<PAGE>
Prospectus Supplement
(To Prospectus Dated February 15, 2000)
$299,286,000
(Approximate)
[GREENPOINT MORTGAGE SECURITIES, INC. LOGO]
GreenPoint Mortgage Funding, Inc.
Seller and Servicer
GreenPoint Home Equity Loan Trust 2000-3
Home Equity Loan Asset-Backed Notes, Series 2000-3
$102,736,000 Class A-1 Variable Rate Asset-Backed Notes
$98,584,000 Class A-2 Variable Rate Asset-Backed Notes
$97,966,000 Class A-3 Variable Rate Asset-Backed Notes
Consider carefully the risk factors beginning on page S-12 of this prospectus
supplement and on page 4 of the accompanying prospectus.
The Class A 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., Bankers Trust Company, Wilmington Trust
Company, or any of their affiliates (other than as described herein).
This prospectus supplement may be used to offer and sell the Class A Notes
only if accompanied by the prospectus.
[FGIC LOGO]
The Trust will issue:
o Three classes of senior Class A Notes, that are offered for sale.
o A single class of interest-only certificates that is not offered for
sale.
o A single residual certificate that is not offered for sale.
The Class A Notes:
o Represent debt obligations in a trust, whose assets consist of three
pools of adjustable-rate, revolving home equity lines of credit
mortgage loans and fixed-rate closed-end second lien mortgage loans.
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 16,
2001.
o Will have the benefit of an insurance policy from Financial Guaranty
Insurance Company, which will guarantee timely payment of interest and
the ultimate payment of principal, as described in this prospectus
supplement.
Greenwich Capital Markets, Inc., as underwriter, will buy the Class A 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 Class A Notes from the proceeds of
this sale. The interest-only certificates and the residual certificate will
not be offered and will be retained by GreenPoint Mortgage Securities Inc. The
underwriter proposes to sell the Class A 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 LOGO]
--------------------------------------------------------------------------------
December 5, 2000
<PAGE>
IMPORTANT NOTICE ABOUT THE INFORMATION PRESENTED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS
We tell you about the Class A 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 the Class A Notes,
and (2) this prospectus supplement, which describes the specific terms of the
Class A Notes and may be different from the information in the prospectus.
If the terms of your class 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-84 in this prospectus supplement.
The underwriter may engage in transactions that stabilize, maintain, or
in some way affect the price of the Class A 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 "Method of Distribution" in this prospectus
supplement.
TABLE OF CONTENTS
Prospectus Supplement
SUMMARY...................................................................S-4
RISK FACTORS.............................................................S-12
FORMATION OF THE TRUST...................................................S-16
THE TRUST PROPERTY.......................................................S-17
THE INSURER AND THE POLICY...............................................S-17
GREENPOINT MORTGAGE FUNDING, INC.........................................S-21
THE COMPANY'S MORTGAGE LOAN PROGRAM......................................S-24
THE SPONSOR..............................................................S-25
DESCRIPTION OF THE MORTGAGE LOANS........................................S-25
YIELD, MATURITY AND PREPAYMENT CONSIDERATIONS............................S-51
POOL FACTOR AND TRADING INFORMATION......................................S-60
DESCRIPTION OF THE CLASS A NOTES.........................................S-60
CERTAIN PROVISIONS OF THE SALE AND SERVICING AGREEMENT...................S-70
USE OF PROCEEDS..........................................................S-78
CERTAIN FEDERAL INCOME TAX CONSEQUENCES..................................S-78
STATE TAXES..............................................................S-81
ERISA CONSIDERATIONS.....................................................S-81
LEGAL INVESTMENT CONSIDERATIONS..........................................S-82
METHOD OF DISTRIBUTION...................................................S-82
LEGAL MATTERS............................................................S-83
EXPERTS..................................................................S-83
RATINGS..................................................................S-83
INDEX OF DEFINED TERMS...................................................S-84
ANNEX I: INSURER'S AUDITED FINANCIAL STATEMENTS........................S-87
ANNEX II: INSURER'S UNAUDITED INTERIM FINANCIAL STATEMENTS............S-107
ANNEX III: CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES.....S-115
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........................................37
THE AGREEMENTS.............................................................40
CERTAIN LEGAL ASPECTS OF THE LOANS.........................................57
FEDERAL INCOME TAX CONSEQUENCES............................................68
STATE TAX CONSIDERATIONS...................................................94
ERISA CONSIDERATIONS.......................................................94
LEGAL INVESTMENT ..........................................................99
METHOD OF DISTRIBUTION....................................................100
LEGAL MATTERS.............................................................101
FINANCIAL INFORMATION.....................................................101
AVAILABLE INFORMATION.....................................................101
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE...........................102
RATING....................................................................102
INDEX OF DEFINED TERMS ...................................................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. The documents described in the accompanying prospectus under
"Incorporation of Certain Documents by Reference" are incorporated herein by
reference.
This prospectus supplement and the accompanying prospectus are part of
a registration statement filed by the Sponsor with the SEC (Registration No.
333-95349). 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: S.A. Ibrahim
(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 2000-3
Home Equity Loan Asset-Backed Notes,
Series 2000-3
Class A-1 Notes, Class A-2 Notes and Class A-3 Notes
<TABLE>
<CAPTION>
Initial Rating
of Offered Notes(1)
Initial Interest Rate Final Scheduled S&P Moody's
Security Principal Balance (per annum) Payment Date Rating Rating
<S> <C> <C> <C> <C> <C>
Class A-1 Notes $102,736,000 Variable January 2027 AAA Aaa
Class A-2 Notes $98,584,000 Variable January 2027 AAA Aaa
Class A-3 Notes $97,966,000 Variable January 2027 AAA Aaa
</TABLE>
------------
(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 2000-3.
Sponsor: GreenPoint Mortgage Securities Inc.
Servicer: GreenPoint Mortgage Funding, Inc.
Owner Trustee: Wilmington Trust Company.
Indenture Trustee: Bankers Trust Company.
Insurer: Financial Guaranty Insurance
Company.
------------------------------------------
S-4
<PAGE>
Cut-Off Date: The close of business on November 30, 2000.
Closing Date: On or about December 18, 2000.
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 16, 2001.
Record Date: The business day immediately 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 18, 2000, the trust will acquire three 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 34 states and in the
District of Columbia. As of November 30, 2000, these home equity lines of credit
mortgage loans in pool I had an aggregate principal balance of approximately
$86,778,200 and had the following characteristics:
Number of Mortgage Loans: 2,277
Range of Outstanding Principal
Balances(1): $0 to $259,525
Average Outstanding Principal
Balance(1): $38,111
Range of Credit Limits(1): $3,500 to $300,000
Average Credit Limit(1): $51,067
Range of Credit Limit Utilization
Rates(1): 0.00% to 100.00%
Weighted Average Credit Limit
Utilization Rate(1), (2): 74.63%
Range of Remaining Terms to
Stated Maturity: 54 to 300 months
Weighted Average Remaining Term
to Stated Maturity(1): 200 months
Range of Loan Rates: 5.875 % to 16.625%
Weighted Average Loan Rate(1): 8.503%
Range of Margins: 0.000% to 7.125%
Weighted Average Margin(1): 2.969%
Range of Combined Loan-to-Value
Ratios(1): 8.81% to 100.00%
Weighted Average Combined
Loan-to-Value Ratio(1): 81.64%
Geographic Concentrations in
Excess of 5%(1):
California 68.85%
--------------
(1) Approximate
(2) Weighted by Credit Limit
o Fixed-rate closed-end mortgage loans secured by second lien mortgages
on residential properties located in 23 states. As of November 30, 2000, these
closed-end second lien mortgage loans in pool I had an aggregate principal
balance of approximately $13,943,713 and had the following characteristics:
Number of Mortgage Loans: 387
Range of Outstanding Principal
Balances(1): $198 to $125,000
Average Outstanding Principal
Balance(1): $36,030
Range of Remaining Terms to
Stated Maturity: 157 to 180 months
Weighted Average Remaining Term
to Stated Maturity(1): 178 months
Range of Loan Rates: 8.625% to 15.500%
Weighted Average Loan Rate(1): 12.413%
Range of Combined Loan-to-Value
Ratios(1): 38.75% to 100.00%
Weighted Average Combined
Loan-to-Value Ratio(1): 87.53%
Geographic Concentrations in
Excess of 5%(1):
California 59.65%
Washington 8.72%
Oregon 6.65%
---------------
(1) Approximate
S-5
<PAGE>
Pool II
The mortgage loans in pool II 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 29 states and in the
District of Columbia. As of November 30, 2000, these home equity lines of credit
mortgage loans in pool II had an aggregate principal balance of approximately
$80,937,119 and had the following characteristics:
Number of Mortgage Loans: 1,854
Range of Outstanding Principal
Balances(1): $0 to $212,000
Average Outstanding Principal
Balance(1): $43,655
Range of Credit Limits(1): $6,500 to
$250,000
Average Credit Limit(1): $56,629
Range of Credit Limit Utilization
Rates(1): 0.00% to 100.00%
Weighted Average Credit Limit
Utilization Rate(1), (2): 77.09%
Range of Remaining Terms to
Stated Maturity: 168 to 300 months
Weighted Average Remaining Term
to Stated Maturity(1): 203 months
Range of Loan Rates: 5.875% to 15.750%
Weighted Average Loan Rate(1): 7.685%
Range of Margins: 0.000% to 9.000%
Weighted Average Margin(1): 2.880%
Range of Combined Loan-to-Value
Ratios(1): 6.78% to 100.00%
Weighted Average Combined
Loan-to-Value Ratio(1): 81.48%
Geographic Concentrations in
Excess of 5%(1):
California 73.52%
----------------
(1) Approximate
(2) Weighted by Credit Limit
o Fixed-rate closed-end mortgage loans secured by second lien mortgages
on residential properties located in 26 states. As of November 30, 2000, these
closed-end second lien mortgage loans in pool II had an aggregate principal
balance of approximately $15,714,746 and had the following characteristics:
Number of Mortgage Loans: 334
Range of Outstanding Principal $9,200 to
Balances(1): $126,300
Average Outstanding Principal
Balance(1): $47,050
Range of Remaining Terms to
Stated Maturity: 156 to 180 months
Weighted Average Remaining Term
to Stated Maturity(1): 178 months
Range of Loan Rates: 9.250% to 15.750%
Weighted Average Loan Rate(1): 12.087%
Range of Combined Loan-to-Value
Ratios(1): 37.29% to 100.00%
Weighted Average Combined
Loan-to-Value Ratio(1): 87.43%
Geographic Concentrations in
Excess of 5%(1):
California 69.18%
----------------
(1) Approximate
S-6
<PAGE>
Pool III
The mortgage loans in pool III 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 18 states. As of
November 30, 2000, these home equity lines of credit mortgage loans in pool III
had an aggregate principal balance of approximately $91,390,653 and had the
following characteristics:
Number of Mortgage Loans: 554
Range of Outstanding Principal
Balances(1): $0 to $638,566
Average Outstanding Principal
Balance(1): $164,965
Range of Credit Limits(1): $30,000 to $650,000
Average Credit Limit(1): $222,032
Range of Credit Limit Utilization
Rates(1): 0.00% to 100.00%
Weighted Average Credit Limit
Utilization Rate(1), (2): 74.30%
Range of Remaining Terms to
Stated Maturity: 170 to 300 months
Weighted Average Remaining Term
to Stated Maturity(1): 196 months
Range of Loan Rates: 5.875% to 15.500%
Weighted Average Loan Rate(1): 7.832%
Range of Margins: 0.000% to 6.000%
Weighted Average Margin(1): 3.117%
Range of Combined Loan-to-Value
Ratios(1): 21.86% to 100.00%
Weighted Average Combined
Loan-to-Value Ratio(1): 74.42%
Geographic Concentrations in
Excess of 5%(1):
California 90.80%
----------------
(1) Approximate
(2) Weighted by Credit Limit
o Fixed-rate closed-end mortgage loans secured by second lien mortgages
on residential properties located in 4 states and in the District of Columbia.
As of November 30, 2000, these closed-end second lien mortgage loans in pool III
had an aggregate principal balance of approximately $4,655,255 and had the
following characteristics:
Number of Mortgage Loans: 29
Range of Outstanding Principal $21,017 to
Balances(1): $266,993
Average Outstanding Principal
Balance(1): $160,526
Range of Remaining Terms to
Stated Maturity: 172 to 180 months
Weighted Average Remaining Term
to Stated Maturity(1): 178 months
Range of Loan Rates: 9.625% to 14.750%
Weighted Average Loan Rate(1): 11.881%
Range of Combined Loan-to-Value
Ratios(1): 51.20% to 99.98%
Weighted Average Combined
Loan-to-Value Ratio(1): 77.77%
Geographic Concentrations in
Excess of 5%(1):
California 80.17%
New York 6.77%
Washington 6.13%
----------------
(1) Approximate
We refer you to "Description of the Mortgage Loans" in this prospectus
supplement for more detail on these three pools of mortgage loans.
Trust Property
In addition to pool I, pool II and pool III, 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, the Class A-2 Notes will relate to pool II and the Class A-3 Notes
will relate to pool III.
We refer you to "The Trust Property" in this prospectus supplement for more
detail.
Removal of Certain Mortgage Loans
On any payment date, the trust will have a limited right to elect to remove
certain mortgage loans from pool I, pool II and pool III without providing
notice to you. The trust must comply with certain conditions in order to
exercise this option.
We refer you to "Certain Provisions of the Sale and Servicing
Agreement--Optional Removals of Mortgage Loans by the Trust " in this Prospectus
Supplement for more detail.
S-7
<PAGE>
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 related 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
18, 2000, 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 the lesser of (i) one-month
LIBOR plus 0.21% (for each interest period ending on or prior to the date on
which the sponsor could first exercise its option to redeem the Class A-1 Notes)
or one-month LIBOR plus 0.42% (for each interest period ending after such date)
or (ii) 15.50%, subject to a maximum rate as described under "Description of the
Class A Notes--Payment of Interest--Class A-1 Notes."
We refer you to "Description of the Class A Notes--Payment of Interest" in this
prospectus supplement for more information.
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
18, 2000, 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 the lesser of (i) one-month
LIBOR plus 0.21% (for each interest period ending on or prior to the date on
which the sponsor could first exercise its option to redeem the Class A-2 Notes)
or one-month LIBOR plus 0.42% (for each interest period ending after such date)
or (ii) 15.50%, subject to a maximum rate as described under "Description of the
Class A Notes--Payment of Interest--Class A-2 Notes.
We refer you to "Description of the Class A Notes--Payment of Interest" in this
prospectus supplement for more information.
Class A-3 Interest Rate
o Interest accrues on the Class A-3 Notes from the preceding payment
date to the date immediately preceding the next payment date (or from December
18, 2000, in the case of the first payment date).
o For each interest period, interest will generally accrue on the Class
A-3 Notes at an annual rate of interest equal to the lesser of (i) one-month
LIBOR plus 0.22% (for each interest period ending on or prior to the date on
which the sponsor could first exercise its option to redeem the Class A-3 Notes)
or one-month LIBOR plus 0.44% (for each interest period ending after such date)
or (ii) 15.50%, subject to a maximum rate as described under "Description of the
Class A Notes--Payment of Interest--Class A-3 Notes.
We refer you to "Description of the Class A Notes--Payment of Interest" in this
prospectus supplement for more information.
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
(during the managed amortization period) 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
S-8
<PAGE>
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
plus the principal collections on the fixed-rate closed-end 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
(during the managed amortization period) 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 The amount of principal payable with respect to the Class A-3 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 III each
month plus the principal collections on the fixed-rate closed-end mortgage loans
in pool III 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 (during the managed amortization period) minus any excess cash not needed
to maintain certain required levels of overcollateralization for the Class A-3
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-3 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 on the related payment date as a principal payment
in order to create and 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 risk to the holders of notes resulting 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 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 is expected to be excess cashflow each month. Some of the excess cashflow
will be used as accelerated principal payments on the related notes to create
overcollateralization. The level of overcollateralization required on any date
for any class of notes may decrease beginning on the payment date in July 2003.
o Overcollateralization and Limited Crosscollateralization. Additional
credit enhancement will result from the fact that the balance of the pools of
underlying mortgage loans is expected to eventually be greater than the
principal balance of the notes backed 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 specified overcollateralization level for
each pool. Once the specified 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 with respect to a
class of notes to be applied to the funding of certain deficiencies in interest
and principal with respect to the other classes of notes.
o Demand Note. Initially the aggregate principal balance of the notes
will be greater than the aggregate balances of the pools of underlying mortgage
loans by approximately 2.00%. To protect against this initial
undercollateralization and to provide funds for certain other payments,
GreenPoint Bank will issue a demand note in the amount of 2.00% of the aggregate
principal balance of the mortgage loans on the Cut-Off Date. The amount of the
demand note will decrease to 1.50% of the aggregate principal balance of the
mortgage loans on the Cut-Off Date on the date on which the principal balances
of the Class A-1 Notes, the Class A-2 Notes and the Class A-3 Notes are first
equal to or less than the outstanding principal balances of the mortgage loans
in pool I, pool II and pool III, respectively. After that date, the amount of
the demand note may
S-9
<PAGE>
decline on each date until its maturity. The Indenture Trustee will deposit all
amounts received under the demand note into the Collection Account for
distribution to the applicable noteholders.
The demand note will mature on the earlier of (i) the date on which the
aggregate principal balances of the notes are paid down to zero or (ii) the date
on which the specified overcollateralization amount for each class of notes has
been reached, but in no event shall the maturity date be later than the
twenty-fourth payment date. The Indenture provides that GreenPoint Bank will pay
pursuant to the demand note, shortfalls in interest payment amounts for each
class (which payments will not reduce the amount outstanding under the demand
note), prior to the maturity of the demand note. The Indenture also provides
that GreenPoint Bank will pay pursuant to the demand note, realized losses
incurred prior to the maturity of the demand note to the extent such losses are
not covered by excess cashflow (which payments will reduce the amount
outstanding under the demand note). If the specified overcollateralization
amount with respect to any class of notes has not been reached by the
twenty-fourth payment date (after distribution of all amounts on that payment
date), the Indenture Trustee will demand payment from GreenPoint Bank of up to
the entire amount remaining under the demand note on that date to the extent
necessary to reach the specified overcollateralization amount with respect to
each class of notes.
We refer you to "Description of the Class A Notes--Overcollateralization and
Crosscollateralization Feature" in this prospectus supplement for more detail.
o The Insurance Policy. GreenPoint Mortgage Securities Inc. will obtain
a noncancellable insurance policy from Financial Guaranty Insurance Company with
respect to all of the 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 specific terms
and conditions set forth under the heading "The Insurer and the Policy" in this
prospectus supplement.
o Subordination of the Residual Certificate. The trust is issuing a
certificate representing the residual beneficial ownership interest in the
underlying pools of mortgage loans. Payments on the residual certificate are
subordinated to payments due on the notes as described elsewhere in this
prospectus supplement. This subordination of the residual certificate provides
credit enhancement to the notes.
o Reserve Fund. On December 18, 2000, 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 all pools until certain specified levels of
overcollateralization have been reached with respect to all pools. The level of
overcollateralization required will be determined by Financial Guaranty
Insurance Company and may decrease beginning on the payment date in July 2003.
Amounts on deposit in the reserve fund may be used to pay interest shortfalls
and losses in future periods.
Optional Redemption
On any payment date on or after the total outstanding principal balance of a
class of notes declines to or below 10% of the total principal balance of such
class of notes as of December 18, 2000, before taking into account payments to
be made on the notes on such payment date, GreenPoint Mortgage Securities Inc.
may elect to redeem such class of notes subject to certain conditions herein,
including (a) the consent of Financial Guaranty Insurance Company (if the
redemption would result in a draw under the policy), and (b) that no
reimbursement be due to Financial Guaranty Insurance Company. If such an event
occurs for your class of notes, you will receive a final distribution on such
payment date and (c) unless Financial Guaranty Insurance Company waives such
requirement, the overcollateralization amount for the other pools at such time
is at least equal to the specified overcollateralization amount for those pools.
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
balance of the notes will be paid in full on the payment date in January 2027.
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.
S-10
<PAGE>
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 indebtedness. By
your acceptance of a note, you agree to treat the notes as indebtedness.
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-83.
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-11
<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 Mortgage Loans Because most of the mortgage loans in the trust are
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, 2000. 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 Liquidation Even assuming that the mortgaged properties
provided 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 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 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
lien residential mortgages.
Prepayment Considerations The rate of principal distributions and yield to
maturity 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. Substantially all of the home
equity lines of credit mortgage loans are subject
to a termination fee for three years after
origination except in those states where
S-12
<PAGE>
termination fees 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 additional draws on home equity lines of
credit mortgage loans;
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 the
related 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 fully offset any adverse yield
effect.
We refer you to "Yield, Maturity and
Prepayment Considerations" in this prospectus
supplement for more detail.
Balloon Payment Mortgage Balloon loans pose a special payment risk because
Loans Present Special the borrower must pay a large lump sum payment of
Payment Risks principal at the end of the loan term. If the
borrower is unable to pay the lump sum or refinance
such amount, you will suffer a loss if the
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 6.93% of the pool I mortgage loans
(by aggregate pool principal balance),
approximately 8.85% of the pool II mortgage loans
(by aggregate pool principal balance) and
approximately 3.48% of the pool III mortgage loans
(by aggregate pool principal balance) are mortgage
loans with balloon payments.
S-13
<PAGE>
Insolvency Related Matters The sale of the mortgage loans from GreenPoint
Mortgage 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 holders evidencing
more than 50% of the note 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
reimburse Financial Guaranty Insurance Company
under the insurance policy and the insurance
agreement. Any remaining amounts will be
distributed to satisfy the noteholders first and
then the holder of the residual certificate. 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 Financial Guaranty
Insurance Company 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.
Geographic Concentration As of November 30, 2000, approximately 68.85% of
the home equity lines of credit mortgage loans in
pool I by aggregate pool principal balance were
secured by properties that are located in the state
of California and approximately 59.65% , 8.72% and
6.65% of the fixed-rate closed-end mortgage loans
in pool I by aggregate pool principal balance were
secured by properties that are located in the
states of California Washington and Oregon
respectively. As of November 30, 2000,
approximately 73.52% of the home equity lines of
credit mortgage loans in pool II by aggregate pool
principal balance were secured by properties that
are located in the state of California and
approximately 69.18% of the fixed-rate closed-end
mortgage loans in pool II by aggregate pool
principal balance were secured by properties that
are located in the state of California. As of
November 30, 2000, approximately 90.80% of the home
equity lines of credit mortgage loans in pool III
by aggregate pool principal balance were secured by
properties that are located in the state of
California and approximately 80.17% , 6.77% and
6.13% of the fixed-rate closed-end mortgage loans
in pool III by aggregate pool principal balance
were secured by properties that are located in the
states of California, New York and Washington,
respectively. 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.
S-14
<PAGE>
Neither the mortgages, the Sale and Servicing
Agreement nor the loan agreements require natural
disaster insurance that would cover earthquake
damage.
Servicer's Ability to The servicer may agree to changes in the terms of a
Change the Terms of the home equity line of credit mortgage loan, provided
Home Equity Lines of that these changes (i) do not adversely affect the
Credit Mortgage Loans interests of the noteholders or Financial Guaranty
Insurance Company, and (ii) are consistent with
prudent business practice. There is no 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 the
home equity line of credit mortgage loan.
Financial Strength of the The rating on the notes depends primarily on an
Insurer assessment 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 Rate The notes are subject to a "hard cap" and a maximum
rate on their 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 hard cap or the
interest the trust receives on the mortgage loans
minus such fees and other deductions. 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 home equity line of credit mortgage
loans decreased without a corresponding decrease in
the index for the notes, or if the index for the
notes rose significantly, the interest rates on the
notes could be subject to the limitation imposed by
the hard cap or the maximum rate. This limitation
may reduce the amount of interest you, as an
investor in the notes, receive.
The Trust Assets, the The notes will be non-recourse obligations solely
Insurance Policy and the of the trust. The notes will not represent
Demand Note are the Only obligations of or interests in GreenPoint Mortgage
Source of Payments on the Funding, Inc., Wilmington Trust Company, Bankers
Notes Trust Company, GreenPoint Mortgage Securities Inc.
or Financial Guaranty Insurance Company, or in any
of their respective affiliates, except as described
in this prospectus supplement. The assets included
in the trust, the payments under the insurance
policy and the payments under the demand note will
be the sole source of payments on the notes, and
there will be no recourse to GreenPoint Mortgage
Funding, Inc., Wilmington Trust Company, Bankers
Trust Company, GreenPoint Mortgage Securities Inc.
or Financial Guaranty Insurance Company (other than
as provided in the insurance policy), or any of
their respective affiliates (other than as provided
in the demand note), 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-15
<PAGE>
FORMATION OF THE TRUST
General
GreenPoint Home Equity Loan Trust 2000-3 (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, 2000 and entered into between the Sponsor and
the Owner Trustee (the "Trust Agreement"). Pursuant to the Trust Agreement, the
Trust will issue a residual certificate (the "Residual Certificate") and the
Class S Certificates (the "Class S Certificates") on or about December 18, 2000
(the "Closing Date"). Pursuant to the Indenture dated as of December 1, 2000
between the Trust and the Indenture Trustee (the "Indenture"), the Trust will
issue the Class A-1 Notes (the "Class A-1 Notes"), the Class A-2 Notes (the
"Class A-2 Notes") and the Class A-3 Notes (the "Class A-3 Notes", and together
with the Class A-1 Notes and the Class A-2 Notes, the "Class A Notes"). The
Residual Certificate represents the beneficial ownership interest in the Trust.
The Class A Notes represent debt obligations of the Trust. The Class S
Certificates are entitled to receive payments of interest only on certain dates,
as described herein. Prior to the sale and assignment of the 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, the Class S
Certificates and the Residual Certificate, (iii) making payments on the Class A
Notes, the Class S Certificates and the Residual Certificate 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: (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 trustee (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,
the Class S Certificates and the Residual Certificate 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, 2000
among the Sponsor, the Servicer, the Trust and the Indenture Trustee (the "Sale
and Servicing Agreement").
The Indenture Trustee
Bankers Trust Company, a New York banking corporation, is the Indenture
Trustee ("Indenture Trustee") under the Indenture. The offices of the Indenture
Trustee are located in Santa Ana, California. 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.
S-16
<PAGE>
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 ("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 HELOC Mortgage Loans in Pool I), and certain fixed-rate closed-end
second lien residential mortgage loans ("Closed-End Mortgage Loans,"),
conveyed to the Trust on the Closing Date, all of which conform to certain
loan origination standards with respect to loan balance and other items as
of the date of origination set forth by the Federal National Mortgage
Association (the "Pool I Mortgage Loans");
o a pool ("Pool II") containing certain HELOC Mortgage Loans (including any
Additional Balances with respect to such HELOC Mortgage Loans in Pool II)
and certain Closed-End Mortgage Loans, conveyed to the Trust on the Closing
Date, all of which conform to certain loan origination standards with
respect to loan balance and other items as of the date of origination set
forth by the Federal Home Loan Mortgage Corporation (the "Pool II Mortgage
Loans");
o a pool ("Pool III") containing certain HELOC Mortgage Loans (including any
Additional Balances with respect to such HELOC Mortgage Loans in Pool III)
and certain Closed-End Mortgage Loans, conveyed to the Trust on the Closing
Date, which will not necessarily conform to certain loan origination
standards with respect to loan balance and other items as of the date of
origination set forth by either the Federal National Mortgage Association
or the Federal Home Loan Mortgage Corporation (the "Pool III Mortgage
Loans" and together with the Pool I Mortgage Loans and the Pool II Mortgage
Loans, the "Mortgage Loans");
o the collections in respect of such Mortgage Loans conveyed to the Trust and
received after November 30, 2000 (the "Cut-Off Date") (except Interest
Collections due on or before the Cut-Off Date);
o property that secured a Mortgage Loan that has been acquired by foreclosure
or deed in lieu of foreclosure;
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 Mortgage Loan Purchase Agreement dated as of December 1, 2000 (the
"Purchase Agreement") between the Sponsor and GreenPoint Mortgage Funding,
Inc. (the "Servicer");
o certain rights of the Trust in the insurance policy issued by the Insurer
to the Indenture Trustee with respect to the Class A Notes (the "Policy")
and the demand note issued by GreenPoint Bank (the "Demand Note"); 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").
"Pool" means Pool I, Pool II or Pool III, as applicable.
THE INSURER AND THE POLICY
The information set forth in this section has been provided by
Financial Guaranty Insurance Company (the "Insurer") for inclusion in this
Prospectus Supplement. No representation is made by Greenwich Capital Markets,
Inc. (the "Underwriter"), the Sponsor, the Servicer, the Indenture Trustee or
any of their affiliates as to the accuracy or completeness of such information.
S-17
<PAGE>
The Insurer, a New York stock insurance corporation, is a monoline
financial guaranty insurance company which, since January 1984, has been a
leading insurer of bonds issued by municipal governmental subdivisions and their
agencies. The Insurer also insures a variety of non-municipal structured debt
obligations and pass-through securities. The Insurer is authorized to write
insurance in all 50 states and the District of Columbia and is also authorized
to carry on general insurance business in the United Kingdom and to write credit
and guaranty insurance in France.
The Insurer is a wholly-owned subsidiary of FGIC Corporation, a
Delaware holding company. FGIC Corporation is a subsidiary of General Electric
Capital Corporation ("GE Capital"). Neither FGIC Corporation nor GE Capital is
obligated to pay the debts of or the claims of the Insurer.
The Insurer and its holding company, FGIC Corporation, are subject to
regulation by the State of New York Insurance Department and by each other
jurisdiction in which the Insurer is licensed to write insurance. These
regulations vary from jurisdiction to jurisdiction, but generally require
insurance holding companies and their insurance subsidiaries to register and
file certain reports, including information concerning their capital structure,
ownership, and financial condition and require prior approval by the insurance
department of their state of domicile of changes in control, of dividends and of
other intercorporate transfers of assets, and of transactions between insurance
companies, their parents, and affiliates. The Insurer is required to file
quarterly and annual statutory financial statements and is subject to statutory
restrictions concerning the types and quality of investments, the use of policy
forms, premium rates, and the size of risk that it may insure, subject to
reinsurance. Additionally, the Insurer is subject to triennial audits by the
State of New York Insurance Department.
As of September 30, 2000, December 31, 1999, and December 31, 1998, the
Insurer had written directly or assumed through reinsurance, guaranties of
approximately $318.9 billion, $298.9 billion, and $268.1 billion par value of
securities, respectively (of which approximately 86 percent, 86 percent, and 86
percent, respectively, constituted guaranties of municipal bonds), for which it
had collected gross premiums of approximately $2.44 billion, $2.37 billion, and
$2.25 billion, respectively. As of September 30, 2000, the Insurer had reinsured
approximately 20 percent of the risks it had written, 32 percent through quota
share reinsurance, 12 percent through excess of loss reinsurance, and 56 percent
through facultative arrangements.
The following table sets forth the capitalization of the Insurer as of
December 31, 1998, December 31, 1999 and September 30, 2000, respectively, on
the basis of generally accepted accounting principles (subject to year-end
adjustments with respect to September 30, 2000 information). No material adverse
change in the capitalization of the Insurer has occurred since September 30,
2000.
Financial Guaranty Insurance Company
CAPITALIZATION TABLE
(Dollars in Millions)
<TABLE>
<CAPTION>
December December September
31, 1998 31, 1999 30, 2000
----------- ----------- ------------
(unaudited)
<S> <C> <C> <C>
Unearned premiums...................................................... $ 610 $ 579 $ 581
Other liabilities...................................................... 302 180 270
Stockholder's equity
Common stock...................................................... 15 15 15
Additional paid-in capital........................................ 384 384 384
Accumulated other comprehensive income (loss)..................... 92 (47) (21)
Retained earnings................................................. 1,581 1,687 1,570
----------- ----------- ------------
Total stockholder's equity............................................. 2,072 2,039 1,948
----------- ----------- ------------
Total liabilities and stockholder's equity............................. $2,984 $2,798 $2,799
=========== =========== ============
</TABLE>
------------------------
For further financial information concerning the Insurer, see the
audited financial statements and the unaudited interim financial statements of
the Insurer included as Annex I and Annex II.
S-18
<PAGE>
Copies of the Insurer's quarterly and annual statutory statements filed
by the Insurer with the State of New York, Insurance Department are available
upon request to Financial Guaranty Insurance Company, 115 Broadway, New York,
New York 10006, Attention: Corporate Communications Department. The Insurer's
telephone number is (212) 312-3000.
The Insurer considers its role in providing insurance to be credit
enhancement rather than credit substitution. The Insurer only insures securities
that it considers to be of investment grade quality. With respect to each
category of obligations considered for insurance, the Insurer has established
and maintains its own underwriting standards that are based on those aspects of
credit quality that the Insurer deems important for the category and that take
into account criteria established for the category typically used by rating
agencies. Credit criteria for evaluating securities include economic and social
trends, debt management, financial management and legal and administrative
factors, the adequacy of anticipated cash flow, including the historical and
expected performance of assets pledged for payment of securities under varying
economic scenarios, underlying levels of protection such as insurance or
overcollateralization, and particularly in the case of long-term municipal
securities, the importance of the project being financed.
The Insurer also reviews the security features and reserves created by
the financing documentation, as well as the financial and other covenants
imposed on the credit backing the issue. In connection with underwriting new
issues, the Insurer sometimes requires, as a condition to insuring an issue,
that collateral be pledged or, in some instances, that a third-party guarantee
be provided for a term of the insured obligation by a party of acceptable credit
quality obligated to make payment prior to any payment by the Insurer.
Insurance written by the Insurer insures the full and timely payment of
interest and principal when due on insured debt securities and timely interest
and ultimate principal payments due in respect of pass-through securities and
mortgage-backed debt securities. If the issuer of a security insured by the
Insurer defaults on its obligations to pay such debt service, or, in the case of
a pass-through security, available funds are insufficient to pay the insured
amounts, the Insurer will make the scheduled insured payments, without regard to
any acceleration of the securities which may have occurred, and will be
subrogated to the rights of Noteholders to the extent of its payments. The
claims paying ability of the Insurer is rated Aaa, AAA and AAA by Moody's
Investors Service, Inc. ("Moody's"), Standard & Poor's, a division of The
McGraw-Hill Companies Inc. ("Standard & Poor's", and together with Moody's, the
"Rating Agencies"), and Fitch, Inc., respectively.
In consideration for issuing its insurance, the Insurer receives a
premium which is generally paid in full upon issuance of the policy or on an
annual, semiannual, or monthly basis. The premium rates charged depend
principally on the credit strength of the securities as judged by the Insurer
according to its internal credit rating system and the type of issue.
The Insurer makes no representation regarding the Class A Notes or the
advisability of investing in the Class A Notes. The Insurer does not accept any
responsibility for the accuracy or completeness of this Prospectus Supplement or
the related Prospectus, or any information or disclosure contained herein or
therein, or omitted herefrom or therefrom, other than the information supplied
by the Insurer and presented under the headings "The Insurer and the Policy."
Each rating of the Insurer should be evaluated independently. The
ratings reflect the respective rating agency's current assessment of the
financial strength of the Insurer. Any further explanation as to the
significance of the rating of the Insurer may be obtained only from the
applicable rating agency.
The above ratings are not recommendations to buy, sell, or hold the
Class A Notes, and such ratings may be subject to revision or withdrawal at any
time by the rating agencies. Any downward revision or withdrawal of any of the
above ratings may have an adverse effect on the market price of the Class A
Notes. The Insurer does not guarantee the market price of the Class A Notes nor
does it guarantee that the ratings on the Class A Notes will not be revised or
withdrawn.
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<PAGE>
The Policy
The following summary of the Policy is qualified in its entirety by
reference to the Policy, the Insurance and Indemnity Agreement, dated as of
December 18, 2000, among the Insurer, the Trust, the Servicer, the Sponsor and
the Indenture Trustee (the "Insurance Agreement") and the Indenture.
The Insurer will issue the Policy to the Indenture Trustee with respect
to the Class A Notes. The Policy unconditionally guarantees the payment of
Insured Payments (as defined below) with respect to the Class A Notes. The
Insurer will make each required Insured Payment, other than Preference Amounts
(as defined below), 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 Business
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 any Class A Note 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 (as defined below) and any
Deferred Interest (as defined herein)), (b) the related Preference Amount
(without duplication) and (c) for each Payment Date on or after the Insured
Payment Date (as defined below) the related Overcollateralization Deficit (as
defined herein) over (ii) the Total Available Funds for the related Pool and (y)
on the related Final Scheduled Payment Date, the outstanding principal balance
of each related Class of Class A Notes then outstanding, to the extent not
otherwise paid on such Payment Date.
"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 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), (ii) any Crossover Amounts (as defined herein)
available from the other Classes and (iii) 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 Classes, are
insufficient to pay the amounts specified in clauses (iii) and (vi) of
"Description of the Class A Notes--Priority of Distributions" with respect to
the related Class).
"Insured Payment Date" with respect to each Class of Class A Notes will
be the earlier to occur of (i) the first Payment Date after the Parity Date with
respect to such Class and (ii) the date on which the Demand Note matures.
