower than
such investor's anticipated yield. If the actual rate of Accelerated Principal
Payments applied in reduction of the outstanding Note Principal Balance of a
Class of Class A Notes is faster than the rate anticipated by an investor who
purchases such Class A Note at a premium, the actual yield to such investor will
be lower than such investor's anticipated yield. The amount of Excess Cashflow
with respect to each Pool which is available to fund Accelerated Principal
Payments on any Payment Date will be affected by, among other things, the actual
amount of interest received, collected or recovered in respect of the Mortgage
Loans in such Pool during the related Collection Period and such amount will be
influenced by changes in the weighted average of the Loan Rates resulting from
prepayment and liquidations of Mortgage Loans in such Pool.
The amount of Accelerated Principal Payments paid to each Class of
Class A Notes and applied to the outstanding Note Principal Balance of such
Class on each Payment Date will be based on the related Specified
Overcollateralization Amount of such Class. The Indenture generally provides
that the Specified Overcollateralization Amount may, with respect to each Class,
over time, decrease, or increase, subject to certain floors, caps and triggers,
including triggers that allow such Specified Overcollateralization Amount to
decrease or "step down" based on the performance of the Mortgage Loans in the
related Pool under certain tests specified in the Indenture based on delinquency
rates. Any increase in the Specified Overcollateralization Amount with respect
to each Class of Class A Notes may result in an accelerated amortization of such
Class until such Specified Overcollateralization Amount is reached. Conversely,
any decrease in the Specified Overcollateralization Amount with respect to each
Class of Class A Notes may result in a decelerated amortization of such Class
until such Specified Overcollateralization Amount is reached.
S-44
<PAGE>
Class A-1 Note Decrement Table
The following decrement table is based on the following constant
prepayment rate assumptions:
Class A-1 Note Decrement Table
The following decrement table is based on the following constant
prepayment rate assumptions:
Scenario Scenario Scenario Scenario Scenario
I II III IV V
Description (%CPR) (%CPR) (%CPR) (%CPR) (%CPR)
----------- ------ ------ ------ ------ ------
HELOC Mortgage Loan 20% 30% 40% 45% 50%
Closed End Mortgage Loan 10% 20% 30% 40% 50%
For purposes of the calculations in the following table, Pool I was
assumed to have the following collateral characteristics:
<TABLE>
<CAPTION>
Credit
Gross Fully Original Amortization Remaining Months Utilization
Gross Margin Indexed Term Term Term Age to Roll Rate
Description Current Balance WAC (%) (%) Rate (%) (months) (months) (months) (months) (months) (%)
----------- --------------- ------- --- -------- -------- -------- -------- -------- -------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial HELOCs* $141,422,871.09 6.69013 3.22630 11.72630 211 211 209 2 3 88.93161
Subsequent
HELOCs* 38,739,074.35 6.69013 3.22630 11.72630 211 211 211 0 3 88.93161
Closed-End Fully
Amortizing 6,772,165.19 11.11965 N/A N/A 180 180 180 0 N/A N/A
Closed-End
Balloons 6,341,391.91 11.55021 N/A N/A 180 360 180 0 N/A N/A
</TABLE>
- ------------------------------------
*HELOCs have a maximum cap of approximately 18%.
In addition, it was assumed that (i) the distributions are made in
accordance with the description set forth under "Description of the Class A
Notes -- Payments on the Class A Notes"; (ii) distributions of principal and
interest on the Notes will be made on the 15th day of each calendar month
regardless of the day on which the Payment Date actually occurs; (iii) no
extension past the scheduled maturity date of a Mortgage Loan is made; (iv) no
delinquencies occur; (v) scheduled monthly payments on the HELOC Mortgage Loans
are comprised of interest only payments and the only principal payments on the
HELOC Mortgage Loans are those represented by prepayments calculated under each
of the prepayment assumptions as set forth in the tables below before giving
effect to draws, and a principal payment representing the remaining principal
balance outstanding at the end of the remaining term and scheduled monthly
payments on the Closed End Mortgage Loans consist of principal and interest
payments; (vi) monthly draws are calculated under each of the assumptions as set
forth in the table before giving effect to prepayments; (vii) each HELOC
Mortgage Loan is subject to a maximum credit utilization rate of 100%; (viii)
the scheduled due date of the Mortgage Loans is the first day of each month;
(ix) each month consists of 30 days; (x) the Closing Date is December 22, 1999;
(xi) for each Payment Date, LIBOR is 6.46250%; (xii) for each Payment Date, the
Index Rate is 8.50%; (xiii) the Servicing Fee for each Mortgage Loan is 0.50%;
(xiv) the Subsequent Pool I Mortgage Loans are purchased for the entire Original
Class A-1 Pre-Funded Amount on December 30, 1999 and have their first payment in
February 2000; and (xv) any shortfalls in Interest Payment Amounts, due to
either the presence of the Pre-Funding Account during the Pre-Funding Period or
the teaser period for any HELOC Mortgage Loan, will be fully funded.
S-45
<PAGE>
Percentage of Original Class A-1 Note
Principal Balance Amortization Schedule(1)(2)
Payment Date I II III IV V
- ------------ -------- -------- -------- -------- --------
Initial Percentage........... 100% 100% 100% 100% 100%
December 2000............. 96% 84% 73% 66% 60%
December 2001............. 95% 73% 53% 44% 36%
December 2002............. 94% 63% 39% 29% 21%
December 2003............. 94% 54% 30% 21% 14%
December 2004............. 93% 47% 22% 14% 9%
December 2005............. 75% 33% 13% 8% 4%
December 2006............. 59% 23% 8% 4% 2%
December 2007............. 47% 16% 5% 2% 1%
December 2008............. 38% 12% 3% 1% 0%
December 2009............. 30% 8% 1% 0% 0%
December 2010............. 24% 6% 1% 0% 0%
December 2011............. 19% 4% 0% 0% 0%
December 2012............. 15% 3% 0% 0% 0%
December 2013............. 12% 2% 0% 0% 0%
December 2014............. 9% 1% 0% 0% 0%
December 2015............. 7% 0% 0% 0% 0%
December 2016............. 6% 0% 0% 0% 0%
December 2017............. 0% 0% 0% 0% 0%
Weighted Average Life
Years to Maturity (in years) 8.65 4.79 2.98 2.40 1.96
Years to Call(3) (in years) 8.48 4.56 2.82 2.26 1.83
- -------------------
(1) Assumes a constant draw rate of 20% with respect to the HELOC Mortgage Loans
for the first 60 months.
(2) All percentages are rounded to the nearest 1%.
(3) Assumes that an optional redemption is exercised on the first possible
Payment Date.
S-46
<PAGE>
Class A-2 Note Decrement Table
The following decrement table is based on the following constant
prepayment rate assumptions:
The following decrement table is based on the following constant
prepayment rate assumptions:
Scenario Scenario Scenario Scenario Scenario
I II III IV V
Description (%CPR) (%CPR) (%CPR) (%CPR) (%CPR)
------------------------ -------- -------- -------- -------- --------
HELOC Mortgage Loan 20% 30% 40% 45% 50%
Closed End Mortgage Loan 10% 20% 30% 40% 50%
For purposes of the calculations in the following table, Pool II was
assumed to have the following collateral characteristics:
<TABLE>
<CAPTION>
Credit
Gross Fully Original Amortization Remaining Months Utilization
Gross Margin Indexed Term Term Term Age to Roll Rate
Description Current Balance WAC (%) (%) Rate (%) (months) (months) (months) (months) (months) (%)
--------------- ---------------- ------- -------- --------- -------- ------------ ---------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
HELOCs* $41,109,718.39 6.45135 2.99710 11.49710 211 211 209 2 3 93.61460
Subsequent
HELOCs* 11,260,925.65 6.45135 2.99710 11.49710 211 211 211 0 3 93.61460
</TABLE>
- ------------------------------------
*HELOCs have a maximum cap of approximately 18%.
In addition, it was assumed that (i) the distributions are made in
accordance with the description set forth under "Description of the Class A
Notes -- Payments on the Class A Notes"; (ii) distributions of principal and
interest on the Notes will be made on the 15th day of each calendar month
regardless of the day on which the Payment Date actually occurs; (iii) no
extension past the scheduled maturity date of a Mortgage Loan is made; (iv) no
delinquencies occur; (v) scheduled monthly payments on the HELOC Mortgage Loans
are comprised of interest only payments and the only principal payments on the
HELOC Mortgage Loans are those represented by prepayments calculated under each
of the prepayment assumptions as set forth in the tables below before giving
effect to draws, and a principal payment representing the remaining principal
balance outstanding at the end of the remaining term; (vi) monthly draws are
calculated under each of the assumptions as set forth in the table before giving
effect to prepayments; (vii) each HELOC Mortgage Loan is subject to a maximum
credit utilization rate of 100%; (viii) the scheduled due date of the Mortgage
Loans is the first day of each month; (ix) each month consists of 30 days; (x)
the Closing Date is December 22, 1999; (xi) for each Payment Date LIBOR is
6.46250%; (xii) for each Payment Date, the Index Rate is 8.50%; (xiii) the
Servicing Fee for each Mortgage Loan is 0.50%; (xiv) the Subsequent Pool II
Mortgage Loans are purchased for the entire Original Class A-2 Pre-Funded Amount
on December 30, 1999 and have their first payment in February 2000; and (xv) any
shortfalls in Interest Payment Amounts, due to either the presence of the
Pre-Funding Account during the Pre-Funding Period or the teaser period for any
HELOC Mortgage Loan, will be fully funded.
S-47
<PAGE>
Percentage of Original Class A-2 Note
Principal Balance
Amortization Schedule(1)(2)
Payment Date I II III IV V
- ------------ -------- -------- -------- ------- -------
Initial Percentage........... 100% 100% 100% 100% 100%
December 2000............. 97% 85% 73% 67% 61%
December 2001............. 97% 74% 54% 45% 37%
December 2002............. 97% 64% 40% 30% 22%
December 2003............. 97% 56% 30% 22% 15%
December 2004............. 97% 49% 23% 15% 9%
December 2005............. 77% 34% 14% 8% 5%
December 2006............. 61% 24% 8% 4% 2%
December 2007............. 48% 17% 5% 2% 1%
December 2008............. 38% 12% 3% 1% 0%
December 2009............. 31% 8% 1% 0% 0%
December 2010............. 24% 6% 1% 0% 0%
December 2011............. 20% 4% 0% 0% 0%
December 2012............. 16% 3% 0% 0% 0%
December 2013............. 13% 2% 0% 0% 0%
December 2014............. 10% 1% 0% 0% 0%
December 2015............. 8% 1% 0% 0% 0%
December 2016............. 6% 0% 0% 0% 0%
December 2017............. 0% 0% 0% 0% 0%
Weighted Average Life
Years to Maturity (in years) 8.84 4.88 3.01 2.44 2.01
Years to Call(3) (in years) 8.67 4.64 2.85 2.31 1.89
- -------------------
(1) Assumes a constant draw rate of 20% with respect to the HELOC Mortgage Loans
for the first 60 months.
(2) All percentages are rounded to the nearest 1%.
(3) Assumes that an optional redemption is exercised on the first possible
Payment Date.
POOL FACTOR AND TRADING INFORMATION
The "Pool Factor" is a seven-digit decimal which the Servicer will
compute monthly expressing the Note Principal Balance of each Class of Class A
Notes as of each Payment Date (after giving effect to any distribution of
principal on such Payment Date) as a proportion of the initial Note Principal
Balance with respect to such Class. On the Closing Date, the Pool Factor will be
1.0000000 for each Class. See "Description of the Class A Notes--Payments on the
Class A Notes" herein. Thereafter, the Pool Factor will decline to reflect
reductions in the related Note Principal Balance resulting from distributions of
principal to the related Class of Class A Notes.
Pursuant to the Indenture, monthly reports concerning the Trust and the
Class A Notes and various other items of information will be made available to
the Holders of Class A Notes ("Class A Noteholders" or "Holders"). In addition,
within 60 days after the end of each calendar year, beginning with the 1999
calendar year, information for tax reporting purposes will be made available to
each person who has been a Noteholder of record at any time during the preceding
calendar year. See "Description of the Class A Notes--Book-Entry Securities" and
"--Reports to Class A Noteholders" herein.