S-20
<PAGE>
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 Holders of the Class A Notes any
rate of principal payments on the Class A Notes. The Policy does not cover any
Deferred Interest or Relief Act Shortfalls on the Class A Notes.
The Policy is non-cancellable. 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 be required to
determine, pursuant to the Indenture, 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 fourth 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 on the Class A Notes for any Payment Date, the Indenture Trustee
shall be required to complete a notice, pursuant to the Indenture, 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 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 ("GreenPoint
Bank"), a New York State chartered savings bank with $11 billion in deposits and
73 branch offices in the greater New York area. 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
S-21
<PAGE>
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, California, 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 November 30, 2000, the Company's mortgage loan servicing
portfolio consisted of 171,776 one- to four-unit family residential mortgage
loans with an aggregate principal balance of approximately $16.6 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 were
transferred to the servicing center formerly maintained by GreenPoint Mortgage
in Columbus, Georgia. The Company continues 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 are principally former GreenPoint Mortgage employees rather than former
Headlands employees.
The following tables contain 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 prior to the consolidation of
GreenPoint Financial's mortgage operations in the Company on October 1, 1999.
The third table shows delinquency, foreclosure and loss experience of the
Company after such date. 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-22
<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 of Percent of Percent of Percent of
Number of Servicing Number of Servicing Number of Servicing Number of Servicing
Loans Portfolio Loans Portfolio Loans Portfolio Loans Portfolio
---------- ------------ ---------- ------------ ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Number* 3,711 100.0% 8,671 100.0% 18,178 100.0% 21,332 100.0%
========== ============ ========== ============ ========== ============ ========== ============
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
(excluding Foreclosures) 15 0.4% 207 2.4% 271 1.5% 329 1.6%
========== ============ ========== ============ ========== ============ ========== ============
Foreclosures Pending 0 0.0% 8 0.1% 37 0.2% 58 0.3%
Losses Sustained for Period $0 $293,111 $703,930 $1,159,593
Ending on Such Date
</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* 1,673 100.0% 1,722 100.0%
=========== ============= =========== =============
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
(excluding Foreclosures) 63 3.8% 37 2.1%
=========== ============= =========== =============
Foreclosures Pending 11 0.7% 20 1.2%
Losses Sustained for Period $0 $0
Ending on Such Date
</TABLE>
* The total portfolio has been reduced by the number of loans that have been
foreclosed.
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<PAGE>
GREENPOINT MORTGAGE FUNDING'S
HELOC AND SECOND LIEN MORTGAGE PORTFOLIO
DELINQUENCY, FORECLOSURE AND LOSS EXPERIENCE
--------------------------------------------
<TABLE>
<CAPTION>
December 31, 1999 March 31, 2000 June 30, 2000 September 30, 2000
----------------------- ----------------------- ----------------------- -----------------------
Percent of Percent of Percent of Percent of
Number of Servicing Number of Servicing Number of Servicing Number of Servicing
Loans Portfolio Loans Portfolio Loans Portfolio Loans Portfolio
---------- ------------ ---------- ------------ ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Number* 26,302 100.0% 29,163 100.0% 33,041 100.0% 47,875 100.0%
========== ============ ========== ============ ========== ============ ========== ============
Period of Delinquency:
30-59 days 316 1.2% 376 1.3% 651 2.0% 906 1.9%
60-89 days 57 0.2 61 0.2 201 0.6 149 0.3
90 days or more 48 0.2 47 0.2 75 0.2 116 0.2
---------- ------------ ---------- ------------ ---------- ------------ ---------- ------------
Total Delinquencies
(excluding Foreclosures) 421 1.6% 484 1.7% 927 2.8% 1,171 2.4%
========== ============ ========== ============ ========== ============ ========== ============
Foreclosures Pending 81 0.3% 108 0.4% 124 0.4% 181 0.4%
Losses Sustained for Period $2,637,696 $986,240 $493,517 $1,579,625
Ending on
Such Date
</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 were 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."
Underwriting Standards
The Company believes that the Mortgage Loans 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 underwriter 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,
employment information and payment information, as well as an authorization to
acquire a credit report which summarizes the borrower's credit history with
merchants and lenders and 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
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<PAGE>
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 suggested in valuing
property 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. Appraisals
in accordance with the Company's Underwriting Standards shall be made on a full
or a drive-by basis. 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 or coverage under a standard
mortgage lien guaranty agreement for lenders 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, where there is no verification of stated assets, a "No
Employment/Income Documentation" program, where there is no verification of
employment or income, and a "No Ratio Documentation" program, where there is no
stated income, thus eliminating ratio calculations. 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, which is waived.
In the case of a Mortgage Loan secured by a leasehold interest in a
real property, the title to which is held by a third party lessor, the 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 37 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.
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<PAGE>
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 (other than the final
payment for a balloon loan) 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 termination fee for loans paid within
three years of origination.
A borrower may access a HELOC credit line at any time during the draw
period by writing a check. The minimum payment during the draw period of the
HELOC is the greater of accrued finance charges on the 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. The HELOC Mortgage Loans are subject to a
maximum rate equal to approximately 18.000% per annum and subject to applicable
usury limitations. 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 0.000% to
9.000% (with respect to each HELOC Mortgage Loan, the "Margin") (subject to
"teaser periods"); such Loan Rates range between 5.875% and 16.625%. As of the
Cut-Off Date, the Pool I Mortgage Loans which are HELOC Mortgage Loans had a
weighted average Loan Rate of approximately 8.503%, the Pool II Mortgage Loans
which are HELOC Mortgage Loans had a weighted average Loan Rate of approximately
7.685% and the Pool III Mortgage Loans which are HELOC Mortgage Loans had a
weighted average Loan Rate of approximately 7.832%.
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 Mortgage Loans).
Pool I Mortgage Loans - General
The aggregate Principal Balance of the Pool I Mortgage Loans as of the
Cut-Off Date was approximately $100,721,913 (the "Pool I Balance"). As of the
Cut-Off Date, the aggregate Principal Balance of Pool I Closed-End Mortgage
Loans was approximately $13,943,713 (the "Pool I Closed-End Balance") and the
aggregate Principal Balance of Pool I HELOC Mortgage Loans was approximately
$86,778,200 (the "Pool I HELOC Balance"). As of the Cut-Off Date, the average
Principal Balance of the Pool I Mortgage Loans was approximately $37,809, the
minimum Principal Balance was $0, the maximum Principal Balance was
approximately $259,525, the Loan Rates ranged from 5.875% to 16.625% per annum
and the weighted average Loan Rate was approximately 9.045% per annum. Each of
the Pool I HELOC Mortgage Loans is subject to a maximum Loan Rate of 18.000%. As
of the Cut-Off Date and with respect to the Pool I HELOC Mortgage Loans, the
weighted average Margin was approximately 2.969%, the minimum Margin was 0.000%
and the maximum Margin was 7.125%. As of the Cut-Off Date and with respect to
the Pool I HELOC Mortgage Loans, the weighted average Credit Limit Utilization
Rate (weighted by Credit Limit) was approximately 74.63%, the minimum Credit
Limit Utilization Rate was approximately 0.00% and the maximum Credit Limit
Utilization Rate was approximately 100.00%. The "Credit Limit Utilization Rate"
is determined by dividing the Principal Balance of a HELOC Mortgage Loan as of
the Cut-Off Date 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 ("Mortgagor"). As of the Cut-Off Date, the remaining term to scheduled
maturity for the Pool I Mortgage Loans ranged from 54 months to 300 months and
the weighted average remaining term to scheduled maturity was
S-26
<PAGE>
approximately 197 months. As of the Cut-Off Date, the Combined Loan-to-Value
Ratio of the Pool I Mortgage Loans ranged from 8.81% to 100.00% and the weighted
average Combined Loan-to-Value Ratio of the Pool I Mortgage Loans was
approximately 82.46%. 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) (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 lesser of (x) the appraised value of the related Mortgaged
Property as set forth in the loan files at such date of origination and (y) 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) (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 lesser of (x) the appraised
value of the related Mortgaged Property as set forth in the loan files at such
date of origination and (y) the purchase price of such Mortgaged Property.
Credit Limits of the Pool I HELOC Mortgage Loans ranged from $3,500 to $300,000
and averaged approximately $51,067. The Weighted Average Second Mortgage Ratio
for the Pool I Mortgage Loans was approximately 24.07%. The "Second Mortgage
Ratio" is (I) with respect to a HELOC Mortgage Loan, 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, the original loan balance of
such Closed-End Mortgage Loan divided by the sum of such original loan balance
and the outstanding principal balance of any mortgage loan senior to such
Closed-End Mortgage Loan. Substantially all of the Pool I Mortgage Loans
represented second liens on the related Mortgaged Properties. As of the Cut-Off
Date, 66.37%, by Principal Balance, of the Pool I Mortgage Loans were secured by
Mortgaged Properties which are single-family residences and 85.56%, by Principal
Balance, of the Pool I Mortgage Loans are secured by Mortgaged Properties which
are owner-occupied. As of the Cut-Off Date, 67.57%, by Principal Balance, of the
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.
Set forth below is a description of certain characteristics of the Pool
I Mortgage Loans as of the Cut-Off Date. The sum of the columns in each such
table may not equal the total indicated due to rounding.
TYPE OF MORTGAGE LOANS
POOL I MORTGAGE LOANS
<TABLE>
<CAPTION>
Aggregate
Number of Cut-Off Date Percent of
Type Pool I Mortgage Loans Principal Balance Pool I Balance
------------------------------------------ -------------------------- ---------------------- -------------------
<S> <C> <C> <C>
HELOC Mortgage Loans...................... 2,277 $ 86,778,199.64 86.16%
Closed-End Mortgage Loans................. 387 13,943,713.35 13.84
-------------------------- ---------------------- -------------------
Total................................ 2,664 $ 100,721,912.99 100.00%
========================== ====================== ===================
</TABLE>
S-27
<PAGE>
OUTSTANDING PRINCIPAL BALANCES
POOL I MORTGAGE LOANS
<TABLE>
<CAPTION>
Aggregate
Range of Number of Cut-Off Date Percent of
Outstanding Principal Balances ($) Pool I Mortgage Loans Principal Balance Pool I Balance
------------------------------------------ -------------------------- ---------------------- -------------------
<S> <C> <C> <C>
0.00 ........... 63 $ 0.00 0.00%
0.01 - 10,000.00 ........... 231 1,457,771.61 1.45
10,000.01 - 20,000.00 ........... 462 6,922,625.57 6.87
20,000.01 - 30,000.00 ........... 502 12,710,341.53 12.62
30,000.01 - 40,000.00 ........... 403 14,117,243.76 14.02
40,000.01 - 50,000.00 ........... 362 16,652,030.58 16.53
50,000.01 - 60,000.00 ........... 182 10,164,412.13 10.09
60,000.01 - 70,000.00 ........... 129 8,375,604.18 8.32
70,000.01 - 80,000.00 ........... 95 7,100,362.42 7.05
80,000.01 - 90,000.00 ........... 56 4,714,521.93 4.68
90,000.01 - 100,000.00 ........... 134 13,124,028.15 13.03
greater than 100,000.00 ........... 45 5,382,971.13 5.34
-------------------------- ---------------------- -------------------
Total................................ 2,664 $ 100,721,912.99 100.00%
========================== ====================== ===================
</TABLE>
TYPE OF OCCUPANCY
POOL I MORTGAGE LOANS
<TABLE>
<CAPTION>
Aggregate
Number of Cut-Off Date Percent of
Occupancy Pool I Mortgage Loans Principal Balance Pool I Balance
------------------------------------------ -------------------------- ---------------------- -------------------
<S> <C> <C> <C>
Primary................................... 2,124 $ 86,175,505.16 85.56%
Non-owner................................. 492 12,772,648.58 12.68
Second Home(1)............................ 48 1,773,759.25 1.76
-------------------------- ---------------------- -------------------
Total................................ 2,664 $ 100,721,912.99 100.00%
========================== ====================== ===================
</TABLE>
------------------
(1) Includes vacation and second homes.
LOAN PURPOSE
POOL I MORTGAGE LOANS
<TABLE>
<CAPTION>
Aggregate
Number of Cut-Off Date Percent of
Loan Purpose Pool I Mortgage Loans Principal Balance Pool I Balance
------------------------------------------ -------------------------- ---------------------- -------------------
<S> <C> <C> <C>
Cash Out Refinance........................ 1,622 $ 67,501,155.31 67.02%
Purchase.................................. 982 31,409,013.54 31.18
Rate/Term Refinance....................... 60 1,811,744.14 1.80
-------------------------- ---------------------- -------------------
Total................................ 2,664 $ 100,721,912.99 100.00%
========================== ====================== ===================
</TABLE>
S-28
<PAGE>
COMBINED LOAN-TO-VALUE RATIOS
POOL I MORTGAGE LOANS
<TABLE>
<CAPTION>
Aggregate
Range of Number of Cut-Off Date Percent of
Combined Loan-to-Value Ratios (%) Pool I Mortgage Loans Principal Balance Pool I Balance
------------------------------------------ -------------------------- ---------------------- -------------------
<S> <C> <C> <C>
less than or
equal to 10.00...................... 4 $ 92,409.84 0.09%
10.01 - 20.00...................... 9 321,208.07 0.32
20.01 - 30.00...................... 17 831,062.90 0.83
30.01 - 40.00...................... 26 1,043,332.28 1.04
40.01 - 50.00...................... 54 1,956,193.86 1.94
50.01 - 60.00...................... 83 4,054,076.79 4.03
60.01 - 70.00...................... 177 7,547,752.62 7.49
70.01 - 80.00...................... 487 21,681,216.11 21.53
80.01 - 90.00...................... 1,113 37,091,007.50 36.83
90.01 - 100.00...................... 694 26,103,653.02 25.92
-------------------------- ---------------------- -------------------
Total............................ 2,664 $ 100,721,912.99 100.00%
========================== ====================== ===================
</TABLE>
DOCUMENTATION
POOL I MORTGAGE LOANS
<TABLE>
<CAPTION>
Aggregate
Number of Cut-Off Date Percent of
Documentation Pool I Mortgage Loans Principal Balance Pool I Balance
------------------------------------------ -------------------------- ---------------------- -------------------
<S> <C> <C> <C>
Limited Documentation.................... 1,687 $ 65,080,619.29 64.61%
Full Documentation....................... 912 33,320,093.76 33.08
No Ratio Documentation................... 65 2,321,199.94 2.30
-------------------------- ---------------------- -------------------
Total................................ 2,664 $ 100,721,912.99 100.00%
========================== ====================== ===================
</TABLE>
PROPERTY TYPE
POOL I MORTGAGE LOANS
<TABLE>
<CAPTION>
Aggregate
Number of Cut-Off Date Percent of
Property Type Pool I Mortgage Loans Principal Balance Pool I Balance
------------------------------------------ -------------------------- ---------------------- -------------------
<S> <C> <C> <C>
Single Family ........................... 1,723 $ 66,846,338.07 66.37%
PUD ..................................... 362 14,691,234.28 14.59
Condominium ............................. 310 9,798,291.81 9.73
2-4 Units ............................... 269 9,386,048.83 9.32
-------------------------- ---------------------- -------------------
Total................................ 2,664 $100,721,912.99 100.00%
========================== ====================== ===================
</TABLE>
S-29
<PAGE>
GEOGRAPHIC DISTRIBUTION(1)
POOL I MORTGAGE LOANS
<TABLE>
<CAPTION>
Aggregate
Number of Cut-Off Date Percent of
State Pool I Mortgage Loans Principal Balance Pool I Balance
------------------------------------------ -------------------------- ---------------------- -------------------
<S> <C> <C> <C>
Arizona................................. 93 $ 2,363,475.70 2.35%
California.............................. 1,576 68,062,490.91 67.57
Colorado................................ 89 2,824,177.95 2.80
Connecticut............................. 10 293,143.97 0.29
Delaware................................ 1 26,000.00 0.03
District of Columbia.................... 5 177,068.90 0.18
Florida................................. 105 2,337,531.42 2.32
Georgia................................. 15 327,865.44 0.33
Idaho................................... 24 618,766.06 0.61
Illinois................................ 79 2,240,438.50 2.22
Indiana................................. 3 31,183.58 0.03
Kansas.................................. 3 79,864.89 0.08
Maryland................................ 33 1,081,313.82 1.07
Massachusetts .......................... 114 4,068,393.46 4.04
Michigan ............................... 8 220,970.09 0.22
Missouri ............................... 1 7,000.00 0.01
Montana ................................ 4 137,668.91 0.14
Nebraska................................ 2 95,796.67 0.10
Nevada ................................. 29 979,270.86 0.97
New Hampshire .......................... 7 122,650.50 0.12
New Jersey ............................. 24 812,420.46 0.81
New Mexico ............................. 8 218,606.51 0.22
New York ............................... 65 2,251,188.50 2.24
North Carolina ......................... 16 418,545.35 0.42
Ohio ................................... 3 42,014.34 0.04
Oregon ................................. 83 2,453,532.91 2.44
Pennsylvania ........................... 20 565,346.79 0.56
Rhode Island ........................... 9 148,594.54 0.15
South Carolina ......................... 6 203,116.81 0.20
South Dakota ........................... 2 38,056.78 0.04
Utah ................................... 48 1,467,307.34 1.46
Virginia ............................... 30 1,086,783.98 1.08
Washington ............................. 146 4,864,010.00 4.83
West Virginia .......................... 1 30,144.11 0.03
Wisconsin .............................. 1 10,000.00 0.01
Wyoming ................................ 1 17,172.94 0.02
-------------------------- ---------------------- -------------------
Total............................... 2,664 $ 100,721,912.99 100.00%
========================== ====================== ===================
</TABLE>
------------------
(1) Geographic location is determined by the address of the Mortgaged Property
securing the related Mortgage Loan.
S-30
<PAGE>
CREDIT LIMITS
POOL I HELOC MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of Aggregate
Pool I HELOC Mortgage Cut-Off Date Percent of
Range of Credit Limits ($) Loans Principal Balance Pool I HELOC Balance
------------------------------------------ -------------------------- ---------------------- ---------------------
<S> <C> <C> <C>
3,500.00 - 10,000.00 ........... 79 $ 731,662.63 0.84%
10,000.01 - 20,000.00 ........... 294 4,179,927.98 4.82
20,000.01 - 30,000.00 ........... 328 7,453,227.05 8.59
30,000.01 - 40,000.00 ........... 306 9,255,189.37 10.67
40,000.01 - 50,000.00 ........... 432 15,577,792.53 17.95
50,000.01 - 60,000.00 ........... 131 6,328,328.66 7.29
60,000.01 - 70,000.00 ........... 119 6,087,321.13 7.01
70,000.01 - 80,000.00 ........... 130 7,268,255.81 8.38
80,000.01 - 90,000.00 ........... 71 4,057,662.17 4.68
90,000.01 - 100,000.00 ........... 318 19,706,120.94 22.71
greater than 100,000.00 ........... 69 6,132,711.37 7.07
-------------------------- ---------------------- --------------------
Total.............................. 2,277 $ 86,778,199.64 100.00%
========================== ====================== ====================
</TABLE>
CREDIT LIMIT UTILIZATION RATES
POOL I HELOC MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of Aggregate Percent of
Pool I HELOC Mortgage Cut-Off Date Pool I HELOC
Range of Utilization Rates (%) Loans Principal Balance Balance
------------------------------------------ -------------------------- ---------------------- -------------------
<S> <C> <C> <C>
less than or
equal to 10.00 ....................... 144 $ 166,819.21 0.19%
10.01 - 20.00 ....................... 48 485,486.96 0.56
20.01 - 30.00 ....................... 60 1,073,291.05 1.24
30.01 - 40.00 ....................... 65 1,658,524.45 1.91
40.01 - 50.00 ....................... 80 2,468,782.07 2.84
50.01 - 60.00 ....................... 104 3,609,626.75 4.16
60.01 - 70.00 ....................... 102 3,900,507.96 4.49
70.01 - 80.00 ....................... 90 3,959,558.86 4.56
80.01 - 90.00 ....................... 103 5,071,744.66 5.84
90.01 - 100.00 ....................... 1,481 64,383,857.67 74.19
-------------------------- ---------------------- -------------------
Total.............................. 2,277 $ 86,778,199.64 100.00%
========================== ====================== ===================
</TABLE>
ORIGINAL TERMS
POOL I MORTGAGE LOANS
<TABLE>
<CAPTION>
Aggregate
Range of Original Terms Number of Cut-Off Date Percent of
(in months) Pool I Mortgage Loans Principal Balance Pool I Balance
------------------------------------------ -------------------------- ---------------------- -------------------
<S> <C> <C> <C>
180 ..................................... 2,247 $ 84,519,329.23 83.91%
300 ..................................... 417 16,202,583.76 16.09
-------------------------- ---------------------- -------------------
Total............................... 2,664 $ 100,721,912.99 100.00%
========================== ====================== ===================
</TABLE>
S-31
<PAGE>
MONTHS REMAINING TO SCHEDULED MATURITY
POOL I MORTGAGE LOANS
<TABLE>
<CAPTION>
Aggregate
Range of Remaining Terms Number of Cut-Off Date Percent of
(in months) Pool I Mortgage Loans Principal Balance Pool I Balance
------------------------------------------ -------------------------- ---------------------- -------------------
<S> <C> <C> <C>
54 - 56 .............................. 1 $ 74,238.80 0.07%
153 - 158 .............................. 1 30,369.01 0.03
165 - 170 .............................. 15 525,445.31 0.52
171 - 176 .............................. 69 2,158,880.14 2.14
177 - 182 .............................. 2,161 81,730,395.97 81.14
285 - 290 .............................. 4 94,261.74 0.09
291 - 296 .............................. 7 276,602.85 0.27
297 - 300 .............................. 406 15,831,719.17 15.72
-------------------------- ---------------------- -------------------
Total............................. 2,664 $ 100,721,912.99 100.00%
========================== ====================== ===================
</TABLE>
MARGINS
POOL I HELOC MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of Aggregate Percent of
Pool I HELOC Mortgage Cut-Off Date Pool I HELOC
Range of Margins (%) Loans Principal Balance Balance
------------------------------------------ -------------------------- ---------------------- -------------------
<S> <C> <C> <C>
less than or
equal to 0.500 ........................ 389 $16,188,117.97 18.65%
0.501 - 1.000 ........................ 96 3,041,521.28 3.50
1.001 - 1.500 ........................ 90 3,425,507.60 3.95
1.501 - 2.000 ........................ 66 2,537,394.77 2.92
2.001 - 2.500 ........................ 105 4,733,793.90 5.46
2.501 - 3.000 ........................ 195 7,712,072.97 8.89
3.001 - 3.500 ........................ 180 6,997,790.83 8.06
3.501 - 4.000 ........................ 339 10,242,830.12 11.80
4.001 - 4.500 ........................ 444 16,984,481.25 19.57
4.501 - 5.000 ........................ 259 10,275,967.93 11.84
5.001 - 5.500 ........................ 80 3,102,264.43 3.57
5.501 - 6.000 ........................ 23 953,358.96 1.10
6.001 - 6.500 ........................ 10 567,861.23 0.65
7.001 - 7.125 ........................ 1 15,236.40 0.02
-------------------------- ---------------------- -------------------
Total............................... 2,277 $86,778,199.64 100.00%
========================== ====================== ===================
</TABLE>
S-32
<PAGE>
CURRENT LOAN RATES
POOL I MORTGAGE LOANS
<TABLE>
<CAPTION>
Aggregate
Number of Cut-Off Date Percent of
Range of Current Loan Rates (%) Pool I Mortgage Loans Principal Balance Pool I Balance
------------------------------------------ -------------------------- ---------------------- -------------------
<S> <C> <C> <C>
5.875 - 6.000 ...................... 1,261 $ 52,446,125.87 52.07%
8.501 - 9.000 ...................... 1 30,369.01 0.03
9.001 - 9.500 ...................... 158 5,915,247.05 5.87
9.501 - 10.000 ...................... 36 1,430,153.48 1.42
10.001 - 10.500 ...................... 49 1,737,807.97 1.73
10.501 - 11.000 ...................... 59 2,446,920.09 2.43
11.001 - 11.500 ...................... 60 2,342,442.68 2.33
11.501 - 12.000 ...................... 63 2,484,837.19 2.47
12.001 - 12.500 ...................... 132 5,025,268.52 4.99
12.501 - 13.000 ...................... 130 5,212,305.28 5.17
13.001 - 13.500 ...................... 216 5,309,129.47 5.27
13.501 - 14.000 ...................... 263 8,154,836.95 8.10
14.001 - 14.500 ...................... 155 5,001,166.85 4.97
14.501 - 15.000 ...................... 53 1,875,802.27 1.86
greater than 15.000 ...................... 28 1,309,500.31 1.30
-------------------------- ---------------------- -------------------
Total.............................. 2,664 $100,721,912.99 100.00%
========================== ====================== ===================
</TABLE>
ORIGINAL DRAW TERMS
POOL I HELOC MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of Aggregate Percent of
Range of Original Draw Terms Pool I HELOC Mortgage Cut-Off Date Pool I HELOC
(in months) Loans Principal Balance Balance
------------------------------------------ -------------------------- ---------------------- -------------------
<S> <C> <C> <C>
60 .................................... 1,860 $70,575,615.88 81.33%
180 .................................... 417 16,202,583.76 18.67
-------------------------- ---------------------- -------------------
Total............................... 2,277 $86,778,199.64 100.00%
========================== ====================== ===================
</TABLE>
AMORTIZATION
POOL I MORTGAGE LOANS
<TABLE>
<CAPTION>
Aggregate
Number of Cut-Off Date Percent of
Amortization Pool I Mortgage Loans Principal Balance Pool I Balance
------------------------------------------ -------------------------- ---------------------- -------------------
<S> <C> <C> <C>
Fully Amortizing......................... 2,484 $ 93,746,644.20 93.07%
Balloon ................................. 180 6,975,268.79 6.93
-------------------------- ---------------------- -------------------
Total............................... 2,664 $100,721,912.99 100.00%
========================== ====================== ===================
</TABLE>
S-33
<PAGE>
CREDIT SCORES(1)
POOL I MORTGAGE LOANS
<TABLE>
<CAPTION>
Aggregate
Number of Cut-Off Date Percent of
Range of Credit Scores Pool I Mortgage Loans Principal Balance Pool I Balance
------------------------------------------ -------------------------- ---------------------- -------------------
<S> <C> <C> <C>
N/A ............................... 13 $ 379,479.39 0.38%
601 - 650 ............................. 401 16,915,719.49 16.79
651 - 700 ............................. 1,043 38,713,946.31 38.44
701 - 750 ............................. 777 29,331,565.01 29.12
751 - 800 ............................. 418 14,939,551.81 14.83
801 - 817.............................. 12 441,650.98 0.44
-------------------------- ---------------------- -------------------
Total.............................. 2,664 $ 100,721,912.99 100.00%
========================== ====================== ===================
</TABLE>
--------
(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-34
<PAGE>
Pool II - General
The aggregate Principal Balance of the Pool II Mortgage Loans as of the
Cut-Off Date was approximately $96,651,865 (the "Pool II Balance").
As of the Cut-Off Date, the aggregate Principal Balance of Pool II
Closed-End Mortgage Loans was approximately $15,714,746 (the "Pool II Closed-End
Balance") and the aggregate Principal Balance of Pool II HELOC Mortgage Loans
was approximately $80,937,119 (the "Pool II HELOC Balance"). As of the Cut-Off
Date, the average Principal Balance of the Pool II Mortgage Loans was
approximately $44,174, the minimum Principal Balance was $0, the maximum
Principal Balance was approximately $212,000, the Loan Rates ranged from 5.875%
to 15.750% per annum and the weighted average Loan Rate was approximately 8.401%
per annum. Each of the Pool II HELOC Mortgage Loans is subject to a maximum Loan
Rate of 18.000%. As of the Cut-Off Date and with respect to the Pool II HELOC
Mortgage Loans, the weighted average Margin was approximately 2.880%, the
minimum Margin was 0.000% and the maximum Margin was 9.000%. As of the Cut-Off
Date and with respect to the Pool II HELOC Mortgage Loans, the weighted average
Credit Limit Utilization Rate (weighted by Credit Limit) was approximately
77.09%, the minimum Credit Limit Utilization Rate was approximately 0.00% and
the maximum Credit Limit Utilization Rate was approximately 100.00%. As of the
Cut-Off Date, the remaining term to scheduled maturity for the Pool II Mortgage
Loans ranged from 156 months to 300 months and the weighted average remaining
term to scheduled maturity was approximately 199 months. As of the Cut-Off Date,
the Combined Loan-to-Value Ratio of the Pool II Mortgage Loans ranged from 6.78%
to 100.00% and the weighted average Combined Loan-to-Value Ratio of the Pool II
Mortgage Loans was approximately 82.45%. Credit Limits of the Pool II HELOC
Mortgage Loans ranged from $6,500 to $250,000 and averaged approximately
$56,629. The Weighted Average Second Mortgage Ratio for the Pool II Mortgage
Loans was approximately 24.19%. Substantially all of the Pool II Mortgage Loans
represented second liens on the related Mortgaged Properties. As of the Cut-Off
Date, 67.85%, by Principal Balance, of the Pool II Mortgage Loans were secured
by Mortgaged Properties which are single-family residences and 100.00%, by
Principal Balance, of the Pool II Mortgage Loans are secured by Mortgaged
Properties which are owner-occupied. As of the Cut-Off Date, 72.81%, by
Principal Balance, of the 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 Pool
II Mortgage Loans as of the Cut-Off Date. The sum of the columns in each such
table may not equal the total indicated due to rounding.
TYPE OF MORTGAGE LOANS
POOL II MORTGAGE LOANS
<TABLE>
<CAPTION>
Aggregate
Number of Cut-Off Date Percent of
Type Pool II Mortgage Loans Principal Balance Pool II Balance
------------------------------------------ -------------------------- ---------------------- -------------------
<S> <C> <C> <C>
HELOC Mortgage Loans.................... 1,854 $80,937,119.33 83.74%
Closed-End Mortgage Loans............... 334 15,714,745.68 16.26
-------------------------- ---------------------- -------------------
Total.............................. 2,188 $96,651,865.01 100.00%
========================== ====================== ===================
</TABLE>
S-35
<PAGE>
OUTSTANDING PRINCIPAL BALANCES
POOL II MORTGAGE LOANS
<TABLE>
<CAPTION>
Aggregate
Range of Number of Cut-Off Date Percent of
Outstanding Principal Balances ($) Pool II Mortgage Loans Principal Balance Pool II Balance
------------------------------------------ -------------------------- ---------------------- -------------------
<S> <C> <C> <C>
0.00 ............ 5 $ 0.00 0.00%
0.01 - 10,000.00 ............ 130 705,333.51 0.73
10,000.01 - 20,000.00 ............ 263 4,034,330.02 4.17
20,000.01 - 30,000.00 ............ 434 10,952,771.18 11.33
30,000.01 - 40,000.00 ............ 349 12,254,699.18 12.68
40,000.01 - 50,000.00 ............ 332 15,380,782.61 15.91
50,000.01 - 60,000.00 ............ 152 8,477,351.74 8.77
60,000.01 - 70,000.00 ............ 147 9,586,746.68 9.92
70,000.01 - 80,000.00 ............ 105 7,900,435.94 8.17
80,000.01 - 90,000.00 ............ 67 5,728,503.35 5.93
90,000.01 - 100,000.00 ............ 133 12,966,794.71 13.42
greater than 100,000.00 ............ 71 8,664,116.09 8.96
-------------------------- ---------------------- -------------------
Total.............................. 2,188 $96,651,865.01 100.00%
========================== ====================== ===================
</TABLE>
TYPE OF OCCUPANCY
POOL II MORTGAGE LOANS
<TABLE>
<CAPTION>
Aggregate
Number of Cut-Off Date Percent of
Occupancy Pool II Mortgage Loans Principal Balance Pool II Balance
------------------------------------------ -------------------------- ---------------------- -------------------
<S> <C> <C> <C>
Primary ................................. 2,188 $96,651,865.01 100.00%
-------------------------- ---------------------- -------------------
Total.............................. 2,188 $96,651,865.01 100.00%
========================== ====================== ===================
</TABLE>
LOAN PURPOSE
POOL II MORTGAGE LOANS
<TABLE>
<CAPTION>
Aggregate
Number of Cut-Off Date Percent of
Loan Purpose Pool II Mortgage Loans Principal Balance Pool II Balance
------------------------------------------ -------------------------- ---------------------- -------------------
<S> <C> <C> <C>
Cash Out Refinance ...................... 1,498 $67,756,427.89 70.10%
Purchase ................................ 637 26,835,621.85 27.77
Rate/Term Refinance ..................... 53 2,059,815.27 2.13
-------------------------- ---------------------- -------------------
Total.............................. 2,188 $96,651,865.01 100.00%
========================== ====================== ===================
</TABLE>
S-36
<PAGE>
COMBINED LOAN-TO-VALUE RATIOS
POOL II MORTGAGE LOANS
<TABLE>
<CAPTION>
Aggregate
Range of Number of Cut-Off Date Percent of
Combined Loan-to-Value Ratios (%) Pool II Mortgage Loans Principal Balance Pool II Balance
------------------------------------------ -------------------------- ---------------------- -------------------
<S> <C> <C> <C>
less than or
equal to 10.00 ....................... 2 $ 120,101.45 0.12%
10.01 - 20.00 ....................... 9 354,253.95 0.37
20.01 - 30.00 ....................... 20 904,821.45 0.94
30.01 - 40.00 ....................... 18 618,250.40 0.64
40.01 - 50.00 ....................... 44 2,071,252.47 2.14
50.01 - 60.00 ....................... 78 3,066,143.30 3.17
60.01 - 70.00 ....................... 156 7,313,307.03 7.57
70.01 - 80.00 ....................... 491 24,288,040.70 25.13
80.01 - 90.00 ....................... 759 31,502,224.47 32.59
90.01 - 100.00 ....................... 611 26,413,469.79 27.33
-------------------------- ---------------------- -------------------
Total.............................. 2,188 $ 96,651,865.01 100.00%
========================== ====================== ===================
</TABLE>
DOCUMENTATION
POOL II MORTGAGE LOANS
<TABLE>
<CAPTION>
Aggregate
Number of Cut-Off Date Percent of
Documentation Pool II Mortgage Loans Principal Balance Pool II Balance
------------------------------------------ -------------------------- ---------------------- -------------------
<S> <C> <C> <C>
Limited Documentation ................... 1,332 $60,896,534.15 63.01%
Full Documentation ...................... 807 33,328,071.84 34.48
No Ratio Documentation .................. 49 2,427,259.02 2.51
-------------------------- ---------------------- -------------------
Total.............................. 2,188 $96,651,865.01 100.00%
========================== ====================== ===================
</TABLE>
PROPERTY TYPE
POOL II MORTGAGE LOANS
<TABLE>
<CAPTION>
Aggregate
Number of Cut-Off Date Percent of
Property Type Pool II Mortgage Loans Principal Balance Pool II Balance
------------------------------------------ -------------------------- ---------------------- -------------------
<S> <C> <C> <C>
Single Family ........................... 1,518 $65,574,309.34 67.85%
PUD ..................................... 321 15,806,452.89 16.35
Condominium ............................. 214 7,924,434.71 8.20
2-4 Units ............................... 135 7,346,668.07 7.60
-------------------------- ---------------------- -------------------
Total.............................. 2,188 $96,651,865.01 100.00%
========================== ====================== ===================
</TABLE>
S-37
<PAGE>
GEOGRAPHIC DISTRIBUTION(1)
POOL II MORTGAGE LOANS
<TABLE>
<CAPTION>
Aggregate
Number of Cut-Off Date Percent of
State Pool II Mortgage Loans Principal Balance Pool II Balance
------------------------------------------ -------------------------- ---------------------- -------------------
<S> <C> <C> <C>
Arizona ................................. 54 $ 1,913,498.78 1.98%
California .............................. 1,478 70,375,566.21 72.81
Colorado ................................ 54 2,138,380.95 2.21
Connecticut ............................. 10 309,322.16 0.32
Delaware ................................ 3 137,653.97 0.14
District of Columbia .................... 2 70,176.79 0.07
Florida ................................. 40 1,110,457.01 1.15
Georgia ................................. 13 677,362.75 0.70
Idaho ................................... 14 343,856.68 0.36
Illinois ................................ 48 1,550,433.22 1.60
Indiana ................................. 1 28,008.26 0.03
Maryland ................................ 16 598,580.12 0.62
Massachusetts ........................... 84 3,405,758.78 3.52
Michigan ................................ 9 368,650.69 0.38
Missouri ................................ 2 28,629.36 0.03
Montana ................................. 9 382,335.05 0.40
Nevada .................................. 23 1,086,181.59 1.12
New Hampshire ........................... 3 102,573.76 0.11
New Jersey .............................. 15 728,244.32 0.75
New Mexico .............................. 9 251,816.07 0.26
New York ................................ 47 1,899,264.06 1.97
North Carolina .......................... 9 362,669.10 0.38
Oklahoma ................................ 1 23,695.29 0.02
Oregon .................................. 54 1,881,301.00 1.95
Pennsylvania ............................ 6 265,119.53 0.27
Rhode Island ............................ 4 108,462.27 0.11
South Carolina .......................... 8 275,656.48 0.29
Tennessee ............................... 1 13,400.00 0.01
Utah .................................... 42 1,180,883.42 1.22
Virginia ................................ 18 705,918.24 0.73
Washington .............................. 109 4,293,809.10 4.44
Wyoming ................................. 2 34,200.00 0.04
-------------------------- ---------------------- -------------------
Total.............................. 2,188 $ 96,651,865.01 100.00%
========================== ====================== ===================
</TABLE>
------------------
(1) Geographic location is determined by the address of the Mortgaged Property
securing the related Mortgage Loan.
S-38
<PAGE>
CREDIT LIMITS
POOL II HELOC MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of Aggregate
Pool II HELOC Mortgage Cut-Off Date Percent of
Range of Credit Limits ($) Loans Principal Balance Pool II HELOC Balance
------------------------------------------ -------------------------- ---------------------- ---------------------
<S> <C> <C> <C>
6,500.00 - 10,000.00 ........... 14 $ 127,265.10 0.16%
10,000.01 - 20,000.00 ........... 144 2,159,408.16 2.67
20,000.01 - 30,000.00 ........... 269 6,193,181.27 7.65
30,000.01 - 40,000.00 ........... 236 7,251,674.74 8.96
40,000.01 - 50,000.00 ........... 411 15,005,347.95 18.54
50,000.01 - 60,000.00 ........... 103 5,201,685.47 6.43
60,000.01 - 70,000.00 ........... 128 7,195,624.30 8.89
70,000.01 - 80,000.00 ........... 116 7,033,502.14 8.69
80,000.01 - 90,000.00 ........... 77 5,291,833.17 6.54
90,000.01 - 100,000.00 ........... 274 17,191,575.43 21.24
greater than 100,000.00 ........... 82 8,286,021.60 10.24
-------------------------- ---------------------- --------------------
Total.............................. 1,854 $80,937,119.33 100.00%
========================== ====================== ====================
</TABLE>
CREDIT LIMIT UTILIZATION RATES
POOL II HELOC MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of Aggregate Percent of
Pool II HELOC Mortgage Cut-Off Date Pool II HELOC
Range of Utilization Rates (%) Loans Principal Balance Balance
------------------------------------------ -------------------------- ---------------------- -------------------
<S> <C> <C> <C>
less than or
equal to 10.00 ....................... 73 $ 205,107.29 0.25%
10.01 - 20.00 ....................... 41 451,758.64 0.56
20.01 - 30.00 ....................... 59 1,006,855.55 1.24
30.01 - 40.00 ....................... 56 1,520,110.47 1.88
40.01 - 50.00 ....................... 78 2,184,500.92 2.70
50.01 - 60.00 ....................... 95 3,428,870.47 4.24
60.01 - 70.00 ....................... 105 4,093,647.96 5.06
70.01 - 80.00 ....................... 82 3,931,074.24 4.86
80.01 - 90.00 ....................... 78 3,917,231.76 4.84
90.01 - 100.00 ....................... 1,187 60,197,962.03 74.38
-------------------------- ---------------------- -------------------
Total.............................. 1,854 $80,937,119.33 100.00%
========================== ====================== ===================
</TABLE>
ORIGINAL TERMS
POOL II MORTGAGE LOANS
<TABLE>
<CAPTION>
Aggregate
Range of Original Terms Number of Cut-Off Date Percent of
(in months) Pool II Mortgage Loans Principal Balance Pool II Balance
------------------------------------------ -------------------------- ---------------------- -------------------
<S> <C> <C> <C>
180 ..................................... 1,758 $79,685,831.26 82.45%
300 ..................................... 430 16,966,033.75 17.55
-------------------------- ---------------------- -------------------
Total.............................. 2,188 $96,651,865.01 100.00%
========================== ====================== ===================
</TABLE>
S-39
<PAGE>
MONTHS REMAINING TO SCHEDULED MATURITY
POOL II MORTGAGE LOANS
<TABLE>
<CAPTION>
Aggregate
Range of Remaining Terms Number of Cut-Off Date Percent of
(in months) Pool II Mortgage Loans Principal Balance Pool II Balance
------------------------------------------ -------------------------- ---------------------- -------------------
<S> <C> <C> <C>
156 - 158 .............................. 1 $ 34,274.04 0.04%
165 - 170 .............................. 10 347,163.34 0.36
171 - 176 .............................. 41 2,113,707.62 2.19
177 - 182 .............................. 1,706 77,190,686.26 79.86
285 - 290 .............................. 2 42,207.18 0.04
291 - 296 .............................. 2 101,853.86 0.11
297 - 300 .............................. 426 16,821,972.71 17.40
-------------------------- ---------------------- -------------------
Total.............................. 2,188 $96,651,865.01 100.00%
========================== ====================== ===================
</TABLE>
MARGINS
POOL II HELOC MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of Aggregate Percent of
Pool II HELOC Mortgage Cut-Off Date Pool II HELOC
Range of Margins (%) Loans Principal Balance Balance
------------------------------------------ -------------------------- ---------------------- -------------------
<S> <C> <C> <C>
less than or
equal to 0.500 ....................... 404 $16,480,957.34 20.36%
0.501 - 1.000 ....................... 84 3,112,509.12 3.85
1.001 - 1.500 ....................... 50 2,093,625.53 2.59
1.501 - 2.000 ....................... 68 2,801,346.56 3.46
2.001 - 2.500 ....................... 102 5,373,081.18 6.64
2.501 - 3.000 ....................... 149 6,727,387.77 8.31
3.001 - 3.500 ....................... 160 7,067,742.48 8.73
3.501 - 4.000 ....................... 213 8,897,441.88 10.99
4.001 - 4.500 ....................... 324 15,059,840.17 18.61
4.501 - 5.000 ....................... 248 11,211,302.08 13.85
5.001 - 5.500 ....................... 42 1,631,916.31 2.02
5.501 - 6.000 ....................... 8 389,768.91 0.48
6.001 - 6.500 ....................... 1 68,700.00 0.08
greater than 8.000 ....................... 1 21,500.00 0.03
-------------------------- ---------------------- -------------------
Total.............................. 1,854 $80,937,119.33 100.00%
========================== ====================== ===================
</TABLE>
S-40
<PAGE>
CURRENT LOAN RATES
POOL II MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of Aggregate
Pool II Cut-Off Date Percent of
Range of Current Loan Rates (%) Mortgage Loans Principal Balance Pool II Balance
------------------------------------------ -------------------------- ---------------------- -------------------
<S> <C> <C> <C>
5.875 - 6.000 ...................... 1,314 $57,909,330.25 59.92%
9.001 - 9.500 ...................... 128 5,221,370.25 5.40
9.501 - 10.000 ...................... 31 1,576,570.21 1.63
10.001 - 10.500 ...................... 52 2,094,064.35 2.17
10.501 - 11.000 ...................... 43 2,092,843.02 2.17
11.001 - 11.500 ...................... 57 2,743,128.81 2.84
11.501 - 12.000 ...................... 58 2,618,282.24 2.71
12.001 - 12.500 ...................... 93 3,969,252.04 4.11
12.501 - 13.000 ...................... 99 4,886,365.02 5.06
13.001 - 13.500 ...................... 82 3,351,829.05 3.47
13.501 - 14.000 ...................... 123 5,423,376.39 5.61
14.001 - 14.500 ...................... 87 3,767,015.81 3.90
14.501 - 15.000 ...................... 16 719,680.86 0.74
greater than 15.000 ...................... 5 278,756.71 0.29
-------------------------- ---------------------- -------------------
Total.............................. 2,188 $96,651,865.01 100.00%
========================== ====================== ===================
</TABLE>
ORIGINAL DRAW TERMS
POOL II HELOC MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of Aggregate Percent of
Range of Original Draw Terms Pool II HELOC Mortgage Cut-Off Date Pool II HELOC
(in months) Loans Principal Balance Balance
------------------------------------------ -------------------------- ---------------------- -------------------
<S> <C> <C> <C>
60 .................................... 1,424 $63,971,085.58 79.04%
180 .................................... 430 16,966,033.75 20.96
-------------------------- ---------------------- -------------------
Total.............................. 1,854 $80,937,119.33 100.00%
========================== ====================== ===================
</TABLE>
AMORTIZATION
POOL II MORTGAGE LOANS
<TABLE>
<CAPTION>
Aggregate
Number of Cut-Off Date Percent of
Amortization Pool II Mortgage Loans Principal Balance Pool II Balance
------------------------------------------ -------------------------- ---------------------- -------------------
<S> <C> <C> <C>
Fully Amortizing ........................ 2,026 $88,101,975.73 91.15%
Balloon ................................. 162 8,549,889.28 8.85
-------------------------- ---------------------- -------------------
Total.............................. 2,188 $96,651,865.01 100.00%
========================== ====================== ===================
</TABLE>
S-41
<PAGE>
CREDIT SCORES(1)
POOL II MORTGAGE LOANS
<TABLE>
<CAPTION>
Aggregate
Number of Cut-Off Date Percent of
Range of Credit Scores Pool II Mortgage Loans Principal Balance Pool II Balance
------------------------------------------ -------------------------- ---------------------- -------------------
<S> <C> <C> <C>
N/A................................. 13 $ 451,421.36 0.47%
551 - 600 .............................. 2 28,664.45 0.03
601 - 650 .............................. 368 15,641,183.51 16.18
651 - 700 .............................. 850 38,689,843.12 40.03
701 - 750 .............................. 618 27,437,288.96 28.39
751 - 800 .............................. 319 13,635,984.93 14.11
801 - 823 .............................. 18 767,478.68 0.79
-------------------------- ---------------------- -------------------
Total.............................. 2,188 $96,651,865.01 100.00%
========================== ====================== ===================
</TABLE>
---------------
(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-42
<PAGE>
Pool III - General
The aggregate Principal Balance of the Pool III Mortgage Loans as of
the Cut-Off Date was approximately $96,045,908 (the "Pool III Balance").
As of the Cut-Off Date, the aggregate Principal Balance of Pool III
Closed-End Mortgage Loans was approximately $4,655,255 (the "Pool III Closed-End
Balance") and the aggregate Principal Balance of Pool III HELOC Mortgage Loans
was approximately $91,390,653 (the "Pool III HELOC Balance"). As of the Cut-Off
Date, the average Principal Balance of the Pool III Mortgage Loans was
approximately $164,744, the minimum Principal Balance was $0, the maximum
Principal Balance was approximately $638,566, the Loan Rates ranged from 5.875%
to 15.500% per annum and the weighted average Loan Rate was approximately 8.028%
per annum. Each of the Pool III HELOC Mortgage Loans is subject to a maximum
Loan Rate of 18.000%. As of the Cut-Off Date and with respect to the Pool III
HELOC Mortgage Loans, the weighted average Margin was approximately 3.117%, the
minimum Margin was 0.000% and the maximum Margin was 6.000%. As of the Cut-Off
Date and with respect to the Pool III HELOC Mortgage Loans, the weighted average
Credit Limit Utilization Rate (weighted by Credit Limit) was approximately
74.30%, the minimum Credit Limit Utilization Rate was approximately 0.00% and
the maximum Credit Limit Utilization Rate was approximately 100.00%. As of the
Cut-Off Date, the remaining term to scheduled maturity for the Pool III Mortgage
Loans ranged from 170 months to 300 months and the weighted average remaining
term to scheduled maturity was approximately 195 months. As of the Cut-Off Date,
the Combined Loan-to-Value Ratio of the Pool III Mortgage Loans ranged from
21.86% to 100.00% and the weighted average Combined Loan-to-Value Ratio of the
Pool III Mortgage Loans was approximately 74.58%. Credit Limits of the Pool III
HELOC Mortgage Loans ranged from $30,000 to $650,000 and averaged approximately
$222,032. The Weighted Average Second Mortgage Ratio for the Pool III Mortgage
Loans was approximately 35.53%. Substantially all of the Pool III Mortgage Loans
represented second liens on the related Mortgaged Properties. As of the Cut-Off
Date, 76.63%, by Principal Balance, of the Pool III Mortgage Loans were secured
by Mortgaged Properties which are single-family residences and 94.09%, by
Principal Balance, of the Pool III Mortgage Loans are secured by Mortgaged
Properties which are owner-occupied. As of the Cut-Off Date, 90.29%, by
Principal Balance, of the Pool III 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 Pool
III Mortgage Loans as of the Cut-Off Date. The sum of the columns in each such
table may not equal the total indicated due to rounding.
TYPE OF MORTGAGE LOANS
POOL III MORTGAGE LOANS
<TABLE>
<CAPTION>
Aggregate
Number of Cut-Off Date Percent of
Type Pool III Mortgage Loans Principal Balance Pool III Balance
------------------------------------------ -------------------------- ---------------------- -------------------
<S> <C> <C> <C>
HELOC Mortgage Loans .................... 554 $91,390,652.79 95.15%
Closed-End Mortgage Loans ............... 29 4,655,255.28 4.85
-------------------------- ---------------------- -------------------
Total................................ 583 $96,045,908.07 100.00%
========================== ====================== ===================
</TABLE>
S-43
<PAGE>
OUTSTANDING PRINCIPAL BALANCES
POOL III MORTGAGE LOANS
<TABLE>
<CAPTION>
Aggregate
Range of Number of Cut-Off Date Percent of
Outstanding Principal Balances ($) Pool III Mortgage Loans Principal Balance Pool III Balance
------------------------------------------ -------------------------- ---------------------- -------------------
<S> <C> <C> <C>
less than or
equal to 50,000.00 ............ 99 $ 1,432,696.11 1.49%
50,000.01 - 100,000.00 ............ 58 4,226,018.44 4.40
100,000.01 - 150,000.00 ............ 153 20,611,680.05 21.46
150,000.01 - 200,000.00 ............ 123 22,160,060.25 23.07
200,000.01 - 250,000.00 ............ 47 10,699,699.12 11.14
250,000.01 - 300,000.00 ............ 44 12,219,809.12 12.72
300,000.01 - 350,000.00 ............ 19 6,269,156.00 6.53
350,000.01 - 400,000.00 ............ 13 4,924,934.31 5.13
400,000.01 - 450,000.00 ............ 7 3,047,026.08 3.17
450,000.01 - 500,000.00 ............ 13 6,443,065.81 6.71
greater than 500,000.00 ............ 7 4,011,762.78 4.18
-------------------------- ---------------------- -------------------
Total................................ 583 $96,045,908.07 100.00%
========================== ====================== ===================
</TABLE>
TYPE OF OCCUPANCY
POOL III MORTGAGE LOANS
<TABLE>
<CAPTION>
Aggregate
Number of Cut-Off Date Percent of
Occupancy Pool III Mortgage Loans Principal Balance Pool III Balance
------------------------------------------ -------------------------- ---------------------- -------------------
<S> <C> <C> <C>
Primary ................................. 536 $90,369,226.07 94.09%
Non-owner ............................... 41 4,974,054.50 5.18
Second Home(1)........................... 6 702,627.50 0.73
-------------------------- ---------------------- -------------------
Total................................ 583 $96,045,908.07 100.00%
========================== ====================== ===================
</TABLE>
------------------
(1) Includes vacation and second homes
LOAN PURPOSE
POOL III MORTGAGE LOANS
<TABLE>
<CAPTION>
Aggregate
Number of Cut-Off Date Percent of
Loan Purpose Pool III Mortgage Loans Principal Balance Pool III Balance
------------------------------------------ -------------------------- ---------------------- -------------------
<S> <C> <C> <C>
Cash Out Refinance....................... 524 $84,170,061.86 87.64%
Purchase ................................ 50 10,003,924.73 10.42
Rate/Term Refinance ..................... 9 1,871,921.48 1.95
-------------------------- ---------------------- -------------------
Total................................ 583 $96,045,908.07 100.00%
========================== ====================== ===================
</TABLE>
S-44
<PAGE>
COMBINED LOAN-TO-VALUE RATIOS
POOL III MORTGAGE LOANS
<TABLE>
<CAPTION>
Aggregate
Range of Number of Cut-Off Date Percent of
Combined Loan-to-Value Ratios (%) Pool III Mortgage Loans Principal Balance Pool III Balance
------------------------------------------ -------------------------- ---------------------- -------------------
<S> <C> <C> <C>
21.86 - 30.00 ....................... 1 $ 343,422.13 0.36%
30.01 - 40.00 ....................... 9 2,203,528.31 2.29
40.01 - 50.00 ....................... 21 4,514,990.72 4.70
50.01 - 60.00 ....................... 50 8,674,928.47 9.03
60.01 - 70.00 ....................... 88 15,479,880.83 16.12
70.01 - 80.00 ....................... 229 36,177,995.80 37.67
80.01 - 90.00 ....................... 125 20,067,681.09 20.89
90.01 - 100.00 ....................... 60 8,583,480.72 8.94
-------------------------- ---------------------- -------------------
Total................................ 583 $96,045,908.07 100.00%
========================== ====================== ===================
</TABLE>
DOCUMENTATION
POOL III MORTGAGE LOANS
<TABLE>
<CAPTION>
Aggregate
Number of Cut-Off Date Percent of
Documentation Pool III Mortgage Loans Principal Balance Pool III Balance
------------------------------------------ -------------------------- ---------------------- -------------------
<S> <C> <C> <C>
Limited Documentation ................... 425 $75,031,886.85 78.12%
Full Documentation ...................... 138 17,826,675.88 18.56
No Ratio Documentation .................. 20 3,187,345.34 3.32
-------------------------- ---------------------- -------------------
Total................................ 583 $96,045,908.07 100.00%
========================== ====================== ===================
</TABLE>
PROPERTY TYPE
POOL III MORTGAGE LOANS
<TABLE>
<CAPTION>
Aggregate
Number of Cut-Off Date Percent of
Property Type Pool III Mortgage Loans Principal Balance Pool III Balance
------------------------------------------ -------------------------- ---------------------- -------------------
<S> <C> <C> <C>
Single Family ........................... 433 $73,602,144.21 76.63%
PUD ..................................... 100 16,368,980.82 17.04
2-4 Units ............................... 25 3,306,902.81 3.44
Condominium ............................. 25 2,767,880.23 2.88
-------------------------- ---------------------- -------------------
Total................................ 583 $96,045,908.07 100.00%
========================== ====================== ===================
</TABLE>
S-45
<PAGE>
GEOGRAPHIC DISTRIBUTION(1)
POOL III MORTGAGE LOANS
<TABLE>
<CAPTION>
Aggregate
Number of Cut-Off Date Percent of
State Pool III Mortgage Loans Principal Balance Pool III Balance
------------------------------------------ -------------------------- ---------------------- -------------------
<S> <C> <C> <C>
Arizona ................................. 4 $ 400,977.42 0.42%
California .............................. 515 86,717,487.48 90.29
Colorado ................................ 3 269,001.45 0.28
Connecticut ............................. 1 0.00 0.00
District of Columbia .................... 1 172,455.86 0.18
Florida ................................. 3 491,175.65 0.51
Georgia ................................. 3 485,726.42 0.51
Illinois ................................ 6 762,930.84 0.79
Maryland ................................ 4 811,741.86 0.85
Massachusetts ........................... 4 495,714.02 0.52
New Jersey .............................. 1 35,887.50 0.04
New Mexico .............................. 2 157,410.41 0.16
New York ................................ 14 2,148,178.37 2.24
Ohio .................................... 1 134,530.98 0.14
Oregon .................................. 4 644,891.54 0.67
Pennsylvania ............................ 1 51,755.50 0.05
Utah .................................... 1 5,398.00 0.01
Virginia ................................ 1 140,000.00 0.15
Washington .............................. 14 2,120,644.77 2.21
-------------------------- ---------------------- -------------------
Total................................ 583 $96,045,908.07 100.00%
========================== ====================== ===================
</TABLE>
------------------
(1) Geographic location is determined by the address of the Mortgaged Property
securing the related Mortgage Loan.
S-46
<PAGE>
CREDIT LIMITS
POOL III HELOC MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of Aggregate
Pool III HELOC Mortgage Cut-Off Date Percent of
Range of Credit Limits ($) Loans Principal Balance Pool III HELOC Balance
------------------------------------------ -------------------------- ---------------------- ----------------------
<S> <C> <C> <C>
less than or
equal to 50,000.00 ............ 6 $ 137,292.13 0.15%
50,000.01 - 100,000.00 ............ 15 294,255.55 0.32
100,000.01 - 150,000.00 ............ 152 16,781,019.84 18.36
150,000.01 - 200,000.00 ............ 180 23,398,500.64 25.60
200,000.01 - 250,000.00 ............ 60 9,937,954.75 10.87
250,000.01 - 300,000.00 ............ 53 11,755,349.34 12.86
300,000.01 - 350,000.00 ............ 27 7,111,811.03 7.78
350,000.01 - 400,000.00 ............ 21 5,761,541.02 6.30
400,000.01 - 450,000.00 ............ 11 3,594,245.76 3.93
450,000.01 - 500,000.00 ............ 22 8,606,919.95 9.42
greater than 500,000.00 ............ 7 4,011,762.78 4.39
-------------------------- ---------------------- ---------------------
Total................................ 554 $91,390,652.79 100.00%
========================== ====================== =====================
</TABLE>
CREDIT LIMIT UTILIZATION RATES
POOL III HELOC MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of Aggregate Percent of
Pool III HELOC Mortgage Cut-Off Date Pool III HELOC
Range of Utilization Rates (%) Loans Principal Balance Balance
------------------------------------------ -------------------------- ---------------------- -------------------
<S> <C> <C> <C>
less than or
equal to 10.00 ....................... 67 $ 271,300.39 0.30%
10.01 - 20.00 ....................... 14 472,064.42 0.52
20.01 - 30.00 ....................... 18 932,032.63 1.02
30.01 - 40.00 ....................... 21 1,296,373.84 1.42
40.01 - 50.00 ....................... 22 2,289,251.78 2.50
50.01 - 60.00 ....................... 22 2,754,805.40 3.01
60.01 - 70.00 ....................... 24 3,704,271.29 4.05
70.01 - 80.00 ....................... 32 4,701,578.94 5.14
80.01 - 90.00 ....................... 28 5,428,670.92 5.94
90.01 - 100.00 ....................... 306 69,540,303.18 76.09
-------------------------- ---------------------- -------------------
Total................................ 554 $91,390,652.79 100.00%
========================== ====================== ===================
</TABLE>
ORIGINAL TERMS
POOL III MORTGAGE LOANS
<TABLE>
<CAPTION>
Aggregate
Range of Original Terms Number of Cut-Off Date Percent of
(in months) Pool III Mortgage Loans Principal Balance Pool III Balance
------------------------------------------ -------------------------- ---------------------- -------------------
<S> <C> <C> <C>
180 ..................................... 488 $82,775,648.45 86.18%
300 ..................................... 95 13,270,259.62 13.82
-------------------------- ---------------------- -------------------
Total................................ 583 $96,045,908.07 100.00%
========================== ====================== ===================
</TABLE>
S-47
<PAGE>
MONTHS REMAINING TO SCHEDULED MATURITY
POOL III MORTGAGE LOANS
<TABLE>
<CAPTION>
Aggregate
Range of Remaining Terms Number of Cut-Off Date Percent of
(in months) Pool III Mortgage Loans Principal Balance Pool III Balance
------------------------------------------ -------------------------- ---------------------- -------------------
<S> <C> <C> <C>
170 .............................. 2 $ 638,565.86 0.66%
171 - 176 .............................. 8 1,643,800.62 1.71
177 - 182 .............................. 478 80,493,281.97 83.81
291 - 296 .............................. 2 138,495.84 0.14
297 - 300 .............................. 93 13,131,763.78 13.67
-------------------------- ---------------------- -------------------
Total................................ 583 $96,045,908.07 100.00%
========================== ====================== ===================
</TABLE>
MARGINS
POOL III HELOC MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of Aggregate Percent of
Pool III HELOC Mortgage Cut-Off Date Pool III HELOC
Range of Margins (%) Loans Principal Balance Balance
------------------------------------------ -------------------------- ---------------------- -------------------
<S> <C> <C> <C>
less than or
equal to 0.500 ........................ 19 $ 1,020,268.96 1.12%
0.501 - 1.000 ........................ 37 5,662,693.60 6.20
1.001 - 1.500 ........................ 19 2,647,487.29 2.90
1.501 - 2.000 ........................ 39 6,202,237.82 6.79
2.001 - 2.500 ........................ 110 18,440,924.98 20.18
2.501 - 3.000 ........................ 86 15,554,840.13 17.02
3.001 - 3.500 ........................ 59 10,617,311.53 11.62
3.501 - 4.000 ........................ 60 10,800,795.70 11.82
4.001 - 4.500 ........................ 70 10,597,948.95 11.60
4.501 - 5.000 ........................ 41 7,568,377.04 8.28
5.001 - 5.500 ........................ 7 774,864.93 0.85
5.501 - 6.000 ........................ 7 1,502,901.86 1.64
-------------------------- ---------------------- -------------------
Total................................ 554 $91,390,652.79 100.00%
========================== ====================== ===================
</TABLE>
S-48
<PAGE>
CURRENT LOAN RATES
POOL III MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of Aggregate
Pool III Cut-Off Date Percent of
Range of Current Loan Rates (%) Mortgage Loans Principal Balance Pool III Balance
------------------------------------------ -------------------------- ---------------------- -------------------
<S> <C> <C> <C>
5.875 - 6.000 ...................... 385 $64,607,211.04 67.27%
9.001 - 9.500 ...................... 16 2,355,755.96 2.45
9.501 - 10.000 ...................... 6 382,056.48 0.40
10.001 - 10.500 ...................... 12 1,552,615.37 1.62
10.501 - 11.000 ...................... 4 445,599.07 0.46
11.001 - 11.500 ...................... 15 2,613,733.58 2.72
11.501 - 12.000 ...................... 29 3,755,521.08 3.91
12.001 - 12.500 ...................... 28 5,598,837.81 5.83
12.501 - 13.000 ...................... 29 5,161,061.45 5.37
13.001 - 13.500 ...................... 16 2,370,961.34 2.47
13.501 - 14.000 ...................... 21 3,235,547.74 3.37
14.001 - 14.500 ...................... 13 2,647,305.05 2.76
14.501 - 15.000 ...................... 5 658,243.21 0.69
greater than 15.000 ...................... 4 661,458.89 0.69
-------------------------- ---------------------- -------------------
Total................................ 583 $96,045,908.07 100.00%
========================== ====================== ===================
</TABLE>
ORIGINAL DRAW TERMS
POOL III HELOC MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of Aggregate Percent of
Range of Original Draw Terms Pool III HELOC Mortgage Cut-Off Date Pool III HELOC
(in months) Loans Principal Balance Balance
------------------------------------------ -------------------------- ---------------------- -------------------
<S> <C> <C> <C>
60 .................................... 459 $78,120,393.17 85.48%
180 .................................... 95 13,270,259.62 14.52
-------------------------- ---------------------- -------------------
Total 554 $91,390,652.79 100.00%
========================== ====================== ===================
</TABLE>
AMORTIZATION
POOL III MORTGAGE LOANS
<TABLE>
<CAPTION>
Aggregate
Number of Cut-Off Date Percent of
Amortization Pool III Mortgage Loans Principal Balance Pool III Balance
------------------------------------------ -------------------------- ---------------------- -------------------
<S> <C> <C> <C>
Fully Amortizing......................... 562 $92,705,861.64 96.52%
Balloon ................................. 21 3,340,046.43 3.48
-------------------------- ---------------------- -------------------
Total................................ 583 $96,045,908.07 100.00%
========================== ====================== ===================
</TABLE>
S-49
<PAGE>
CREDIT SCORES(1)
POOL III MORTGAGE LOANS
<TABLE>
<CAPTION>
Aggregate
Number of Cut-Off Date Percent of
Range of Credit Scores Pool III Mortgage Loans Principal Balance Pool III Balance
------------------------------------------ -------------------------- ---------------------- -------------------
<S> <C> <C> <C>
595 - 600 .............................. 3 $ 592,609.01 0.62%
601 - 650 .............................. 76 13,536,442.01 14.09
651 - 700 .............................. 223 37,930,524.21 39.49
701 - 750 .............................. 182 28,476,724.99 29.65
751 - 800 .............................. 96 15,050,252.87 15.67
801 - 809 .............................. 3 459,354.98 0.48
-------------------------- ---------------------- -------------------
Total................................ 583 $96,045,908.07 100.00%
========================== ====================== ===================
</TABLE>
(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 III Mortgage Loan or more recently.
Neither the Sponsor nor the Company make any representations or
warranties as to the actual performance of any Pool III 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-50
<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 (as defined herein) 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, substantially all of the HELOC Mortgage Loans have termination
fees for three years after origination, except for those Mortgage Loans which
were originated in those states where termination fees are prohibited by law.
None of the Closed-End Mortgage Loans have prepayment penalties or termination
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 (as defined herein) represented by the related Note
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 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-51
<PAGE>
The "Parity Date" with respect to each Class of Class A Notes and the
related Pool is the Payment Date on which the related Pool Balance first equals
or exceeds the outstanding principal balance for the related Class of Class A
Notes.
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 outstanding 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 Trust, 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 the related 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 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 Removals of Mortgage Loans by the Trust" 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 lien 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 lien 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 any Pool may be applied as an Accelerated Principal Payment in
reduction of the outstanding principal balance of the related Class of Class A
Notes, 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.
S-52
<PAGE>
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 outstanding principal balance of the
related Class of Class A Notes, the aggregate payments in reduction of the
outstanding 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 principal balance of the
related Class of Class A Notes will increase in proportion to such outstanding
principal balance over time, to the extent such Excess Cashflow is not applied
to offset losses on the Mortgage Loans in the related Pool.
Accelerated Principal Payments will be paid on each Class of Class A
Notes in reduction of the principal balance of such Class on each Payment Date
if 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 Noteholder. If the actual rate of Accelerated Principal Payments on
a Class of Class A Notes applied in reduction of the outstanding 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 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 any 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 principal balance of such Class on
each Payment Date will be based on the related Specified Overcollateralization
Amount of such Class. The "Accelerated Principal Payment" will equal, for any
Payment Date, the lesser of (A) the Excess Cashflow with respect to the related
Pool and (B) the amount required to increase the related Overcollateralization
Amount to the related Specified Overcollateralization Amount applicable to such
Payment Date. 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" or increase or "step up" based on the performance of the Mortgage
Loans in the related Pool under certain tests specified in the Indenture based
on delinquency or loss 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.
S-53
<PAGE>
Class A-1 Decrement Table
The following decrement table is based on the following constant
prepayment rate assumptions:
<TABLE>
<CAPTION>
Scenario Scenario Scenario Scenario Scenario
I II III IV V
Description (% CPR) (% CPR) (% CPR) (% CPR) (% CPR)
-------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
HELOC Mortgage Loans 30 35 40 45 50
Closed-End Mortgage Loans 10 20 30 40 50
</TABLE>
For purposes of the calculations in the following table, Pool I was
assumed to have the following collateral characteristics:
<TABLE>
<CAPTION>
Weighted
Average Fully Credit
Current Gross Gross Indexed Original Amortization Remaining Months Utilization
Balance WAC Margin Rate Term Term Term Age to Roll Rate
Description ($) (%) (%) (%) (months) (months) (months) (months) (months) (%)
-------------- ------------- -------- --------- --------- --------- ------------ --------- --------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
HELOCs* 86,778,199.64 8.50327 2.96927 18.00000 202 202 200 2 1 74.63
Closed-End
Balloons 6,975,268.79 12.52610 0.00000 12.52641 180 360 178 2 0 N/A
Closed-End
Fully
Amortizing 6,968,444.56 12.30069 0.00000 12.30133 180 180 178 2 0 N/A
</TABLE>
------------------------------------
*HELOCs have a maximum rate 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 Class A-1 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 table below (the "Prepayment
Assumptions") 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 below 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) the Closing Date is December 18, 2000; (x) for each Payment Date
LIBOR is 6.76875%; (xi) for each Payment Date, the Index Rate is 9.50000%; and
(xii) any shortfalls in Interest Payment Amounts, due to either the teaser
period for any HELOC Mortgage Loan or the initial undercollateralization, will
be fully funded.
S-54
<PAGE>
<TABLE>
<CAPTION>
Percentage of Original Class A-1 Principal Balance
Amortization Schedule(1)(2)
Payment Date I II III IV V
------------ ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage........................ 100 100 100 100 100
December 2001........................ 85 78 72 65 59
December 2002........................ 73 62 52 43 35
December 2003........................ 64 50 39 29 22
December 2004........................ 56 41 29 20 14
December 2005........................ 49 33 22 14 8
December 2006........................ 35 22 13 7 4
December 2007........................ 26 15 8 4 2
December 2008........................ 19 10 5 2 1
December 2009........................ 14 6 3 1 0
December 2010........................ 10 4 1 0 0
December 2011........................ 8 3 1 0 0
December 2012........................ 6 2 0 0 0
December 2013........................ 4 1 0 0 0
December 2014........................ 3 0 0 0 0
December 2015........................ 1 0 0 0 0
December 2016........................ 0 0 0 0 0
Weighted Average Life
Years to Maturity 5.04 3.77 2.94 2.35 1.92
Years to Call(3) 4.80 3.57 2.78 2.22 1.80
</TABLE>
-------------------
(1) Assumes a constant draw rate of 20% for the first 60 months with respect
to the HELOC Mortgage Loans.
(2) All percentages are rounded to the nearest whole percentage.
(3) Assumes that an optional redemption is exercised on the first possible
Payment Date.
S-55
<PAGE>
Class A-2 Decrement Table
The following decrement table is based on the following constant
prepayment rate assumptions:
<TABLE>
<CAPTION>
Scenario Scenario Scenario Scenario Scenario
I II III IV V
Description (% CPR) (% CPR) (% CPR) (% CPR) (% CPR)
-------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
HELOC Mortgage Loans 30 35 40 45 50
Closed-End Mortgage Loans 10 20 30 40 50
</TABLE>
For purposes of the calculations in the following table, Pool II was
assumed to have the following collateral characteristics:
<TABLE>
<CAPTION>
Weighted
Average Fully Credit
Current Gross Gross Indexed Original Amortization Remaining Months Utilization
Balance WAC Margin Rate Term Term Term Age to Roll Rate
Description ($) (%) (%) (%) (months) (months) (months) (months) (months) (%)
-------------- ------------- -------- --------- --------- --------- ------------ --------- --------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
HELOCs* 80,937,119.33 7.68514 2.87965 18.00000 205 205 203 2 1 77.09
Closed-End
Balloons 8,549,889.28 12.34040 0.00000 12.34096 180 360 178 2 0 N/A
Closed-End
Fully
Amortizing 7,164,856.40 11.78564 0.00000 11.78608 180 180 178 2 0 N/A
</TABLE>
------------------------------------
*HELOCs have a maximum rate 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 Class
A-2 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 table below (the "Prepayment
Assumptions") 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 below 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) the Closing Date is December 18, 2000; (x) for each Payment Date
LIBOR is 6.76875%; (xi) for each Payment Date, the Index Rate is 9.50000%; and
(xii) any shortfalls in Interest Payment Amounts, due to either the teaser
period for any HELOC Mortgage Loan or the initial undercollateralization, will
be fully funded.
S-56
<PAGE>
<TABLE>
<CAPTION>
Percentage of Original Class A-2 Principal Balance
Amortization Schedule(1)(2)
Payment Date I II III IV V
------------ ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage........................ 100 100 100 100 100
December 2001........................ 85 78 72 65 59
December 2002........................ 73 62 52 43 34
December 2003....................... 64 50 39 29 21
December 2004........................ 56 41 29 20 13
December 2005........................ 49 33 21 14 8
December 2006........................ 36 22 13 7 4
December 2007........................ 26 15 8 4 2
December 2008........................ 19 10 5 2 1
December 2009........................ 14 6 3 1 0
December 2010........................ 11 4 1 0 0
December 2011........................ 8 3 1 0 0
December 2012........................ 6 2 0 0 0
December 2013........................ 4 1 0 0 0
December 2014........................ 3 0 0 0 0
December 2015........................ 1 0 0 0 0
December 2016........................ 0 0 0 0 0
Weighted Average Life
Years to Maturity 5.08 3.78 2.93 2.34 1.91
Years to Call(3) 4.84 3.57 2.77 2.21 1.78
</TABLE>
-------------------
(1) Assumes a constant draw rate of 20% for the first 60 months with respect
to the HELOC Mortgage Loans.
(2) All percentages are rounded to the nearest whole percentage.
(3) Assumes that an optional redemption is exercised on the first possible
Payment Date.