DESCRIPTION OF THE CLASS A NOTES
The $193,275,000 Class A-1 Variable Rate Asset-Backed Notes (the "Class
A-1 Notes") and the $52,370,000 Class A-2 Variable Rate Asset-Backed Notes (the
"Class A-2 Notes" and together with the Class A-1 Notes, the "Class A Notes")
will be issued pursuant to the Indenture, a form of which has been filed as an
exhibit to the Registration Statement. The following summaries describe certain
provisions of the Indenture. 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 Indenture. Wherever particular sections or defined terms of
the Indenture are referred to, such
S-48
<PAGE>
sections or defined terms are incorporated herein by reference. "Class" shall
mean each respective class of Class A Notes.
General
The Class A Notes will be offered in denominations of $1,000 and
multiples of $1,000 in excess thereof, in book-entry form only. Definitive
Notes, if issued, will be transferable and exchangeable at the corporate trust
office of the Indenture Trustee, which will initially act as certificate
registrar (the "Note Registrar"). See "Book-Entry Securities" below. No service
charge will be made for any registration of exchange or transfer of Class A
Notes, but the Indenture Trustee may require payment of a sum sufficient to
cover any tax or other governmental charge.
Payments on the Class A Notes
Beginning with the first Payment Date (which will occur on January 18,
2000), distributions on the Class A Notes will be made by the Indenture Trustee
or the Paying Agent on each Payment Date to the persons in whose names such
Class A Notes are registered at the close of business on the Record Date for
such Class. The "Record Date" shall be the last Business Day immediately
preceding such Payment Date unless the Class A Notes are no longer Book-Entry
Securities, in which case the Record Date is the last Business Day of the month
preceding the month of a Payment Date. The term "Payment Date" means the
fifteenth day of each month or, if such day is not a Business Day, then the next
succeeding Business Day. Distributions will be made by check or money order
mailed (or upon the request of a Holder holding Class A Notes having
denominations aggregating at least $1,000,000 and received by the Indenture
Trustee at least five Business Days prior to the related Record Date, by wire
transfer or otherwise) to the address of the person entitled thereto (which, in
the case of Book-Entry Securities, will be DTC or its nominee) as it appears on
the register of Holders of Class A Notes (the "Certificate Register") maintained
by the Registrar on the Record Date in amounts calculated as described below.
However, the final distribution in respect of the Class A 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 Holders of such final distribution.
For purposes hereof, a "Business Day" is any day other than (i) a Saturday or
Sunday or (ii) a day on which banking institutions in the State of New York or
in the city in which the principal corporate trust office of the Indenture
Trustee is located, are authorized or obligated by law or executive order to be
closed.
Payment of Interest
Interest on each Class of Class A Notes will be payable monthly on each
Payment Date, commencing on January 18, 2000, at the related Note Rate for the
related Interest Accrual Period.
Class A-1 Notes. The "Note Rate" on the Class A-1 Notes for any
Interest Accrual Period will be equal to: the lesser of (i) (x) with respect to
any Payment Date which occurs on or prior to the Optional Redemption Date with
respect to the Class A-1 Notes, the sum of (a) LIBOR (determined as described
herein) and (b) 0.30% per annum and (y) for any Payment Date thereafter, the sum
of (a) LIBOR (determined as described herein) and (b) 0.60% per annum and (ii)
15.50%; provided, however, that notwithstanding the foregoing, in no event will
the amount of interest required to be distributed in respect of the Class A-1
Notes on any Payment Date exceed a rate (the "Maximum Rate" with respect to the
Class A-1 Notes) equal to the weighted average of the Loan Rates of the Pool I
Mortgage Loans, assuming each HELOC Mortgage Loan is fully indexed, weighted on
the basis of the average daily balance of each Mortgage Loan in Pool I during
the related billing cycle prior to the Collection Period relating to such
Payment Date (adjusted to an effective rate reflecting accrued interest
calculated on the basis of the actual number of days in such Collection Period
and a 360-day year) 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 and, after the December
2000 Payment Date, 0.50% per annum, in each case with respect to the Class A-1
Notes.
To the extent the Maximum Rate is less than the Note Rate on the Class
A-1 Notes for any Payment Date, the deficiency will be deferred (the "Deferred
Interest" with respect to the Class A-1 Notes). The Policy will not guarantee
the payment of such Deferred Interest.
Class A-2 Notes. The "Note Rate" with respect to the Class A-2 Notes
for any Interest Accrual Period will be equal to: the lesser of (i) (x) with
respect to any Payment Date which occurs on or prior to the Optional
S-49
<PAGE>
Redemption Date with respect to the Class A-2 Notes, the sum of (a) LIBOR
(determined as described herein) and (b) 0.38% per annum and (y) for any Payment
Date thereafter, the sum of (a) LIBOR (determined as described herein) and (b)
0.76% per annum and (ii) 15.50%; provided, however, that notwithstanding the
foregoing, in no event will the amount of interest required to be distributed in
respect of the Class A-2 Notes on any Payment Date exceed a rate (the "Maximum
Rate" with respect to the Class A-2 Notes) equal to the weighted average of the
Loan Rates of the Pool II Mortgage Loans, assuming each HELOC Mortgage Loan is
fully indexed, weighted on the basis of the average daily balance of each
Mortgage Loan in Pool II during the related billing cycle prior to the
Collection Period relating to such Payment Date (adjusted to an effective rate
reflecting accrued interest calculated on the basis of the actual number of days
in such Collection Period and a 360-day year), 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 and,
after the December 2000 Payment Date, 0.50% per annum, in each case with respect
to the Class A-2 Notes.
To the extent the Maximum Rate is less than the Note Rate on the Class
A-2 Notes for any Payment Date, the deficiency will be deferred (the "Deferred
Interest" with respect to the Class A-2 Notes). The Policy will not guarantee
the payment of such Deferred Interest.
The "Optional Redemption Date" with respect to each Class of Class A
Notes is the first Payment Date upon which the Sponsor is entitled to exercise
its optional redemption of the related Class of Class A Notes.
Interest Accrual Periods. Interest on the Class A Notes in respect of
any Payment Date will accrue from the preceding Payment Date (or in the case of
the first Payment Date, from the Closing Date) through the day preceding such
Payment Date (the "Interest Accrual Period" with respect to such Payment Date)
on the basis of the actual number of days in the Interest Accrual Period and a
360-day year. For any Payment Date, the interest then due with respect to each
Class of Class A Notes (calculated using the related Note Rate) is the "Interest
Payment Amount" for such Class of Class A Notes and such Payment Date.
Calculation of the LIBOR Rate. With respect to each Payment Date, LIBOR
shall be established by the Indenture Trustee as follows.
"LIBOR" shall equal the rate for one-month Eurodollar deposits 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 the related Interest Accrual
Period (or as of two LIBOR Business Days prior to the Closing Date, in the case
of the first 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 LIBOR shall equal 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 Class A 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 one 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 Class A 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 (i) a Saturday or a Sunday or (ii) a day on which banking
institutions in the State of New York or in the city of London, England are
required or authorized by law to be closed.
S-50
<PAGE>
Payment of Principal
Principal Payment Amount. On each Payment Date, the Holders of each
Class of the Class A Notes will receive, to the extent of Available Funds for
such Class, the related Principal Payment Amount (as defined below) for such
Payment Date.
The term of each Class of the Class A Notes has been divided into two
periods, the Managed Amortization Period and the Rapid Amortization Period (each
as defined below). The "Managed Amortization Period is the period commencing on
December 22, 1999, and ending on the earlier to occur of (x) the December 2004
Payment Date or (y) the Payment Date which immediately precedes the occurrence
of a Rapid Amortization Event. The "Rapid Amortization Period" is the period
which immediately follows the end of the Managed Amortization Period.
With respect to each Payment Date and each Class of Class A Notes, the
"Principal Payment Amount" shall equal the positive difference of (a) the
Maximum Principal Payment and (b) the Overcollateralization Reduction Amount, if
any, in each case, with respect to such Payment Date and such Class. With
respect to each Payment Date and each Class of Class A Notes, the "Maximum
Principal Payment" shall equal (i) during the Managed Amortization Period, the
Net Principal Collections with respect to such Payment Date, such Class and the
related Pool and (ii) during the Rapid Amortization Period, the Principal
Collections with respect to such Payment Date, such Class and the related Pool.
With respect to each Payment Date and each Pool, "Net Principal Collections"
shall equal the positive difference of (x) the Principal Collections with
respect to such Payment Date and such Pool and (y) the aggregate principal
amount of all Additional Balances with respect to such Pool arising during the
Collection Period related to such Payment Date. The aggregate distributions of
principal to the Holders of each Class of Class A Notes shall not exceed the
initial Note Principal Balance of such Class.
With respect to each Class of Class A Notes, "Overcollateralization
Reduction Amount" shall equal the amount by which the Overcollateralization
Amount for such Class exceeds the Specified Overcollateralization Amount for
such Class, assuming that the Maximum Principal Payment for such Class had been
distributed to the related Class A Noteholders on such Payment Date.
In addition, on the Payment Date in December 2025 (the "Final Scheduled
Payment Date" ), the Holders of the Class A-1 Notes and the Class A-2 Notes will
be entitled to receive a payment of principal in an amount equal to the
outstanding Principal Balance of the Class A-1 Notes and the Class A-2 Notes,
respectively. The Final Scheduled Payment Date is the date which is thirteen
months after the date which is the latest possible maturity date of an Initial
Mortgage Loan which amortizes according to its terms.
Accelerated Principal. With respect to each Class of Class A Notes and
the related Pool, on any Payment Date with respect to which there exists Excess
Cashflow with respect to such Pool, such amount will be distributed in reduction
of the Note Principal Balance of such Class to the extent required to increase
the related Overcollateralization Amount to the related Specified
Overcollateralization Amount applicable to such Payment Date (any such payment,
an "Accelerated Principal Payment").
The "Specified Overcollateralization Amount" with respect to each Class
of Class A Notes will initially be the amounts as defined in the Indenture.
These amounts may be increased or decreased at the discretion of the Insurer.
Rapid Amortization Events. As described above, the Managed Amortization
Period will continue through the Payment Date in December 2004, unless a Rapid
Amortization Event occurs prior to such date in which case the Rapid
Amortization Period will commence immediately. "Rapid Amortization Event," with
respect to each Class of Class A Notes, refers to any of the following events:
(a) failure on the part of the Trust, the Company, the Sponsor
or the Servicer (i) to make a payment or deposit required under the
Indenture, the Sale and Servicing Agreement or the Insurance and
Indemnity Agreement, dated as of December 22, 1999, among the Insurer,
the Trust, the Servicer, the Sponsor and the Indenture Trustee (the
"Insurance Agreement") within two Business Days after notification that
such payment or deposit is required to be made or (ii) to observe or
perform in any material respect any other covenants or agreements of
the Trust, the Company, the Sponsor or the Servicer set forth in the
Sale and Servicing
S-51
<PAGE>
Agreement or the Insurance Agreement or the Indenture, which failure
continues unremedied for a period of 60 days after written notice of
such failure shall have been given to the Trust, the Company, the
Sponsor or the Servicer, as the case may be, by the Indenture Trustee
in accordance with the provisions of the Indenture;
(b) any representation or warranty made by the Trust, the
Company, the Servicer or the Sponsor in the Sale and Servicing
Agreement, the Indenture or the Insurance Agreement proves to have been
incorrect in any material respect when made and continues to be
incorrect in any material respect for a period of 60 days after written
notice and as a result of which the interests of the Class A
Noteholders or the Insurer are materially and adversely affected;
provided, however, that with respect to any such representation or
warranty made with respect to any Mortgage Loan or Mortgage Loans in
the related Pool, a Rapid Amortization Event shall not be deemed to
occur if the Company, the Servicer or the Sponsor has purchased such
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 Indenture;
(c) the occurrence of certain events of bankruptcy, insolvency
or receivership relating to the Sponsor, the Company or the Trust;
(d) the Trust becomes subject to regulation by the Securities
and Exchange Commission as an investment company within the meaning of
the Investment Company Act of 1940, as amended;
(e) as of a given date, the aggregate of all draws under the
Policy related to either Class exceeds 1% of the related Pool Balance
as of the Initial Cut-Off Date; and
(f) default in the payment of any interest, principal or any
installment of principal on the related Class of Class A Notes when the
same becomes due and payable, and such default continues for a period
of five Business Days.