S-57
<PAGE>
Class A-3 Decrement Table
The following decrement table is based on the following constant
prepayment rate assumptions:
<TABLE>
<CAPTION>
Scenario Scenario Scenario Scenario Scenario
I II III IV V
Description (% CPR) (% CPR) (% CPR) (% CPR) (% CPR)
-------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
HELOC Mortgage Loans 30 35 40 45 50
Closed-End Mortgage Loans 10 20 30 40 50
</TABLE>
For purposes of the calculations in the following table, Pool III was
assumed to have the following collateral characteristics:
<TABLE>
<CAPTION>
Weighted
Average Fully Credit
Current Gross Gross Indexed Original Amortization Remaining Months Utilization
Balance WAC Margin Rate Term Term Term Age to Roll Rate
Description ($) (%) (%) (%) (months) (months) (months) (months) (months) (%)
-------------- ------------- -------- --------- --------- --------- ------------ --------- --------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
HELOCs* 91,390,652.79 7.83164 3.11729 18.00000 197 197 196 1 1 74.30
Closed-End
Balloons 3,340,046.43 11.79072 0.00000 11.79099 180 360 178 2 0 N/A
Closed-End
Fully
Amortizing 1,315,208.85 12.11005 0.00000 12.11005 180 180 177 3 0 N/A
</TABLE>
------------------------------------
*HELOCs have a maximum rate 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 Class
A-3 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 table below (the "Prepayment
Assumptions") 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 below 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) the Closing Date is December 18, 2000; (x) for each Payment Date
LIBOR is 6.76875%; (xi) for each Payment Date, the Index Rate is 9.50000%; and
(xii) any shortfalls in Interest Payment Amounts, due to either the teaser
period for any HELOC Mortgage Loan or the initial undercollateralization, will
be fully funded.
S-58
<PAGE>
<TABLE>
<CAPTION>
Percentage of Original Class A-3 Principal Balance
Amortization Schedule(1)(2)
Payment Date I II III IV V
------------ ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage........................ 100 100 100 100 100
December 2001........................ 84 78 72 66 60
December 2002........................ 73 63 53 44 36
December 2003........................ 64 51 40 31 23
December 2004........................ 56 41 30 21 14
December 2005........................ 49 34 22 15 9
December 2006........................ 35 22 14 8 4
December 2007........................ 25 14 8 4 2
December 2008........................ 18 9 5 2 1
December 2009........................ 13 6 3 1 0
December 2010........................ 9 4 1 0 0
December 2011........................ 6 2 1 0 0
December 2012........................ 4 1 0 0 0
December 2013........................ 3 1 0 0 0
December 2014........................ 2 0 0 0 0
December 2015........................ 1 0 0 0 0
December 2016........................ 0 0 0 0 0
Weighted Average Life
Years to Maturity 4.94 3.78 2.99 2.41 1.98
Years to Call(3) 4.70 3.59 2.83 2.28 1.86
</TABLE>
-------------------
(1) Assumes a constant draw rate of 20% for the first 60 months with respect
to the HELOC Mortgage Loans.
(2) All percentages are rounded to the nearest whole percentage.
(3) Assumes that an optional redemption is exercised on the first possible
Payment Date.
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<PAGE>
POOL FACTOR AND TRADING INFORMATION
The "Pool Factor" is a seven-digit decimal which the Servicer will
compute monthly expressing the 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 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 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 ("Noteholders" or "Holders"). In addition, within
60 days after the end of each calendar year, beginning with the 2000 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 Notes" and
"--Reports to Noteholders" herein.
DESCRIPTION OF THE CLASS A NOTES
The $102,736,000 Class A-1 Variable Rate Asset-Backed Notes, the
$98,584,000 Class A-2 Variable Rate Asset-Backed Notes and the $97,966,000 Class
A-3 Variable Rate Asset-Backed Notes will be issued pursuant to the Indenture (a
form of which has been filed as an exhibit to the Registration Statement).
Payments on the Class A Notes and certain rights of investors in the Class A
Notes will be governed by the Indenture. The following summaries describe
certain provisions of the Indenture and of the Trust Agreement. The summaries do
not purport to be complete and are subject to, and are qualified in their
entirety by reference to, all of the provisions of the Indenture and the Trust
Agreement. Wherever particular sections or defined terms of the Indenture or of
the Trust Agreement are referred to, such 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. The Class A Notes will be issued in
book-entry form only. Definitive Class A Notes, if issued, will be transferable
and exchangeable at the corporate trust office of the Indenture Trustee, which
will initially act as registrar (the "Registrar"). See "Book-Entry Notes" 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 16,
2001), 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" for the Class A Notes shall be the Business Day
immediately preceding such Payment Date unless the Class A 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. 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 Notes, will be The Depository Trust Company ("DTC") or
its nominee in the United States or Clearstream Banking, societe anonyme
("Clearstream") or in the Euroclear System ("Euroclear") in Europe) as it
appears on the register of Holders of Class A Notes (the "Security 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 , the State of California or in the city in
S-60
<PAGE>
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 16, 2001, at the related rate for the
related Interest Accrual Period.
The "Class A-1 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)
0.21% per annum and (y) for any Payment Date thereafter, the sum of (a) LIBOR
(determined as described herein) and (b) 0.42% 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 the Interest Accrual
Period and a 360-day year) net of the Servicing Fee expressed as a rate, the fee
payable to the Indenture Trustee expressed as a rate and the rate at which the
premium payable to the Insurer is calculated, in each case with respect to the
Class A-1 Notes.
To the extent the Maximum Rate is less than the Class A-1 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.
The "Class A-2 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 Redemption Date with
respect to the Class A-2 Notes, the sum of (a) LIBOR (determined as described
herein) and (b) 0.21% per annum and (y) for any Payment Date thereafter, the sum
of (a) LIBOR (determined as described herein) and (b) 0.42% 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 the Interest Accrual
Period and a 360-day year), net of the Servicing Fee expressed as a rate, the
fee payable to the Indenture Trustee expressed as a rate and the rate at which
the premium payable to the Insurer is calculated, in each case with respect to
the Class A-2 Notes.
To the extent the Maximum Rate is less than the Class A-2 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 "Class A-3 Rate" with respect to the Class A-3 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-3 Notes, the sum of (a) LIBOR (determined as described
herein) and (b) 0.22% per annum and (y) for any Payment Date thereafter, the sum
of (a) LIBOR (determined as described herein) and (b) 0.44% 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-3
Notes on any Payment Date exceed a rate (the "Maximum Rate" with respect to the
Class A-3 Notes) equal to the weighted average of the Loan Rates of the Pool III
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 III 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 the Interest Accrual
Period and a 360-day year), net of the Servicing Fee expressed as a rate, the
fee payable to the Indenture Trustee expressed as a rate and the rate at which
the premium payable to the Insurer is calculated, in each case with respect to
the Class A-3 Notes.
S-61
<PAGE>
To the extent the Maximum Rate is less than the Class A-3 Rate on the
Class A-3 Notes for any Payment Date, the deficiency will be deferred (the
"Deferred Interest" with respect to the Class A-3 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.
"Note Rate" means the Class A-1 Rate, the Class A-2 Rate or the Class
A-3 Rate, as applicable.
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 Class A-1 Rate, Class A-2 Rate or
Class A-3 Rate, as appropriate, subject to the related Maximum 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.
On the second LIBOR Business Day (as defined below) preceding the
commencement of each Interest Accrual Period (each such date, a "LIBOR
Determination Date"), the Indenture Trustee will determine LIBOR based on the
"Interest Settlement Rate" for U.S. dollar deposits of one-month maturity set by
the British Bankers' Association (the "BBA") as of 11:00 a.m. (London time) on
the LIBOR Determination Date ("LIBOR").
The BBA's Interest Settlement Rates are currently displayed on the Dow
Jones Telerate Service page 3750 (such page, or such other page as may replace
page 3750 on that service or such other service as may be nominated by the BBA
as the information vendor for the purpose of displaying the BBA's Interest
Settlement Rates for deposits in U.S. dollars, the "Designated Telerate Page").
Such Interest Settlement Rates are also currently available on Reuters Monitor
Money Rates Service page "LIBOR01" and Bloomberg L.P. page "BBAM." The BBA's
Interest Settlement Rates currently are rounded to five decimal places.
A "LIBOR Business Day" is any day on which banks in London and New York
are open for conducting transactions in foreign currency and exchange.
With respect to any LIBOR Determination Date, if the BBA's Interest
Settlement Rate does not appear on the Designated Telerate Page as of 11:00 a.m.
(London time) on such date, or if the Designated Telerate Page is not available
on such date, the Indenture Trustee will obtain such rate from the Reuters or
Bloomberg page. If such rate is not published for such LIBOR Determination Date,
LIBOR for such date will be the most recently published Interest Settlement
Rate. In the event that the BBA no longer sets an Interest Settlement Rate, the
Indenture Trustee will designate an alternative index that has performed, or
that the Indenture Trustee expects to perform, in a manner substantially similar
to the BBA's Interest Settlement Rate.
The establishment of LIBOR on each LIBOR Determination Date by the
Indenture Trustee and the Indenture Trustee's calculation of the rates of
interest applicable to the Class A Notes for the related Interest Accrual Period
will (in the absence of manifest error) be final and binding.
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 18, 2000, and ending on the earlier to occur of (x) the December 2005
Payment Date or (y) the Payment Date which immediately precedes the occurrence
of a Rapid Amortization Event. The
S-62
<PAGE>
"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 principal balance of such Class.
With respect to each Class of Class A Notes, the "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 Noteholders on such Payment Date.
In addition, on the Payment Date in January 2027 with respect to the
Class A Notes (the "Final Scheduled Payment Date" with respect to the Class A
Notes), the Holders of the Class A Notes will be entitled to receive a payment
of principal in an amount equal to the outstanding principal balance of the
Class A Notes. The Final Scheduled Payment Date with respect to the Class A
Notes is the date which is twelve months after the Payment Date immediately
following the month of the last due date of the latest maturing Mortgage Loan in
any Pool.
Accelerated Principal. With respect to each Class of Class A Notes, the
related Pool and any Payment Date on which there exists Excess Cashflow relating
to such Pool, Excess Cashflow with respect to such Pool will be distributed in
reduction of the principal balance of such Class on any such Payment Date 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 2005, 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 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 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 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
S-63
<PAGE>
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 any Class exceeds 1% of the related Pool Balance as of the
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 Classes of Class A Notes unless the same event or
circumstance is a Rapid Amortization Event with respect to all 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, any of the Indenture Trustee or Holders holding Class A
Notes evidencing more than 50% of the outstanding principal balance of the Class
A-1 Notes, the Class A-2 Notes or the Class A-3 Notes, as applicable, 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 a
downgrade in the rating of the Insurer) 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 Noteholders 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 Noteholders evidencing more than 50% of the outstanding principal
balance of the related Class of Class A Notes, 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 related Mortgage Loans.
Following the occurrence of a Rapid Amortization Event described in clause (f),
the Noteholders evidencing more than 50% of the outstanding principal balance of
the related Class of Class A Notes, 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
principal balance of the related 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 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 below) shall have occurred and be 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
(as defined below) 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 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 principal balance in full, together
with all accrued and unpaid interest due thereon.
S-64
<PAGE>
An "Insurer Default" shall mean the occurrence of any of (i) the
failure by the Insurer to make a payment required under the Policy in accordance
with the terms thereof, (ii) the voluntary or involuntary filing of a petition
or other invocation of the process of any court or government authority for the
purpose of commencing or sustaining a case under any federal or state
bankruptcy, insolvency or similar law against the Insurer, (iii) the appointing
of a receiver, liquidator, assignee, trustee, custodian, sequestrator or other
similar official of the Insurer or any substantial part of its property, or
ordering the winding up or liquidation of the affairs of the Insurer or (iv) the
Insurer's failure to be qualified to do business as a financial guaranty insurer
in any jurisdiction in which its failure to be so qualified would have a
material adverse effect on the Insurer's ability to perform under the Policy and
the Insurance Agreement.
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 paid under the Demand Note 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 the Class S Certificates (the
"Class S Certificateholders"), 30% of the related
Excess Interest (as defined below), but only on each
Payment Date after the related Parity Date with
respect to the related Class of Class A Notes.
(v) to the Holders of such Class of Class A Notes, as a
distribution of principal, the related Principal
Payment Amount for such Payment Date;
(vi) to the Holders of such Class of Class A Notes, as a
distribution of principal, the related
Overcollateralization Deficit for such Payment Date;
(vii) to the Insurer, the related Reimbursement Amount, if
any, then due to it 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;
(ix) 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), (vi) and
(vii) above with respect to the other Classes of
Class A Notes pro rata according to the relative
amounts of such deficiencies, after taking into
account the allocation of Available Funds for such
other Classes of Class A Notes on such Payment Date
(the amount of such remaining Available Funds used to
fund such
S-65
<PAGE>
deficiencies with respect to the other Classes on
such Payment Date is the "Crossover Amount" with
respect to such Class);
(x) to the Reserve Fund for application in accordance
with the Indenture, to the extent that the sum of the
Overcollateralization Amounts for all Classes of
Class A Notes as of such Payment Date is less than
the sum of the Specified Overcollateralization
Amounts for all Classes of Class A Notes as of such
Payment Date;
(xi) 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;
(xii) to the Holders of such Class of Class A Notes to pay
Deferred Interest on such Class of Class A Notes and
interest thereon at the related rate;
(xiii) 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, 2000 between GreenPoint Mortgage Funding,
Inc., as Manager and the Trust;
(xiv) to reimburse GreenPoint Bank for amounts drawn and
not previously reimbursed under the Demand Note; and
(xv) to the holder of the Residual Certificate (the
"Residual Certificateholder"), 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 Classes, are insufficient to pay
the amounts specified in clauses (iii), (vi) and (vii) 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. If the funds on deposit in the
Reserve Fund are inadequate to pay such insufficiencies with respect to all
Classes for such Payment Date, funds on deposit therein will be allocated among
the Classes pro rata according to the relative amounts of such deficiencies.
An "Overcollateralization Deficit" with respect to a Class of Class A
Notes and any Payment Date is equal to the amount, if any, by which the
outstanding principal balance of such Class exceeds the Pool Balance for the
related Class of Class A Notes.
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 related 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.
"Excess Interest" is, as to any Payment Date and any Pool, the
difference between (x) the Interest Collections for the related Pool with
respect to such Payment Date, less the related Trustee Fee and the related
premium amount payable to the Insurer minus (y) the related Interest Payment
Amount for the related Class of Class A Notes with respect to such Payment Date.
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 any Class. With respect to each Payment Date, the "Determination
Date" is the fourth
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Business Day next preceding such Payment Date or such earlier day as shall be
agreed to by the Insurer and the Indenture Trustee.
The Class S Certificate. The Class S Certificate is an interest-only
certificate which will receive payments of interest equal to 30% of Excess
Interest with respect to each Pool, but only on each Payment Date after the
Parity Date with respect to the related Class of Class A Notes. The Class S
Certificate will initially be retained by the Sponsor and will only be
transferable by the Sponsor to the same party to whom the Residual Certificate
is transferred simultaneously.
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
Noteholders.
Overcollateralization and Crosscollateralization Feature
On the Closing Date, the aggregate principal balance of the Class A
Notes will be greater than the aggregate Pool Balance of the Mortgage Loans as
of the Cut-Off Date by approximately 2.00%. To protect against this initial
undercollateralization and to provide funds for the other applications described
below, GreenPoint Bank will issue a demand note on the Closing Date in the
amount of 2.00% of the aggregate principal balance of the Mortgage Loans as of
the Cut-Off Date. The amount of the demand note will decrease to 1.50% of the
aggregate principal balance of the Mortgage Loans as of the Cut-Off Date on the
date on which the outstanding principal balance of each Class of Class A Notes
is first equal to or less than the related Pool Balance. After that date, the
amount outstanding under the Demand Note on any Payment Date will equal the
lesser of (i) the amount which was outstanding under the Demand Note on the
immediately preceding Payment Date and (ii) the difference between (x) the sum
of the Specified Overcollateralization Amount for the Class A-1 Notes, the
Specified Overcollateralization Amount for the Class A-2 Notes and the Specified
Overcollateralization Amount for the Class A-3 Notes as of the related Payment
Date and (y) the sum of the Overcollateralization Amount for the Class A-1
Notes, the Overcollateralization Amount for the Class A-2 Notes and the
Overcollateralization Amount for the Class A-3 Notes as of the related Payment
Date. There will be no subsequent increase in the amount outstanding under the
Demand Note. Any payments made by GreenPoint Bank under the Demand Note will be
collected by the Indenture Trustee and deposited into the Collection Account for
distribution to the applicable Noteholders. If payments made under the Demand
Note on any Payment Date are insufficient to pay all amounts owing on each Class
of Class A Notes under the Demand Note on such Payment Date, any such payments
received will be distributed between the Classes of Class A Notes pro rata,
based upon the outstanding principal balance of each such Class on such Payment
Date.
The term of the Demand Note will be from the Closing Date until its
maturity on the earlier of (i) the date on which the aggregate principal balance
of the Class A Notes is paid down to zero or (ii) the date on which the
Specified Overcollateralization Amount for each Class of Class A Notes has been
reached, but in no event shall the maturity date be later than the twenty-fourth
Payment Date. On each Payment Date until the Demand Note matures, with respect
to a Class of Class A Notes, the Indenture Trustee may demand payment from
GreenPoint Bank in the amount of shortfalls in Interest Payment Amounts. These
Demand Note payments to cover shortfalls in Interest Payment Amounts are
unlimited in amount under the Demand Note and will not reduce the amount
outstanding under the Demand Note. On each Payment Date until the Demand Note
matures, the Indenture Trustee may also demand payment from GreenPoint Bank in
the amount of Realized Losses (as defined below) relating to each Pool (unless,
after giving effect to such Realized Losses, the related Specified
Overcollateralization Amount would still be met on such Payment Date). These
Demand Note payments to cover Realized Losses are limited in the aggregate to
the amount outstanding under the Demand Note and, if made, will reduce the
amount outstanding under the Demand Note. If the Specified Overcollateralization
Amount for each Class has not been reached by the twenty-fourth Payment Date,
the Indenture Trustee will demand payment from GreenPoint Bank of up to the
entire amount remaining under the Demand Note on that date to achieve the
Specified Overcollateralization Amount for each Class after making all
distributions on that Payment Date.
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.
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With respect to each Class of Class A Notes, all or a portion of Excess
Cashflow will be applied as Accelerated Principal Payments on the related Class
of Class A Notes on each Payment Date to the extent necessary 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
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 fund certain deficiencies with respect to the other Classes of Class
A Notes or 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 Fund and distributed to the
Residual Certificateholder.
The Insurer may permit the Specified Overcollateralization Amount for
the Class A Notes to decrease or "step down" over time beginning on the July
2003 Payment Date, 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 to the holder of the Residual
Certificate 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 related Pool 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 Residual
Certificateholder from the monthly cashflow with respect to such Class, thus
reducing the Overcollateralization Amount for such Class.
"Realized Losses" for any Pool and any Payment Date will equal the
positive difference between (i) the Principal Balances of all Mortgage Loans in
the related Pool that were liquidated during the related Collection Period and
(ii) the sum (without duplication) of (A) the amounts of principal collected
upon liquidation of such Mortgage Loans and (B) Excess Cashflow with respect to
the related Class and such Payment Date.
Book-Entry Securities
The Class A Notes will be Book-Entry Securities. The Class A Notes will
be issued in one or more notes, and will be held by a nominee of DTC or any
successor depository in the United States or Clearstream or Euroclear in Europe.
See "Description of the Securities--Book-Entry Registration of Securities" in
the Prospectus and Annex III in this Prospectus Supplement.
Unless and until Definitive Securities are issued, it is anticipated
that the only "Noteholder" within the meaning of the Indenture with respect to
the Class A Notes will be Cede & Co., as nominee of DTC. Beneficial owners of
the Class A Notes will not be "Noteholders", as that term is used in the
Indenture. Beneficial owners are only permitted to exercise the rights of Class
A Notes indirectly through Financial Intermediaries and DTC.
DTC has advised the Sponsor and the Indenture Trustee that, unless and
until Definitive Securities 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.
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Definitive Securities 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 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 outstanding 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 the Class A Notes
shall be allocated among the Class A Notes 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 securities. Upon surrender by DTC of
the global note or notes representing the Class A Notes and instructions for
re-registration, the Indenture Trustee will issue the definitive securities, and
thereafter the Indenture Trustee will recognize the Holders of such definitive
securities as Noteholders under the Indenture.
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 Noteholders
On each Determination Date, the Indenture Trustee will make available
to the Noteholders 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;
(vii) the related principal balance, after giving effect to
such distribution;
(viii) the related initial Pool Balance and the related Pool
Balance as of the end of the preceding Collection
Period;
(ix) by Pool and in the aggregate, the number and
aggregate Principal Balance of Mortgage Loans that
were (A) delinquent (exclusive of Mortgage Loans in
bankruptcy or foreclosure or properties acquired by
the Trust by deed in lieu of foreclosure) (1) 30 to
59 days, (2) 60 to 89 days, (3) 90 to 119 days, (4)
120 to 149 days, (5) 150 to 179 days and (6) 180 or
more days, (B) in foreclosure, (C) in bankruptcy and
(D) properties acquired by the Trust by deed in lieu
of foreclosure;
(x) cumulative losses as a percentage of original Pool
Balance and current Pool Balance;
(xi) the six-month rolling average of Mortgage Loans that
are 60 days or more delinquent;
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(xii) the book value of any real estate which is acquired
by the Trust through foreclosure or grant of deed in
lieu of foreclosure;
(xiii) the amount of any draws on (a) the Policy and (b) the
Demand Note;
(xiv) 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;
(xv) the occurrence of an Event of Default under the
Indenture; and
(xvi) whether the related Payment Date will fall during the
Managed Amortization Period or the Rapid Amortization
Period.
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.
The Indenture Trustee will make the reports referred to above (and, at
its option, any additional files containing the same information in an
alternative format) available each month to Noteholders, the Insurer, the
Sponsor and the Servicer via the Indenture Trustee's internet website, which is
presently located at http://www-apps.gis.deutsche-bank.com/invr. Any such
persons that are unable to use this website are entitled to have a paper copy of
such information sent to them via facsimile by calling the Indenture Trustee at
1-800-735-7777. The Indenture Trustee shall have the right to change the manner
in which the reports referred to in this section are distributed in order to
make such distribution more convenient and/or more accessible to the
Noteholders, the Insurer, the Sponsor and the Servicer. The Indenture Trustee
will provide timely and adequate notification to all such parties regarding any
such change to the method of distribution of the reports.
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 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
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proceeds, allocated to principal pursuant to the terms of the Loan Agreements.
"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 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 aggregate of the Principal Balances of all Mortgage Loans in such Pool as of
such date. 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
The Indenture Trustee shall establish and maintain the Collection
Account (as defined herein) for the benefit of the Noteholders, the Insurer and
the Sponsor, as their interests may appear. The Collection Account will be an
Eligible Account (as defined below). Subject to the investment provision
described in the following paragraphs, within one Business Day (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, the Insurer and the Indenture Trustee. Not later than on or before the
third Business Day prior to 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.
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 AA- 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.
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,
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title and interest in the foregoing property relating to Pool I, Pool II and
Pool III as collateral for the Class A Notes. The Indenture Trustee will not
have any obligation to make additional funding under the Loan Agreements.
Concurrently with such pledge, the Indenture Trustee 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 Mortgage Loan as of
its Cut-Off Date, as well as information with respect to the Loan Rate.
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, 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 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, meet certain criteria described in
the Indenture, including that they (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 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 no Mortgage Loan is subject to
the requirements of the Home Ownership and Equity Protection Act of 1994 or is
in violation of any comparable state or municipal law, no proceeds from any
Mortgage Loan were used to purchase single-premium credit insurance policies,
the Servicer for each Mortgage Loan will accurately and fully
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report its borrower credit files to all three credit repositories in a timely
manner, no Mortgage Loan has a prepayment penalty term longer than five years
after its origination, and 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 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 Removals of Mortgage Loans by the Trust
Subject to the conditions specified in the Sale and Servicing
Agreement, on any Payment Date the Trust may, but shall not be obligated to,
designate for removal on such Payment Date (the "Removal Date") from any Pool,
certain Mortgage Loans without notice to the related 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 related Pool as of such Removal
Date (after giving effect to such removal) exceeds the related Specified
Overcollateralization Amount as of such Removal Date; (ii) the Trust shall have
delivered to the Indenture Trustee a Mortgage Loan Schedule containing a list of
all Mortgage Loans remaining in the related Pool after such removal; (iii) the
Trust shall represent and warrant that no selection procedures which the Trust
reasonably believes are adverse to the interests of the related Noteholders or
the Insurer were used by the Trust in selecting such Mortgage Loans; (iv) in
connection with each such removal of Mortgage Loans, the Rating Agencies (as
defined herein) shall have been notified of the proposed removal and prior to
the Removal Date shall have notified the Indenture Trustee and the Insurer, as
applicable, in writing that such removal 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 removal shall not cause a Rapid Amortization
Event to occur; (vi) a Rapid Amortization Event shall not have occurred; (vii)
the Trust 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; and (viii) the Insurer shall have been given the opportunity to
review those Mortgage Loans which the Trust proposes to remove.
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 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 senior to such Mortgage Loan from time
to time. The Servicer shall also maintain on property acquired upon foreclosure,
or by deed in lieu of foreclosure, hazard insurance with extended coverage in an
amount which is at least equal to the lesser of (i) the maximum insurable value
from time to time of the improvements which are a part of such property or (ii)
the combined principal balance owing on such Mortgage Loan and any mortgage loan
senior to such Mortgage Loan at the time of such foreclosure or deed in lieu of
foreclosure plus accrued interest and the good-faith estimate of the Servicer of
related liquidation expenses to be incurred in connection therewith. Amounts
collected by the Servicer under any such policies shall be deposited in the
Collection Account 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
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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
and continue in 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 the
Noteholders, the Residual Certificateholder or the Class S 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 Cut-Off Date for the first Collection Period). All
assumption fees, late payment charges and other fees and charges, to the extent
collected from borrowers, will be retained by the Servicer as additional
servicing compensation.
The Servicer will pay certain ongoing expenses associated with the
Trust and incurred by it in connection with its responsibilities under the Sale
and Servicing Agreement. In addition, the Servicer will be entitled to
reimbursement for certain expenses incurred by it in connection with defaulted
Mortgage Loans and in connection with the restoration of Mortgaged Properties,
such right of reimbursement being prior to the rights of Noteholders to receive
any related Net Liquidation Proceeds.
Evidence as to Compliance
The Sale and Servicing Agreement provides for delivery on or before
March 31 in each year, beginning in March 31, 2001, to the Indenture Trustee,
the Insurer and the Rating Agencies 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.
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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) unless the following
conditions are satisfied: (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 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
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 interests of the Noteholders and the
Insurer thereunder.
Any corporation into which the Servicer may be merged or consolidated,
or any corporation resulting from any merger, conversion or consolidation to
which the Servicer shall be a party, or any corporation succeeding to the
business of the Servicer shall be the successor of the Servicer hereunder,
without the execution or filing of any paper or any further act on the part of
any of the parties 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
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Days after the giving of written notice of such failure to the Servicer by the
Indenture Trustee, or to the Servicer and the Indenture Trustee by the Insurer
or Noteholders evidencing more than 25% of the outstanding 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 Noteholders or the Insurer and continues unremedied for 60 days
after the giving of written notice of such failure to the Servicer by the
Indenture Trustee, or to the Servicer and the Indenture Trustee by the Insurer
or Noteholders evidencing more than 25% of the outstanding 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, which has occurred and is continuing. Under certain other
circumstances, any of the Indenture Trustee, the Insurer or the Holders of Class
A Notes evidencing more than 50% of the outstanding principal balance of the
Class A Notes, in each case with the consent of 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 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 (ii) Noteholders evidencing more than 50% of the
outstanding principal balance of the Class A Notes, in each case with the
consent of 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 Noteholders, (a) to cure any ambiguity,
(b) to correct or supplement any provisions therein which may be inconsistent
with any other provisions of the Sale and Servicing Agreement, (c) 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, neither the Sponsor,
the Indenture Trustee nor the Servicer is obligated to obtain, maintain, or
improve any such rating), (d) 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 (e) to comply with any requirement imposed by the Code;
provided that such action will not, as evidenced by an opinion of counsel,
adversely affect in any material respect the interests of any Noteholder or the
Insurer; provided, that any such amendment will not be deemed to materially and
adversely affect the Noteholders and no such opinion
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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 or withdrawal 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 Noteholders evidencing more than 50% of the
outstanding 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 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 outstanding 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 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 January 2027.
The Class A Notes will be subject to optional redemption on or after
any Payment Date that the outstanding principal balance of the related Class A
Notes is reduced to an amount less than or equal to 10% of the principal balance
of the related Class A Notes as of the Closing Date, before taking into account
payments to be made on the related Class A Notes on such Payment Date. Any such
optional repurchase will cause a redemption of the related Class A Notes
outstanding at that time. Such redemption will only occur if the purchase price
is at least equal to the outstanding principal balance for the related Class A
Notes plus accrued and unpaid interest thereon at the Class A-1 Rate, the Class
A-2 Rate or the Class A-3 Rate, as applicable, 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 exercise its right to redeem
the Class A Notes only if (a) it receives the consent of the Insurer (if the
redemption would result in a draw under the Policy), (b) no reimbursement be due
to the Insurer and (c) the Overcollateralization Amount for the other Pools at
such time is at least equal to the Specified Overcollateralization Amount for
those Pools (unless the Insurer waives such requirement). 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 Noteholders evidencing more than 50% of the outstanding principal balance
of the Class A Notes have made written requests upon the Indenture Trustee to
institute such proceeding in its own name as Trustee thereunder and have offered
to the Indenture Trustee reasonable indemnity and the Indenture Trustee for 60
days has neglected or refused to institute any such proceeding. The Indenture
Trustee will be under no obligation to exercise any of the trusts or powers
vested in it by the Indenture or to make any investigation of matters arising
thereunder or to institute, conduct or defend any litigation thereunder or in
relation thereto at the request, order or direction of any of the Noteholders,
unless such Noteholders have offered to the Indenture Trustee reasonable
security or indemnity against the cost, expenses and liabilities which may be
incurred therein or thereby.
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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 Holders of the Class A Notes will agree by
their purchase of Class A Notes, to treat the Class A Notes as indebtedness 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 Notes
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
indebtedness, 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 indebtedness 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 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
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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 a Class of Class
A Notes for federal income tax purposes is 40% CPR and a constant draw rate of
20% for the first 60 months with respect to the HELOC Mortgage Loans and 30% CPR
with respect to the Closed-End Mortgage Loans. See "Yield, Maturity and
Prepayment Considerations" in this Prospectus Supplement and "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
sections 1276 through 1278 of the Code. If a subsequent purchaser of a Class 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 Class A 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 certificate 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.
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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 Class A
Note. Such adjusted basis generally will equal the cost of the Class A Note to
the seller, increased by any original issue 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 section 1221 of the Code 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.
The IRS has issued withholding regulations (the "Withholding
Regulations"), which make certain modifications to withholding, backup
withholding and information reporting rules. The Withholding Regulations attempt
to unify certification requirements and modify certain reliance standards. The
Withholding Regulations will generally be effective for payments made after
December 31, 2000, although taxpayers may begin compliance with the Withholding
Regulations immediately. Prospective investors are urged to consult their own
tax advisors regarding the Withholding Regulations. See "Federal Income
Consequences--Miscellaneous Tax Aspects--Backup Withholding" in the Prospectus.
S-80
<PAGE>
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.
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 Class 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
S-81
<PAGE>
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 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.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement, dated December 5, 2000 (the "Underwriting Agreement"), among the
Company, the Sponsor and 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.
S-82
<PAGE>
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 financial statements of Financial Guaranty Insurance Company, as of
December 31, 1999 and 1998 and for each of the years in the three-year period
ended December 31, 1999 are incorporated by reference herein and in the
registration statement in reliance upon the report of KPMG LLP, independent
certified public accountants, incorporated by reference in this prospectus
supplement 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
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
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-83
<PAGE>
INDEX OF DEFINED TERMS
PAGE
Accelerated Principal Payment.........................................S-53, S-63
Additional Balances.........................................................S-17
Available Funds.............................................................S-65
BBA.........................................................................S-62
Benefit Plan................................................................S-81
BIF.........................................................................S-71
Book-Entry Securities.......................................................S-68
Business Day................................................................S-60
Class.......................................................................S-60
Class A Notes...............................................................S-16
Class A-1 Notes.............................................................S-16
Class A-1 Rate..............................................................S-61
Class A-2 Notes.............................................................S-16
Class A-2 Rate..............................................................S-61
Class A-3 Notes.............................................................S-16
Class A-3 Rate..............................................................S-61
Class S Certificateholders..................................................S-65
Class S Certificates........................................................S-16
Clearstream.................................................................S-60
Closed End Mortgage Loans...................................................S-17
Closing Date................................................................S-16
Code........................................................................S-78
Collection Account..........................................................S-65
Collection Period...........................................................S-70
Combined Loan-to-Value Ratio................................................S-27
Company.....................................................................S-21
Credit Limit................................................................S-26
Credit Limit Utilization Rate...............................................S-26
Credit Line Agreements......................................................S-25
Credit Scores...................................................S-34, S-42, S-50
Crossover Amount............................................................S-66
Cut-Off Date................................................................S-17
Defective Mortgage Loans....................................................S-73
Deferred Interest.....................................................S-61, S-62
Demand Note.................................................................S-17
Designated Telerate Page....................................................S-62
Determination Date....................................................S-21, S-66
DTC.........................................................................S-60
Eligible Account............................................................S-71
Eligible Substitute Mortgage Loan...........................................S-72
Euroclear...................................................................S-60
Events of Servicing Termination.............................................S-75
Excess Cashflow.............................................................S-52
Excess Interest.............................................................S-66
Final Scheduled Payment Date................................................S-63
foreign person..............................................................S-80
GE Capital..................................................................S-18
GreenPoint Bank.............................................................S-21
GreenPoint Financial........................................................S-21
GreenPoint Mortgage.........................................................S-21
Headlands...................................................................S-21
S-84
<PAGE>
HELOC Mortgage Loans........................................................S-17
Holder......................................................................S-20
Holders.....................................................................S-60
Indenture Trust.............................................................S-16
Indenture Trustee...........................................................S-16
Index Rate..................................................................S-26
Insolvency Event............................................................S-76
Insurance Agreement.........................................................S-20
Insured Payment.............................................................S-20
Insured Payment Date........................................................S-20
Insurer.....................................................................S-17
Insurer Default.............................................................S-65
Interest Accrual Period.....................................................S-62
Interest Collections........................................................S-70
Interest Payment Amount.....................................................S-62
Interest Rate Adjustment Date...............................................S-72
IRS.........................................................................S-78
Late Payment Rate...........................................................S-66
LIBOR.......................................................................S-62
LIBOR Business Day..........................................................S-62
LIBOR Determination Date....................................................S-62
Liquidated Mortgage Loan....................................................S-71
Liquidation Proceeds........................................................S-71
Loan Agreements.............................................................S-25
Loan Rate...................................................................S-26
Managed Amortization Period.................................................S-62
Management Agreement........................................................S-66
Management Fee..............................................................S-66
Margin......................................................................S-26
Maximum Principal Payment...................................................S-63
Maximum Rate................................................................S-61
Moody's.....................................................................S-19
Mortgage Loan Schedule......................................................S-72
Mortgage Loans..............................................................S-17
Mortgage Notes..............................................................S-25
Mortgaged Properties........................................................S-17
Mortgagor...................................................................S-26
Net Liquidation Proceeds....................................................S-71
Net Principal Collections...................................................S-63
Note Rate...................................................................S-62
Noteholders.................................................................S-60
OID.........................................................................S-79
Optional Redemption Date....................................................S-62
Overcollateralization Amount................................................S-52
Overcollateralization Deficit...............................................S-66
Overcollateralization Reduction Amount................................S-63, S-68
Owner Trustee...............................................................S-16
Parity Date.................................................................S-52
Paying Agent................................................................S-67
Payment Date................................................................S-60
Plan Assets Regulation......................................................S-81
Policy......................................................................S-17
Pool........................................................................S-17
Pool Balance................................................................S-71
Pool Factor.................................................................S-60
Pool I......................................................................S-17
S-85
<PAGE>
Pool I Balance..............................................................S-26
Pool I Closed End Balance...................................................S-26
Pool I HELOC Balance........................................................S-26
Pool I Mortgage Loans.......................................................S-17
Pool II.....................................................................S-17
Pool II Balance.............................................................S-35
Pool II Closed End Balance..................................................S-35
Pool II HELOC Balance.......................................................S-35
Pool II Mortgage Loans......................................................S-17
Pool III....................................................................S-17
Pool III Balance............................................................S-43
Pool III Closed End Balance.................................................S-43
Pool III HELOC Balance......................................................S-43
Pool III Mortgage Loans.....................................................S-17
Preference Amount...........................................................S-20
Prepayment Assumptions..........................................S-54, S-56, S-58
Principal Balance...........................................................S-71
Principal Collections.......................................................S-70
Principal Payment Amount....................................................S-63
PTCE........................................................................S-81
Purchase Agreement..........................................................S-17
Rapid Amortization Event....................................................S-63
Rapid Amortization Period...................................................S-63
Rating Agencies.............................................................S-19
Realized Losses.............................................................S-68
Record Date.................................................................S-60
Registrar...................................................................S-60
Reimbursement Amount........................................................S-66
Related Documents...........................................................S-71
Relief Act Shortfalls.......................................................S-20
Removal Date................................................................S-73
Reserve Fund................................................................S-68
Residual Certificate........................................................S-16
Residual Certificateholder..................................................S-66
SAIF........................................................................S-71
Sale and Servicing Agreement................................................S-16
SEC..........................................................................S-3
Second Mortgage Ratio.......................................................S-27
Security Register...........................................................S-60
Servicer..............................................................S-17, S-21
Servicing Fee...............................................................S-74
SMMEA.......................................................................S-82
Specified Overcollateralization Amount......................................S-63
Sponsor...............................................................S-17, S-25
Standard & Poor's...........................................................S-19
Tax Counsel.................................................................S-78
Total Available Funds.......................................................S-20
Trust.......................................................................S-16
Trust Agreement.............................................................S-16
Trust Property..............................................................S-16
Trustee Fee.................................................................S-65
Underwriter.................................................................S-17
Underwriting Agreement......................................................S-82
Underwriting Standards......................................................S-24
United States person........................................................S-80
Withholding Regulations.....................................................S-80
S-86
<PAGE>
ANNEX I:
INSURER'S AUDITED FINANCIAL STATEMENTS
FINANCIAL GUARANTY INSURANCE COMPANY
================================================================================
Audited Financial Statements
December 31, 1999
1. Report of Independent Auditors
2. Balance Sheets
3. Statements of Income
4. Statements of Stockholder's Equity
5. Statements of Cash Flows
6. Notes to Financial Statements
S-87
<PAGE>
KPMG LLP
345 Park Avenue
New York, NY 10154
Independent Auditor's Report
The Board of Directors and Stockholder
Financial Guaranty Insurance Company:
We have audited the accompanying balance sheets of Financial Guaranty Insurance
Company as of December 31, 1999 and 1998, and the related statements of income,
stockholder's equity, and cash flows for each of the years in the three year
period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Financial Guaranty Insurance
Company as of December 31, 1999 and 1998 and the results of its operations and
its cash flows for each of the years in the three year period then ended in
conformity with generally accepted accounting principles.
/s/ KPMG LLP
January 21, 2000
S-88
<PAGE>
Financial Guaranty Insurance Company Balance Sheets
--------------------------------------------------------------------------------
($ in Thousands, except per share amounts)
<TABLE>
<CAPTION>
Assets December 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Fixed maturity securities, at fair value
(amortized cost of $2,484,753 in 1999 and $2,519,490 in 1998) $ 2,412,504 $ 2,663,024
Short-term investments, at cost, which approximates fair value 114,776 30,395
Cash 924 318
Accrued investment income 38,677 40,038
Reinsurance recoverable 8,118 8,115
Prepaid reinsurance premiums 133,874 148,366
Deferred policy acquisition costs 71,730 80,924
Property and equipment, net of accumulated depreciation
($7,803 in 1999 and $6,981 in 1998) 967 1,802
Prepaid expenses and other assets 16,672 11,047
------------ ------------
Total assets $ 2,798,242 $ 2,984,029
============ ============
Liabilities and Stockholder's Equity
Liabilities:
Unearned premiums $ 578,930 $ 610,182
Loss and loss adjustment expenses 45,201 59,849
Ceded reinsurance balances payable 2,310 3,129
Accounts payable and accrued expenses 16,265 46,764
Current federal income taxes payable 62,181 69,542
Deferred federal income taxes 46,346 122,839
Payable for securities purchased 7,894 6
------------ ------------
Total liabilities 759,127 912,311
------------ ------------
Stockholder's Equity:
Common stock, par value $1,500 per share;
10,000 shares authorized, issued and outstanding 15,000 15,000
Additional paid-in capital 383,511 383,511
Accumulated other comprehensive income (46,687) 91,922
Retained earnings 1,687,291 1,581,285
------------ ------------
Total stockholder's equity 2,039,115 2,071,718
------------ ------------
Total liabilities and stockholder's equity $ 2,798,242 $ 2,984,029
============ ============
</TABLE>
See accompanying notes to financial statements.
S-89
<PAGE>
Financial Guaranty Insurance Company Statements of Income
--------------------------------------------------------------------------------
($ in Thousands)
<TABLE>
<CAPTION>
For the Year Ended December 31,
----------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Revenues:
Gross premiums written $112,029 $112,425 $95,995
Ceded premiums (14,988) (19,444) (19,780)
-------- -------- --------
Net premiums written 97,041 92,981 76,215
Decrease in net unearned premiums 16,759 12,529 39,788
-------- -------- --------
Net premiums earned 113,800 105,510 116,003
Net investment income 134,994 133,353 127,773
Net realized gains 32,878 29,360 16,700
-------- -------- --------
Total revenues 281,672 268,223 260,476
-------- -------- --------
Expenses:
Loss and loss adjustment expenses (11,185) 3,178 12,539
Policy acquisition costs 7,198 13,870 12,936
Decrease in deferred policy acquisition costs 9,194 5,362 5,659
Other underwriting expenses 18,467 18,539 14,691
-------- -------- --------
Total expenses 23,674 40,949 45,825
-------- -------- --------
Income before provision for Federal income taxes 257,998 227,274 214,651
-------- -------- --------
Federal income tax expense:
Current 53,849 41,467 39,133
Deferred (1,857) 17 1,715
-------- -------- --------
Total Federal income tax expense 51,992 41,484 40,848
-------- -------- --------
Net income $206,006 $185,790 $173,803
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
S-90
<PAGE>
Financial Guaranty Insurance Company Statements of Cash Flows
--------------------------------------------------------------------------------
($ in Thousands)
<TABLE>
<CAPTION>
For the Year Ended December 31,
---------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Operating Activities:
Net income $206,006 $185,790 $173,803
Adjustments to reconcile net income
to net cash provided by operating activities:
Change in unearned premiums (31,252) (18,371) (53,263)
Change in loss and loss adjustment expense reserves (14,648) (17,077) 4,310
Depreciation of property and equipment 835 1,399 2,013
Change in reinsurance recoverable (3) 105 (1,205)
Change in prepaid reinsurance premiums 14,492 5,842 13,475
Change in foreign currency translation adjustment 2,538 (958) (497)
Policy acquisition costs deferred (7,198) (13,870) (12,936)
Amortization of deferred policy acquisition costs 16,392 19,232 18,595
Change in accrued investment income, and prepaid
expenses and other assets (4,264) 12,847 (2,754)
Change in other liabilities (6,318) 15,606 (36,233)
Deferred income taxes 1,857 17 1,715
Amortization of fixed maturity securities 4,674 4,149 2,698
Change in current income taxes payable (7,361) 50,207 (32,681)
Net realized gains on investments (32,878) (29,360) (16,700)
-------- -------- --------
Net cash provided by operating activities 142,872 215,558 60,340
-------- -------- --------
Investing Activities:
Sales and maturities of fixed maturity securities 881,268 607,372 741,604
Purchases of fixed maturity securities (814,153) (818,999) (848,843)
Purchases, sales and maturities of short-term investments, net (84,381) 45,644 (2,200)
Purchases of property and equipment, net - (59) (459)
-------- -------- --------
Net cash used in investing activities (17,266) (166,042) (109,898)
-------- -------- --------
Financing Activities:
Capital Contributions - - 49,500
Dividends paid (125,000) (50,000) -
-------- -------- --------
Net cash used in financing activities (125,000) (50,000) 49,500
-------- -------- --------
(Decrease) Increase in cash 606 (484) (58)
Cash at beginning of year 318 802 860
-------- -------- --------
Cash at end of year $ 924 $ 318 $ 802
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
S-91
<PAGE>
Financial Guaranty Insurance Company Statements of Stockholder's Equity
--------------------------------------------------------------------------------
($ in Thousands)
<TABLE>
<CAPTION>
Additional
Common Paid-In Accumulated Other Retained
Stock Capital Comprehensive Income Earnings Total
--------- ----------- -------------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1997 $ 15,000 $334,011 $ 38,731 $ 1,296,692 $1,684,434
Net income - - - 173,803 173,803
Other comprehensive income:
Change in fixed maturity securities
available for sale, net of tax of ($13,260) - - 45,527 - 45,527
Change in foreign currency translation adjustment - - (323) - (323)
----------
Total comprehensive income - - - - 219,007
----------
Capital contribution - 49,500 - - 49,500
-------- -------- --------- ------------ ----------
Balance, December 31, 1997 15,000 383,511 83,935 1,470,495 1,952,941
-------- -------- --------- ------------ ----------
Net Income - - - 185,790 185,790
Other comprehensive income:
Change in fixed maturity securities
available for sale, net of tax of ($24,516) - - 8,610 - 8,610
Change in foreign currency translation adjustment - - (623) - (623)
-----------
Total comprehensive income - - - - 193,777
----------
Dividend declared - - - (75,000) (75,000)
-------- -------- --------- ------------ ----------
Balance at December 31, 1998 15,000 383,511 91,922 1,581,285 2,071,718
-------- -------- --------- ------------ ----------
Net Income - - - 206,006 206,006
Other comprehensive income:
Change in fixed maturity securities
available for sale, net of tax benefit of $75,524 - - (140,259) - (140,259)
Change in foreign currency translation adjustment - - 1,650 - 1,650
----------
Total comprehensive income - - - - 67,397
----------
Dividend declared - - - (100,000) (100,000)
-------- -------- --------- ------------ ----------
Balance at December 31, 1999 $ 15,000 $383,511 $ (46,687) $ 1,687,291 $2,039,115
======== ======== ========= ============ ==========
</TABLE>
See accompanying notes to financial statements.
S-92
<PAGE>
Financial Guaranty Insurance Company Notes to Financial Statements
--------------------------------------------------------------------------------
(1) Business
Financial Guaranty Insurance Company (the "Company") is a wholly-owned
insurance subsidiary of FGIC Corporation (the "Parent"). The Parent is
owned approximately ninety-nine percent by General Electric Capital
Corporation ("GE Capital") and approximately one percent by Sumitomo
Marine and Fire Insurance Company, Ltd. The Company provides financial
guaranty insurance on newly issued municipal bonds and municipal bonds
trading in the secondary market, the latter including bonds held by
unit investment trusts and mutual funds. The Company also insures
structured debt issues outside the municipal market. Approximately 86%
of the business written since inception by the Company has been
municipal bond insurance.
The Company insures only those securities that, in its judgment, are of
investment grade quality. Municipal bond insurance written by the
Company insures the full and timely payment of principal and interest
when due on scheduled maturity, sinking fund or other mandatory
redemption and interest payment dates to the holders of municipal
securities. The Company's insurance policies do not provide for
accelerated payment of the principal of, or interest on, the bond
insured in the case of a payment default. If the issuer of a
Company-insured bond defaults on its obligation to pay debt service,
the Company will make scheduled interest and principal payments as due
and is subrogated to the rights of bondholders to the extent of
payments made by it.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that effect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
(2) Significant Accounting Policies
The accompanying financial statements have been prepared on the basis
of generally accepted accounting principles ("GAAP") which differ in
certain respects from the accounting practices prescribed or permitted
by regulatory authorities (see Note 3). Significant accounting policies
are as follows:
Investments
Securities held as available-for-sale are recorded at fair value and
unrealized holding gains/losses are recorded as a separate component of
stockholder's equity, net of applicable income taxes.
Short-term investments are carried at cost, which approximates fair
value. Bond discounts and premiums are amortized over the remaining
terms of the securities. Realized gains or losses on the sale of
investments are determined on the basis of specific identification.
Premium Revenue Recognition
Premiums for policies where premiums are collected in a single payment
at policy inception are earned over the period at risk, based on the
total exposure outstanding at any point in time. Financial guaranty
insurance policies exposure generally declines according to
predetermined schedules. For policies with premiums that are collected
periodically, premiums are reflected in income pro rata over the period
covered by the premium payment.
S-93
<PAGE>
Financial Guaranty Insurance Company Notes to Financial Statements
(Continued)
--------------------------------------------------------------------------------
Policy Acquisition Costs
Policy acquisition costs include only those expenses that relate
directly to premium production. Such costs include compensation of
employees involved in underwriting, marketing and policy issuance
functions, rating agency fees, state premium taxes and certain other
underwriting expenses, offset by ceding commission income on premiums
ceded to reinsurers (see Note 6). Net acquisition costs are deferred
and amortized over the period in which the related premiums are earned.
Anticipated loss and loss adjustment expenses and maintenance costs are
considered in determining the recoverability of acquisition costs.
Loss and Loss Adjustment Expenses
Provision for loss and loss adjustment expenses includes principal and
interest and other payments due under insured risks at the balance
sheet date for which, in management's judgment, the likelihood of
default is probable. Such reserves amounted to $45.2 million and $59.8
million at December 31, 1999 and 1998, respectively. As of December 31,
1999 and 1998, such reserves included $32.7 million and $39.6 million,
respectively, established based on an evaluation of the insured
portfolio in light of current economic conditions and other relevant
factors. As of December 31, 1999 and 1998, discounted case-basis loss
and loss adjustment expense reserves were $12.5 million and $20.2
million, respectively. Loss and loss adjustment expenses include
amounts discounted at an approximate interest rate of 6.6% in 1999 and
5.0% in 1998. The amount of the discount as of December 31, 1999 and
1998 was $8.7 million and $8.9 million, respectively. The discount rate
used is based upon the risk free rate for the average maturity of the
applicable bond sector. The reserve for loss and loss adjustment
expenses is necessarily based upon estimates, however, in management's
opinion the reserves for loss and loss adjustment expenses is adequate.
However, actual results will likely differ from those estimates.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. These temporary differences relate principally to
unrealized gains (losses) on fixed maturity securities
available-for-sale, premium revenue recognition, deferred acquisition
costs and deferred compensation. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Financial guaranty insurance companies are permitted to deduct from
taxable income, subject to certain limitations, amounts added to
statutory contingency reserves (see Note 3). The amounts deducted must
be included in taxable income upon their release from the reserves or
upon earlier release of such amounts from such reserves to cover excess
losses as permitted by insurance regulators. The amounts deducted are
allowed as deductions from taxable income only to the extent that U.S.
government non-interest bearing tax and loss bonds are purchased and
held in an amount equal to the tax benefit attributable to such
deductions.
Property and Equipment
Property and equipment consists of furniture, fixtures, equipment and
leasehold improvements which are recorded at cost and are charged to
income over their estimated service lives. Office furniture and
equipment are depreciated straight-line over five years. Leasehold
improvements are amortized over their estimated service life or over
the life of the lease, whichever is shorter. Computer equipment and
software are depreciated over three years. Maintenance and repairs are
charged to expense as incurred.
S-94
<PAGE>
Financial Guaranty Insurance Company Notes to Financial Statements
(Continued)
--------------------------------------------------------------------------------
Foreign Currency Translation
The Company has established foreign branches in France and the United
Kingdom and determined that the functional currencies of these branches
are local currencies. Accordingly, the assets and liabilities of these
foreign branches are translated into U.S. dollars at the rates of
exchange existing at December 31, 1999 and 1998 and revenues and
expenses are translated at average monthly exchange rates. The
cumulative translation gain/(loss) at December 31, 1999 and 1998 was
$0.3 million and $(1.4) million, respectively, net of tax, and is
reported in the statement of stockholder's equity.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities."
The requirements for SFAS No. 133 were delayed by SFAS No. 137,
"Deferral of the Effective Date of FASB Statement No. 133," and are now
effective for financial statements for periods beginning after June 15,
2000. SFAS No. 133 establishes standards for accounting and reporting
for derivative instruments and for hedging activities. It requires that
an entity recognizes all derivatives as either assets or liabilities in
the balance sheet and measure those instruments at fair value. The
Company is currently evaluating the impact of SFAS No. 133 but does not
expect it to have a material impact on the Company.
(3) Statutory Accounting Practices
The financial statements are prepared on the basis of GAAP, which
differs in certain respects from accounting practices prescribed or
permitted by state insurance regulatory authorities. The NAIC has
approved the codification project effective January 1, 2001. The
Company is currently assessing the impact of the NAIC codification on
its statutory financial statements. The following are the significant
ways in which statutory-basis accounting practices differ from GAAP:
(a) premiums are earned directly in proportion to the
scheduled principal and interest payments rather than
in proportion to the total exposure outstanding at any
point in time.
(b) policy acquisition costs are charged to current
operations as incurred rather than as related premiums
are earned;
(c) a contingency reserve is computed on the basis of
statutory requirements for the security of all
policyholders, regardless of whether loss contingencies
actually exist, whereas under GAAP, a reserve is
established based on an ultimate estimate of exposure;
(d) certain assets designated as non-admitted assets are
charged directly against surplus but are reflected as
assets under GAAP, if recoverable;
(e) federal income taxes are only provided with respect to
taxable income for which income taxes are currently
payable, while under GAAP taxes are also provided for
differences between the financial reporting and the tax
bases of assets and liabilities;
(f) purchases of tax and loss bonds are reflected as
admitted assets, while under GAAP they are recorded as
federal income tax payments; and
(g) all fixed income investments are carried at amortized
cost rather than at fair value for securities
classified as available-for-sale under GAAP.
S-95
<PAGE>
Financial Guaranty Insurance Company Notes to Financial Statements
(Continued)
--------------------------------------------------------------------------------
(4) Investments
Investments in fixed maturity securities carried at fair value of $3.1
million and $3.2 million as of December 31, 1999 and 1998,
respectively, were on deposit with various regulatory authorities as
required by law.
The amortized cost and fair values of short-term investments and of
investments in fixed maturity securities classified as
available-for-sale are as follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
1999 Cost Gains Losses Value
---- ---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 44,592 $ 2 $ 2,163 $ 42,431
Obligations of states and political
subdivisions 2,336,563 12,916 81,062 2,268,417
Debt securities issued by foreign
governments 41,043 604 373 41,274
Other 62,555 112 2,285 60,382
---------- ------- ------- ----------
Investments available-for-sale 2,484,753 13,634 85,883 2,412,504
Short-term investments 114,776 - - 114,776
---------- ------- ------- ----------
Total $2,599,529 $13,634 $85,883 $2,527,280
========== ======= ======= ==========
</TABLE>
The amortized cost and fair values of short-term investments and of
investments in fixed maturity securities available-for-sale at December
31, 1999, by contractual maturity date, are shown below. Expected
maturities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
1999 Amortized Cost Fair Value
---- -------------- ----------
<S> <C> <C>
Due in one year or less $ 138,289 $ 138,268
Due after one year through five years 122,715 123,151
Due after five years through ten years 652,777 646,212
Due after ten years through twenty years 1,459,655 1,411,749
Due after twenty years 226,093 207,900
---------- ----------
Total $2,599,529 $2,527,280
========== ==========
</TABLE>
S-96
<PAGE>
Financial Guaranty Insurance Company Notes to Financial Statements
(Continued)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
1998 Cost Gains Losses Value
---- ---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 75,595 $ 1,294 $ 2 $ 76,887
Obligations of states and political
subdivisions 2,367,682 142,777 4,112 2,506,347
Debt securities issued by foreign
governments 38,520 3,182 - 41,702
Other 37,693 416 21 38,088
---------- -------- ------ ----------
Investments available-for-sale 2,519,490 147,669 4,135 2,663,024
Short-term investments 30,395 - - 30,395
---------- -------- ------ ----------
Total $2,549,885 $147,669 $4,135 $2,693,419
========== ======== ====== ==========
</TABLE>
In 1999, 1998 and 1997, proceeds from sales and maturities of
investments in fixed maturity securities available-for-sale carried at fair
value were $881.3 million, $607.3 million, and $741.6 million, respectively. For
1999, 1998 and 1997 gross gains of $35.1 million, $29.6 million, and $19.1
million respectively, and gross losses of $2.2 million, $0.2 million, and $2.4
million respectively, were realized on such sales.
Net investment income of the Company is derived from the following
sources (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Income from fixed maturity securities $130,402 $129,942 $122,372
Income from short-term investments 5,564 4,421 6,366
-------- -------- --------
Total investment income 135,966 134,363 128,738
Investment expenses 972 1,010 965
-------- -------- --------
Net investment income $134,994 $133,353 $127,773
======== ======== ========
</TABLE>
As of December 31, 1999, the Company did not have more than 3% of its
investment portfolio concentrated in a single issuer or industry.
S-97
<PAGE>
Financial Guaranty Insurance Company Notes to Financial Statements
(Continued)
--------------------------------------------------------------------------------
(5) Income Taxes
The Company files a federal tax return as part of the consolidated
return of General Electric Capital Corporation ("GE Capital"). Under a
tax sharing agreement with GE Capital, taxes are allocated to the
Company and the Parent based upon their respective contributions to
consolidated net income. The Company also has a separate tax sharing
agreement with its Parent. Under this agreement the Company can utilize
its Parent's net operating loss to offset taxable income on a
stand-alone basis. The Company's effective federal corporate tax rate
(20.1 percent in 1999, 18.3 percent in 1998, and 19.0 percent in 1997)
is less than the corporate tax rate on ordinary income of 35 percent in
1998, 1997 and 1996, primarily due to tax exempt interest on municipal
investments.
The following is a reconciliation of federal income taxes computed at
the statutory rate and the provision for federal income taxes (in
thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Income taxes computed on income before provision for federal income taxes, at $90,299 $79,546 $75,128
the statutory rate
Tax effect of:
Tax-exempt interest (34,914) (35,660) (34,508)
Original issue discount - (2,511) -
Other, net (3,393) 109 228
------- ------- -------
Provision for income taxes $51,992 $41,484 $40,848
======= ======= =======
</TABLE>
S-98
<PAGE>
Financial Guaranty Insurance Company Notes to Financial Statements
(Continued)
--------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to significant
portions of the net deferred tax liability or asset at December 31,
1999 and 1998 are presented below (in thousands):
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Deferred tax assets:
Unrealized losses on fixed maturity
securities, available for sale $25,287 -
Loss reserves 9,914 12,364
Deferred compensation 2,274 2,230
Tax over book capital gains 4,754 3,464
Other 3,189 3,579
------- --------
Total gross deferred tax assets 45,418 21,637
------- --------
Deferred tax liabilities:
Unrealized gains on fixed maturity
securities, available-for-sale - 50,237
Deferred acquisition costs 25,106 28,323
Premium revenue recognition 45,350 44,935
Rate differential on tax and loss bonds 9,454 9,454
Tax exempt bond discount 6,593 5,746
Other 5,261 5,781
------- --------
Total gross deferred tax liabilities 91,764 144,476
------- --------
Net deferred tax liability $46,346 $122,839
======= ========
</TABLE>
Based upon the level of historical taxable income, projections of
future taxable income over the periods in which the deferred tax assets
are deductible and the estimated reversal of future taxable temporary
differences, the Company believes it is more likely than not that it
will realize the benefits of these deductible differences and has not
established a valuation allowance at December 31, 1999 and 1998. The
Company anticipates that the related deferred tax asset will be
realized based on future profitable business.
Total federal income tax payments during 1999, 1998 and 1997 were $60.4
million, $(8.7) million, and $71.8 million, respectively.
(6) Reinsurance
The Company reinsures portions of its risk with other insurance
companies through quota share reinsurance treaties and, where
warranted, on a facultative basis. This process serves to limit the
Company's exposure on risks underwritten. In the event that any or all
of the reinsuring companies were unable to meet their obligations, the
Company would be liable for such defaulted amounts. The Company
evaluates the financial condition of its reinsurers and monitors
concentrations of credit risk arising from activities or economic
characteristics of the reinsurers to minimize its exposure to
significant losses from reinsurer insolvencies. The Company holds
collateral under reinsurance agreements in the form of letters of
credit and trust agreements in various amounts with various reinsurers
totaling $59.8 million that can be drawn on in the event of default.
Net premiums earned are presented net of ceded earned premiums of $29.5
million, $25.3 million and $33.3 million for the years ended December
31, 1999, 1998 and 1997, respectively. Loss and loss adjustment
expenses incurred are presented net of ceded losses of $0.2 million,
$0.9 million and $0.2 million for the years ended December 31, 1999,
1998 and 1997, respectively.
S-99
<PAGE>
Financial Guaranty Insurance Company Notes to Financial Statements
(Continued)
--------------------------------------------------------------------------------
In accordance with an amendment to an existing reinsurance agreement,
the Company received additional ceding commission income of $6.2
million from the reinsurer. In addition, the Company bought back $14.4
million of ceded premium from the reinsurer and subsequently ceded the
risk to a different reinsurer.
(7) Loss and Loss Adjustment Expenses
Activity in the reserve for loss and loss adjustment expenses is
summarized as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Balance at January 1, $59,849 $76,926 $72,616
Less reinsurance recoverable (8,115) (8,220) (7,015)
------- ------- -------
Net balance at January 1, 51,734 68,706 65,601
Incurred related to:
Current year 2,407 568 1,047
Prior years (6,592) (1,290) 6,492
Portfolio reserves (7,000) 3,900 5,000
------- ------- -------
Total Incurred (11,185) 3,178 12,539
------- ------- -------
Paid related to:
Current year - - (1,047)
Prior years (3,466) (20,150) (8,387)
------- ------- -------
Total Paid (3,466) (20,150) (9,434)
------- ------- -------
Net balance at December 31, 37,083 51,734 68,706
Plus reinsurance recoverable 8,118 8,115 8,220
------- ------- -------
Balance at December 31, $45,201 $59,849 $76,926
======= ======= =======
</TABLE>
The changes in incurred portfolio and case reserves principally relates
to business written in prior years. The changes are based upon an
evaluation of the insured portfolio in light of current economic
conditions and other relevant factors. Due to improvements on specific
credits, items were removed from the credit watchlist causing a
reduction in the portfolio loss reserves.
(8) Related Party Transactions
The Company has various agreements with subsidiaries of General
Electric Company ("GE") and GE Capital. These business transactions
include appraisal fees and due diligence costs associated with
underwriting structured finance mortgage-backed security business;
payroll and office expenses incurred by the Company's international
branch offices but processed by a GE subsidiary; investment fees
pertaining to the management of the Company's investment portfolio; and
telecommunication service charges. Approximately $2.6 million, $3.2
million and $4.9 million in expenses were incurred in 1999, 1998 and
1997, respectively, related to such transactions
S-100
<PAGE>
Financial Guaranty Insurance Company Notes to Financial Statements
(Continued)
--------------------------------------------------------------------------------
The Company also insured certain non-municipal issues with GE Capital
involvement as sponsor of the insured securitization and/or servicer of
the underlying assets. For some of these issues, GE Capital also
provides first loss protection in the event of default. Gross premiums
written on these issues amounted to $0.4 million in 1999, $0.5 million
in 1998, and $0.5 million in 1997. As of December 31, 1999, par
outstanding on these deals before reinsurance was $83.7 million.
The Company insures bond issues and securities in trusts that were
sponsored by affiliates of GE (approximately 1 percent of gross
premiums written) in 1999, 1998 and 1997.
(9) Compensation Plans
Officers and other key employees of the Company participate in the
Parent's incentive compensation, deferred compensation and profit
sharing plans. Expenses incurred by the Company under compensation
plans and bonuses amounted to $2.6 million, $2.2 million and $5.0
million in 1999, 1998 and 1997, respectively, before deduction for
related tax benefits.
(10) Dividends
Under New York insurance law, the Company may pay a dividend only from
earned surplus subject to the following limitations: (a) statutory
surplus after such dividend may not be less than the minimum required
paid-in capital, which was $66.4 million in 1999 and 1998, and (b)
dividends may not exceed the lesser of 10 percent of its surplus or 100
percent of adjusted net investment income, as defined by New York
insurance law, for the 12 month period ending on the preceding December
31, without the prior approval of the Superintendent of the New York
State Insurance Department. At December 31, 1999 and 1998, the amount
of the Company's surplus available for dividends was approximately
$127.2 million and $124.6 million, respectively, without prior
approval.
During 1999, and 1998, the Company declared dividends of $100.0
million, and $75.0 million, respectively.
(11) Capital Contribution
During 1997, the Parent made a capital contribution of $49.5 million to
the Company.
(12) Financial Instruments
Fair Value of Financial Instruments
The following methods and assumptions were used by the Company in
estimating fair values of financial instruments:
Fixed Maturity Securities: Fair values for fixed maturity securities
are based on quoted market prices, if available. If a quoted market price is not
available, fair values is estimated using quoted market prices for similar
securities. Fair value disclosure for fixed maturity securities is included in
the balance sheets and in Note 4.
Short-Term Investments: Short-term investments are carried at cost,
which approximates fair value.
S-101
<PAGE>
Financial Guaranty Insurance Company Notes to Financial Statements
(Continued)
--------------------------------------------------------------------------------
Cash, Receivable for Securities Sold, and Payable for Securities
Purchased: The carrying amounts of these items approximate their fair
values.
The estimated fair values of the Company's financial instruments at
December 31, 1999 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------------------------------- --------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Financial Assets
Cash
On hand an in demand accounts $ 924 $ 924 $ 318 $ 318
Short-term investments $ 114,776 $ 114,776 $ 30,395 $ 30,395
Fixed maturity securities $ 2,412,504 $ 2,412,504 $ 2,663,504 $ 2,663,504
</TABLE>
Financial Guaranties: The carrying value of the Company's financial
guaranties is represented by the unearned premium reserve, net of
deferred acquisition costs, and loss and loss adjustment expense
reserves. Estimated fair values of these guaranties are based on
amounts currently charged to enter into similar agreements (net of
applicable ceding commissions), discounted cash flows considering
contractual revenues to be received adjusted for expected prepayments,
the present value of future obligations and estimated losses, and
current interest rates. The estimated fair values of such financial
guaranties range between $335.3 million and $364.1 million compared to
a carrying value of $410.4 million as of December 31, 1999 and between
$379.1 million and $419.0 million compared to a carrying value of
$432.6 million as of December 31, 1998.
As of December 31, 1999 and 1998, the net present value of future
premiums was $55.7 million and $49.5 million, respectively.
Concentrations of Credit Risk
The Company considers its role in providing insurance to be credit
enhancement rather than credit substitution. The Company insures only
those securities that, in its judgment, are of investment grade
quality. The Company has established and maintains its own underwriting
standards that are based on those aspects of credit that the Company
deems important for the particular category of obligations considered
for insurance. Credit criteria include economic and social trends, debt
management, financial management and legal and administrative factors,
the adequacy of anticipated cash flows, including the historical and
expected performance of assets pledged for payment of securities under
varying economic scenarios and underlying levels of protection such as
insurance or overcollateralization.
In connection with underwriting new issues, the Company sometimes
requires, as a condition to insuring an issue, that collateral be
pledged or, in some instances, that a third-party guarantee be provided
for a term of the obligation insured by a party of acceptable credit
quality obligated to make payment prior to any payment by the Company.
The types and extent of collateral pledged varies, but may include
residential and commercial mortgages, corporate debt, government debt
and consumer receivables.
S-102
<PAGE>
Financial Guaranty Insurance Company Notes to Financial Statements
(Continued)
--------------------------------------------------------------------------------
As of December 31, 1999, the Company's total insured principal exposure
to credit loss in the event of default by bond issuers was $137.4
billion, net of reinsurance of $36.3 billion. The Company's insured
portfolio as of December 31, 1999 was broadly diversified by geography
and bond market sector with no single debt issuer representing more
than 1% of the Company's principal exposure outstanding, net of
reinsurance.
As of December 31, 1999, the composition of principal exposure by type
of issue, net of reinsurance, was as follows (in millions):
Net Principal
Outstanding
-----------
Municipal:
General obligation $77,780.2
Special revenue 45,531.2
Industrial revenue 471.5
Non-municipal 13,575.3
----------
Total $137,358.2
==========
As of December 31, 1999, the composition of principal exposure ceded to
reinsurers was as follows (in millions):
Ceded Principal
Outstanding
-----------
Reinsurer:
Capital Re $12,267.6
Enhance Re 8,921.9
Other 15,148.5
---------
Total $36,338.0
=========
The Company's gross and net exposure outstanding, which includes
principal and interest, was $305,682.7 million and $237,682.2 million,
respectively, as of December 31, 1999.
S-103
<PAGE>
Financial Guaranty Insurance Company Notes to Financial Statements
(Continued)
--------------------------------------------------------------------------------
The Company is authorized to do business in 50 states, the District of
Columbia, and in the United Kingdom and France. Principal exposure
outstanding at December 31, 1999 by state, net of reinsurance, was as
follows (in millions):
Net Principal
Outstanding
-----------
California $ 15,453.9
New York 13,081.7
Pennsylvania 12,829.8
Florida 12,548.5
Illinois 10,142.0
Texas 6,331.0
Michigan 5,912.3
New Jersey 5,120.4
Ohio 3,838.8
Arizona 3,665.6
Sub-total 88,924.0
Other states 48,015.1
International 419.1
----------
Total $137,358.2
==========
(13) Commitments
Total rent expense was $2.6 million, $2.6 million and $2.4 million in
1999, 1998 and 1997, respectively. For each of the next two years and
in the aggregate as of December 31, 1999, the minimum future rental
payments under noncancellable operating leases having remaining terms
in excess of one year approximate (in thousands):
Year Amount
---- ------
2000 $2,909
2001 2,911
------
Total minimum future rental payments $5,820
======
(14) Comprehensive Income
Comprehensive income requires that an enterprise (a) classify items of
other comprehensive income by their nature in a financial statement and
(b) display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the
equity section of a statement of financial position. Accumulated other
comprehensive income of the Company consists of net unrealized gains on
investment securities and foreign currency translation adjustments.