The occurrence of a Rapid Amortization Event with respect to a Class of
Class A Notes will not cause the occurrence of a Rapid Amortization Event with
respect to the other Class of Class A Notes unless the same event or
circumstance is a Rapid Amortization Event with respect to both Classes.
In the case of any event described in clauses (a) through (e) above, a
Rapid Amortization Event will be deemed to have occurred only if, after the
applicable grace period, if any, described in the Indenture or Sale and
Servicing Agreement either the Indenture Trustee or Holders holding Class A
Notes evidencing more than 50% of the Note Principal Balance of the Class A-1
Notes or the Class A-2 Notes, as applicable, in each case, with the prior
written consent of the Insurer (so long as there is no continuing default by the
Insurer in the performance of its obligations under the Policy) or the Insurer
(so long as there is no continuing default by the Insurer in the performance of
its obligations under the Policy), by written notice to the Trust, the Insurer,
the Sponsor, and the Servicer (and to the Indenture Trustee, if given by the
Holders or the Insurer) declare that a Rapid Amortization Event has occurred as
of the date of such notice, or in the case of any event described in clause (f),
the Indenture Trustee or Holders holding Class A Notes evidencing more than 50%
of the Note Principal Balance of the Class A-1 Notes or the Class A-2 Notes, as
applicable, by such written notice declare that a Rapid Amortization Event has
occurred as of the date of such notice. Following the occurrence of a Rapid
Amortization Event described in clauses (a) through (e), the Insurer (so long as
there is no continuing default by the Insurer in the performance of its
obligations under the Policy) shall have the right to direct the Indenture
Trustee to sell the Mortgage Loans. Following the occurrence of a Rapid
Amortization Event described in clause (f), the Holders of the Class A Notes
evidencing more than 50% of the Note Principal Balance of the Class A-1 Notes or
the Class A-2 Notes, as applicable, shall have the right to so direct the
Indenture Trustee. If the Insurer has directed such sale, the Policy will cover
any amounts by which such remaining net proceeds are insufficient to pay the
related Note Principal Balance of such Class of Class A Notes, together with all
accrued and unpaid interest thereon.
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, and such the Sponsor will promptly
give notice to the Indenture Trustee and the Insurer of any such filing or
appointment. Within 15 days, the Indenture Trustee will publish a notice of the
occurrence of such event. If so directed by the Insurer, so long as no Insurer
Default (as defined in the Indenture) shall have occurred and be
S-52
<PAGE>
continuing, the Indenture Trustee will sell, dispose of or otherwise liquidate
the Trust Property with respect to the Mortgage Loans in each Pool in a
commercially reasonable manner and on commercially reasonable terms. So long as
no Event of Servicing Termination has occurred and is continuing, any such sale,
disposal or liquidation will be "servicing retained" by the Servicer. With
respect to each Pool and the related Class of Class A Notes, the net proceeds of
such sale will first be paid to the Insurer to the extent of unreimbursed draws
under the Policy and other amounts owing to the Insurer (but only if an Insurer
Default shall not have occurred and be continuing). The remainder of such net
proceeds will then be distributed to the Holders of such Class of Class A Notes
insofar as may be necessary to reduce the Note Principal Balance of such Class,
together with all accrued and unpaid interest due thereon, to zero. If the
Insurer has directed the Indenture Trustee to undertake such sale or
liquidation, the Policy will cover any amount by which such remaining net
proceeds are insufficient to pay the related Note Principal Balance in full.
Priority of Distributions
The Indenture Trustee shall deposit to a certain account (the
"Collection Account"), without duplication, upon receipt and with respect to
each Class of Class A Notes, (i) any Insured Payments received with respect to
such Class, (ii) the proceeds of any liquidation of the assets of the Trust, to
the extent that such proceeds relate to the Pool corresponding to such Class,
(iii) the related Principal Collections, (iv) the related Interest Collections,
(v) any amounts remaining in the Pre-Funding Account with respect to such Class
on the Payment Date following the end of the Pre-Funding Period (as defined
below) and (vi) certain other amounts remitted by the Servicer, together with
certain other specified amounts, in each case to the extent such amounts relate
to the Pool corresponding to such Class (the amounts specified in clauses (ii)
through (vi) with respect to each Class of Class A Notes, being "Available
Funds" for such Class and the related Payment Date).
With respect to each Class of Class A Notes and each Payment Date, and
to the extent of Available Funds with respect to such Class, the Indenture
Trustee shall make the following allocations, disbursements and transfers from
the Collection Account in the following order of priority, and each such
allocation, transfer and disbursement shall be treated as having occurred only
after all preceding allocations, transfers and disbursements have occurred:
(i) as payment to the Indenture Trustee for its fee for services
rendered pursuant to the Indenture with respect to such Class
(the "Trustee Fee" with respect to each Class);
(ii) the related premium amount payable to the Insurer with respect
to each Class;
(iii) to the Holders of such Class of Class A Notes, the related
Interest Payment Amount for such Payment Date;
(iv) to the Holders of such Class of Class A Notes as a
distribution of principal, the related Principal Payment
Amount for such Payment Date;
(v) to the Holders of such Class of Class A Notes, as a
distribution of principal, the related Overcollateralization
Deficit for such Payment Date;
(vi) to the Insurer, the related Reimbursement Amount, if any, then
due to it with respect to such Class;
(vii) pursuant to the "crosscollateralization" provisions of the
Trust, any Available Funds remaining with respect to such
Class on such Payment Date shall be used to fund any
deficiency in items (iii), (v) and (vi) above with respect to
the other Class after taking into account the allocation of
Available Funds for such other Class on such Payment Date (the
amount of such remaining Available Funds used to fund such
deficiencies with respect to the other Class on such Payment
Date is the "Crossover Amount" with respect to such Class);
(viii) to the Holders of such Class of Class A Notes, the Accelerated
Principal Payment, if any, with respect to such Class;
S-53
<PAGE>
(ix) to the Reserve Fund for application in accordance with the
Indenture, to the extent that the sum of the
Overcollateralization Amount for both Classes of Notes as of
such Payment Date is less than the sum of the Specified
Overcollateralization Amount for both Classes of Notes as of
such Payment Date;
(x) to the Servicer, to pay certain amounts that may be required
to be paid to the Servicer and not previously reimbursed
pursuant to the Sale and Servicing Agreement;
(xi) to the Holders of such Class of Class A Notes to pay Deferred
Interest on such Class A Notes and interest thereon at the
related Class A Note Rate;
(xii) to pay a fee to the Manager (the "Management Fee") with
respect to such Class pursuant to the Management Agreement
(the "Management Agreement") dated as of December 1, 1999
between GreenPoint Mortgage Funding, Inc., as Manager and the
Trust;
(xiii) to the Certificateholders, any amount remaining on deposit in
the Collection Account with respect to such Class.
On each Payment Date, if Available Funds with respect to a Class, plus
any Crossover Amount available from the other Class, are insufficient to pay the
amounts specified in clauses (iii), (v) and (vi) above with respect to such
Class, the amount of such insufficiency shall be withdrawn from the Reserve Fund
to the extent of funds on deposit therein.
The "Reimbursement Amount" is, as to any Payment Date, the sum of (x)
all Insured Payments paid by the Insurer, but for which the Insurer has not been
reimbursed prior to such Payment Date, plus interest accrued thereon, calculated
at the Late Payment Rate from the date the Indenture Trustee received the
related Insured Payments, and (y) without duplication any amounts then due and
owing to the Insurer under the Insurance Agreement plus interest on such amounts
at the Late Payment Rate.
The "Late Payment Rate" is the lesser of (a) the greater of (i) the per
annum rate of interest publicly announced from time to time by Citibank, N.A. as
its prime or base lending rate (any change in such rate of interest to be
effective on the date such change is announced by Citibank, N.A.), plus 2% per
annum and (ii) the then applicable highest rate of interest on the Class A Notes
and (b) the maximum rate permissible under applicable usury or similar laws
limiting interest rates. The Late Payment Rate shall be computed on the basis of
the actual number of days elapsed over a year of 360 days.
On each Determination Date the Indenture Trustee shall determine from
information provided by the Servicer, with respect to the immediately following
Payment Date, whether a drawing is required to be made under the Policy with
respect to either Class. With respect to each Payment Date, the "Determination
Date" is the third Business Day next preceding such Payment Date or such earlier
day as shall be agreed to by the Insurer and the Indenture Trustee.
The Paying Agent. The Paying Agent shall initially be the Indenture
Trustee, together with any successor thereto in such capacity (the "Paying
Agent"). The Paying Agent shall have the revocable power to withdraw funds from
the Collection Account for the purpose of making distributions to the Class A
Noteholders.
Overcollateralization and Crosscollateralization Feature
The Overcollateralization Amount for each Class of Class A Notes as of
the Closing Date will be less than the related initial Specified
Overcollateralization Amount, thus requiring an increase in such
Overcollateralization Amount on future Payment Dates until such
Overcollateralization Amount equals the Specified Overcollateralization Amount.
With respect to each Class of Class A Notes, certain Excess Cashflow
will be applied as a payment of principal on the related Class of Class A Notes
on each Payment Date to maintain the Overcollateralization Amount for such Class
at, or to increase it to, the Specified Overcollateralization Amount for such
Class for such Payment Date. The amount of such Excess Cashflow with respect to
a Class of Class A Notes so applied as a payment of
S-54
<PAGE>
principal on a Payment Date is an "Accelerated Principal Payment" for the
related Class of Class A Notes. The requirement to maintain the
Overcollateralization Amount at the Specified Overcollateralization Amount, or
to increase it to the Specified Overcollateralization Amount, is not an
obligation of the Sponsor, the Servicer, the Indenture Trustee, the Insurer, the
Owner Trustee or any other person.
The Indenture permits Excess Cashflow not required to maintain or
achieve the Specified Overcollateralization Amount of the related Class of Class
A Notes to be applied to the funding of a reserve fund, which has been required
by the Insurer to be established and maintained with respect to the Class A
Notes (the "Reserve Fund"). Amounts on deposit in the Reserve Fund may be
withdrawn therefrom and applied to fund any Interest Payment Amount, any
Overcollateralization Deficit or any Reimbursement Amount with respect to any
Payment Date.
The amount on deposit in the Reserve Fund will not exceed the excess of
(x) the sum of the Specified Overcollateralization Amounts with respect to each
Class of Class A Notes over (y) the sum of the Overcollateralization Amounts
with respect to each Class of Class A Notes. To the extent that the amount on
deposit in the Reserve Fund does exceed such amount on any Payment Date, any
such excess will be released from the Reserve Account and distributed to the
Certificateholders.
The Insurer may permit the Specified Overcollateralization Amount for a
Class of Class A Notes to decrease or "step down" over time, subject to certain
floors and triggers. The dollar amount of any decrease in a Specified
Overcollateralization Amount is an "Overcollateralization Reduction Amount,"
which, with respect to each Class of Class A Notes, may result in a release of
cash from the lien of the Indenture in an amount up to such
Overcollateralization Reduction Amounts (net of any Reimbursement Amounts due to
the Insurer), and/or result in the removal of cash or Mortgage Loans from the
lien of the Indenture on Payment Dates occurring after such step-downs take
effect. The dollar amount of any Overcollateralization Reduction Amount with
respect to a Class will first be released from the Reserve Fund, to the extent
of the amount on deposit therein. If the amount on deposit in the Reserve Fund
with respect to a Class is not sufficient to fund the full amount of such
Overcollateralization Reduction Amount with respect to such Class, then an
amount equal to the remaining portion of such Overcollateralization Reduction
Amount will be released to the Certificateholders from the monthly cashflow with
respect to such Class, thus reducing the Overcollateralization Amount for such
Class.