S-104
<PAGE>
Financial Guaranty Insurance Company Notes to Financial Statements
(Continued)
--------------------------------------------------------------------------------
The following are the reclassification adjustments (in thousands) for the years
ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999
-----------------------------------------------------------
Before Tax Amount Tax Benefit Net of Tax Amount
------------------- ----------------- -------------------
<S> <C> <C> <C>
Unrealized holding losses arising
during the period $(182,905) $64,017 $(118,888)
Less: reclassification adjustment for
gains realized in net income (32,878) 11,507 (21,371)
Unrealized losses on investments $(215,783) $75,524 $(140,259)
</TABLE>
<TABLE>
<CAPTION>
1998
-----------------------------------------------------------
Before Tax Amount Tax Benefit Net of Tax Amount
------------------- ----------------- -------------------
<S> <C> <C> <C>
Unrealized holding losses arising
during the period $42,606 $(14,912) $27,694
Less: reclassification adjustment for
gains realized in net income (29,360) 10,276 (19,084)
Unrealized gains on investments $13,246 $ (4,636) $ 8,610
</TABLE>
<TABLE>
<CAPTION>
1997
-----------------------------------------------------------
Before Tax Amount Tax Benefit Net of Tax Amount
------------------- ----------------- -------------------
<S> <C> <C> <C>
Unrealized holding losses arising
during the period $86,742 $(30,360) $56,382
Less: reclassification adjustment for
gains realized in net income (16,700) 5,845 (10,855)
------- -------- -------
Unrealized gains on investments $70,042 $(24,515) $45,527
======= ========= =======
</TABLE>
S-105
<PAGE>
Financial Guaranty Insurance Company Notes to Financial Statements
(Continued)
--------------------------------------------------------------------------------
The following is a reconciliation of net income and stockholder's equity
presented on a GAAP basis to the corresponding amounts reported on a
statutory-basis for the periods indicated below (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------------------------
1999 1998 1997
------------------------- ------------------------- -------------------------
Stockholder's Stockholder's Stockholder's
Net Income Equity Net Income Equity Net Income Equity
---------- ------------- ---------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
GAAP basis amount $206,006 $2,039,115 $185,790 $2,071,718 $173,803 $1,952,941
Premium revenue recognition 596 (194,559) (13,946) (195,155) (4,924) (181,209)
Deferral of acquisition costs 9,194 (71,730) 5,362 (80,924) 5,659 (86,286)
Contingency reserve - (721,427) - (627,257) - (540,677)
Contingency reserve tax deduction (see Note 2) - 74,059 - 74,059 - 95,185
Non-admitted assets - (806) - (1,502) - (2,593)
Case basis loss reserves (1,294) (1,221) 1,945 73 1,377 (1,872)
Portfolio loss reserves (7,000) 25,900 3,900 32,900 5,000 29,000
Deferral of income taxes (1,857) 71,551 17 72,521 1,715 72,260
Unrealized (gains) on fixed maturity
securities held at fair value, net of tax - 46,962 - (93,297) - (84,687)
Recognition of profit commission (1,092) (7,143) 1,338 (6,050) (1,203) (7,388)
Unauthorized reinsurance - (87) - (39) - -
Allocation of tax benefits due to
Parent's net operating loss to the
Company (see Note 5) (76) 11,093 253 11,169 313 10,916
---------- ------------- ---------- ------------- ---------- -------------
Statutory-basis amount $ 204,477 $ 1,271,707 $ 184,659 $ 1,258,216 $ 181,740 $ 1,255,590
========== ============= ========== ============= ========== =============
</TABLE>
S-106
<PAGE>
ANNEX II:
INSURER'S UNAUDITED INTERIM FINANCIAL STATEMENTS
FINANCIAL GUARANTY INSURANCE COMPANY
================================================================================
Unaudited Interim Financial Statements
September 30, 2000
1. Balance Sheets
2. Statements of Income
3. Statements of Cash Flows
4. Notes to Unaudited Interim Financial Statements
S-107
<PAGE>
Financial Guaranty Insurance Company Balance Sheets
--------------------------------------------------------------------------------
($ in Thousands)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
-------------- --------------
Assets (Unaudited)
<S> <C> <C>
Fixed maturity securities, available for sale, at fair value
(amortized cost of $2,254,334 in 2000 and $2,484,753 in
1999) $2,219,960 $2,412,504
Short-term investments, at cost, which approximates fair value 189,700 114,776
Cash 478 924
Accrued investment income 34,572 38,677
Reinsurance receivable 9,398 8,118
Deferred policy acquisition costs 71,967 71,730
Property, plant and equipment net of accumulated depreciation
of $7,940 in 2000 and $7,803 in 1999 702 967
Prepaid reinsurance premiums 134,395 133,874
Receivable for Securities Sold 124,359 10
Prepaid expenses and other assets 13,361 16,662
------ ------
Total assets $2,799,053 $2,798,242
========== ==========
Liabilities and Stockholder's Equity
Liabilities:
Unearned premiums $ 581,221 $ 578,930
Losses and loss adjustment expenses 47,013 45,201
Ceded reinsurance payable 2,525 2,310
Accounts payable and accrued expenses 11,996 16,265
Current federal income taxes payable 56,562 62,181
Deferred federal income taxes payable 61,705 46,346
Payable for securities purchased 89,866 7,894
------ -----
Total liabilities 850,888 759,127
======= =======
Stockholder's Equity:
Common stock, par value $1,500 per share at September 30,
2000 and at December 31, 1999: 10,000 shares authorized,
issued and outstanding 15,000 15,000
Additional paid-in capital 383,511 383,511
Accumulated other comprehensive loss, net of tax (20,687) (46,687)
Retained earnings 1,570,341 1,687,291
Total stockholder's equity 1,948,165 2,039,115
---------- ----------
Total liabilities and stockholder's equity $2,779,053 $2,798,242
========== ==========
</TABLE>
See accompanying notes to unaudited interim financial statements
S-108
<PAGE>
Financial Guaranty Insurance Company Statements of Income
--------------------------------------------------------------------------------
($ in Thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
2000 1999
-------------- --------------
(Unaudited)
<S> <C> <C>
Revenues:
Gross premiums written $77,729 $ 75,398
Ceded premiums (14,744) (13,086)
-------- --------
Net premiums written 62,985 62,312
(Increase)/Decrease in net unearned premiums (1,770) 29,090
------- ------
Net premiums earned 61,215 91,402
Net investment income 103,273 101,187
Net realized gains 18,780 25,186
------ ------
Total revenues 183,286 217,775
------- -------
Expenses:
Losses and loss adjustment expenses 3,087 (4,386)
Policy acquisition costs 8,320 15,032
Other underwriting expenses 11,635 13,471
------ ------
Total expenses 23,042 24,117
------ ------
Income before provision for federal income taxes 160,226 193,658
Provision for federal income taxes 27,176 38,894
------ ------
Net income $93,096 $154,764
======= ========
</TABLE>
See accompanying notes to unaudited interim financial statements
S-109
<PAGE>
Financial Guaranty Insurance Company Statements of Cash Flows
--------------------------------------------------------------------------------
($ in Thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
2000 1999
-------------- --------------
(Unaudited)
<S> <C> <C>
Operating activities:
Net income $133,050 $154,764
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for deferred income taxes 1,359 533
Amortization of fixed maturity securities 3,731 3,195
Policy acquisition costs deferred (8,557) (10,496)
Amortization of deferred policy acquisition costs 8,320 15,032
Depreciation of property, plant and equipment 265 740
Change in reinsurance receivable (1,280) (1,927)
Change in prepaid reinsurance premiums (521) 10,192
Foreign currency translation adjustment 2,125 1,891
Change in accrued investment income, prepaid expenses and other assets 7,245 (2,474)
Change in unearned premiums 2,291 (39,282)
Change in losses and loss adjustment expense 1,812 (5,845)
Change in ceded reinsurance payable, accounts payable and accrued expenses (4,045) (6,170)
Change in current income taxes payable (5,619) (7,175)
Net realized gains (18,780) (25,186)
-------- --------
Net cash provided by operating activities 121,387 87,792
------- ------
Investing activities:
Sales or maturities of fixed maturity securities 717,451 662,901
Purchases of fixed maturity securities (514,360) (590,689)
Purchases of short-term investments, net (74,924) (84,900)
-------- --------
Net cash used for investing activities 128,167 (12,688)
------- --------
Financing activities:
Dividends paid (250,000) (250,000)
--------- ---------
Net cash used for financing activities (250,000) (250,000)
--------- ---------
(Decrease)/Increase in cash (446) 104
Cash at beginning of period 924 318
--- ---
Cash at end of period $ 478 $ 422
===== =====
</TABLE>
See accompanying notes to unaudited interim financial statements
S-110
<PAGE>
Financial Guaranty Insurance Company Notes to Financial Statements
--------------------------------------------------------------------------------
September 30, 2000 and 1999
(Unaudited)
(1) Basis of Presentation
The interim financial statements of Financial Guaranty Insurance
Company (the Company) in this report reflect all adjustments necessary,
in the opinion of management, for a fair statement of (a) results of
operations for the nine months ended September 30, 2000 and 1999, (b)
the financial position at September 30, 2000 and December 31, 1999, and
(c) cash flows for the nine months ended September 30, 2000 and 1999.
These interim financial statements should be read in conjunction with
the financial statements and related notes included in the 1999 audited
financial statements.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
(2) Statutory Accounting Practices
The financial statements are prepared on the basis of GAAP, which
differs in certain respects from accounting practices prescribed or
permitted by state insurance regulatory authorities. The following are
the significant ways in which statutory basis accounting practices
differ from GAAP:
(a) premiums are earned directly in proportion to the scheduled
principal and interest payments rather than in proportion to
the total exposure outstanding at any point in time;
(b) policy acquisition costs are charged to current operations as
incurred rather than as related premiums are earned;
(c) a contingency reserve is computed on the basis of statutory
requirements for the security of all policyholders, regardless
of whether loss contingencies actually exist, whereas under
GAAP, a reserve is established based on an ultimate estimate
of exposure;
(d) certain assets designated as "non-admitted assets" are charged
directly against surplus but are reflected as assets under
GAAP, if recoverable;
(e) federal income taxes are only provided with respect to taxable
income for which income taxes are currently payable, while
under GAAP taxes are also provided for differences between the
financial reporting and tax bases of assets and liabilities;
(f) purchases of tax and loss bonds are reflected as admitted
assets, while under GAAP they are recorded as federal income
tax payments; and
(g) all fixed income investments are carried at amortized cost,
rather than at fair value for securities classified as
available for sale under GAAP.
S-111
<PAGE>
Financial Guaranty Insurance Company Notes to Financial Statements
(Continued)
--------------------------------------------------------------------------------
The following is a reconciliation of the net income and stockholder's equity of
Financial Guaranty prepared on a GAAP basis to the corresponding amounts
reported on a statutory basis for the periods indicated below:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------------------------------------------------------
2000 1999
-------------------------------------- --------------------------------------
Stockholder's Stockholder's
Net Income Equity Net Income Equity
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
GAAP basis amount $ 133,050 $ 1,948,165 $ 154,764 $ 2,038,827
Premium revenue recognition (9,908) (204,467) (4,836) (199,991)
Deferral of acquisition costs (237) (71,967) 4,536 (76,388)
Contingency reserve - (747,059) - (665,383)
Contingency reserve tax deduction - 74,059 - 74,059
Non-admitted assets - (636) - (632)
Case-basis losses incurred 440 (781) (1,091) (1,018)
Portfolio loss reserves 2,800 28,700 1,000 33,900
Deferral of income tax 1,359 73,654 533 73,479
Unrealized losses on fixed maturity securities
held at fair value, net of taxes - 22,343 -20,585
Profit commission 27 (7,116) (457) (6,508)
Provision for unauthorized reinsurers - (87) - (88)
Allocation of tax benefits due to Parent's
net operating loss to the Company 219 11,312 235 11,404
---------- ------------- ---------- ------------
Statutory basis amount $ 127,750 $ 1,126,120 $ 154,684 $ 1,302,246
========== ============= ========== ============
</TABLE>
S-112
<PAGE>
Financial Guaranty Insurance Company Notes to Financial Statements
(Continued)
--------------------------------------------------------------------------------
(3) Dividends
Under New York Insurance Law, the Company may pay a dividend only from
earned surplus subject to the following limitations:
o Statutory surplus after dividends may not be less than the
minimum required paid-in capital, which was $66.4 million in
2000.
o Dividends may not exceed the lesser of 10 percent of its
surplus or 100 percent of adjusted net investment income, as
defined therein, for the twelve month period ending on the
preceding December 31, without the prior approval of the
Superintendent of the State of New York Insurance Department.
The amount of the Company's surplus available for dividends during 2000
is approximately $112.6 million.
The Company declared dividends of $50 million and $75 million during
the first nine months of 2000 and 1999 respectively. In addition, an
extraordinary dividend of $200 million (approved by New York State
Insurance Department) was paid during the first nine months of 2000.
(4) Income Taxes
The Company's effective Federal corporate tax rate (17.0 percent and
20.1 percent for the nine months ended September 30, 2000 and 1999,
respectively) is less than the statutory corporate tax rate (35 percent
in 2000 and 1999) on ordinary income due to permanent differences
between financial and taxable income, principally tax-exempt interest.
(5) Reinsurance
Net premiums earned are shown net of premiums ceded of $14.2 million
and $23.8 million, respectively, for the nine months ended September
30, 2000 and 1999.
S-113
<PAGE>
Financial Guaranty Insurance Company Notes to Financial Statements
(Continued)
--------------------------------------------------------------------------------
(6) Comprehensive Income
Comprehensive income encompasses all changes in stockholders' equity
(except those arising from transactions with stockholders) and includes
net income, net unrealized capital gains or losses on
available-for-sale securities (net of taxes) and foreign currency
translation adjustments, net of taxes. The following is a
reconciliation of comprehensive income:
<TABLE>
<CAPTION>
September 30, 2000 and 1999
(Unaudited)
For the Nine Months Ended September 30,
2000 1999
<S> <C> <C>
Net income $133,050 $154,764
Other comprehensive income:
Change in unrealized investment gains/, (losses)
net of taxes of $13,256 in 2000 and ($61,321) in 1999 24,619 (113,882)
Change in foreign exchange gains, net of taxes of
$743 in 2000 and $622 in 1999 1,381 1,229
----- -----
Comprehensive income $159,050 $ 42,111
======== ========
</TABLE>
(7) Current Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") has issued, then
subsequently amended Statement of Financial Accounting Standards
("SFAS") No. 133, Accounting for Derivative Instruments and Hedging
activities, effective for Financial Guaranty Insurance Company on
January 1, 2001. Upon adoption, all derivative instruments (including
certain derivative instruments embedded in other contracts) will be
recognized in the balance sheet at their fair values; changes in such
fair values must be recognized immediately in earnings unless specific
hedging criteria are met. Management estimates that at September 30,
2000, the effects on its financial statements of adopting SFAS 133, as
amended, will be immaterial. However, the transition effect as of
January 1, 2001, cannot be estimated at this time because it is subject
to the following unknown variables as of that date: (1) actual
derivatives and related hedged positions, (2) market values of
derivatives and hedged positions, and (3) further interpretation of
SFAS 133 by the FASB.
S-114
<PAGE>
ANNEX III:
CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in limited circumstances, the Class A Notes will be available
only in book-entry form. Investors in the securities may hold the securities
through any of DTC, Clearstream or Euroclear. The Class A Notes will be tradable
as home market instruments in both the European and U.S. domestic markets.
Initial settlement and all secondary trades will settle in same-day funds.
Secondary market trading between investors through Clearstream and
Euroclear will be conducted in the ordinary way in accordance with the normal
rules and operating procedures of Clearstream and Euroclear and in accordance
with conventional eurobond practice, which is seven calendar day settlement.
Secondary market trading between investors through DTC will be
conducted according to DTC's rules and procedures applicable to U.S. corporate
debt obligations.
Secondary cross-market trading between Clearstream or Euroclear and DTC
participants holding securities will be effected on a delivery-against-payment
basis through the respective Depositaries of Clearstream and Euroclear and as
DTC participants.
Non-U.S. holders of global securities will be subject to U.S.
withholding taxes unless the holders meet a number of requirements and deliver
appropriate U.S. tax documents to the securities clearing organizations or their
participants.
Initial Settlement
All Class A Notes will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the securities will be
represented through financial institutions acting on their behalf as direct and
indirect participants in DTC. As a result, Clearstream and Euroclear will hold
positions on behalf of their participants through their relevant depository
which in turn will hold these positions in their accounts as DTC participants.
Investors electing to hold their securities through DTC will follow DTC
settlement practices. Investor securities custody accounts will be credited with
their holdings against payment in same-day funds on the settlement date.
Investors electing to hold their securities through Clearstream or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary security and no
lock-up or restricted period. Securities will be credited to the securities
custody accounts on the settlement date against payment in same-day funds.
Secondary Market Trading
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants
Secondary market trading between DTC participants will be settled using
the procedures applicable to asset-back securities issues in same-day funds.
Trading between Clearstream or Euroclear Participants
Secondary market trading between Clearstream participants or Euroclear
participants will be settled using the procedures applicable to conventional
eurobonds in same-day funds.
Trading between DTC, Seller and Clearstream or Euroclear Participants
When Class A Notes are to be transferred from the account of a DTC
participant to the account of a Clearstream participant or a Euroclear
participant, the purchaser will send instructions to Clearstream or Euroclear
through a Clearstream participant or Euroclear participant at least one business
day prior to settlement. Clearstream or Euroclear will instruct the relevant
depository, as the case may be, to receive the securities against payment.
Payment will include interest accrued on the Class A Notes from and including
the last coupon distribution date to and excluding the settlement date, on the
basis of the actual number of days in the accrual period and a year assumed to
consist of 360 days. For transactions settling on the 31st of the month, payment
will include interest accrued to and excluding the first day of the following
month. Payment will then be made by the relevant depository to the DTC
participant's account against delivery of the Class A Notes. After settlement
has been completed, the Class A Notes will be credited to the respective
clearing system and by the clearing system, in accordance with its usual
procedures, to the Clearstream participant's or Euroclear participant's account.
The securities credit will appear the next day, European time and the cash debt
will be back-valued to, and the interest on the global securities will accrue
from, the value date, which would be the
S-115
<PAGE>
preceding day when settlement occurred in New York. If settlement is not
completed on the intended value date and the trade fails, the Clearstream or
Euroclear cash debt will be valued instead as of the actual settlement date.
Clearstream participants and Euroclear participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Clearstream or Euroclear. Under
this approach, they may take on credit exposure to Clearstream or Euroclear
until the securities are credited to their account one day later.
As an alternative, if Clearstream or Euroclear has extended a line of
credit to them, Clearstream participants or Euroclear participants can elect not
to preposition funds and allow that credit line to be drawn upon to finance
settlement. Under this procedure, Clearstream participants or Euroclear
participants purchasing Class A Notes would incur overdraft charges for one day,
assuming they cleared the overdraft when the securities were credited to their
accounts. However, interest on the Class A Notes would accrue from the value
date. Therefore, in many cases the investment income on the global securities
earned during that one-day period may substantially reduce or offset the amount
of the overdraft charges, although the result will depend on each Clearstream
participant's or Euroclear participant's particular cost of funds.
Since the settlement is taking place during New York business hours,
DTC participants can employ their usual procedures for crediting global
securities to the respective European depository for the benefit of Clearstream
participants or Euroclear participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC participants a
cross-market transaction will settle no differently than a trade between two DTC
participants.
Trading between Clearstream or Euroclear Seller and DTC Purchaser
Due to time zone differences in their favor, Clearstream participants
and Euroclear participants may employ their customary procedures for
transactions in which securities are to be transferred by the respective
clearing system, through the respective depository, to a DTC participant. The
seller will send instructions to Clearstream or Euroclear through a Clearstream
participant or Euroclear participant at least one business day prior to
settlement. In these cases Clearstream or Euroclear will instruct the respective
depository, as appropriate, to credit the Class A Notes to the DTC participant's
account against payment. Payment will include interest accrued on the securities
from and including the last interest payment to and excluding the settlement
date on the basis of the actual number of days in the accrual period and a year
assumed to consist of 360 days. For transactions settling on the 31st of the
month, payment will include interest accrued to and excluding the first day of
the following month. The payment will then be reflected in the account of
Clearstream participant or Euroclear participant the following day, and receipt
of the cash proceeds in the Clearstream participant's or Euroclear participant's
account would be back-valued to the value date, which would be the preceding
day, when settlement occurred in New York. In the event that the Clearstream
participant or Euroclear participant has a line of credit with its respective
clearing system and elects to be in debt in anticipation of receipt of the sale
proceeds in its account, the back-valuation will extinguish any overdraft
incurred over that one-day period. If settlement is not completed on the
intended value date and the trade fails, receipt of the cash proceeds in the
Clearstream participant's or Euroclear participant's account would instead be
valued as of the actual settlement date.
Finally, day traders that use Clearstream or Euroclear and that
purchase global securities from DTC participants for delivery to Clearstream
participants or Euroclear participants may wish to note that these trades would
automatically fail on the sale side unless affirmative action is taken. At least
three techniques should be readily available to eliminate this potential
problem:
o borrowing through Clearstream or Euroclear for one day, until
the purchase side of the trade is reflected in their
Clearstream or Euroclear accounts in accordance with the
clearing system's customary procedures;
o borrowing the Class A Notes in the U.S. from a DTC participant
no later than one day prior to settlement, which would give
the Class A Notes sufficient time to be reflected in their
Clearstream or Euroclear account in order to settle the sale
side of the trade; or
o staggering the value dates for the buy and sell sides of the
trade so that the value date for the purchase from the DTC
participant is at least one day prior to the value date for
the sale to the Clearstream participant or Euroclear
participant.
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner of Class A Notes holding securities through
Clearstream or Euroclear, or through DTC if the holder has an address outside
the U.S., will be subject to the 30% U.S. withholding tax that generally applies
to payments of interest, including original issue discount, on registered debt
issued by U.S. persons, unless:
S-116
<PAGE>
(1) each clearing system, bank or other financial institution
that holds customers' securities in the ordinary course of its trade or
business in the chain of intermediaries between the beneficial owner
and the U.S. entity required to withhold tax complies with applicable
certification requirements and
(2) the beneficial owner takes one of the steps described
below to obtain an exemption or reduced tax rate.
The IRS recently issued withholding regulations, which make certain
modifications to withholding, backup withholding and information reporting
rules. The withholding regulations attempt to unify certification requirements
and modify certain reliance standards. The withholding regulations will
generally be effective for payments made after December 31, 2000, although
taxpayers may begin compliance with the withholding regulations immediately.
This summary does not deal with all aspects of U.S. federal income tax
withholding that may be relevant to foreign holders of the securities as well as
the application of the withholding regulations. Prospective investors are urged
to consult their own tax advisors for specific advice regarding their holding
and disposing of the Class A Notes.
Exemption for Non-U.S. Persons
Under the existing rules, beneficial owners of global securities that
are non-U.S. persons, as defined below, can obtain a complete exemption from the
withholding tax by filing a signed Form W-8, Certificate of Foreign Status.
Under the withholding regulations, a non-U.S. person may claim beneficial owner
status by filing Form W-8BEN, Certificate of Foreign Status of Beneficial Owner
for United States Tax Withholding. The old Form W-8 is valid until the earlier
of (i) three years beginning on the date that the form is signed, or (ii)
December 31, 2000. The new Form W-8BEN is valid for a period of three years
beginning on the date that the form is signed. If the information shown on Form
W-8 or Form W-8BEN changes, a new Form W-8 or Form W-8BEN must be filed within
30 days of the change.
Exemption for Non-U.S. Persons with effectively connected income
Under the existing rules, a non-U.S. person, as defined below,
including a non-U.S. corporation or bank with a U.S. branch, for which the
interest income is effectively connected with its conduct of a trade or business
in the United States, can obtain an exemption from the withholding tax by filing
Form 4224, Exemption from Withholding of Tax on Income Effectively Connected
with the Conduct of a Trade or Business in the United States. Under the
withholding regulations, a non-U.S. person may claim an exemption from U.S.
withholding on income effectively connected with the conduct of a trade or
business in the United States by filing Form W-8ECI, Certificate of Foreign
Person's Claim for Exemption From Withholding on Income Effectively Connected
With the Conduct of a Trade or Business in the United States. The old Form 4224
is valid until the earlier of (i) one year beginning on the date that the form
is signed, or (ii) December 31, 2000. The new Form W-8ECI is valid for a period
of three years beginning on the date that the form is signed.
Exemption or reduced rate for non-U.S. Persons resident in treaty countries
Under the existing rules, non-U.S. persons residing in a country that
has a tax treaty with the United States can obtain an exemption or reduced tax
rate, depending on the treaty terms, by filing Form 1001, Ownership, Exemption
or Reduced Rate Certificate. If the treaty provides only for a reduced rate,
withholding tax will be imposed at that rate unless the filer alternatively
files Form W-8. Under the withholding regulations, a non-U.S. person may claim
treaty benefits by filing Form W-8BEN, Certificate of Foreign Status of
Beneficial Owner for United States Tax Withholding. The old Form 1001 is valid
until the earlier of (i) three years beginning on the date that the form is
signed, or (ii) December 31, 2000. The new Form W-8BEN is valid for a period of
three years beginning on the date that the form is signed.
Exemption for U.S. Persons-Form W-9
U.S. persons can obtain a complete exemption from the withholding tax
by filing Form W-9, Payer's Request for Taxpayer Identification Number and
Certification.
U.S. Federal Income Tax Reporting Procedure
Under the existing rules, the beneficial owner of a global security or
his agent files by submitting the appropriate form to the person through whom it
holds, the clearing agency, in the case of persons holding directly on the books
of the clearing agency. The withholding regulations revise the procedures that
withholding agents and payees must follow to comply with, or to establish an
exemption from, withholding for payments made after December 31, 2000. Each
foreign holder of Class A Notes should consult its own tax advisor regarding
compliance with these procedures under the withholding regulations.
A U.S. person is:
(1) a citizen or resident of the United States;
S-117
<PAGE>
(2) a corporation, partnership or other entity organized in or
under the laws of the United States or any political subdivision
thereof;
(3) an estate that is subject to U.S. federal income tax
regardless of the source of its income; or
(4) a trust if a court within the United States can exercise
primary supervision over its administration and at least one United
States fiduciary has the authority to control all substantial decisions
of the trust.
A non-U.S. person is any person who is not a U.S. person.
S-118
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PROSPECTUS
GREENPOINT 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.
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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
certificates 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.
February 15, 2000
<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...................................37
The Agreements........................................................40
Certain Legal Aspects of the Loans....................................57
Federal Income Tax Consequences.......................................68
State Tax Considerations..............................................94
ERISA Considerations..................................................94
Legal Investment......................................................99
Method of Distribution...............................................100
Legal Matters........................................................101
Financial Information................................................101
Available Information................................................101
Incorporation of Certain Documents by Reference......................102
Rating...............................................................102
Index of Defined Terms...............................................104
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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.
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Risk Factors
Investors should consider the following factors in connection with the
purchase of securities. You should also consider the risk factors described in
your prospectus supplement.
Ability to Resell Securities May Be Limited
No market for any of the securities will exist before they are issued.
We cannot assure you that a secondary market will develop, or if it does
develop, that it will continue. Consequently, you may not be able to sell your
securities readily or at prices that will enable you to realize your desired
yield. The market values of the securities are likely to fluctuate; these
fluctuations may be significant and could result in significant losses to you.
The secondary market for asset backed securities have experienced
periods of illiquidity and can be expected to do so in the future. Illiquidity
can have a severely adverse effect on the prices of securities that are
especially sensitive to prepayment, credit, or interest rate risk, or that have
been structured to meet the investment requirements of limited categories of
investors.
Limited Source of Payments - No Recourse to Sponsor, Seller, Master Servicer
or Trustee
The assets of the trust are the sole source of distributions for the
securities. The securities do not represent an interest in or obligation of the
sponsor, the seller, the master servicer, the trustee or any of their
affiliates, except for the limited obligations of the seller with respect to
certain breaches of its representations and warranties and of the master
servicer with respect to its servicing obligations. Neither the securities nor
the trust assets will be guaranteed by or insured by any governmental agency or
instrumentality, the sponsor, the seller, the master servicer, the trustee or
any of their affiliates, unless so specified in the supplement. Consequently, if
payments on the trust assets are insufficient to make all payments required on
the certificates you may incur a loss on your investment.
Credit Enhancement May Not Be Sufficient to Protect You From Losses
Credit enhancement is intended to reduce the effect of delinquent
payments or loan losses on those classes of securities that have the benefit of
the credit enhancement. However, the amount of any credit enhancement may
decline or be depleted before the securities are paid in full. As a result,
securityholders may suffer losses. In addition, credit enhancement may not cover
all potential sources of loss, such as a loss resulting from fraud or negligence
by a loan originator or other party.
We refer you to "Credit Enhancement" in this prospectus for more
detail.
Prepayments Are Unpredictable and Affect Yield
The rate of principal distributions and yield to maturity on the
securities will be directly related to the rate of principal payments on the
trust assets. For example, the rate of principal payments on the loans will be
affected by the following:
o the amortization schedules of the loans;
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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.
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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 craftsmanship 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 cleanup costs to the lender if the lender was
involved in the operations of the borrower, even if the
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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 Notes" 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 certificates of each series will represent interests in the assets
of the trust and the notes of each series will be secured by the pledge of the
trust assets. The trust for each series will be held by the trustee for the
benefit of the related securityholders. The securities will be entitled to
payment from the assets of the trust or other assets pledged for the benefit of
the securityholders, as specified in the prospectus supplement and will not be
entitled to payments in respect of the assets of any other trust established by
the sponsor.
The trust assets will be acquired by the sponsor, either directly or
through affiliates, from originators or sellers which may be affiliates of the
sponsor, and conveyed without recourse by the sponsor to the trust. Loans
acquired by the sponsor will have been originated in accordance with the
underwriting criteria described under "Loan Program--Underwriting Standards" or
as otherwise described in the prospectus supplement. See "Loan
Program--Underwriting Standards."
The sponsor will cause the trust assets to be assigned to the trustee
named in the prospectus supplement for the benefit of the holders of the
securities. For a fee, the master servicer named in the prospectus supplement
will service the trust assets, either directly or through other servicing
institutions, or subservicers, pursuant to a pooling and servicing agreement
among the sponsor, the master servicer and the trustee in the case of a series
consisting of
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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, or, in either case such agreements
containing comparable provisions as set forth in the prospectus supplement, 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--Sub
servicing by Sellers" and "Assignment of the Trust Assets") and its obligation,
if any, to make certain cash advances in the event of delinquencies in payments
on or with respect to the loans in the amounts described herein under
"Description of the Securities--Advances." The obligations of the master
servicer to make advances may be subject to limitations, to the extent provided
herein and in the prospectus supplement.
The following is a brief description of the assets expected to be
included in the trust. If specific information respecting the trust assets is
not known at the time the securities are offered, more general information of
the nature described below will be provided in the prospectus supplement, and
specific information will be set forth in a report on Form 8-K to be filed with
the SEC within fifteen days after the initial issuance of the securities. A copy
of the Agreements with respect to each series of securities will be available
for inspection at the corporate trust office of the trustee. A schedule of the
loans relating to each series will be attached to the Agreement delivered to the
trustee.
The Loans
General. The loans included in a trust will be mortgage loans, home
equity loans or home improvement contracts. The loans may be either closed-end
loans or revolving credit line loans. The loans may be conventional loans or
loans that are insured or guaranteed by a governmental agency, such as the FHA
or VA.
The loans will have monthly payments due on the first day of each month
or on such other day of the month specified in the prospectus supplement. The
payment terms of the loans to be
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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.
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The real property that secures repayment of the loans is referred to
herein as the mortgaged properties. Home improvement contracts may, and the
other loans will, be secured by mortgages or deeds of trust or other similar
security instruments creating a lien on a mortgaged property. In the case of
home equity loans, such liens generally will be subordinated to one or more
senior liens on the related mortgaged properties as described in the prospectus
supplement. As specified in the prospectus supplement, home improvement
contracts may be unsecured or secured by purchase money security interests in
the home improvements financed thereby. The mortgaged properties and the home
improvements are collectively referred to herein as the properties. The
properties relating to loans will consist of detached or semi-detached one- to
four-family dwelling units, townhouses, rowhouses, individual condominium units,
manufactured homes, individual units in planned unit developments, and certain
other dwelling units. Such properties may include vacation and second homes,
investment properties and dwellings situated on leasehold estates. The loans may
include cooperative apartment loans secured by security interests in shares
issued by private, nonprofit, cooperative housing corporations and in the
related proprietary lease or occupancy agreements granting exclusive rights to
occupy specific dwelling units in the cooperatives' building. In the case of
leasehold interests, the term of the leasehold will exceed the scheduled
maturity of the loan by at least five years, unless otherwise specified in the
prospectus supplement. The properties may be located in any one of the fifty
states, the District of Columbia, Guam, Puerto Rico or any other territory of
the United States.
Loans with certain loan-to-value ratios and/or certain principal
balances may be covered wholly or partially by primary mortgage guaranty
insurance policies. The existence, extent and duration of any such coverage will
be described in the prospectus supplement.
The aggregate principal balance of loans secured by properties that are
owner-occupied may be disclosed in the prospectus supplement. The basis for a
representation that a given percentage of the loans is secured by single family
properties that are owner-occupied will be either (i) the making of a
representation by the borrower at origination of the loan either that the
underlying property will be used by the borrower for a period of at least six
months every year or that the borrower intends to use the property as a primary
residence or (ii) a finding that the address of the underlying property is the
borrower's mailing address.
Home Equity Loans.
As more fully described in the prospectus supplement, interest on each
revolving credit line loan, excluding introduction rates offered from time to
time during promotional periods, is computed and payable monthly on the average
daily outstanding principal balance of such loan. Principal amounts on a
revolving credit line loan may be drawn down (up to a maximum amount as set
forth in the prospectus supplement) or repaid under each revolving credit line
loan from time to time, but may be subject to a minimum periodic payment. As
specified in the prospectus supplement, the trust may include any amounts
borrowed under a revolving credit line loan after the Cut-off Date.
The full amount of a closed-end loan is advanced at the origination of
the loan and generally is repayable in equal (or substantially equal)
installments of an amount to fully amortize such loan at its stated maturity or
is a balloon loan. As more fully described in the prospectus supplement,
interest on each closed-end loan is calculated on the basis of the outstanding
principal
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balance of such loan multiplied by the related loan rate thereon and further
multiplied by either a fraction, the numerator of which is the number of days in
the period elapsed since the preceding payment of interest was made and the
denominator of which is the number of days in the annual period for which
interest accrues on such loan, or a fraction which is 30 over 360. Except to the
extent provided in the prospectus supplement, the original terms to stated
maturity of closed-end loans generally will not exceed 360 months.
Under certain circumstances, under either a revolving credit line loan
or a closed-end loan, a borrower may choose an interest only payment option and
is obligated to pay only the amount of interest which accrues on the loan during
the billing cycle. An interest only payment option may be available for a
specified period before the borrower must begin paying at least the minimum
monthly payment of a specified percentage of the average outstanding balance of
the loan.
Home Improvement Contracts.
The trust assets for a series of securities may consist, in whole or in
part, of home improvement contracts originated by a home improvement contractor,
a thrift or a commercial mortgage banker in the ordinary course of business. The
home improvements securing the home improvement contracts may include, but are
not limited to, replacement windows, house siding, new roofs, swimming pools,
satellite dishes, kitchen and bathroom remodeling goods and solar heating
panels. As specified in the prospectus supplement, the home improvement
contracts will either be unsecured or secured by mortgages which are generally
subordinate to other mortgages on the same property, or secured by purchase
money security interests in the home improvements financed thereby. Except as
otherwise specified in the prospectus supplement, the home improvement contracts
will be fully amortizing and may have fixed interest rates or adjustable
interest rates and may provide for other payment characteristics as described in
the prospectus supplement. The initial loan-to-value ratio of a home improvement
contract is computed in the manner described in the prospectus supplement.
Additional Information.
Each prospectus supplement will contain information, as of the date of
such prospectus supplement and to the extent then specifically known to the
sponsor, with respect to the loans contained in the pool, including:
o the aggregate outstanding principal balance and the average
outstanding principal balance of the loans as of the applicable
Cut-off Date;
o the type of property securing the loan (e.g., single family
residences, individual units in condominium apartment buildings,
two- to four-family dwelling units, other real property or home
improvements);
o the original terms to maturity of the loans;
o the largest principal balance;
o the smallest principal balance of any of the loans;
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o the earliest origination date and latest maturity date of any of
the loans;
o the loan-to-value ratios or combined loan-to-value ratios, as
applicable, of the loans;
o the loan rates or annual percentage rates or range of loan rates
or annual percentage rates borne by the loans;
o the maximum and minimum per annum loan rates; and
o the geographical location of the loans.
If specific information regarding the loans is not known to the sponsor
at the time the related securities are initially offered, more general
information of the nature described above will be provided in the prospectus
supplement, and specific information will be set forth in a report filed on Form
8-K to be filed with the SEC within 15 days of initial issuance of the
securities.
Generally, the loan-to-value ratio (or "LTV") of a loan at any given
time is the fraction, expressed as a percentage, the numerator of which is the
original principal balance of the related loan and the denominator of which is
the collateral value of the related property. Generally, the combined
loan-to-value ratio (or "CLTV") of a loan at any given time is the ratio,
expressed as a percentage, of (i) the sum of (a) the original principal balance
of the loan (or, in the case of a revolving credit line loan, the maximum amount
available) and (b) the outstanding principal balance at the date of origination
of the loan of any senior mortgage loan(s) or, in the case of any open-ended
senior mortgage loan, the maximum available line of credit with respect to such
mortgage loan, regardless of any lesser amount actually outstanding at the date
of origination of the loan, to (ii) the collateral value of the related
property.
The "collateral value" of a property, other than with respect to
certain loans the proceeds of which were used to refinance an existing mortgage
loan (each, a "refinance loan"), is the lesser of (a) the appraised value
determined in an appraisal obtained at origination of such loan and (b) the
sales price for such property if the proceeds of such loan are used to purchase
the related property. In the case of refinance loans, the collateral value of
the related property is the appraised value thereof determined in an appraisal
obtained at the time of refinancing.
No assurance can be given that values of the properties have remained
or will remain at their levels on the dates of origination of the related loans.
If the residential real estate market should experience an overall decline in
property values such that the sum of the outstanding principal balances of the
loans and any primary or secondary financing on the properties, as applicable,
in a particular pool become equal to or greater than the value of the
properties, the actual rates of delinquencies, foreclosures and losses could be
higher than those now generally experienced in the mortgage lending industry. In
addition, adverse economic conditions and other factors (which may or may not
affect real property values) may affect the timely payment by borrowers of
scheduled payments of principal and interest on the loans and, accordingly, the
actual rates of delinquencies, foreclosures and losses with respect to any pool.
To the extent that such losses are not covered by subordination provisions or
alternative arrangements, such losses will be borne by the securityholders.
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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 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
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<PAGE>
collateral. In general, a prospective borrower applying for a mortgage loan is
required to fill out a detailed application designed to provide to the
underwriting officer pertinent credit information. As part of the description of
the borrower's financial condition, the borrower generally is required to
provide a current list of assets and liabilities and a statement of income and
expenses, as well as an authorization to apply for a credit report which
summarizes the borrower's credit history with local merchants and lenders and
any record of bankruptcy or other significant public records. In most cases, an
employment verification is obtained from an independent source (typically the
borrower's employer), which verification reports the length of employment with
that organization, the borrower's current salary and whether it is expected that
the borrower will continue such employment in the future. If a prospective
borrower is self-employed, the borrower may be required to submit copies of
signed tax returns. The borrower may also be required to authorize verification
of deposits at financial institutions where the borrower has demand or savings
accounts.
In determining the adequacy of the property as collateral, an appraisal
will generally be made of each property considered for financing. The appraiser
is required to inspect the property and verify that it is in good repair and
that construction, if new, has been completed. The appraisal is based on the
market value of comparable homes, the estimated rental income (if considered
applicable by the appraiser) and the cost of replacing the home.
Once all applicable employment, credit and property information is
received, a determination generally is made as to whether the prospective
borrower has sufficient monthly income available:
o to meet the borrower's monthly obligations on the proposed
mortgage loan (generally determined on the basis of the monthly
payments due in the year of origination) and other expenses
related to the property (such as property taxes and hazard
insurance), and
o to meet monthly housing expenses and other financial obligations
and monthly living expenses.
The underwriting standards applied by a seller, particularly with respect to the
level of loan documentation and the borrower's income and credit history, may be
varied in appropriate cases where factors such as low CLTVs or other favorable
credit aspects exist.
If specified in the prospectus supplement, a portion of the loans in
the pool may have been originated under a limited documentation program. Under a
limited documentation program, more emphasis is placed on the value and adequacy
of the property as collateral and other assets of the borrower than on credit
underwriting. Under a limited documentation program, certain credit underwriting
documentation concerning income or income verification and/or employment
verification is waived. The prospectus supplement will indicate the types of
limited documentation programs pursuant to which the loans were originated and
the underwriting standards applicable to such limited documentation programs.
In the case of a loan secured by a leasehold interest in real property,
the title to which is held by a third party lessor, the seller will represent
and warrant, among other things, that the
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<PAGE>
remaining term of the lease and any sublease is at least five years longer than
the remaining term on the related mortgage note.
Certain of the types of loans that may be included in a trust may
involve additional uncertainties not present in traditional types of loans. For
example, certain of such loans may provide for escalating or variable payments
by the borrower. These types of loans are underwritten on the basis of a
judgment that the borrowers have the ability to make the monthly payments
required initially. In some instances, however, a borrower's income may not be
sufficient to permit continued loan payments as such payments increase. These
types of loans may also be underwritten primarily upon the basis of CLTVs or
other favorable credit factors.
Qualifications of Sellers
Each seller must be an institution experienced in originating and
servicing loans of the type contained in the pool in accordance with accepted
practices and prudent guidelines, and must maintain satisfactory facilities to
originate and service those loans. Each seller must be a seller/servicer
approved by either Fannie Mae or Freddie Mac. Each seller must be a mortgagee
approved by the FHA or an institution the deposit accounts of which are insured
by the Federal Deposit Insurance Corporation.
Representations by Sellers; Repurchases
Each seller will have made representations and warranties in respect of
the loans sold by such seller and evidenced by all, or a part, of a series of
securities. Such representations and warranties may include, among other things:
o that title insurance (or in the case of properties located in
areas where such policies are generally not available, an
attorney's certificate of title) and any required hazard insurance
policy were effective at origination of each loan and that each
policy (or certificate of title as applicable) remained in effect
on the date of purchase of the loan from the seller by or on
behalf of the sponsor;
o that the seller had good title to each such loan and such loan was
subject to no offsets, defenses, counterclaims or rights of
rescission except to the extent that any buydown agreement may
forgive certain indebtedness of a borrower;
o that each loan constituted a valid lien on, or a perfected
security interest with respect to, the property (subject only to
permissible liens disclosed, if applicable, title insurance
exceptions, if applicable, and certain other exceptions described
in the Agreement) and that the property was free from damage and
was in acceptable condition;
o that there were no delinquent tax or assessment liens against the
property;
o that no required payment on a loan was delinquent more than the
number of days specified in the prospectus supplement; and
o that each loan was made in compliance with, and is enforceable
under, all applicable state and federal laws and regulations in
all material respects.
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<PAGE>
The master servicer or the trustee will promptly notify the relevant
seller of any breach of any representation or warranty made by it in respect of
a loan which materially and adversely affects the interests of the
securityholders in such loan. Unless otherwise specified in the prospectus
supplement, if such seller cannot cure such breach within the time period
specified in the prospectus supplement following notice from the master servicer
or the trustee, as the case may be, then such seller will be obligated either
o to repurchase such loan from the trust at a purchase price equal
to 100% of the unpaid principal balance thereof as of the date of
the repurchase plus accrued interest thereon to the first day of
the month following the month of repurchase at the loan rate (less
any advances or amount payable as related servicing compensation
if the seller is the master servicer) or
o substitute for such loan a replacement loan that satisfies the
criteria specified in the prospectus supplement.
If a REMIC election is to be made with respect to a trust the master
servicer or a holder of the related residual certificate generally will be
obligated to pay any prohibited transaction tax which may arise in connection
with any such repurchase or substitution and the trustee must have received a
satisfactory opinion of counsel that any such substitution will not cause the
trust to lose its status as a REMIC or otherwise subject the trust to a
prohibited transaction tax. This repurchase or substitution obligation will
constitute the sole remedy available to holders of securities or the trustee for
a breach of representation by a seller.
Neither the sponsor nor the master servicer (unless the master servicer
is the seller) will be obligated to purchase or substitute a loan if a seller
defaults on its obligation to do so, and no assurance can be given that sellers
will carry out their respective repurchase or substitution obligations with
respect to loans.
Description of the Securities
Each series of certificates will be issued pursuant to either a pooling
and servicing agreement or a trust agreement among the sponsor, the master
servicer and the trustee. A form of pooling and servicing agreement and trust
agreement has been filed as an exhibit to the registration statement of which
this prospectus forms a part. Each series of notes will be issued pursuant to an
indenture between the related trust and the entity named in the prospectus
supplement as trustee, and the related loans will be serviced by the master
servicer pursuant to a master servicing agreement. A form of indenture and
master servicing agreement has been filed as an exhibit to the registration
statement of which this prospectus forms a part.
A series of securities may consist of both notes and certificates. Each
Agreement, dated as of the related Cut-off Date, will be among the seller, the
sponsor, the master servicer and the trustee for the benefit of the holders of
the securities. The provisions of each Agreement will vary depending upon the
nature of the securities to be issued thereunder and the nature of the trust.
The following are descriptions of the material provisions which may appear in
each Agreement. The descriptions are subject to, and are qualified in their
entirety by reference to, all of the provisions of the Agreement for each series
of securities and the prospectus supplement. The sponsor will
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<PAGE>
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 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
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<PAGE>
covered by insurance policies, surety bonds or other forms of credit
enhancement, in each case as described under "Credit Enhancement" herein and in
the prospectus supplement. One or more classes of securities of a series may be
entitled to receive distributions of principal, interest or any combination
thereof. Distributions on one or more classes of a series of securities may be
made prior to one or more other classes, after the occurrence of specified
events, in accordance with a schedule or formula or on the basis of collections
from designated portions of the related trust assets, in each case as specified
in the prospectus supplement. The timing and amounts of such distributions may
vary among classes or over time as specified in the prospectus supplement.
Distributions of principal and interest (or, where applicable, of
principal only or interest only) on the related securities will be made by the
trustee on each distribution date (i.e., monthly, quarterly, semi-annually or at
such other intervals and on the dates as are specified in the prospectus
supplement) in proportion to the percentages specified in the prospectus
supplement. Distributions will be made to the persons in whose names the
securities are registered at the close of business on the record date.
Distributions will be made in the manner specified in the prospectus supplement
to the persons entitled thereto at the address appearing in the register
maintained for securityholders; provided, however, that the final distribution
in retirement of the securities will be made only upon presentation and
surrender of the securities at the office or agency of the trustee or other
person specified in the notice to securityholders of such final distribution.
The securities will be freely transferable and exchangeable at the
corporate trust office of the trustee specified in the prospectus supplement. No
service charge will be made for any registration of exchange or transfer of
securities of any series, but the trustee may require payment of a sum
sufficient to cover any related tax or other governmental charge.
Under current law the purchase and holding by or on behalf of any
employee benefit plan subject to provisions of ERISA or the Code of certain
classes of securities may result in prohibited transactions within the meaning
of ERISA and the Code. See "ERISA Considerations." Retirement arrangements
subject to these provisions include individual retirement accounts and
annuities, Keogh plans and collective investment funds in which the plans,
accounts or arrangements are invested. Unless otherwise specified in the
prospectus supplement, the transfer of securities will not be registered unless
the transferee:
o represents that it is not, and is not purchasing on behalf of or
with plan assets of, any such plan, account or arrangement; or
o provides an opinion of counsel satisfactory to the trustee and the
sponsor that the purchase of securities of such a class by, on
behalf of such plan or with plan assets, account or arrangement is
permissible under applicable law and will not subject the trustee,
the master servicer or the sponsor to any obligation or liability
in addition to those undertaken in the Agreements.
As to each series, an election may be made to treat the related trust
or designated portions thereof as a REMIC as defined in the Code. The prospectus
supplement will specify whether a REMIC election is to be made. Alternatively,
the Agreement for a series of securities may provide that a REMIC election may
be made at the discretion of the sponsor or the master servicer and may only be
made if certain conditions are satisfied. As to any such series, the terms and
provisions
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applicable to the making of a REMIC election will be set forth in the
prospectus supplement. If such an election is made with respect to a series of
securities, one of the classes will be designated as evidencing the sole class
of residual interests in the REMIC. All other classes of securities in such a
series will constitute regular interests in the REMIC. As to each series of
securities with respect to which a REMIC election is to be made; the master
servicer, the trustee or a holder of the residual certificate will be obligated
to take all actions required in order to comply with applicable laws and
regulations.
Distributions on Securities
General.
In general, the method of determining the amount of distributions on a
particular series of securities will depend on the type of credit support, if
any, that is used with respect to such series. See "Credit Enhancement." Set
forth below are descriptions of various methods that may be used to determine
the amount of distributions on the securities of a particular series. The
prospectus supplement for each series of securities will describe the method to
be used in determining the amount of distributions on the securities of such
series.
Distributions allocable to principal and interest on the securities
will be made by the trustee out of, and only to the extent of, funds in the
related Security Account, including any funds transferred from any reserve
account. As between securities of different classes and as between distributions
of principal (and, if applicable, between distributions of principal prepayments
and scheduled payments of principal) and interest, distributions made on any
distribution date will be applied as specified in the prospectus supplement. The
prospectus supplement will also describe the method for allocating distributions
among securities of a particular class.
Available Funds.
All distributions on the securities of each series on each distribution
date will be made from the available funds described below, in accordance with
the terms described in the prospectus supplement and specified in the Agreement.
Available funds for each distribution date will generally equal the amount on
deposit in the related Security Account on such distribution date (net of
related fees and expenses payable by the related trust) other than amounts to be
held therein for distribution on future distribution dates.
Distributions of Interest.
Interest will accrue on the aggregate principal balance of the
securities (or, in the case of securities entitled only to distributions
allocable to interest, the aggregate notional amount) of each class of
securities (the "Class Security Balance") entitled to interest from the date, at
the pass-through rate or interest rate, as applicable (which in either case may
be a fixed rate or rate adjustable as specified in such prospectus supplement),
and for the periods specified in such prospectus supplement. To the extent funds
are available therefor, interest accrued during each such specified period on
each class of securities entitled to interest (other than a class of securities
that provides for interest that accrues, but is not currently payable, referred
to herein as accrual securities) will be distributable on the distribution dates
specified in the prospectus supplement until the aggregate Class Security
Balance of the securities of such class has been distributed in full
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or, in the case of securities entitled only to distributions allocable to
interest, until the aggregate notional amount of such securities is reduced to
zero or for the period of time designated in the prospectus supplement. Except
in the case of the accrual securities, the original Class Security Balance of
each security will equal the aggregate distributions allocable to principal to
which such security is entitled. Distributions allocable to interest on each
security that is not entitled to distributions allocable to principal will be
calculated based on the notional amount of such security. The notional amount of
a security will not evidence an interest in or entitlement to distributions
allocable to principal but will be used solely for convenience in expressing the
calculation of interest and for certain other purposes.
Interest payable on the securities of a series on a distribution date
will include all interest accrued during the period specified in the prospectus
supplement. In the event interest accrues over a period ending two or more days
prior to a distribution date, the effective yield to securityholders will be
reduced from the yield that would otherwise be obtainable if interest payable on
the security were to accrue through the day immediately preceding such
distribution date, and the effective yield (at par) to securityholders will be
less than the indicated coupon rate.
With respect to any class of accrual securities, if specified in the
prospectus supplement, any interest that has accrued but is not paid on a given
distribution date will be added to the aggregate Class Security Balance of such
class of securities on that distribution date. Distributions of interest on any
class of accrual securities will commence only after the occurrence of the
events specified in such prospectus supplement. Prior to such time, the
beneficial ownership interest in the trust or the principal balance, as
applicable, of such class of accrual securities, as reflected in the aggregate
Class Security Balance of such class of accrual securities, will increase on
each distribution date by the amount of interest that accrued on such class of
accrual securities during the preceding interest accrual period but that was not
required to be distributed to such class on such distribution date. Any such
class of accrual securities will thereafter accrue interest on its outstanding
Class Security Balance as so adjusted.
Distributions of Principal.
The prospectus supplement will specify the method by which the amount
of principal to be distributed on the securities on each distribution date will
be calculated and the manner in which such amount will be allocated among the
classes of securities entitled to distributions of principal. The aggregate
Class Security Balance of any class of securities entitled to distributions of
principal generally will be the aggregate original Class Security Balance of
such class of securities specified in such prospectus supplement, reduced by all
distributions reported to the holders of such securities as allocable to
principal and,
o in the case of accrual securities, as specified in the prospectus
supplement, increased by all interest accrued but not then
distributable on such accrual securities, and
o in the case of adjustable rate securities, subject to the effect
of negative amortization, if applicable.
If so provided in the prospectus supplement, one or more classes of
securities will be entitled to receive all or a disproportionate percentage of
the principal prepayments in the
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percentages and under the circumstances or for the periods specified in such
prospectus supplement. Any such allocation of principal prepayments to such
class or classes of securities will have the effect of accelerating the
amortization of such securities while increasing the interests evidenced by one
or more other classes of securities in the trust. Increasing the interests of
the other classes of securities relative to that of certain securities is
intended to preserve the availability of the subordination provided by such
other securities. See "Credit Enhancement--Subordination."
Unscheduled Distributions.
If specified in the prospectus supplement, the securities will be
subject to receipt of distributions before the next scheduled distribution date
under the circumstances and in the manner described below and in such prospectus
supplement. If applicable, the trustee will be required to make such unscheduled
distributions on the day and in the amount specified in the prospectus
supplement if, due to substantial payments of principal (including principal
prepayments) on the trust assets, the trustee or the master servicer determines
that the funds available or anticipated to be available from the Security
Account and, if applicable, any reserve account, may be insufficient to make
required distributions on the securities on such distribution date. Unless
otherwise specified in the prospectus supplement, the amount of any such
unscheduled distribution that is allocable to principal will not exceed the
amount that would otherwise have been required to be distributed as principal on
the securities on the next distribution date. Unless otherwise specified in the
prospectus supplement, the unscheduled distributions will include interest at
the applicable pass-through rate (if any) or interest rate (if any) on the
amount of the unscheduled distribution allocable to principal for the period and
to the date specified in the prospectus supplement.
Advances
To the extent provided in the prospectus supplement, the master
servicer will be required to advance on or before each distribution date (from
its own funds, funds advanced by subservicers or funds held in the Security
Account for future distributions to the holders of securities of the related
series), an amount equal to the aggregate of payments of interest and/or
principal that were delinquent on the related determination date (as specified
in the prospectus supplement) and were not advanced by any subservicer, subject
to the master servicer's determination that such advances may be recoverable out
of late payments by borrowers, liquidation proceeds, insurance proceeds or
otherwise.
In making advances, the master servicer will endeavor to maintain a
regular flow of scheduled interest and principal payments to securityholders,
rather than to guarantee or insure against losses. If advances are made by the
master servicer from cash being held for future distribution to securityholders,
the master servicer will replace such funds on or before any future distribution
date to the extent that funds in the applicable Security Account on such
distribution date would be less than the amount required to be available for
distributions to securityholders on such date. Any funds advanced will be
reimbursable to the master servicer out of recoveries on the specific loans with
respect to which such advances were made (e.g., late payments made by the
related borrower, any related insurance proceeds, liquidation proceeds or
proceeds of any loan purchased by the sponsor, a subservicer or a seller
pursuant to the related Agreement). Advances by the master servicer (and any
advances by a subservicer) also will be reimbursable to the master
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servicer (or subservicer) from cash otherwise distributable to securityholders
(including the holders of senior securities) to the extent that the master
servicer determines that any such advances previously made are not ultimately
recoverable as described above. To the extent provided in the prospectus
supplement, the master servicer also will be obligated to make advances, to the
extent recoverable out of insurance proceeds, liquidation proceeds or otherwise,
in respect of certain taxes and insurance premiums not paid by borrowers on a
timely basis. Funds so advanced are reimbursable to the master servicer to the
extent permitted by the related Agreement. The obligations of the master
servicer to make advances may be supported by a cash advance reserve fund, a
surety bond or other arrangement of the type described herein under "Credit
Enhancement," in each case as described in the prospectus supplement.
If specified in the prospectus supplement, in the event the master
servicer or a subservicer fails to make a required advance, the trustee will be
obligated to make such advance in its capacity as successor servicer. If the
trustee makes such an advance, it will be entitled to be reimbursed for such
advance to the same extent and degree as the master servicer or a subservicer is
entitled to be reimbursed for advances. See "Description of the Securities
Distributions on Securities."
Compensating Interest
If so specified in the prospectus supplement, the master servicer will
be required to remit to the trustee, with respect to each loan in the trust as
to which a principal prepayment in full or a principal payment which is in
excess of the scheduled monthly payment and is not intended to cure a
delinquency was received during any Due Period, an amount, from and to the
extent of amounts otherwise payable to the master servicer as servicing
compensation, equal to (1) the excess, if any, of (a) 30 days' interest on the
principal balance of the related loan at the loan rate net of the per annum rate
at which the master servicer's servicing fee accrues, over (b) the amount of
interest actually received on such loan during such Due Period, net of the
master servicer's servicing fee or (2) such other amount as described in the
prospectus supplement.
Reports to Securityholders
Prior to or concurrently with each distribution on a distribution date
the master servicer or the trustee will furnish to each securityholder of record
of the related series a statement setting forth, to the extent applicable to
such series of securities, among other things:
o the amount of such distribution allocable to principal, separately
identifying the aggregate amount of any principal prepayments and
if so specified in the prospectus supplement, any applicable
prepayment penalties included therein;
o the amount of such distribution allocable to interest;
o the amount of any advance;
o the aggregate amount (a) otherwise allocable to the subordinated
securityholders on such distribution date, and (b) withdrawn from
the reserve account, if any, that is included in the amounts
distributed to the senior securityholders;
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o the outstanding principal balance or notional amount of each class
of the related series after giving effect to the distribution of
principal on such distribution date;
o the percentage of principal payments on the loans (excluding
prepayments), if any, which each such class will be entitled to
receive on the following distribution date;
o the percentage of principal prepayments on the loans, if any,
which each such class will be entitled to receive on the following
distribution date;
o the related amount of the servicing compensation retained or
withdrawn from the Security Account by the master servicer, and
the amount of additional servicing compensation received by the
master servicer attributable to penalties, fees, excess
liquidation proceeds and other similar charges and items;
o the number and aggregate principal balances of loans
o delinquent (exclusive of loans in foreclosure) (A) 1 to 30
days, (B) 31 to 60 days, (C) 61 to 90 days and (D) 91 or more
days, and
o in foreclosure and delinquent (A) 1 to 30 days, (B) 31 to 60
days, (C) 61 to 90 days and (D) 91 or more days, as of the
close of business on the last day of the calendar month
preceding such distribution date;
o the book value of any real estate acquired through
foreclosure or grant of a deed in lieu of foreclosure;
o the pass-through rate or interest rate, as applicable, if
adjusted from the date of the last statement, of any such
class expected to be applicable to the next distribution to
such class;
o if applicable, the amount remaining in any reserve account at
the close of business on the distribution date;
o the pass-through rate or interest rate, as applicable, as of
the day prior to the immediately preceding distribution date;
and
o any amounts remaining under letters of credit, pool insurance
policies or other forms of credit enhancement.
The report to securityholders for any series of securities may include
additional or other information of a similar nature to that specified above.
In addition, within a reasonable period of time after the end of each
calendar year, the master servicer or the trustee will mail to each
securityholder of record at any time during such calendar year a report
customary information as may be deemed necessary or desirable for
securityholders to prepare their tax returns.
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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
PRINCIPAL TYPES
<S> <C>
Accretion Directed........................................ A class that receives principal payments from the
accreted interest from specified accrual classes. An
accretion directed class also may receive principal
payments from principal paid on the trust assets.
Component Certificates.................................... A class consisting of "components." The components of a
class of component certificates may have different
principal and/or interest payment characteristics but
together constitute a single class. Each component of a
class of component certificates may be identified as
falling into one or more of the categories in this chart.
Notional Amount Certificates.............................. A class having no principal balance and bearing interest
on the related notional amount. The notional amount is
used for purposes of the determination of interest
distributions.
Planned Principal Class or PACs........................... A class that is designed to receive principal payments
using a predetermined principal balance schedule derived
by assuming two constant prepayment rates for the trust
assets. These two rates are the endpoints for the
"structuring range" for the planned principal class. The
planned principal classes in any series of certificates
may be subdivided into different categories (e.g.,
primary planned principal classes, secondary planned
principal classes and so forth) having different
effective structuring ranges and different principal
payment priorities. The structuring range for the
secondary planned principal class of a series of
securities will be narrower than that for the primary
planned principal class of such series.
Scheduled Principal Class................................. A class that is designed to receive principal payments
using a predetermined principal
</TABLE>
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<TABLE>
<S> <C>
balance schedule but is not designated as a planned
principal class or targeted principal class. In many
cases, the schedule is derived by assuming two constant
prepayment rates for the trust assets. These two rates are
the endpoints for the "structuring range" for the
scheduled principal class.
Sequential Pay............................................ Classes that receive principal payments in a prescribed
sequence, that do not have predetermined principal
balance schedules and that under all circumstances
receive payments of principal continuously from the first
distribution date on which they receive principal until
they are retired. A single class that receives principal
payments before or after all other classes in the same
series of securities may be identified as a sequential
pay class.
Strip..................................................... A class that receives a constant proportion, or "strip,"
of the principal payments on the trust assets. The
constant proportion of such principal payments may or may
not vary for each trust asset included in the trust and
will be calculated in the manner described in the
prospectus supplement. Such classes may also receive
payments of interest.
Support Class (or companion class)........................ A class that receives principal payments on any
distribution date only if scheduled payments have been
made on specified planned principal classes, targeted
principal classes and/or scheduled principal classes.
Targeted Principal Class.................................. A class that is designed to receive principal payments
using a predetermined principal balance schedule derived
by assuming a single constant prepayment rate for the
trust assets.
INTEREST TYPES
Accrual................................................... A class that accretes the amount of accrued interest
otherwise distributable on such class, which amount will
be added as principal to the principal balance of such
class on each applicable distribution date. Such
accretion may continue until some specified event has
occurred or until such class is retired.
Fixed Rate................................................ A class with a pass-through rate that is fixed throughout
the life of the class.
</TABLE>
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<TABLE>
<S> <C>
Floating Rate............................................. A class with a pass-through rate that resets periodically
based upon a designated index and that varies directly
with changes in such index.
Inverse Floating Rate..................................... A class with a pass-through rate that resets periodically
based upon a designated index and that varies inversely
with changes in such index.
Interest Only or IO....................................... Securities that receive some or all of the interest
payments made on the trust assets and little or no
principal. Interest only certificates have either a
nominal principal balance or a notional amount. A
nominal principal balance represents actual principal
that will be paid on such securities. It is referred to
as nominal since it is extremely small compared to other
classes. A notional amount is the amount used as a
reference to calculate the amount of interest due on an
interest only security that is not entitled to any
distributions in respect of principal.
Partial Accrual........................................... A class that accretes a portion of the amount of accrued
interest thereon, which amount will be added to the
principal balance of such class on each applicable
distribution date, with the remainder of such accrued
interest to be distributed currently as interest on such
class. Such accretion may continue until a specified
event has occurred or until such class is retired.
Principal Only or PO...................................... A class that does not bear interest and is entitled to
receive only distributions in respect of principal.
Variable Rate............................................. A class with a pass-through rate that resets periodically
and is calculated by reference to the rate or rates of
interest applicable to specified assets or instruments
(e.g., the loan rates borne by the loans in the trust).
</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 Cedelbank or the
Euroclear System ("Euroclear") in Europe, if they are participants of such
systems, or indirectly through organizations which are participants in such
systems. The book-entry securities will be issued in one or more certificates
which equal the aggregate principal balance of the securities and will
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initially be registered in the name of Cede & Co., the nominee of DTC, Cedelbank
and Euroclear will hold omnibus positions on behalf of their participants
through customers' securities accounts in Cedelbank's and Euroclear's names on
the books of their respective depositaries which in turn will hold such
positions in customers' securities accounts in the depositaries' names on the
books of DTC. Citibank, N.A., will act as depositary for Cedelbank and The Chase
Manhattan Bank will act as depositary for Euroclear (in such capacities,
individually the "Relevant Depositary" and collectively the "European
Depositaries"). Except as described below, no beneficial owner will be entitled
to receive a physical certificate representing their security. Unless and until
physical securities are issued, it is anticipated that the only securityholder
of record will be Cede & Co., as nominee of DTC. Beneficial owners are only
permitted to exercise their rights indirectly through participants and DTC.
The beneficial owner's ownership of a book-entry security will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary that maintains the beneficial owner's account for such
purpose. In turn, the financial intermediary's ownership of a book-entry
security will be recorded on the records of DTC (or of a participating firm that
acts as agent for the financial intermediary, whose interest will in turn be
recorded on the records of DTC, if the beneficial owner's financial intermediary
is not a DTC participant, and on the records of Cedelbank or Euroclear, as
appropriate).
Beneficial owners will receive all distributions of principal of, and
interest on, the securities from the trustee through DTC and DTC participants.
While the securities are outstanding (except under the circumstances described
below), under the DTC system, DTC is required to make book-entry transfers among
its participants with respect to the securities and is required to receive and
transmit distributions of principal of, and interest on, the securities.
Participants and indirect participants with whom beneficial owners have accounts
with respect to the securities are similarly required to make book-entry
transfers and receive and transmit such distributions on behalf of their
clients. Accordingly, although beneficial owners will not possess physical
securities, the DTC system provide a mechanism by which beneficial owners will
receive distributions and will be able to transfer their interest.
Beneficial owners will not receive or be entitled to receive physical
certificates representing their interests in the securities, except under the
limited circumstances described below. Unless and until physical securities are
issued, beneficial owners who are not DTC participants may transfer ownership of
securities only through the DTC system.
Because of time zone differences, credits of securities received in
Cedelbank or Euroclear as a result of a transaction with a participant will be
made during subsequent securities settlement processing and dated the business
day following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or Cedelbank participants on such business day. Cash received in
Cedelbank or Euroclear as a result of sales of securities by or through a
Cedelbank participant or Euroclear participant to a DTC participant will be
received with value on the DTC settlement date but will be available in the
relevant Cedelbank or Euroclear cash account only as of the business day
following settlement with DTC.
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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 bookentry changes
in accounts of Cedelbank participants, thereby eliminating the need for physical
movement of securities. Transactions may be settled in Cedelbank in any of 28
currencies, including United States dollars. Cedelbank provides to its Cedelbank
participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Cedelbank interfaces with domestic markets in several
countries. As a professional depository, Cedelbank is subject to regulation by
the Luxembourg Monetary Institute. Cedelbank participants are recognized
financial institutions around the world, including underwriters, securities
brokers and dealers, banks, trust companies, clearing corporations and certain
other organizations. Indirect access to Cedelbank is also available to others,
such as banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a Cedelbank participant, either directly
or indirectly.
Euroclear was created in 1968 to hold securities for its participants
and to clear and settle transactions between Euroclear participants through
simultaneous electronic book-entry delivery against payment, thereby eliminating
the need for physical movement of securities and any risk from lack of
simultaneous transfers of securities and cash. Transactions may be settled in
any of 32 currencies, including United States dollars. Euroclear includes
various other services, including securities lending and borrowing and
interfaces with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC described above. Euroclear is
operated by the Brussels, Belgium office of Morgan Guaranty Trust Company of New
York ("Morgan" and in such capacity, the "Euroclear Operator"), under contract
with Euroclear Clearance Systems S.C., a Belgian cooperative corporation (the
"Belgian Cooperative"). All operations are conducted by Morgan, and all
Euroclear securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear Operator, not the Belgian Cooperative. The Belgian
Cooperative establishes policy for Euroclear on behalf of Euroclear
participants. Euroclear participants include banks (including central banks),
securities brokers and dealers and other professional financial intermediaries.
Indirect access to Euroclear is also available to other firms
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that clear through or maintain a custodial relationship with a Euroclear
participant, either directly or indirectly.
Morgan is the Belgian branch of a New York banking corporation which is
a member bank of the Federal Reserve System. As such, it is regulated and
examined by the Board of Governors of the Federal Reserve System and the New
York State Banking Department, as well as the Belgian Banking Commission.
Securities clearance accounts and cash accounts with Morgan are
governed by the Terms and Conditions Governing Use of Euroclear and the related
Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear participants, and has no record of or relationship with persons
holding through Euroclear participants.
Under a book-entry format, beneficial owners of book-entry securities
may experience some delay in their receipt of payments, since such payments will
be forwarded by the trustee to Cede & Co., as nominee of DTC. Distributions with
respect to securities held through Cedelbank or Euroclear will be credited to
the cash accounts of Cedelbank participants or Euroclear participants in
accordance with the relevant system's rules and procedures, to the extent
received by the Relevant Depositary. Such distributions will be subject to tax
reporting in accordance with relevant United States tax laws and regulations.
See "Federal Income Tax Consequences--Tax Treatment of Foreign Investors" and
"--Tax Consequences to Holders of the Notes--Backup Withholding" herein. Because
DTC can only act on behalf of financial intermediaries, the ability of a
beneficial owner to pledge book-entry securities to persons or entities that do
not participate in the DTC system may be limited due to the lack of physical
certificates. In addition, issuance of the securities in book-entry form may
reduce the liquidity of such securities in the secondary market since certain
potential investors may be unwilling to purchase securities for which they
cannot obtain physical certificates.
Monthly and annual reports on the Trust will be provided to Cede & Co.,
as nominee of DTC, and may be made available by Cede & Co. to beneficial owners
upon request, in accordance with the rules, regulations and procedures creating
and affecting DTC, and to the financial intermediaries to whose DTC accounts the
book-entry securities are credited.
DTC has advised the trustee that, unless and until physical securities
are issued, DTC will take any action permitted to be taken by the
securityholders under the applicable Agreement only at the direction of one or
more financial intermediaries to whose DTC accounts the book-entry securities
are credited, to the extent that such actions are taken on behalf of financial
intermediaries whose holdings include such book-entry securities. Cedelbank or
the Euroclear Operator, as the case may be, will take any other action permitted
to be taken by a securityholder under the Agreement on behalf of a Cedelbank
participant or Euroclear participant only in accordance with its relevant rules
and procedures and subject to the ability of the Relevant Depositary to effect
such
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actions on its behalf through DTC. DTC may take actions, at the direction of its
participants, with respect to some securities which conflict with actions taken
with respect to other securities.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the trustee will be required to notify all beneficial
owners of the occurrence of such event and the availability through DTC of
physical securities. Upon surrender by DTC of the certificates representing the
book-entry securities and instructions for re-registration, the trustee will
issue physical securities, and thereafter the trustee will recognize the holders
of such physical securities as securityholders under the applicable Agreement.
Although DTC, Cedelbank and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of securities among participants of
DTC, Cedelbank and Euroclear, they are under no obligation to perform or
continue to perform such procedures and such procedures may be discontinued at
any time.
None of the master servicer, the sponsor or the trustee will have any
responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the book-entry securities held by
Cede & Co., as nominee of DTC, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
Credit Enhancement
General
Credit enhancement may be provided with respect to one or more classes
of a series of securities or with respect to the related trust assets. Credit
enhancement may be in the form of:
o a limited financial guaranty policy issued by an entity named in
the prospectus supplement,
o the subordination of one or more classes of the securities of such
series,
o the establishment of one or more reserve accounts,
o the use of a cross-collateralization feature,
o use of a mortgage pool insurance policy,
o FHA insurance or VA guarantee,
o bankruptcy bond,
o special hazard insurance policy,
o surety bond,
o letter of credit,
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o guaranteed investment contract,
o overcollateralization,
o or another method of credit enhancement contemplated herein and
described in the prospectus supplement, or any combination of the
foregoing.
Unless otherwise specified in the prospectus supplement, credit
enhancement will not provide protection against all risks of loss and will not
guarantee repayment of the entire principal balance of the securities and
interest thereon. If losses occur which exceed the amount covered by credit
enhancement or which are not covered by the credit enhancement, securityholders
will bear their allocable share of any deficiencies.
If specified in the prospectus supplement, the coverage provided by one
or more of the forms of credit enhancement described in this prospectus may
apply concurrently to two or more separate trusts. If applicable, the prospectus
supplement will identify the trusts to which such credit enhancement relates and
the manner of determining the amount of coverage provided to such trusts thereby
and of the application of such coverage to the identified trusts.
Subordination
If so specified in the prospectus supplement, protection afforded to
holders of one or more classes of securities of a series by means of the
subordination feature may be accomplished by the preferential right of holders
of senior securities to receive distributions in respect of scheduled principal,
principal prepayments, interest or any combination thereof that otherwise would
have been payable to holders of subordinate securities under the circumstances
and to the extent specified in the prospectus supplement. Protection may also be
afforded to the holders of senior securities by (a) reducing the ownership
interest (if applicable) of the related subordinate securities; (b) a
combination of the immediately preceding sentence and clause (a) above; or (c)
as otherwise described in the prospectus supplement.
If so specified in the prospectus supplement, delays in receipt of
scheduled payments on the loans and losses on defaulted loans may be borne first
by the various classes of subordinate securities and thereafter by the various
classes of senior securities, in each case under the circumstances and subject
to the limitations specified in the prospectus supplement. The aggregate
distributions in respect of delinquent payments on the loans over the lives of
the securities or at any time, the aggregate losses in respect of defaulted
loans which must be borne by the subordinate securities by virtue of
subordination and the amount of the distributions otherwise distributable to the
subordinate securityholders that will be distributable to senior securityholders
on any distribution date may be limited as specified in the prospectus
supplement. If aggregate distributions in respect of delinquent payments on the
loans or aggregate losses in respect of such loans were to exceed an amount
specified in the prospectus supplement, holders of senior securities would
experience losses.
As specified in the prospectus supplement, all or any portion of
distributions otherwise payable to holders of subordinate securities on any
distribution date may instead be deposited into one or more reserve accounts
established with the trustee or distributed to holders of senior
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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 crosscollateralization
mechanism or otherwise. As between classes of senior securities and as between
classes of subordinate securities, distributions may be allocated among such
classes:
o in the order of their scheduled final distribution dates,
o in accordance with a schedule or formula,
o in relation to the occurrence of events, or
o otherwise, as specified in the prospectus supplement.
As between classes of subordinate securities, payments to holders of
senior securities on account of delinquencies or losses and payments to any
reserve account will be allocated as specified in the prospectus supplement.
Letter of Credit
The letter of credit, if any, with respect to a series of securities
will be issued by the bank or financial institution specified in the prospectus
supplement (the "L/C Bank"). Under the letter of credit, the L/C Bank will be
obligated to honor drawings thereunder in an aggregate fixed dollar amount, net
of unreimbursed payments thereunder, equal to the percentage specified in the
prospectus supplement of the aggregate principal balance of the loans on the
related Cut-off Date or of one or more classes of securities. If so specified in
the prospectus supplement, the letter of credit may permit drawings in the event
of losses not covered by insurance policies or other credit support, such as
losses arising from damage not covered by standard hazard insurance policies,
losses resulting from the bankruptcy of a borrower and the application of
certain provisions of the federal Bankruptcy Code, or losses resulting from
denial of insurance coverage due to misrepresentations in connection with the
origination of a loan. The amount available under the letter of credit will, in
all cases, be reduced to the extent of the unreimbursed payments thereunder. The
obligations of the L/C Bank under the letter of credit for each series of
securities will expire at the earlier of the date specified in the prospectus
supplement or the termination of the trust. See "The Agreements--Termination:
Optional Termination." A copy of the letter of credit for a series, if any, will
be filed with the SEC as an exhibit to a Current Report on Form 8-K to be filed
within 15 days of issuance of the securities of the related series.
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Insurance Policies, Surety Bonds and Guaranties
If so provided in the prospectus supplement, deficiencies in amounts
otherwise payable on the securities or certain classes thereof will be covered
by insurance policies and/or surety bonds provided by one or more insurance
companies or sureties. Such instruments may cover, with respect to one or more
classes of securities, timely distributions of interest and/or full
distributions of principal on the basis of a schedule of principal distributions
set forth in or determined in the manner specified in the prospectus supplement.
In addition, if specified in the prospectus supplement, a trust may also include
bankruptcy bonds, special hazard insurance policies, other insurance or
guaranties for the purpose of:
o maintaining timely payments or providing additional protection
against losses on the assets included in such trust,
o paying administrative expenses, or
o establishing a minimum reinvestment rate on the payments made in
respect of such assets or principal payment rate on such assets.
Such arrangements may include agreements under which securityholders
are entitled to receive amounts deposited in various accounts held by the
trustee upon the terms specified in the prospectus supplement. A copy of any
such instrument for a series will be filed with the SEC as an exhibit to a
Current Report on Form 8-K to be filed with the Commission within 15 days of
issuance of the securities.
Over-Collateralization
If so provided in the prospectus supplement, a portion of the interest
payment on each loan may be applied as an additional distribution in respect of
principal to reduce the principal balance of a certain class or classes of
securities and, thus, accelerate the rate of payment of principal on such class
or classes of securities relative to the principal balance of the loans in the
related trust.
Reserve Accounts
If specified in the prospectus supplement, credit support with respect
to a series of securities will be provided by the establishment and maintenance
with the trustee for such series of securities, in trust, of one or more reserve
accounts for such series. The prospectus supplement will specify whether or not
any such reserve accounts will be included in the trust for such series.