Pre-Funding Account
On the Closing Date, up to approximately $38,739,074 (the "Original
Class A-1 Pre-Funded Amount") will be deposited in an account (the "Pre-Funding
Account") for the purchase of Subsequent Pool I Mortgage Loans and up to
approximately $11,260,926 (the "Original Class A-2 Pre-Funded Amount") will be
deposited in the Pre-Funding Account for the purchase of Subsequent Pool II
Mortgage Loans, from the proceeds of the sale of the Class A Notes. During the
Period (the "Pre-Funding Period") from the Closing Date until the earlier of (i)
the date on which the amount on deposit in the Pre-Funding Account is less than
$100,000 or (ii) January 18, 2000 (the "Pre-Funding Period Termination Date"),
the Sponsor may deliver Subsequent Mortgage Loans to the Indenture Trustee for
assignment to Pool I or Pool II in exchange for a corresponding release of money
from the Pre-Funding Account in an amount equal to the Principal Balance of such
Subsequent Mortgage Loans as of the related Subsequent Transfer Date. The amount
on deposit in the Pre-Funding Account as of any date during the Pre-Funding
Period for the purchase of Subsequent Pool I Mortgage Loans or Subsequent Pool
II Mortgage Loans, respectively, shall be the related "Pre-Funded Amount." Each
of the Subsequent Mortgage Loans must meet the criteria set forth in the Sale
and Servicing Agreement and must be reasonably acceptable to the Insurer. The
Sponsor expects that the sum of (i) the Original Class A-1 Pre-Funded Amount and
the Original Class A-2 Pre-Funded Amount will be reduced to less than $100,000
by January 18, 2000. Any amount remaining in the Pre-Funding Account on the
Payment Date at the end of the Pre-Funding Period will be treated as Principal
Collections and used to pay principal on the Class A Notes.
The Subsequent Mortgage Loans will consist only of HELOC Mortgage Loans
with respect to Pool I and Pool II.
S-55
<PAGE>
Book-Entry Securities
The Class A Notes will be Book-Entry Securities. The Class A Notes will
be issued in one or more certificates, and will be held by a nominee of The
Depository Trust Company ("DTC") or any successor depository. Beneficial
interests in the Class A Notes will be indirectly held by investors through the
book-entry facilities of DTC, as described herein. The Sponsor has been informed
by DTC that its nominee will be Cede & Co. Accordingly, Cede & Co. is expected
to be the Holder of record of the Class A Notes. Except as described below, no
person acquiring a Class A Note (each, a "beneficial owner") will be entitled to
receive a physical certificate representing such Class A Note (a "Definitive
Note").
The beneficial owner's ownership of a Book-Entry Security will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
beneficial owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Security will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the beneficial owner's Financial Intermediary is not a DTC participant).
Therefore, the beneficial owner must rely on the foregoing procedures to
evidence its beneficial ownership of a Class A Note. Beneficial ownership of a
Note may be transferred only in compliance with the procedures of such Financial
Intermediaries and DTC participants.
DTC, which is a New York-chartered limited purpose trust company,
performs services for its participants, some of which (and/or their
representatives) own DTC. In accordance with its normal procedures, DTC is
expected to record the positions held by each DTC participant in the Class A
Notes, whether held for its own account or as a nominee for another person. In
general, beneficial ownership of the Class A Notes will be subject to the rules,
regulations and procedures governing DTC and DTC participants as in effect from
time to time.
Distributions on the Class A Notes will be made on each Payment Date by
the Indenture Trustee to DTC. DTC will be responsible for crediting the amount
of such payments to the accounts of the applicable DTC participants in
accordance with DTC's normal procedures. Each DTC participant will be
responsible for disbursing such payments to the beneficial owners of the Class A
Notes that it represents and to each Financial Intermediary for which it acts as
agent. Each such Financial Intermediary will be responsible for disbursing funds
to the beneficial owners of the Class A Notes that it represents.
Under a book-entry format, beneficial owners of the Class A Notes may
experience some delay in their receipt of payments, since such payments will be
forwarded by the Indenture Trustee to Cede & Co. None of the Sponsor, the
Servicer, the Insurer, the Owner Trustee, or the Indenture Trustee is
responsible or liable for such delays in the application of such payments to
such beneficial owners. Because DTC can only act on behalf of Financial
Intermediaries, the ability of a beneficial owner to pledge Class A Notes to
persons or entities that do not participate in the DTC system, or otherwise take
actions in respect of the Class A Notes, may be limited due to the absence of
physical certificates for the Class A Notes. In addition, issuance of the Class
A Notes in book-entry form may reduce the liquidity of such Class A Notes in the
secondary market since certain potential investors may be unwilling to purchase
Class A Notes for which they cannot obtain physical certificates.
Unless and until Definitive Notes are issued, it is anticipated that
the only "Class A Noteholder" within the meaning of the Indenture will be Cede &
Co., as nominee of DTC. Beneficial owners of the Class A Notes will not be
"Class A Noteholders", as that term is used in the Indenture. Beneficial owners
are only permitted to exercise the rights of Class A Noteholders indirectly
through Financial Intermediaries and DTC. Reports on the Trust provided by the
Servicer to Cede & Co., as nominee of DTC, may be made available 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 Class A Notes of such beneficial owners are credited.
DTC has advised the Sponsor and the Indenture Trustee that, unless and
until Definitive Notes are issued, DTC will take any action permitted to be
taken by the Holders of the Class A Notes under the Indenture only at the
direction of one or more Financial Intermediaries to whose DTC accounts the
Class A Notes are credited, to the extent that such actions are taken on behalf
of Financial Intermediaries whose holdings include such Class A Notes.
Definitive Notes will be issued to beneficial owners of the Class A
Notes, or their nominees, rather than to DTC, only if (a) the Sponsor advises
the Indenture Trustee in writing that DTC is no longer willing, qualified or
able
S-56
<PAGE>
to discharge properly its responsibilities as nominee and depository with
respect to the Class A Notes and the Sponsor or the Indenture Trustee is unable
to locate a qualified successor; (b) the Sponsor, at its sole option, advises
the Indenture Trustee that it elects to terminate a book-entry system through
DTC; or (c) with the consent of the Insurer after the occurrence of an event of
default under the Indenture, beneficial owners of the Class A Notes evidencing
more than 50% of the Note Principal Balance of the Class A Notes advise the
Indenture Trustee and DTC through the Financial Intermediaries in writing that
the continuation of a book-entry system with respect to such Book-Entry
Securities through DTC (or a successor thereto) is no longer in the best
interests of beneficial owners. Voting rights allocated to a Class of Class A
Notes shall be allocated among the Class A Notes of such Class in accordance
with their respective percentage interests.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Indenture Trustee will be required to notify all
beneficial owners of the Class A Notes through DTC of the occurrence of such
event and the availability of Definitive Notes. Upon surrender by DTC of the
global certificate or certificates representing the Class A Notes and
instructions for re-registration, the Indenture Trustee will issue the
Definitive Notes, and thereafter the Indenture Trustee will recognize the
Holders of such Definitive Notes as Class A Noteholders under the Indenture.
DTC management is aware that some computer applications, systems, and
the like for processing data ("Systems") that are dependent upon calendar dates,
including dates before, on, and after January 1, 2000, may encounter "Year 2000
problems." DTC has informed its participants and other members of the financial
community (the "Industry") that it has developed and is implementing a program
so that its Systems, as the same relate to the timely payment of distributions
(including principal and income payments) to security holders, book-entry
deliveries, and settlement of trades within DTC ("DTC Services"), continue to
function appropriately. This program includes a technical assessment and a
remediation plan, each of which is complete. Additionally, DTC's plan includes a
testing phase, which is expected to be completed within appropriate time frames.
However, DTC's ability to perform properly its services is also
dependent upon other parties, including but not limited to issuers and their
agents, as well as third party vendors from whom DTC licenses software and
hardware, and third party vendors on whom DTC relies for information of the
provision of services, including telecommunication and electrical utility
service providers, among others. DTC has informed the Industry that it is
contacting (and will continue to contact) third party vendors from whom DTC
acquires services to: (i) impress upon them the importance of such services
being year 2000 compliant; and (ii) determine the extent of their efforts for
Year 2000 remediation (and, as appropriate, testing) of their services. In
addition, DTC is in the process of developing such contingency plans as it deems
appropriate.
According to DTC, the foregoing information with respect to DTC has
been provided to the Industry for informational purposes only and is not
intended to serve as a representation, warranty, or contract modification of any
kind.
Reports to Class A Noteholders
Concurrently with each distribution to the Class A Noteholders and the
Insurer, the Servicer will forward to the Indenture Trustee for mailing to such
Noteholder and the Insurer a statement setting forth among other items:
(i) the amount being distributed to each Class of Class A
Notes;
(ii) the amount of interest included in such distribution and
the related Note Rate;
(iii) the amount, if any, of overdue accrued interest included
in such distribution (and the amount of interest thereon);
(iv) the amount, if any, of the remaining overdue accrued
interest after giving effect to such distribution;
(v) the amount, if any, of principal included in such
distribution;
(vi) the Servicing Fee for such Payment Date;
S-57
<PAGE>
(vii) the related Note Principal Balance, each after giving
effect to such distribution;
(viii) the related Pool Balance as of the end of the preceding
Collection Period;
(ix) the number and aggregate Principal Balances of each type
of Mortgage Loans as to which the minimum monthly payment is delinquent
for 30-59 days, 60-89 days and 90 or more days, respectively, as of the
end of the preceding Collection Period;
(x)the book value of any real estate which is acquired by the
Trust through foreclosure or grant of deed in lieu of foreclosure;
(xi) the amount of any draws on the Policy;
(xii) the amount, if any, on deposit in the Reserve Fund and
the amount, if any, transferred from the Reserve Fund in respect of
such Payment Date; and
(xiii) the occurrence of an Event of Default under the
Indenture.
In the case of information furnished pursuant to clauses (ii), (iii),
(iv) and (v) above, the amounts shall be expressed as a dollar amount per Class
A Note with a $1,000 denomination.
Within 60 days after the end of each full calendar year beginning with
2000, the Servicer will be required to forward to the Indenture Trustee a
statement containing the information set forth in clauses (ii) and (v) above
aggregated for the prior calendar year.
CERTAIN PROVISIONS OF THE SALE AND SERVICING AGREEMENT
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 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.
Allocations and Collections
All collections on the Mortgage Loans will generally be allocated in
accordance with the Loan Agreements between amounts collected in respect of
interest and amounts collected in respect of principal. As to any Payment Date,
"Interest Collections" with respect to each Pool will be equal to the amounts
collected during the calendar month preceding the month of such Payment Date
(each such period, the "Collection Period"), including the portion of Net
Liquidation Proceeds and insurance proceeds allocated to interest pursuant to
the terms of the Loan Agreements and earnings received on funds on deposit in
the Pre-Funding Account, in each case, with respect to such Pool for the related
Collection Period, less Servicing Fees for the related Collection Period
As to any Payment Date, "Principal Collections" with respect to each
Pool will be equal to the amounts collected during the related Collection
Period, including such portion of Net Liquidation Proceeds and insurance
proceeds, allocated to principal pursuant to the terms of the Loan Agreements
and any amount remaining in the Pre-Funding Account on the Payment Date at the
end of the Pre-Funding Period. "Net Liquidation Proceeds" with respect to a
Mortgage Loan are equal to the Liquidation Proceeds and insurance proceeds,
reduced by related expenses, but not including the portion, if any, of such
amount that exceeds the sum of (i) the Principal Balance of the Mortgage Loan,
and (ii) accrued and unpaid interest thereon to the end of the Collection Period
during which
S-58
<PAGE>
such Mortgage Loan became a Liquidated Mortgage Loan. "Liquidation Proceeds" are
the proceeds received in connection with the liquidation of any Mortgage Loan,
whether through trustee's sale, foreclosure sale or otherwise.
A "Liquidated Mortgage Loan" means, as to any Payment Date, 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 related Collection Period that all Liquidation Proceeds which it
expects to recover with respect to the disposition of the related Mortgaged
Property have been recovered.
The Indenture Trustee will deposit any amounts drawn under the Policy
into the Collection Account.
With respect to any date, the "Pool Balance" of a Pool will be equal to
the sum of (i) the aggregate of the Principal Balances of all Mortgage Loans in
such Pool as of such date plus (ii) the related Pre-Funded Amount, if any. The
"Principal Balance" of a Mortgage Loan (other than a Liquidated Mortgage Loan)
on any date is equal to (i) the principal balance of such Mortgage Loan as of
the related Cut-Off Date, minus (ii) all collections credited against the
principal balance of such Mortgage Loan in accordance with the related Loan
Agreement prior to such day, plus (iii) if such Mortgage Loan is a HELOC
Mortgage Loan, any Additional Balances in respect of such HELOC Mortgage Loan.
The Principal Balance of a Liquidated Mortgage Loan shall be zero.
Payments on Mortgage Loans; Deposits to Collection Account; Deposits to the
Pre-Funding Account
The Indenture Trustee shall establish and maintain the Collection
Account (as defined herein) for the benefit of the Class A Noteholders, the
Insurer and the Sponsor, as their interests may appear. The Collection Account
will be an Eligible Account (as defined below). Subject to the investment
provision described in the following paragraphs, within two Business Days (as
defined herein) of receipt by the Servicer of amounts in respect of the Mortgage
Loans (excluding amounts representing administrative charges, annual fees,
taxes, assessments, credit insurance charges, insurance proceeds to be applied
to the restoration or repair of a Mortgaged Property or similar items), the
Servicer will deposit such amounts in the Collection Account. Amounts so
deposited may be invested in Eligible Investments maturing no later than one
Business Day prior to the next Payment Date or on such Payment Date if approved
by the Rating Agencies and the Insurer. Not later than on or before 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.
The Pre-Funding Account will be an Eligible Account established with
the Indenture Trustee on the Closing Date. On the Closing Date, $50,000,000 will
be deposited into the Pre-Funding Account from the proceeds of the sale of the
Class A Notes and will be invested in Eligible Investments at the direction of
the Servicer maturing no later than one Business Day prior to the related
Payment Date or on the related Payment Date if approved by the Rating Agencies
and the Insurer. All income or gain realized from any investment in Eligible
Investments shall constitute part of Interest Collections for the related Class.
In the event that not all amounts on deposit in the Pre-Funding Account have
been applied to the purchase of Subsequent Mortgage Loans on the last Payment
Date of the Pre-Funding Period, the remaining amount of Principal Collections on
deposit in the Pre-Funding Account will be distributed to the related Class A
Noteholders as a payment of principal on such last Payment Date.
An "Eligible Account" is an account that is (i) maintained with a
depository institution whose short-term debt obligations at the time of any
deposit therein have the highest short-term debt rating by the Rating Agencies,
(ii) one or more accounts maintained with a depository institution whose long
term unsecured debt rating by the Rating Agencies is at least A+ and whose
accounts are fully insured by either the Savings Association Insurance Fund
("SAIF") or the Bank Insurance Fund ("BIF") of the Federal Deposit Insurance
Corporation established by such fund, (iii) a segregated trust account
maintained with the Indenture Trustee in its fiduciary capacity or (iv)
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 Class A Notes
without regard to the Policy.
Eligible Investments are specified in the Indenture and may also
include investments which meet the criteria of the Rating Agencies from time to
time as being consistent with their then current ratings of the Class A Notes.
S-59
<PAGE>
Assignment of Mortgage Loans
At the time of issuance of the Class A Notes, the Sponsor will transfer
to the Trust all of its right, title and interest in and to each Mortgage Loan
(including, with respect to HELOC Mortgage Loans, any Additional Balances
arising in the future) and the related Loan Agreements, mortgages and other
related documents (collectively, the "Related Documents"), including all
collections received with respect to each such Mortgage Loan after the
applicable Cut-Off Date. The Trust will in turn pledge to the Indenture Trustee
under the Indenture all of its right, title and interest in the foregoing
property as collateral for the Class A Notes. The Indenture Trustee will not
have any obligation to make additional funding under the Loan Agreements. The
Indenture Trustee, concurrently with such pledge, will deliver the Class A Notes
on behalf of the Trust. Each Mortgage Loan transferred to the Trust will be
identified on a schedule (the "Mortgage Loan Schedule") delivered to the
Indenture Trustee pursuant to the Sale and Servicing Agreement. Such schedule
will include information as to the Principal Balance of each Initial Mortgage
Loan as of its Initial Cut-Off Date, as well as information with respect to the
Loan Rate. Subject to the following conditions, among others, Subsequent
Mortgage Loans, to the extent of the availability thereof and funds on deposit
in the Pre-Funding Account, will be sold to the Trust on or before the last
Payment Date of the Pre-Funding Period. Subsequent Mortgage Loans (i) must meet
the general criteria for eligibility in accordance with the terms of the Sale
and Servicing Agreement (other than statistical information relating to the
Initial Mortgage Loans or Eligible Substitute Mortgage Loans (as defined
below)), (ii) must be selected by the Servicer in a manner it believes will not
materially adversely affect the Class A Noteholders or the Insurer and (iii)
must have received Insurer consent to transfer such Subsequent Mortgage Loans.
The Sale and Servicing Agreement will require that on or prior to the
Closing Date, the Servicer shall deliver to the Indenture Trustee (or a
custodian, as the Indenture Trustee's agent for such purpose) the Mortgage Notes
endorsed in blank to the Indenture Trustee on behalf of the Trust and the
Related Documents. In lieu of delivery of original mortgages, the Servicer may
deliver true and correct copies thereof which with respect to lost mortgages
have been certified as to the authenticity by the appropriate county recording
office where such mortgage is recorded.
Under the terms of the Sale and Servicing Agreement, the Sponsor will
have 30 days after the Closing Date to prepare and submit for recordation
assignments of the mortgages related to each Mortgage Loan in favor of the
Indenture Trustee.
Within 90 days of the Closing Date with respect to the Initial Mortgage
Loans or within 90 days of the transfer to the Trust of any Subsequent Mortgage
Loans, the Indenture Trustee will review the Mortgage Loans and the Related
Documents and if any Mortgage Loan or Related Document is found to be defective
in any material respect and such defect is not cured within 90 days following
notification thereof to the Sponsor by the Indenture Trustee, 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 an Eligible
Substitute Mortgage Loan (as defined below) or to purchase such Mortgage Loan at
a purchase price equal to the Principal Balance of such Mortgage Loan plus an
amount equal to all accrued but unpaid interest on such removed Mortgage Loan.
The obligation of the Sponsor either to accept a transfer of a Defective
Mortgage Loan (as defined below) and to convey an Eligible Substitute Mortgage
Loan or to repurchase such Mortgage Loan is the sole remedy regarding any
defects in the Mortgage Loans and Related Documents available to the Indenture
Trustee or the Class A Noteholders.
An "Eligible Substitute Mortgage Loan" is a mortgage loan substituted
by the Sponsor, with the consent of the Insurer, for a Defective Mortgage Loan
which must, on the date of such substitution, (i) have an outstanding Principal
Balance (or, in the case of a substitution of more than one Mortgage Loan for a
Defective Mortgage Loan, an aggregate Principal Balance), equal to or less than
the Principal Balance of the Defective Mortgage Loan as of the applicable
Cut-Off Date (as defined below), (ii) except for HELOC Mortgage Loans still in
their teaser period, have a Loan Rate not less than the Loan Rate of the
Defective Mortgage Loan and not more than 4.00% in excess of the Loan Rate of
such Defective HELOC Mortgage Loan; (iii) in the case of HELOC Mortgage Loans,
have a Loan Rate based on the same Index with adjustments to such Loan Rate made
on the same date on which the Defective HELOC Mortgage Loan's interest rate
adjusts (the "Interest Rate Adjustment Date"); (iv) in the case of HELOC
Mortgage Loans except for HELOC Mortgage Loans still in their teaser period,
have a Margin that is not less than the Margin of the Defective HELOC Mortgage
Loan and not more than 100 basis points higher than the Margin for the Defective
HELOC Mortgage Loan; (v) have a mortgage of the same or higher level of priority
as the Mortgage
S-60
<PAGE>
Loan relating to the Defective Mortgage Loan at the time such Mortgage Loan was
transferred to the Trust; (vi) have a remaining term to maturity not more than
120 months earlier and not more than 180 months later than the remaining term to
maturity of the Defective Mortgage Loan; (vii) comply with each representation
and warranty as to the Mortgage Loans set forth in the Sale and Servicing
Agreement (deemed to be made as of the date of substitution); (viii) have an
original Combined Loan-to-Value Ratio not greater than that of the Defective
Mortgage Loan and (ix) have a Credit Score greater than or equal to the Credit
Score of the Defective Mortgage Loan at the time such Mortgage Loan was
transferred to the Trust.
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., Principal Balance as
of the related Cut-Off Date and Loan Rate). In addition, the Sponsor will
represent and warrant on the Closing Date that at the time of transfer to the
Trust, the Sponsor has transferred or assigned all of its rights, title and
interest in each Mortgage Loan and the Related Documents, free of any lien. Upon
discovery of a breach of any such representation and warranty which materially
and adversely affects the interests of the Class A 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 for the transfer of a Defective
Mortgage Loan in the preceding paragraph will apply to the transfer of a
Mortgage Loan that is required to be transferred because of such breach of a
representation or warranty.
Mortgage Loans required to be transferred to the Sponsor as described
in the preceding paragraphs are referred to as "Defective Mortgage Loans."
Optional Retransfers of Mortgage Loans to the Sponsor
Subject to the conditions specified in the Sale and Servicing
Agreement, on any Payment Date the Sponsor may, but shall not be obligated to,
designate for removal on such Payment Date (the "Transfer Date") from the Trust,
certain Mortgage Loans without notice to the Class A Noteholders. Mortgage Loans
so designated will only be removed upon satisfaction of certain conditions
specified in the Sale and Servicing Agreement, including that: (i) the
Overcollateralization Amount with respect to the applicable Pool as of such
Transfer Date (after giving effect to such removal) exceeds the related
Specified Overcollateralization Amount as of such Transfer Date; (ii) the
Sponsor shall have delivered to the Indenture Trustee a Mortgage Loan Schedule
containing a list of all Mortgage Loans remaining in the Trust after such
removal; (iii) the Sponsor shall represent and warrant that no selection
procedures which the Sponsor reasonably believes are adverse to the interests of
the related Class A Noteholders or the Insurer were used by the Sponsor in
selecting such Mortgage Loans; (iv) in connection with each such retransfer of
Mortgage Loans, the Rating Agencies (as defined herein) shall have been notified
of the proposed transfer and prior to the Transfer Date shall have notified the
Indenture Trustee and the Insurer in writing that such transfer would not result
in a reduction or withdrawal of the ratings assigned to the related Class A
Notes without regard to the Policy; (v) the proposed retransfer shall not cause
a Rapid Amortization Event to occur; (vi) the Rapid Amortization Period shall
not have commenced; and (vii) the Sponsor shall have delivered to the Indenture
Trustee and the Insurer an officer's certificate confirming the conditions set
forth in clauses (i) through (vi) above.
Amendments to Credit Line Agreements
Subject to applicable law, the Servicer may change the terms of the
Loan Agreements at any time provided that such changes (i) do not adversely
affect the interest of the Class A Noteholders or the Insurer, and (ii) are
consistent with prudent business practice. In addition, the Sale and Servicing
Agreement permits the Servicer, within certain limitations described therein, to
increase the Credit Limit of the related HELOC Mortgage Loan or reduce the
Margin for such HELOC Mortgage Loan.
Hazard Insurance
The Servicer shall cause to be maintained for each Mortgage Loan hazard
insurance naming the Servicer or the related subservicer as loss payee
thereunder providing extended coverage in an amount which is at least equal to
the lesser of (i) the maximum insurable value of the improvements securing such
Mortgage Loan from time to time or (ii) the combined principal balance owing on
such Mortgage Loan and any mortgage loan from senior to such
S-61
<PAGE>
Mortgage Loan from time to time. The Servicer shall also maintain on property
acquired upon foreclosure, or by deed in lieu of foreclosure, hazard insurance
with extended coverage in an amount which is at least equal to the lesser of (i)
the maximum insurable value from time to time of the improvements which are a
part of such property or (ii) the combined principal balance owing on such
Mortgage Loan and any mortgage loan senior to such Mortgage Loan at the time of
such foreclosure or deed in lieu of foreclosure. Amounts collected by the
Servicer under any such policies shall be deposited in the Collection Account
net of certain amounts as indicated in the Sale and Servicing Agreement. In
cases in which any Mortgaged Property is located in a federally designated flood
area, the hazard insurance to be maintained for the related Mortgage Loan shall
include flood insurance. All such flood insurance shall be in such amounts as
are required under applicable guidelines of the Federal Flood Emergency Act. The
Servicer shall be under no obligation to require that any Mortgagor maintain
earthquake or other additional insurance and shall be under no obligation itself
to maintain any such additional insurance on property acquired in respect of a
Mortgage Loan, other than pursuant to such applicable laws and regulations as
shall at any time be in force and as shall require such additional insurance. If
the Servicer shall obtain and maintain a blanket policy consistent with prudent
industry standards insuring against hazard losses on all of the Mortgage Loans
in an aggregate amount prudent under industry standards, it shall conclusively
be deemed to have satisfied its obligations and if there shall have been a loss
which would have been covered by such policy, deposit in the Collection Account,
as the case may be, the amount not otherwise payable under the blanket policy
because of any deductible clause.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements on the property by
fire, lightning, explosion, smoke, windstorm and hail, and the like, strike and
civil commotion, subject to the conditions and exclusions specified in each
policy. Although the policies relating to the Mortgage Loans will be
underwritten by different insurers and therefore will not contain identical
terms and conditions, the basic terms thereof are dictated by state laws and
most of such policies typically do not cover any physical damage resulting from
the following: war, revolution, governmental actions, floods and other
water-related causes, earth movement (including earthquakes, landslides and
mudflows), nuclear reactions, wet or dry rot, vermin, rodents, insects or
domestic animals, theft and, in certain cases, vandalism. The foregoing list is
merely indicative of certain kinds of uninsured risks and is not intended to be
all-inclusive or an exact description of the insurance policies relating to the
Mortgaged Properties.
Realization Upon Defaulted Mortgage Loans
The 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
judgement, such foreclosure, correction or restoration will increase Net
Liquidation Proceeds. The Servicer will be reimbursed out of Liquidation
Proceeds for advance of its own funds as liquidation expenses before any Net
Liquidation Proceeds are distributed to Holders of the Class A Notes or the
Certificateholders.
Servicing Compensation and Payment of Expenses
With respect to each Collection Period and each Pool, the Servicer will
receive from interest collections in respect of the Mortgage Loans in such Pool,
a portion of such interest collections as a monthly servicing fee (the
"Servicing Fee" with respect to each Pool) in the amount equal to approximately
0.50% per annum on the related Pool Balance as of the first day of the related
Collection Period (or at the Initial 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 Class A Noteholders to
receive any related Net Liquidation Proceeds.
S-62
<PAGE>
Evidence as to Compliance
The Sale and Servicing Agreement provides for delivery on or before
March 31 in each year, beginning in March 31, 2001, 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, 2001, the
Servicer will furnish a report prepared by a firm of 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, (i) 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 affiliate or (ii) upon the satisfaction
of the following conditions: (a) 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
(b) the Rating Agencies have confirmed to the Indenture Trustee that the
appointment of such proposed successor servicer as the Servicer will not result
in the reduction or withdrawal of the then current ratings of the Class A Notes
without regard to the Policy. 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
acceptable to the Insurer, which may be affiliates of the Servicer.
Notwithstanding any such arrangement, the Servicer will remain liable and
obligated to the Indenture Trustee and the Class A 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.
The Sale and Servicing Agreement provides that the Servicer will
indemnify the Trust and the Indenture Trustee from and against any loss,
liability, expense, damage or injury suffered or sustained as a result of the
Servicer's actions or omissions in connection with the servicing and
administration of the Mortgage Loans which are not in accordance with the
provisions of the Sale and Servicing Agreement. 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 Class A
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 Class A 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
S-63
<PAGE>
or any further act on the part of any of the parties hereto, anything in the
Sale and Servicing Agreement to the contrary notwithstanding.
Events of Servicing Termination
"Events of Servicing Termination" will consist of: (i) 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 Class A Noteholders evidencing more than 25% of the Note
Principal Balance of the Class A Notes; (ii) 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 Class A 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 Class A Noteholders evidencing more than 25%
of the Note Principal Balance of the Class A Notes; (iii) 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 (iv) any Event of Servicing Termination, as defined
in the Insurance Agreement, 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 (i) above for a period of five Business Days or
referred to under clause (ii) 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 Class A
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
(i) the Indenture Trustee, or Class A Noteholders evidencing more than 50% of
the Note Principal Balance of the Class A Notes in each case with the consent of
the Insurer or (ii) 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 $15,000,000 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.
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 Class A 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 Class A Notes (it
being understood that, after obtaining the ratings in effect on the Closing
Date,
S-64
<PAGE>
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 Class A 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 Class A 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 Class A Noteholders evidencing more than 50% of the Note Principal Balance of
the Class A Notes 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 Class A
Noteholders; provided that no such amendment will (i) reduce in any manner the
amount of, or delay the timing of, collections of payments on the Class A Notes
or distributions or payments under the Policy which are required to be made on
any Class A Note without the consent of the Holder of such Class A Note or (ii)
reduce the aforesaid percentage required to consent to any such amendment,
without the consent of the Holders of all Class A Notes then outstanding or
(iii) adversely affect in any material respect the interest of the Insurer.
Termination; Retirement of the Class A 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 (i) the Payment Date on which the Note Principal Balance
of all of the Classes of Class A Notes have been reduced to zero and all other
amounts due and owing to the Class A Noteholders have been paid in full, (ii)
the Payment Date immediately following the final payment or other liquidation of
the last Mortgage Loan in the Trust, (iii) the Payment Date immediately
following the optional redemption by the Sponsor of the Class A Notes, as
described below and (iv) the Payment Date in December 2025.
The Class A-1 Notes will be subject to optional redemption on any
Payment Date after the Note Principal Balance of the Class A-1 Notes is reduced
to an amount less than or equal to 10% of the Note Principal Balance of the
Class A-1 Notes as of the Closing Date. The Class A-2 Notes will be subject to
optional redemption on any Payment Date after the Note Principal Balance of the
Class A-2 Notes is reduced to an amount less than or equal to 10% of the Note
Principal Balance of the Class A-2 Notes as of the Closing Date. Any such
optional repurchase will cause a redemption of the related Class A 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 Principal Balance for the
related Class and accrued and unpaid interest thereon at the related Note Rate
through the day preceding the final Payment Date and interest accrued on any
unpaid interest, to the extent legally permissible, 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 Class of Class A 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 Class A 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" herein.
No Holder of a Class 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 Class A Noteholders evidencing more than 50% of the Note Principal
Balance of the Class A Notes 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
S-65
<PAGE>
of the Class A Noteholders, unless such Class A Noteholders have offered to the
Indenture Trustee reasonable security or indemnity against the cost, expenses
and liabilities which may be incurred therein or thereby.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Class A Notes will
be applied by the Sponsor toward the purchase of the Mortgage Loans. The Company
will use the proceeds from the transfer of the Mortgage Loans to the Sponsor to
pay down warehouse lines and for general corporate purposes.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion, when read in conjunction with
the discussion of "Federal Income Tax Consequences" in the Prospectus, of the
material anticipated federal income tax considerations to investors of the
purchase, ownership and disposition of the securities offered hereby. The
discussion is based upon laws, regulations, rulings and decisions now in effect,
all of which are subject to change. The discussion below does not purport to
deal with all federal tax considerations applicable to all categories of
investors, some of which may be subject to special rules. Investors should
consult their own tax advisors in determining the federal, state, local and any
other tax consequences to them of the purchase, ownership and disposition of the
Class A Notes.
The Class A Notes will not represent "real estate assets" for purposes
of Section 856(c)(4)(A) of the Internal Revenue Code of 1986, as amended (the
"Code") or "[l]oans . . . principally secured by an interest in real property"
within the meaning of Section 7701(a)(19)(C) of the Code.
Treatment of the Class A Notes as Indebtedness. The Sponsor, the
Servicer and the Trust agree, and the Noteholders will agree by their purchase
of Class A Notes, to treat the Class A Notes as debt for all federal, state and
local income tax purposes. There are no regulations, published rulings or
judicial decisions involving the characterization for federal income tax
purposes of securities with terms substantially the same as the Class A Notes.
In general, whether instruments such as the Class A Notes constitute
indebtedness for federal income tax purposes is a question of fact, the
resolution of which is based primarily upon the economic substance of the
instruments and the transaction pursuant to which they are issued rather than
merely upon the form of the transaction or the manner in which the instruments
are labeled. The Internal Revenue Service (the "IRS") and the courts have set
forth various factors to be taken into account in determining, for federal
income tax purposes, whether or not an instrument constitutes indebtedness and
whether a transfer of property is a sale because the transferor has relinquished
substantial incidents of ownership in the property or whether such transfer is a
borrowing secured by the property. On the basis of its analysis of such factors
as applied to the facts and its analysis of the economic substance of the
contemplated transaction, Dewey Ballantine LLP, tax counsel to the Sponsor and
counsel to the Underwriter ("Tax Counsel"), is of the opinion that, for federal
income tax purposes, the Class A Notes will be treated as indebtedness, and not
as an ownership interest in the Mortgage Loans, or an equity interest in the
Trust or in a separate association taxable as a corporation or other taxable
entity. Further, Tax Counsel is of the opinion that the Trust will not be
characterized as an association (or a publicly traded partnership) taxable as a
corporation or as a taxable mortgage pool. See "Federal Income
Consequences--Taxation of Debt Securities" in the Prospectus.
If the Class A Notes are characterized as indebtedness, interest paid
or accrued on a Class A Note will be treated as ordinary income to the
Noteholders and principal payments on a Class A Note will be treated as a return
of capital to the extent of the Noteholder's basis in the Class A Note allocable
thereto. An accrual method taxpayer will be required to include in income
interest on the Class A Notes when earned, even if not paid, unless it is
determined to be uncollectible. The Trust will report to Noteholders of record
and the IRS in respect of the interest paid and original issue discount, if any,
accrued on the Class A Notes to the extent required by law.
Although, as described above, it is the opinion of Tax Counsel that,
for federal income tax purposes, the Class A Notes will be characterized as
debt, such opinion is not binding on the IRS and thus no assurance can be given
that such a characterization will prevail. If the IRS successfully asserted that
the Class A Notes did not represent debt for federal income tax purposes,
Holders of the Class A Notes would likely be treated as owning an interest in a
partnership and not an interest in an association (or publicly traded
partnership) taxable as a corporation. If the Noteholders were treated as owning
an equitable interest in a partnership, the partnership itself would not be
subject to federal income tax; rather each partner would be taxed individually
on their respective distributive share of the partnership's income, gain, loss,
deductions and credits. The amount, timing and characterization of items of
S-66
<PAGE>
income and deductions for a Noteholder would differ if the Class A Notes were
held to constitute partnership interests, rather than indebtedness. Since the
parties will treat the Class A Notes as indebtedness for federal income tax
purposes, none of the Servicer, the Indenture Trustee or the Owner Trustee will
attempt to satisfy the tax reporting requirements that would apply under this
alternative characterization of the Class A Notes. Investors that are foreign
persons are strongly advised to consult their own tax advisors in determining
the federal, state, local and other tax consequences to them of the purchase,
ownership and disposition of the Class A Notes.
Original Issue Discount. It is anticipated, and this discussion
assumes, that the Class A Notes will not have any original issue discount
("OID") other than possibly OID within a de minimis exception and that
accordingly the provisions of sections 1271 through 1273 and 1275 the Code
generally will not apply to the Class A Notes. OID will be considered de minimis
if it is less than 0.25% of the principal amount of a Class A Note multiplied by
its expected weighted average life. The prepayment assumption that will be used
for purposes of computing original issue discount, if any, for federal income
tax purposes is the Prepayment Assumption. See "Federal Income
Consequences--Taxation of Debt Securities--Interest and Acquisition Discount" in
the Prospectus.
Market Discount. A subsequent purchaser who buys a Class A Note for
less than its principal amount may be subject to the "market discount" rules of
Section 1276 through 1278 of the Code. If a subsequent purchaser of a Note
disposes of such Class A Note (including certain nontaxable dispositions such as
a gift), or receives a principal payment, any gain upon such sale or other
disposition will be recognized, or the amount of such principal payment will be
treated, as ordinary income to the extent of any "market discount" accrued for
the period that such purchaser holds the Class A Note. Such Holder may instead
elect to include market discount in income as it accrues with respect to all
debt instruments acquired in the year of acquisition of the Class A Notes and
thereafter. Market discount generally will equal the excess, if any, of the then
current unpaid principal balance of the Class A Note over the purchaser's basis
in the Class A Note immediately after such purchaser acquired the Note. In
general, market discount on a Class A Note will be treated as accruing over the
term of such Class A Note in the ratio of interest for the current period over
the sum of such current interest and the expected amount of all remaining
interest payments, or at the election of the Holder, under a constant yield
method (taking into account the Prepayment Assumption). At the request of a
Holder of a Class A Note, information will be made available that will allow the
Holder to compute the accrual of market discount under the first method
described in the preceding sentence. See "Federal Income Tax
Consequences--Taxation of Debt Securities--Market Discount" in the Prospectus.
The market discount rules also provide that a Holder who incurs or
continues indebtedness to acquire a Class A Note at a market discount may be
required to defer the deduction of all or a portion of the interest on such
indebtedness until the corresponding amount of market discount is included in
income.
Notwithstanding the above rules, market discount on a Class A Note will
be considered to be zero if it is less than a de minimis amount, which is 0.25%
of the remaining principal balance of the Class A Note multiplied by its
expected weighted average remaining life. If OID or market discount is de
minimis, the actual amount of discount must be allocated to the remaining
principal distributions on the Class A Notes and, when each such distribution is
received, capital gain equal to the discount allocated to such distribution will
be recognized.
Market Premium. A subsequent purchaser who buys a Class A Note for more
than its principal amount generally will be considered to have purchased the
Class A Note at a premium. Such Holder may amortize such premium, using a
constant yield method, over the remaining term of the Class A Note and, except
as future regulations may otherwise provide, may apply such amortized amounts to
reduce the amount of interest reportable with respect to such note over the
period from the purchase date to the date of maturity of the Class A Note. The
amortization of such premium on an obligation that provides for partial
principal payments prior to maturity should be governed by the methods for
accrual of market discount on such an obligation (described above). A Holder
that elects to amortize premium must reduce the tax basis in the related
obligation by the amount of the aggregate deductions (or interest offsets)
allowable for amortizable premium. If a debt instrument purchased at a premium
is redeemed in full prior to its maturity, a purchaser who has elected to
amortize premium should be entitled to a deduction for any remaining unamortized
premium in the taxable year of redemption. See "Federal Income Consequences--
Taxation of Debt Securities--Premium" in the Prospectus.
Sale or Redemption of Class A Notes. If a Class A Note is sold or
retired, the seller will recognize gain or loss equal to the difference between
the amount realized on the sale and such Holder's adjusted basis in the Note.
Such adjusted basis generally will equal the cost of the Class A Note to the
seller, increased by any original issue
S-67
<PAGE>
discount included in the seller's gross income in respect of the Class A Note
(and by any market discount which the taxpayer elected to include in income or
was required to include in income), and reduced by payments other than payments
of qualified stated interest in respect of the Class A Note received by the
seller and by any amortized premium. Similarly, a Holder who receives a payment
other than a payment of qualified stated interest in respect of a Class A Note,
either on the date on which such payment is scheduled to be made or as a
prepayment, will recognize gain equal to the excess, if any, of the amount of
the payment over his adjusted basis in the Class A Note allocable thereto. A
Noteholder who receives a final payment which is less than his adjusted basis in
the Class A Note will generally recognize a loss in the amount of the shortfall
on the last day of his taxable year. Generally, any such gain or loss realized
by an investor who holds a Class A Note as a "capital asset" within the meaning
of Code Section 1221 should be capital gain or loss, except as described above
in respect of market discount and except that a loss attributable to accrued but
unpaid interest may be an ordinary loss. See "Federal Income Consequences--
Taxation of Holders of Residual Interest Securities--Sale or Exchange" in the
Prospectus.
Taxation of Certain Foreign Investors. Interest payments (including
OID, if any) on the Class A Notes made to a Noteholder who is a nonresident
alien individual, foreign corporation or other non-United States person (a
"foreign person") generally will be "portfolio interest" which is not subject to
United States tax if such payments are not effectively connected with the
conduct of a trade or business in the United States by such foreign person and
if the Trust (or other person who would otherwise be required to withhold tax
from such payments) is provided with an appropriate statement that the
beneficial owner of the Class A Note identified on the statement is a foreign
person. For these purposes, "United States person" means a person who or which
is for United States federal income tax purposes a citizen or resident of the
United States, a corporation or partnership (including an entity treated as a
corporation or partnership for federal income tax purposes) created or organized
in or under the laws of the United States or any state thereof or the District
of Columbia (except in the case of a partnership, to the extent provided in
regulations), an estate that is subject to United States federal income tax,
regardless of the source of its income, or a trust if a court within the United
States can exercise primary supervision over its administration and at least one
United States person has the authority to control all substantial decisions of
the trust. Under the certification requirements, a Noteholder must certify,
under penalties of perjury, that it is not a United States person and provide
its name and address. Regulations, which will be effective for payments made
after December 31, 2000, provide alternative certification requirements and
means for claiming the exemption from federal income and withholding tax. If
income or gain with respect to a Class A Note is effectively connected with a
United States trade or business carried on by a Noteholder who or which is not a
United States person, the withholding tax will not apply, but such a Noteholder
will be subject to United States federal income tax at graduated rates
applicable to United States persons. Potential investors who are non-United
States persons should consult their own tax advisors regarding the specific tax
consequences to them of owning the Class A Notes. See "Federal Income
Consequences--Tax Treatment of Foreign Investors" in the Prospectus.
Backup Withholding. Distributions of interest and principal as well as
distributions of proceeds from the sale of the Class A Notes, may be subject to
the "backup withholding tax" under Section 3406 of the Code at rate of 31% if
recipients of such distributions fail to furnish to the payor certain
information, including their taxpayer identification numbers, or otherwise fail
to establish an exemption from such tax. Any amounts deducted and withheld from
a distribution to a recipient would be allowed as a credit against such
recipient's federal income tax. Furthermore, certain penalties may be imposed by
the IRS on a recipient of distributions that is required to supply information
but does not do so in the proper manner. See "Federal Income
Consequences--Miscellaneous Tax Aspects -- Backup Withholding" in the
Prospectus.
STATE TAXES
The Sponsor makes no representations regarding the tax consequences of
purchase, ownership or disposition of the Class A Notes under the tax laws of
any state. Investors considering an investment in the Class A Notes should
consult their own tax advisors regarding such tax consequences.
All investors should consult their own tax advisors regarding the
federal, state, local or foreign income tax consequences of the purchase,
ownership and disposition of the Class A Notes.
S-68
<PAGE>
ERISA CONSIDERATIONS
Section 406 of ERISA and 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 (each, a "Benefit Plan"),
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 acquired an "equity interest" in the
Trust and none of the exceptions contained in the Plan Assets Regulation were
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 Class A
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 Class A Notes, including the reasonable
expectation of purchasers of Class A Notes that the Class A 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 Class A Notes for ERISA
purposes could change if the Trust incurred losses.
Without regard to whether the Class A Notes are treated as equity
interests in the Trust for purposes of the Plan Assets Regulation, the
acquisition or holding of Class A 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") 90-1, 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." Each investor using the assets of a Benefit Plan which acquires the
Class A Notes, or to whom the Class A Notes are transferred, will be deemed to
have represented that the acquisition and continued holding of the Class A Notes
will be covered by one of the exemptions listed above or by another Department
of Labor prohibited transaction class exemption.
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 federal, state or local law restrictions.
A plan fiduciary considering the purchase of Class A 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 related issues and their potential
consequences.
The sale of Class A Notes to a Benefit Plan is in no respect a
representation by the Sponsor or the Underwriter that this investment meets all
relevant legal requirements with respect to investments by Benefit Plans
generally or by a particular Benefit Plan, or that this investment is
appropriate for Benefit Plans generally or any particular Benefit Plan.
LEGAL INVESTMENT CONSIDERATIONS
Although, as a condition to their issuance, the Class A Notes will be
rated in the highest rating category of the Rating Agencies, the Class A 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
S-69
<PAGE>
rated securities based on first mortgage loans may not be legally authorized to
invest in the Class A Notes, which because they evidence interests in a pool
that includes junior mortgage loans are not "mortgage related securities" under
SMMEA.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement, dated December 15, 1999 (the "Underwriting Agreement"), among the
Company, the Sponsor and Greenwich Capital Markets, Inc. (the "Underwriter"),
the Sponsor has agreed to cause the Trust to sell to the Underwriter, and the
Underwriter has agreed to purchase the Class A Notes from the Trust.
In the Underwriting Agreement, the Underwriter has agreed, subject to
the terms and conditions set forth therein, to purchase all the Class A Notes
offered hereby if any of the Class A Notes are purchased.
The Underwriter has informed the Sponsor that it proposes to offer the
Class A Notes for sale from time to time in one or more negotiated transactions,
or otherwise, at varying prices to be determined, in each case, at the time of
the related sale. The Underwriter may effect such transactions by selling the
Class A Notes to or through dealers, and such dealers may receive compensation
in the form of underwriting discounts, concessions or commissions from the
Underwriter. In connection with the sale of the Class A Notes, the Underwriter
may be deemed to have received compensation from the Sponsor in the form of
underwriting compensation. The Underwriter and any dealers that participate with
the Underwriter in the distribution of the Class A Notes may be deemed to be
underwriters and any commissions received by them and any profit on the resale
of the Class A Notes by them may be deemed to be underwriting discounts and
commissions under the 1933 Act.
The Sponsor has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the 1933 Act.
In connection with this offering and in compliance with applicable law
and industry practice, the Underwriter may overallot or effect transactions
which stabilize, maintain or otherwise affect the market price of the Class A
Notes at a level above that which might otherwise prevail in the open market,
including stabilizing bids, effecting syndicate covering transactions or
imposing penalty bids. A stabilizing bid means the placing of any bid, or the
effecting of any purchase, for the purpose of pegging, fixing or maintaining the
price of a security. A syndicate covering transaction means the placing of any
bid on behalf of the underwriting syndicate or the effecting of any purchase to
reduce a short position created in connection with the offering. A penalty bid
means an arrangement that permits the Underwriter to reclaim a selling
concession from a syndicate member in connection with the offering when Class A
Notes originally sold by the syndicate member are purchased in syndicate
covering transactions. The Underwriter is not required to engage in any of these
activities. Any such activities, if commenced, may be discontinued at any time.
The Sponsor has been advised by the Underwriter that the Underwriter
presently intends to make a market in the Class A Notes, as permitted by
applicable laws and regulations. The Underwriter is not obligated, however, to
make a market in the Class A Notes and such market-making may be discontinued at
any time at the sole discretion of the Underwriter. Accordingly, no assurance
can be given as to the liquidity of any trading markets for the Class A Notes.
LEGAL MATTERS
Certain legal matters with respect to the Class A Notes will be passed
upon for the Trust and the Sponsor by Tobin & Tobin, San Francisco, California,
and for the Underwriter and with regard to the tax characterization of the Class
A Notes by Dewey Ballantine LLP, New York, New York.
EXPERTS
The consolidated financial statements of Ambac Assurance Corporation
and subsidiaries as of December 31, 1998 and 1997 and for each of the years in
the three-year period ended December 31, 1998 are incorporated by reference
herein and in the registration statement in reliance upon the report of KPMG
LLP, independent certified
S-70
<PAGE>
public accountants, incorporated by reference herein, and upon the authority of
said firm as experts in accounting and auditing.
RATINGS
It is a condition to issuance that the Class A Notes be rated "AAA" by
S&P and "Aaa" by Moody's.
A securities rating addresses the likelihood of the receipt by Class A
Noteholders of distributions on the Class A Notes. The rating takes into
consideration the characteristics of the Mortgage Loans and the structural and
legal aspects associated with the Class A Notes. The ratings on the Class A
Notes do not, however, constitute statements regarding the likelihood or
frequency of prepayments on the Mortgage Loans or the possibility that Class A
Noteholders might realize a lower than anticipated yield. The ratings do not
take into account the likelihood of payment of any Relief Act Shortfalls or
Deferred Interest.
The ratings assigned to the Class A 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
Class A Notes may result in a reduction of one or more of the ratings assigned
to the Class A 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.
S-71
<PAGE>
INDEX OF DEFINED TERMS
PAGE
Accelerated Principal Payment...........................................51, 55
Additional Balances.........................................................15
Available Funds.............................................................53
beneficial owner............................................................56
Benefit Plan................................................................69
BIF.........................................................................59
Book-Entry Securities.......................................................56
Business Day................................................................49
Certificate Register........................................................49
Certificates................................................................15
Class.......................................................................49
Class A Noteholders.........................................................48
Class A Notes...............................................................48
Class A-1 Notes.............................................................48
Class A-2 Notes.............................................................48
Closing Date................................................................15
Code........................................................................66
Collection Account..........................................................53
Collection Period...........................................................58
Combined Loan-to-Value Ratio........................................24, 27, 36
Company.....................................................................19
Credit Limit................................................................24
Credit Limit Utilization Rate...............................................24
Credit Line Agreements......................................................23
Credit Scores...........................................................31, 40
Crossover Amount............................................................53
Cut-Off Date................................................................16
Defective Mortgage Loans....................................................61
Deferred Interest.......................................................49, 50
Definitive Note.............................................................56
Determination Date..........................................................19
DTC.........................................................................56
Eligible Account............................................................59
Eligible Substitute Mortgage Loan...........................................60
Events of Servicing Termination.............................................64
Excess Cashflow.............................................................43
Final Scheduled Payment Date................................................51
Financial Intermediary......................................................56
FNMA........................................................................16
foreign person..............................................................68
GreenPoint Financial........................................................20
GreenPoint Mortgage.........................................................20
Headlands...................................................................20
Holder......................................................................18
Holders.....................................................................48
Indenture...................................................................15
Indenture Trustee...........................................................15
Index Rate..................................................................23
Industry....................................................................57
Initial Closed End Mortgage Loans...........................................15
Initial Cut-Off Date........................................................16
Initial HELOC Mortgage Loans................................................15
S-72
<PAGE>
Initial Mortgage Loans..................................................15, 16
Initial Pool I Balance......................................................24
Initial Pool I Closed End Balance...........................................24
Initial Pool I HELOC Balance................................................24
Initial Pool I Mortgage Loans...............................................16
Initial Pool II Balance.....................................................32
Initial Pool II Mortgage Loans..............................................16
Insolvency Event............................................................64
Insurance Agreement.........................................................51
Insured Payment.............................................................18
Insurer.....................................................................16
Interest Accrual Period.....................................................50
Interest Collections........................................................58
Interest Payment Amount.....................................................50
Interest Rate Adjustment Date...............................................60
IRS.........................................................................66
Late Payment Rate...........................................................54
LIBOR.......................................................................50
LIBOR Business Day..........................................................50
Liquidated Mortgage Loan....................................................59
Liquidation Proceeds........................................................59
Loan Agreements.............................................................23
Loan Rate...............................................................23, 24
Managed Amortization Period.................................................51
Management Agreement........................................................54
Management Fee..............................................................54
Margin......................................................................23
Maximum Principal Payment...................................................51
Maximum Rate............................................................49, 50
Moody's.....................................................................16
Mortgage Loan Schedule......................................................60
Mortgage Loans..............................................................16
Mortgage Notes..............................................................23
Mortgaged Properties........................................................16
Net Liquidation Proceeds....................................................58
Net Principal Collections...................................................51
Note Principal Balance......................................................18
Note Rate...................................................................49
Note Registrar..............................................................49
OID.........................................................................67
Optional Redemption Date....................................................50
Original Class A-1 Pre-Funded Amount........................................55
Original Class A-2 Pre-Funded Amount........................................55
Overcollateralization Amount................................................43
Overcollateralization Deficit...............................................18
Overcollateralization Reduction Amount..................................51, 55
Owner Trustee...............................................................15
Paying Agent................................................................54
Payment Date................................................................49
Plan Assets Regulation......................................................69
Policy......................................................................18
Pool........................................................................18
Pool Balance................................................................59
Pool Factor.................................................................48
Pool I......................................................................15
Pool II.....................................................................16
S-73
<PAGE>
Preference Amount...........................................................18
Pre-Funded Amount...........................................................55
Pre-Funding Account.........................................................55
Pre-Funding Period..........................................................55
Pre-Funding Period Termination Date.........................................55
Principal Balance...........................................................59
Principal Collections.......................................................58
Principal Payment Amount....................................................51
PTCE........................................................................69
Purchase Agreement..........................................................16
Rapid Amortization Event....................................................51
Rapid Amortization Period...................................................51
Rating Agencies.............................................................41
Record Date.................................................................49
Reference Bank Rate.........................................................50
Reimbursement Amount........................................................54
Related Documents...........................................................60
Relief Act Shortfalls.......................................................19
Reserve Fund................................................................55
S&P.........................................................................16
SAIF........................................................................59
Sale and Servicing Agreement................................................15
SEC..........................................................................3
Servicer................................................................16, 19
Servicing Fee...............................................................62
SMMEA.......................................................................69
Specified Overcollateralization Amount......................................51
Sponsor.................................................................16, 23
Subsequent Mortgage Loans...................................................16
Systems.....................................................................57
Tax Counsel.................................................................66
Telerate Screen Page 3750...................................................50
Total Available Funds.......................................................19
Transfer Date...............................................................61
Trust.......................................................................15
Trust Agreement.............................................................15
Trust Property..............................................................15
Trustee Fee.................................................................53
Underwriter.................................................................70
Underwriting Agreement......................................................70
Underwriting Standards......................................................21
United States person........................................................68
Weighted Average Second Mortgage Ratio......................................24
S-74
<PAGE>
PROSPECTUS
GREENPOINT MORTGAGE SECURITIES INC.
(Formerly Headlands Mortgage Securities Inc.)
(Sponsor)
Asset Backed Securities
(Issuable in Series)
- --------------------
Please carefully
consider our
discussion of
some of the
risks of
investing in the
certificates
under "Risk Factors"
beginning on
page 4.
- --------------------
The Trusts
Each trust will be established to hold the assets
transferred to it by GreenPoint 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
GreenPoint 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.
June 14, 1999
<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 Considerations...........................................38
The Agreements................................................................41
Certain Legal Aspects of the Loans............................................58
Federal Income Tax Consequences...............................................69
State Tax Considerations......................................................96
ERISA Considerations..........................................................96
Legal Investment.............................................................101
Method of Distribution.......................................................102
Legal Matters................................................................103
Financial Information........................................................103
Available Information........................................................103
Incorporation of Certain Documents by Reference..............................104
Rating.......................................................................104
ii
<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.
iii
<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:
4
<PAGE>
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.
5
<PAGE>
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
6
<PAGE>
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.
7
<PAGE>
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
GreenPoint 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
8
<PAGE>
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
9
<PAGE>
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.
10
<PAGE>
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
11
<PAGE>
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;
12
<PAGE>
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
13
<PAGE>
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
GreenPoint 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 GreenPoint Mortgage
Funding, Inc., 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
14
<PAGE>
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
15
<PAGE>
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;
16
<PAGE>
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.
17
<PAGE>
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 GreenPoint 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
18
<PAGE>
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
19
<PAGE>
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.
20
<PAGE>
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
21
<PAGE>
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
22
<PAGE>
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.
23
<PAGE>
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;
24
<PAGE>
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.
<TABLE>
<CAPTION>
Categories of Classes Definition
<S> <C>
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
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
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
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
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.
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
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).
</TABLE>
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
28
<PAGE>
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
29
<PAGE>
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
30
<PAGE>
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,
31
<PAGE>
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.
32
<PAGE>
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
33
<PAGE>
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.
34
<PAGE>
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.
35
<PAGE>
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:
36
<PAGE>
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
37
<PAGE>
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,
38
<PAGE>
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
39
<PAGE>
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.
40
<PAGE>
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.
41
<PAGE>
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,
42
<PAGE>
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):
43
<PAGE>
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
44
<PAGE>
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.
45
<PAGE>
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
46
<PAGE>
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.
47
<PAGE>
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
48
<PAGE>
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.
49
<PAGE>
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:
50
<PAGE>
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
51
<PAGE>
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
52
<PAGE>
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
53
<PAGE>
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.
54
<PAGE>
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
55
<PAGE>
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.
56
<PAGE>
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
57
<PAGE>
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.
58
<PAGE>
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
59
<PAGE>
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.
60
<PAGE>
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.
61
<PAGE>
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.
62
<PAGE>
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
63
<PAGE>
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,
64
<PAGE>
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.
65
<PAGE>
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.
66
<PAGE>
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
67
<PAGE>
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
68
<PAGE>
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
69
<PAGE>
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
70
<PAGE>
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
71
<PAGE>
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
72
<PAGE>
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.
73
<PAGE>
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.
74
<PAGE>
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
75
<PAGE>
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.
76
<PAGE>
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
77
<PAGE>
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.
78
<PAGE>
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.
79
<PAGE>
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."
80
<PAGE>
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
81
<PAGE>
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
82
<PAGE>
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.
83
<PAGE>
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
84
<PAGE>
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,
85
<PAGE>
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
86
<PAGE>
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.
87
<PAGE>
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.
88
<PAGE>
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
89
<PAGE>
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
90
<PAGE>
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
91
<PAGE>
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.
92
<PAGE>
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.
93
<PAGE>
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
94
<PAGE>
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.
95
<PAGE>
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
96
<PAGE>
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
97
<PAGE>
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
98
<PAGE>
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.
99
<PAGE>
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
100
<PAGE>
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
101
<PAGE>
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,
102
<PAGE>
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:
103
<PAGE>
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
104
<PAGE>
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.
105
<PAGE>
================================================================================
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE SPONSOR
OR THE UNDERWRITER. THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS DOES NOT
CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH THEY RELATE OR
AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY
JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THEIR
RESPECTIVE DATES.
------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Prospectus Supplement
PAGE
----
<S> <C>
Summary........................................... S-4
Risk Factors...................................... S-10
Formation of the Trust............................ S-15
The Trust Property................................ S-15
The Insurer and the Policy........................ S-16
GreenPoint Mortgage Funding, Inc.................. S-19
The Company's Mortgage Loan Program............... S-21
The Sponsor....................................... S-23
Description of the Mortgage Loans................. S-23
Yield, Maturity and Prepayment Considerations..... S-42
Pool Factor and Trading Information............... S-48
Description of the Class A Notes.................. S-48
Certain Provisions of the Sale and Servicing
Agreement....................................... S-58
Use of Proceeds................................... S-66
Certain Federal Income Tax Consequences........... S-66
State Taxes....................................... S-68
ERISA Considerations.............................. S-69
Legal Investment Considerations................... S-69
Underwriting...................................... S-70
Legal Matters..................................... S-70
Experts........................................... S-70
Ratings........................................... S-71
Index of Defined Terms............................ S-72
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 Considerations............... 38
The Agreements.................................... 41
Certain Legal Aspects of the Loans................ 58
Federal Income Tax Consequences................... 69
State Tax Considerations.......................... 96
ERISA Considerations.............................. 96
Legal Investment.................................. 101
Method of Distribution............................ 102
Legal Matters..................................... 103
Financial Information............................. 103
Available Information............................. 103
Incorporation of Certain Documents by Reference... 104
Rating............................................ 104
</TABLE>
================================================================================
================================================================================
GREENPOINT HOME EQUITY LOAN
TRUST 1999-2
$193,275,000 CLASS A-1 VARIABLE RATE
ASSET-BACKED NOTES
$52,370,000 CLASS A-2 VARIABLE RATE
ASSET-BACKED NOTES
HOME EQUITY LOAN
ASSET-BACKED NOTES
SERIES 1999-2
[Logo of GreenPoint Mortage Securities Inc.]
SPONSOR
------------------------------------------
PROSPECTUS SUPPLEMENT
------------------------------------------
GREENWICH CAPITAL
- --------------------------------------------------------------------------------
- -----------------
December 15, 1999
================================================================================