The reserve account for a series will be funded:
o by the deposit therein of cash, United States Treasury securities,
instruments evidencing ownership of principal or interest payments
thereon, letters of credit, demand notes, certificates of deposit
or a combination thereof in the aggregate amount specified in the
prospectus supplement,
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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 blanketpolicies against loss, since claims thereunder may only be made
respecting particular defaulted loans and only upon satisfaction of certain
conditions precedent described below. The pool insurance policies generally will
not cover losses due to a failure to pay or denial of a claim under a primary
mortgage insurance policy.
The pool insurance policies generally will provide that no claims may
be validly presented unless:
o any required primary mortgage insurance policy is in effect for
the defaulted loan and a claim thereunder has been submitted and
settled;
o hazard insurance on the related property has been kept in force
and real estate taxes and other protection and preservation
expenses have been paid;
o if there has been physical loss or damage to the property, it has
been restored to its physical condition (reasonable wear and tear
excepted) at the time of issuance of the policy; and
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o the insured has acquired good-and merchantable title to the
property free and clear of liens except certain permitted
encumbrances.
Upon satisfaction of these conditions, the pool insurer will have the
option either:
o to purchase the property securing the defaulted loan at a price
equal to the principal balance thereof plus accrued and unpaid
interest at the loan rate to the date of such purchase and certain
expenses incurred by the master servicer on behalf of the trustee
and securityholders, or
o to pay the amount by which the sum of the principal balance of the
defaulted loan plus accrued and unpaid interest at the loan rate
to the date of payment of the claim and the aforementioned
expenses exceeds the proceeds received from an approved sale of
the property,
in either case net of certain amounts paid or assumed to have been paid under
the related primary mortgage insurance policy.
If any property securing a defaulted loan is damaged and proceeds, if
any, from the related hazard insurance policy or the applicable special hazard
insurance policy are insufficient to restore the damaged property to a condition
sufficient to permit recovery under the pool insurance policy, the master
servicer will not be required to expend its own funds to restore the damaged
property unless it determines that (a) such restoration will increase the
proceeds to securityholders on liquidation of the loan after reimbursement of
the master servicer for its expenses and (b) such expenses will be recoverable
by it through proceeds of the sale of the property or proceeds of the related
pool insurance policy or any related primary mortgage insurance policy.
The pool insurance policies generally will not insure (and many primary
mortgage insurance policies do not insure) against loss sustained by reason of a
default arising from, among other things:
o fraud or negligence in the origination or servicing of a loan,
including misrepresentation by the borrower, the originator or
persons involved in the origination thereof, or
o failure to construct a property in accordance with plans and
specifications.
A failure of coverage attributable to one of the foregoing events might result
in a breach of the related seller's representations described above, and, in
such events might give rise to an obligation on the part of such seller to
repurchase the defaulted loan if the breach cannot be cured by such seller. No
pool insurance policy will cover (and many primary mortgage insurance policies
do not cover) a claim in respect of a defaulted loan occurring when the servicer
of such loan, at the time of default or thereafter, was not approved by the
applicable insurer.
The original amount of coverage under each pool insurance policy
generally will be reduced over the life of the related securities by the
aggregate dollar amount of claims paid less the aggregate of the net amounts
realized by the pool insurer upon disposition of all foreclosed properties. The
amount of claims paid will include certain expenses incurred by the master
servicer
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as well as accrued interest on delinquent loans to the date of payment
of the claim or such other date set forth in the prospectus supplement.
Accordingly, if aggregate net claims paid under any pool insurance policy reach
the original policy limit, coverage under that pool insurance policy will be
exhausted and any further losses will be borne by the related securityholders.
Cross Support
If specified in the prospectus supplement, the beneficial ownership of
separate groups of assets included in a trust may be evidenced by separate
classes of the related series of securities. In such case, credit support may be
provided by a cross support feature which requires that distributions be made to
securities evidencing a beneficial ownership interest in, or secured by, one or
more asset groups within the same trust prior to distributions to subordinate
securities evidencing a beneficial ownership interest in, or secured by, one or
more other asset groups within such trust. The prospectus supplement for a
series of securities which includes a cross support feature will describe the
manner and conditions for applying such cross support feature.
Other Insurance, Guaranties, Letters of Credit and Similar Instruments or
Agreements
If specified in the prospectus supplement, a trust may also include
insurance, guaranties, letters of credit or similar arrangements for the purpose
of:
o maintaining timely payments or providing additional protection
against losses on the assets included in such trust,
o paying administrative expenses, or
o establishing a minimum reinvestment rate on the payments made in
respect of such assets or principal payment rate on such assets.
Such arrangements may include agreements under which
securityholders are entitled to receive amounts deposited in
various accounts held by the trustee upon the terms specified in
such prospectus supplement.
Yield and Prepayment Considerations
The yields to maturity and weighted average lives of the securities
will be affected primarily by the amount and timing of principal payments
received on or in respect of the trust assets. The original terms to maturity of
the loans in a given pool will vary depending upon the type of loans included
therein. Each prospectus supplement will contain information with respect to the
type and maturities of the loans in the related pool. The prospectus supplement
will specify the circumstances, if any, under which the related loans will be
subject to prepayment penalties. The prepayment experience on the loans in a
pool will affect the weighted average life of the securities.
The rate of prepayments with respect to conventional mortgage loans has
fluctuated significantly in recent years. In general, if prevailing rates fall
significantly below the loan rates borne by the loans, such loans are more
likely to be subject to higher prepayment rates than if prevailing interest
rates
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remain at or above such loan rates. Conversely, if prevailing interest
rates rise appreciably above the loan rates borne by the loans, such loans are
more likely to experience a lower prepayment rate than if prevailing rates
remain at or below such loan rates. However, there can be no assurance that such
will be the case.
The rate of prepayment on the loans cannot be predicted. Home equity
loans and home improvement contracts have been originated in significant volume
only during the past few years and the sponsor is not aware of any publicly
available studies or statistics on the rate of prepayment of such loans.
Generally, home equity loans and home improvement contracts are not viewed by
borrowers as permanent financing. Accordingly, such loans may experience a
higher rate of prepayment than traditional first mortgage loans. On the other
hand, because home equity loans such as the revolving credit line loans
generally are not fully amortizing, the absence of voluntary borrower
prepayments could cause rates of principal payments lower than, or similar to,
those of traditional fully-amortizing first mortgage loans. The prepayment
experience of the trust may be affected by a wide variety of factors, including:
o general economic conditions,
o prevailing interest rate levels,
o the availability of alternative financing,
o homeowner mobility,
o the frequency and amount of any future draws on any revolving
credit line loans,
o the amounts of, and interest rates on, the underlying senior
mortgage loans,
o the use of first mortgage loans as long-term financing for home
purchase and subordinate mortgage loans as shorter-term financing
for a variety of purposes, including home improvement, education
expenses and purchases of consumer durables such as automobiles.
Accordingly, the loans may experience a higher rate of prepayment than
traditional fixed rate mortgage loans. In addition, any future limitations on
the right of borrowers to deduct interest payments on home equity loans for
federal income tax purposes may further increase the rate of prepayments of the
loans. The enforcement of due-on-sale provision will have the same effect as a
prepayment of the related loan. See "Certain Legal Aspects of the
Loans--Due-on-Sale Clauses."
The yield to an investor who purchases securities in the secondary
market at a price other than par will vary from the anticipated yield if the
rate of prepayment on the loans is actually different than the rate anticipated
by such investor at the time such securities were purchased.
Collections on home equity loans may vary because, among other things,
borrowers may:
o make payments during any month as low as the minimum monthly
payment for such month or, during the interest-only period for
certain revolving credit line loans and, in more limited
circumstances, closed-end loans, with respect to which an
interest-only
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payment option has been selected, the interest and the fees and
charges for such month, or
o make payments as high as the entire outstanding principal balance
plus accrued interest and the fees and charges thereon. It is
possible that borrowers may fail to make the required periodic
payments. In addition, collections on the loans may vary due to
seasonal purchasing and the payment habits of borrowers.
As specified in the prospectus supplement, certain of the conventional
loans will contain due-on-sale provisions permitting the mortgagee to accelerate
the maturity of the loan upon sale or certain transfers by the borrower of the
related property. Loans insured by the FHA, and single family loans partially
guaranteed by the VA, are assumable with the consent of the FHA and the VA,
respectively. Thus, the rate of prepayments on such loans may be lower than that
of conventional loans bearing comparable interest rates. The master servicer
generally will enforce any due-on-sale or due-on-encumbrance clause, to the
extent it has knowledge of the conveyance or further encumbrance or the proposed
conveyance or proposed further encumbrance of the property and reasonably
believes that it is entitled to do so under applicable law; provided, however,
that the master servicer will not take any enforcement action that would impair
or threaten to impair any recovery under any related insurance policy. See
"Certain Legal Aspects of the Loans" for a description of certain provisions of
each Agreement and certain legal developments that may affect the prepayment
experience on the loans.
When a full prepayment is made on a loan, the borrower is charged
interest on the principal amount of the loan so prepaid only for the number of
days in the month actually elapsed up to the date of the prepayment, rather than
for a full month. The effect of prepayments in full will be to reduce the amount
of interest passed through or paid in the following month to holders of
securities because interest on the principal amount of any loan so prepaid will
generally be paid only to the date of prepayment. Partial prepayments in a given
month may be applied to the outstanding principal balances of the loans so
prepaid on the first day of the month of receipt or the month following receipt.
In the latter case, partial prepayments will not reduce the amount of interest
passed through or paid in such month. Generally, neither full nor partial
prepayments will be passed through or paid until the month following receipt.
Even assuming that the properties provide adequate security for the
loans, substantial delays could be encountered in connection with the
liquidation of defaulted loans and corresponding delays in the receipt of
related proceeds by securityholders could occur. An action to foreclose on a
property securing a loan is regulated by state statutes and rules and is subject
to many of the delays and expenses of other lawsuits if defenses or
counterclaims are interposed, sometimes requiring several years to complete.
Furthermore, in some states an action to obtain a deficiency judgment is not
permitted following a nonjudicial sale of a property. In the event of a default
by a borrower, these restrictions among other things, may impede the ability of
the master servicer to foreclose on or sell the property or to obtain
liquidation proceeds sufficient to repay all amounts due on the related loan. In
addition, the master servicer will be entitled to deduct from related
liquidation proceeds all expenses reasonably incurred in attempting to recover
amounts due on defaulted loans and not yet repaid, including payments to senior
lienholders, legal fees and costs of legal action, real estate taxes and
maintenance and preservation expenses.
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Liquidation expenses with respect to defaulted mortgage loans do not
vary directly with the outstanding principal balance of the loan at the time of
default. Therefore, assuming that a servicer took the same steps in realizing
upon a defaulted mortgage loan having a small remaining principal balance as it
would in the case of a defaulted mortgage loan having a large remaining
principal balance, the amount realized after expenses of liquidation would be
smaller as a percentage of the remaining principal balance of the small mortgage
loan than would be the case with the other defaulted mortgage loan having a
large remaining principal balance.
If the rate at which interest is passed through or paid to the holders
of securities of a series is calculated on a loan-by-loan basis,
disproportionate principal prepayments among loans with different loan rates
will affect the yield on such securities. In most cases, the effective yield to
securityholders will be lower than the yield otherwise produced by the
applicable pass-through rate and purchase price, because while interest will
accrue on each loan from the first day of the month (unless otherwise specified
in the prospectus supplement), the distribution of such interest will not be
made earlier than the month following the month of accrual.
Under certain circumstances, the master servicer, the holders of the
residual interests in a REMIC or any person specified in the prospectus
supplement may have the option to purchase the assets of a trust and thereby
effect earlier retirement of the related series of securities. See "The
Agreements--Termination; Optional Termination."
The relative contribution of the various factors affecting prepayment
may vary from time to time. There can be no assurance as to the rate of payment
of principal of the trust assets at any time or over the lives of the
securities.
The prospectus supplement will discuss in greater detail the effect of
the rate and timing of principal payments (including prepayments), delinquencies
and losses on the yield, weighted average lives and maturities of the
securities.
The Agreements
Set forth below is a description of the material provisions of each
Agreement which are not described elsewhere in this prospectus. The description
is subject to, and qualified in its entirety by reference to, the provisions of
each Agreement. Where particular provisions or terms used in the Agreements are
referred to, such provisions or terms are as specified in the Agreements.
Assignment of the Trust Assets
Assignment of the Loans. At the time of issuance of the securities, the
sponsor will assign the loans to the trustee, without recourse, together with
all principal and interest received by or on behalf of the sponsor on or with
respect to such loans after the Cut-off Date, other than principal and interest
due on or before the Cut-off Date and other than any amounts specified in the
prospectus supplement. The trustee will, concurrently with such assignment,
deliver the securities to the sponsor in exchange for the loans. Each loan will
be identified in a schedule appearing as an exhibit to the related Agreement.
Such schedule will include information as to the outstanding principal balance
of each loan after application of payments due on or before the Cut-off Date, as
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well as information regarding the loan rate or annual percentage rate, the
maturity of the loan, the LTVs or CLTVs, as applicable, at origination and
certain other information.
Unless otherwise specified in the prospectus supplement, the related
Agreement will require that, within the time period specified therein, the
sponsor will also deliver or cause to be delivered to the trustee (or to the
custodian hereinafter referred to) as to each mortgage loan or home equity loan,
among other things:
o the mortgage note or contract endorsed without recourse in blank
or to the order of the trustee,
o the mortgage, deed of trust or similar instrument with evidence of
recording indicated thereon, except that any mortgage not returned
from the public recording office, in which case the sponsor will
deliver or cause to be delivered a copy of such mortgage together
with a certificate that the original of such mortgage was
delivered to such recording office,
o an assignment of the mortgage to the trustee, which assignment
will be in recordable form in the case of a mortgage assignment,
and
o such other security documents, including those relating to any
senior interests in the property, as may be specified in the
prospectus supplement or the related Agreement.
Unless otherwise specified in the prospectus supplement, the sponsor
will promptly cause the assignments of the loans to be recorded in the
appropriate public office for real property records. If specified in the
prospectus supplement, some or all of the loan documents may not be delivered to
the trustee until after the occurrence of certain events specified in the
prospectus supplement.
Unless otherwise specified in the prospectus supplement, the sponsor
will as to each home improvement contract, deliver or cause to be delivered to
the trustee the original home improvement contract and copies of documents and
instruments related to each home improvement contract and, other than in the
case of unsecured home improvement contracts, the security interest in the
property securing such home improvement contract. In order to give notice of the
right, title and interest of securityholders to the home improvement contracts,
the sponsor will cause a UCC-1 financing statement to be executed by the sponsor
or the seller identifying the trustee as the secured party and identifying all
home improvement contracts as collateral. Unless otherwise specified in the
prospectus supplement, the home improvement contracts will not be stamped or
otherwise marked to reflect their assignment to the trustee. Therefore, if,
through negligence, fraud or otherwise, a subsequent purchaser were able to take
physical possession of the home improvement contracts without notice of such
assignment, the interest of securityholders in the home improvement contracts
could be defeated. See "Certain Legal Aspects of the Loans--The Home Improvement
Contracts."
The trustee or an appointed custodian will review the loan documents
within the time period specified in the prospectus supplement after receipt
thereof to ascertain that all required documents have been properly executed and
received, and the trustee will hold such documents in trust for the
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benefit of the related securityholders. Unless otherwise specified in the
prospectus supplement, if any such document is found to be missing or defective
in any material respect, the trustee (or such custodian) will notify the master
servicer and the sponsor, and the master servicer will notify the related
seller. If such seller cannot cure the omission or defect within the time period
specified in the prospectus supplement after receipt of such notice, such seller
will be obligated to either purchase the related loan from the trust at the
Purchase Price or if so specified in the prospectus supplement, remove such loan
from the trust and substitute in its place one or more other loans that meets
certain requirements set forth therein. There can be no assurance that a seller
will fulfill this purchase or substitution obligation. Unless otherwise
specified in the prospectus supplement, this obligation to cure, purchase or
substitute constitutes the sole remedy available to the securityholders or the
trustee for omission of, or a material defect in, a constituent document.
The trustee will be authorized to appoint a custodian pursuant to a
custodial agreement to maintain possession of and, if applicable, to review the
documents relating to the loans as agent of the trustee.
Notwithstanding the foregoing provisions, with respect to a trust for
which a REMIC election is to be made, no purchase or substitution of a loan will
be made if such purchase or substitution would result in a prohibited
transaction tax under the Code.
No Recourse to Sellers; Sponsor or Master Servicer. As described above
under "-Assignment of the Loans," the sponsor will assign the loans comprising
the trust to the trustee, without recourse. However, each seller will be
obligated to repurchase or substitute for any loan as to which certain
representations and warranties are breached or for failure to deliver certain
documents relating to the loans as described herein under "Assignment of the
Loans" and "Loan Program--Representations by Sellers; Repurchases." These
obligations to purchase or substitute constitute the sole remedy available to
the securityholders or the trustee for a breach of any such representation or
warranty or failure to deliver a constituent document.
Payments on Loans; Deposits to Security Account
The master servicer will establish and maintain or cause to be
established and maintained with respect to the each trust a separate account or
accounts for the collection of payments on the trust assets in the trust (the
"Security Account"). The prospectus supplement may provide for other
requirements for the Security Account, but if it does not, then the Security
Account must be either:
o maintained with a depository institution the short-term debt
obligations of which (or, in the case of a depository institution
that is the principal subsidiary of a holding company, the
short-term debt obligations of such holding company) are rated in
one of the two highest short-term rating categories by the rating
agency that rated one or more classes of the related series of
securities,
o an account or accounts the deposits in which are fully insured by
the FDIC,
o an account or accounts the deposits in which are insured by the
FDIC to the limits established by the FDIC and the uninsured
deposits in which are otherwise secured such that, as evidenced by
an opinion of counsel, securityholders have a claim with respect
to
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the funds in such account or accounts, or a perfected
first-priority security interest against any collateral securing
such funds, that is superior to the claims of any other depositors
or general creditors of the depository institution with which such
account or accounts are maintained, or
o an account or accounts otherwise acceptable to such rating agency.
The collateral eligible to secure amounts in the Security Account is
limited to Permitted Investments. A Security Account may be maintained as an
interest bearing account or the funds held therein may be invested pending each
succeeding distribution date in Permitted Investments. The master servicer or
its designee will be entitled to receive any such interest or other income
earned on funds in the Security Account as additional compensation and will be
obligated to deposit in the Security Account the amount of any loss immediately
as realized. The Security Account may be maintained with the master servicer or
with a depository institution that is an affiliate of the master servicer,
provided it meets the standards set forth above.
The master servicer will deposit or cause to be deposited in the
Security Account for each trust, to the extent applicable and unless otherwise
specified in the prospectus supplement and provided in the related Agreement,
the following payments and collections received or advances made by or on behalf
of it subsequent to the Cut-off Date (other than certain payments due on or
before the Cut-off Date and any excluded amounts):
o all payments on account of principal and interest (which may be
net of the applicable servicing compensation), including principal
prepayments and, if specified in the prospectus supplement, any
applicable prepayment penalties, on the loans;
o all net insurance proceeds, less any incurred and unreimbursed
advances made by the master servicer, of the hazard insurance
policies and any primary mortgage insurance policies, to the
extent such proceeds are not applied to the restoration of the
property or released to the mortgagor in accordance with the
master servicer's normal servicing procedures;
o all proceeds received in connection with the liquidation of
defaulted loans, less any expenses of liquidation and any
unreimbursed advances made by the master servicer;
o any net proceeds received on a monthly basis with respect to any
properties acquired on behalf of the securityholders by
foreclosure or deed in lieu of foreclosure;
o all advances as described herein under "Description of the
Securities--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;
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o all payments required to be deposited in the Security Account with
respect to any deductible clause in any blanket insurance policy
described under "--Hazard Insurance" below;
o any amount required to be deposited by the master servicer in
connection with losses realized on investments for the benefit of
the master servicer of funds held in the Security Account and, to
the extent specified in the prospectus supplement, any payments
required to be made by the master servicer in connection with
prepayment interest shortfalls; and
o all other amounts required to be deposited in the Security Account
pursuant to the related agreement.
The master servicer (or the sponsor, as applicable) may from time to
time direct the institution that maintains the Security Account to withdraw
funds from the Security Account for the following purposes:
o to pay to the master servicer the servicing fees described in the
prospectus supplement and, as additional servicing compensation,
earnings on or investment income with respect to funds in the
Security Account credited thereto;
o to reimburse the master servicer for advances, such right of
reimbursement with respect to any loan being limited to amounts
received that represent late recoveries of payments of principal
and/or interest on such loan (or insurance proceeds or liquidation
proceeds with respect thereto) with respect to which such advance
was made;
o to reimburse the master servicer for any advances previously made
which the master servicer has determined to be nonrecoverable;
o to reimburse the master servicer from insurance proceeds for
expenses incurred by the master servicer and covered by insurance
policies;
o to reimburse the master servicer for unpaid master servicing fees
and unreimbursed out-of-pocket costs and expenses incurred by the
master servicer in the performance of its servicing obligations,
such right of reimbursement being limited to amounts received
representing late recoveries of the payments for which such
advances were made;
o to pay to the master servicer, with respect to each loan or
property acquired in respect thereof that has been purchased by
the master servicer pursuant to the Agreement, all amounts
received thereon and not taken into account in determining the
principal balance of such repurchased loan,
o to reimburse the master servicer or the sponsor for expenses
incurred and reimbursable pursuant to the Agreement;
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o to withdraw any amount deposited in the Security Account and not
required to be deposited therein; and
o to clear and terminate the Security Account upon termination of
the Agreement.
In addition, unless otherwise specified in the prospectus supplement,
on or prior to the business day immediately preceding each distribution date,
the master servicer shall withdraw from the Security Account the amount of
available funds, to the extent on deposit, for deposit in an account maintained
by the trustee.
The applicable Agreement may require the master servicer to establish
and maintain one or more escrow accounts into which mortgagors deposit amounts
sufficient to pay taxes, assessments, hazard insurance premiums or comparable
items. Withdrawals from the escrow accounts maintained for mortgagors may be
made to effect timely payment of taxes, assessments and hazard insurance
premiums or comparable items, to reimburse the master servicer out of related
assessments for maintaining hazard insurance, to refund to mortgagors amounts
determined to be overages, to remit to mortgagors, if required, interest earned,
if any, on balances in any of the escrow accounts, to repair or otherwise
protect the property and to clear and terminate any of the escrow accounts. The
master servicer will be solely responsible for administration of the escrow
accounts and will be expected to make advances to such account when a deficiency
exists therein.
Pre-Funding Account
If so provided in the prospectus supplement, the master servicer will
establish and maintain, in the name of the trustee on behalf of the
securityholders, a pre-funding account into which the sponsor will deposit cash
on the Closing Date. The pre-funding account will be maintained with the
trustee. The deposit will not exceed 50% of the initial aggregate principal
amount of the securities. The money will be used by the trustee to purchase
additional loans from the sponsor from time to time during the funding period.
Monies on deposit in the prefunding 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.
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Subservicing by Sellers
The master servicer may enter into subservicing agreements with any
servicing entity which will act as the subservicer for the loans, which will not
contain any terms inconsistent with the related Agreement. While each
subservicing agreement will be a contract solely between the master servicer and
the subservicer, the Agreement pursuant to which a series of securities is
issued will provide that, if for any reason the master servicer for such series
of securities is no longer the master servicer of the loans, the trustee or any
successor master servicer must recognize the subservicer's rights and
obligations under such subservicing agreement. Notwithstanding any such
subservicing arrangement, unless otherwise provided in the prospectus
supplement, the master servicer will remain liable for its servicing duties and
obligations under the master servicing agreement as if the master servicer alone
were servicing the loans.
Collection Procedures
The master servicer, directly or through one or more subservicers, will
make reasonable efforts to collect all payments called for under the loans and
will, consistent with each Agreement and any pool insurance policy, primary
mortgage insurance policy, FHA insurance, VA guaranty, bankruptcy bond or
alternative arrangements, follow such collection procedures as are customary
with respect to loans that are comparable to the loans. Consistent with the
above, the master servicer may, in its discretion:
o waive any prepayment charge, assumption fee, late payment or other
charge in connection with a loan, and
o to the extent not inconsistent with the coverage of such loan by a
pool insurance policy, primary mortgage insurance policy, FHA
insurance, VA guaranty, bankruptcy bond or alternative
arrangements, if applicable, suspend or reduce regular monthly
payment for a period of up to six months, or arrange with a
borrower a schedule for the liquidation of delinquencies.
To the extent the master servicer is obligated to make or cause to be
made advances, such obligation will remain during any period of such an
arrangement.
Under the Agreement, the master servicer will be required to enforce
due-on-sale clauses with respect to any loans to the extent contemplated by the
terms of such loans and permitted by applicable law. Where an assumption of, or
substitution of liability with respect to, a loan is required by law, upon
receipt of assurance that the primary mortgage insurance policy covering such
loan will not be affected, the master servicer may permit the assumption of a
loan, pursuant to which the borrower would remain liable on the related loan
note, or a substitution of liability with respect to such loan, pursuant to
which the new borrower would be substituted for the original borrower as being
liable on the loan note. Any fees collected for entering into an assumption or
substitution of liability agreement may be retained by the master servicer as
additional servicing compensation. In connection with any assumption or
substitution, the loan rate borne by the related loan note may not be changed.
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Hazard Insurance
Except as otherwise specified in the prospectus supplement, the master
servicer will require the mortgagor or obligor on each loan to maintain a hazard
insurance policy providing coverage against loss by fire and other hazards which
are covered under the standard extended coverage endorsement customary for the
type of property in the state in which such property is located. Such coverage
will be in an amount that is at least equal to the lesser of:
o the maximum insurable value of the improvements securing such loan
from time to time and
o the greater of
o the combined principal balance owing on such loan and any mortgage
loan senior to such loan and
o an amount such that the proceeds of such policy shall be
sufficient to prevent the mortgagor or obligor and/or the lender
from becoming a co-insurer.
All amounts collected by the master servicer under any hazard policy (except for
amounts to be applied to the restoration or repair of the property or released
to the mortgagor or obligor in accordance with the master servicer's normal
servicing procedures) will be deposited in the related Security Account. In the
event that the master servicer maintains a blanket policy insuring against
hazard losses on all the loans comprising part of a trust, it will conclusively
be deemed to have satisfied its obligation relating to the maintenance of hazard
insurance. Such blanket policy may contain a deductible clause, in which case
the master servicer will be required to deposit from its own funds into the
Security Account the amounts which would have been deposited therein but for
such clause.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements securing a loan by
fire, lightning, explosion, smoke, windstorm and hail, riot, strike and civil
commotion, subject to the conditions and exclusions particularized in each
policy. Although the policies relating to the loans may have been underwritten
by different insurers under different state laws in accordance with different
applicable forms and therefore may not contain identical terms and conditions,
the basic terms thereof are dictated by respective state laws, and most such
policies typically do not cover (among other things) any physical damage
resulting from the following:
o war,
o revolution,
o governmental actions,
o floods and other water-related causes,
o earth movement, including earthquakes, landslides and mud flows,
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o nuclear reactions,
o wet or dry rot,
o vermin, rodents, insects or domestic animals,
o theft and, in certain cases, vandalism.
The foregoing list is merely indicative of certain kinds of uninsured risks and
is not intended to be all inclusive.
If, however, any mortgaged property at the time of origination of the
related loan is located in an area identified by the Flood Emergency Management
Agency as having special flood hazards and flood insurance has been made
available, the master servicer will cause to be maintained with a generally
acceptable insurance carrier a flood insurance policy in accordance with
mortgage servicing industry practice. Such flood insurance policy will provide
coverage in an amount not less than the lesser of the principal balance of the
loan and the minimum amount required under the terms of coverage to compensate
for any damage or loss on a replacement cost basis, but not more than the
maximum amount of such insurance available for the related mortgaged property
under either the regular or emergency programs of the National Flood Insurance
Program.
The hazard insurance policies covering properties securing the loans
typically contain a clause which in effect requires the insured at all time to
carry insurance of a specified percentage (generally 80% to 90%) of the full
replacement value of the insured property in order to recover the full amount of
any partial loss. If the insured's coverage falls below this specified
percentage, then the insurer's liability in the event of partial loss will not
exceed the larger of (a) the replacement costs of the improvements less physical
depreciation and (b) such proportion of the loss as the amount of insurance
carried bears to the specified percentage of the full replacement cost of such
improvements. Since the amount of hazard insurance the master servicer may cause
to be maintained on the improvements securing the loans declines as the
principal balances owing thereon decrease, and since improved real estate
generally has appreciated in value over time in the past, the effect of this
requirement in the event of partial loss may be that hazard insurance proceeds
will be insufficient to restore fully the damaged property.
Primary Mortgage Insurance
The master servicer will maintain or cause to be maintained, as the
case may be, in full force and effect, to the extent specified in the prospectus
supplement, a primary mortgage insurance policy with regard to each loan for
which such coverage is required. The master servicer will not cancel or refuse
to renew any such primary mortgage insurance policy in effect at the time of the
initial issuance of a series of securities that is required to be kept in force
under the applicable Agreement unless the replacement primary mortgage insurance
policy for such cancelled or nonrenewed policy is maintained with an insurer
whose claims-paying ability is sufficient to maintain the current rating of the
classes of securities of such series that have been rated.
Although the terms and conditions of primary mortgage insurance vary,
the amount of a claim for benefits under a primary mortgage insurance policy
covering a mortgage loan will consist
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of the insured percentage of the unpaid principal amount of the covered loan and
accrued and unpaid interest thereon and reimbursement of certain expenses, less:
o all rents or other payments collected or received by the insured
(other than the proceeds of hazard insurance) that are derived
from or in any way related to the property,
o hazard insurance proceeds in excess of the amount required to
restore the property and which have not been applied to the
payment of the loan,
o amounts expended but not approved by the insurer of the related
primary mortgage insurance policy,
o claim payments previously made by the insurer, and
o unpaid premiums.
Primary mortgage insurance policies reimburse certain losses sustained
by reason of default in payments by borrowers. Primary mortgage insurance
policies will not insure against, and exclude from coverage, a loss sustained by
reason of a default arising from or involving certain matters, including:
o fraud or negligence in ordination or servicing of the loans,
including misrepresentation by the originator, mortgagor (or
obligor) or other persons involved in the origination of the loan;
o failure to construct the property subject to the loan in
accordance with specified plans;
o physical damage to the property; and
o the related subservicer not being approved as a servicer by the
insurer.
Evidence of each primary mortgage insurance policy will be provided to
the trustee simultaneously with the transfer to the trustee of the loan. The
master servicer, on behalf of itself, the trustee and securityholders, is
required to present claims to the insurer under any primary mortgage insurance
policy and to take such reasonable steps as are necessary to permit recovery
thereunder with respect to defaulted loans. Amounts collected by the master
servicer on behalf of the master servicer, the trustee and securityholders shall
be deposited in the related Security Account for distribution as set forth
above. The master servicer will not cancel or refuse to renew any primary
mortgage insurance policy required to be kept in force by the Agreement.
Claims Under Insurance Policies and Other Realization Upon Defaulted Loans
The master servicer, on behalf of the trustee and securityholders, will
present claims to the insurer under any applicable insurance policies. If the
property securing a defaulted loan is damaged and proceeds, if any, from the
related hazard insurance policy are insufficient to restore the damaged
property, the master servicer is not required to expend its own funds to restore
the damaged property unless it determines (a) that such restoration will
increase the proceeds to securityholders on liquidation of the loan after
reimbursement of the master servicer for its
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expenses and (b) that such expenses will be recoverable by it from related
insurance proceeds or liquidation proceeds.
If recovery on a defaulted loan under any insurance policy is not
available, or if the defaulted loan is not covered by an insurance policy, the
master servicer will be obligated to follow or cause to be followed such normal
practices and procedures as it deems necessary or advisable to realize upon the
defaulted loan. If the proceeds of any liquidation of the property securing the
defaulted loan are less than the principal balance of such loan plus interest
accrued thereon that is payable to securityholders, the trust will realize a
loss in the amount of such difference plus the aggregate of expenses incurred by
the master servicer in connection with such proceedings and which are
reimbursable under the Agreement.
The proceeds from any liquidation of a loan will be applied in the
following order of priority:
first, to reimburse the master servicer for any unreimbursed expenses
incurred by it to restore the related property and any unreimbursed servicing
compensation payable to the master servicer with respect to such loan;
second, to reimburse the master servicer for any unreimbursed advances
with respect to such loan;
third, to accrued and unpaid interest (to the extent no advance has
been made for such amount) on such loan; and
fourth, as a recovery of principal of such loan.
Servicing and Other Compensation and Payment of Expenses
The master servicer's primary compensation for its activities as master
servicer will come from the payment to it, with respect to each interest payment
on a loan, of the amount specified in the prospectus supplement. As principal
payments are made on the loans, the portion of each monthly payment which
represents interest will decline, and thus servicing compensation to the master
servicer will decrease as the loans amortize. Prepayments and liquidations of
loans prior to maturity will also cause servicing compensation to the master
servicer to decrease. As compensation for its servicing duties, a subservicer,
if any, will be entitled to a monthly servicing fee as described in the
prospectus supplement. In addition, the master servicer or subservicer will
retain all prepayment charges, assumption fees and late payment charges, to the
extent collected from borrowers, and any benefit that may accrue as a result of
the investment of funds in the applicable Security Account (unless otherwise
specified in the prospectus supplement).
The master servicer will pay or cause to be paid certain ongoing
expenses associated with each trust and incurred by it in connection with its
responsibilities under the related Agreement, including, without limitation, and
if so specified in the prospectus supplement, payment of any fee or other amount
payable in respect of any credit enhancement arrangements, payment of the fees
and disbursements of the trustee, any custodian appointed by the trustee, the
certificate registrar and any paying agent, and payment of expenses incurred in
enforcing the obligations of subservicers and sellers. The master servicer will
be entitled to reimbursement of expenses
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incurred in enforcing the obligations of subservicers and sellers under
certain limited circumstances.
Evidence as to Compliance
Each Agreement will provide that the master servicer at its expense
shall cause a firm of independent public accountants to furnish a report
annually to the trustee to the effect that such firm has performed certain
procedures specified in the Agreement and that such review has disclosed no
items of noncompliance with the provisions of such Agreement which, in the
opinion of such firm, are material, except for such items of noncompliance as
shall be set forth in such report.
Each Agreement will also provide for delivery to the trustee, on or
before a specified date in each year, of an annual statement signed by an
officer of the master servicer to the effect that the master servicer has
fulfilled its obligations under the Agreement throughout the preceding year.
Certain Matters Regarding the Master Servicer and the Sponsor
The master servicer under each pooling and servicing agreement or
master servicing agreement, as applicable, will be named in the prospectus
supplement. The entity serving as master servicer may have normal business
relationships with the sponsor or the sponsor's affiliates.
Each Agreement will provide that the master servicer may not resign
from its obligations and duties under the Agreement except upon (a) appointment
of a successor servicer and receipt by the trustee of a letter from the
applicable rating agency that such resignation and appointment will not result
in a downgrade of the securities or (b) a determination that its duties
thereunder are no longer permissible under applicable law. The master servicer
may, however, be removed from its obligations and duties as set forth in the
Agreement. No such resignation will become effective until the trustee or a
successor servicer has assumed the master servicer's obligations and duties
under the Agreement.
Each Agreement will further provide that neither the master servicer,
the sponsor nor any director, officer, employee, or agent of the master servicer
or the sponsor (collectively, the "Indemnified Parties") will be under any
liability to the related trust or securityholders for any action taken or for
refraining from the taking of any action in good faith pursuant to the
Agreement, or for errors in judgment; provided, however, that neither the master
servicer, the sponsor nor any such person will be protected against any
liability which would otherwise be imposed by reason of willful 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
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sponsor will be under any obligation to appear in, prosecute or defend any legal
action which is not incidental to its respective responsibilities under the
Agreement and which in its opinion may involve it in any expense or liability.
The master servicer or the sponsor may, however, in its discretion undertake any
such action which it may deem necessary or desirable with respect to the
Agreement and the rights and duties of the parties thereto and the interests of
the securityholders thereunder. In such event, the legal expenses and costs of
such action and any liability resulting therefrom will be expenses, costs and
liabilities of the trust and the master servicer or the sponsor, as the case may
be, will be entitled to be reimbursed therefor out of funds otherwise
distributable to securityholders.
Except as otherwise specified in the prospectus supplement, any person
into which the master servicer may be merged or consolidated, or any person
resulting from any merger or consolidation to which the master servicer is a
party, or any person succeeding to the business of the master servicer, will be
the successor of the master servicer under each Agreement, provided that such
person is qualified to sell mortgage loans to, and service mortgage loans on
behalf of, Fannie Mae or Freddie Mac; and further, provided, that such merger,
consolidation or succession does not adversely affect the then current rating or
ratings of the class or classes of securities of such series that have been
rated.
Events of Default; Rights Upon Event of Default
Pooling and Servicing Agreement; Master Servicing Agreement. Except as
otherwise specified in the prospectus supplement, events of default under each
Agreement will consist of:
o any failure by the master servicer to make an Advance which
continues unremedied for one business day
o any failure by the master servicer to make or cause to be made any
other required payment pursuant to the Agreement which continues
unremedied for five days after written notice of such failure to
the master servicer in the manner specified in the Agreement;
o any failure by the master servicer duly to observe or perform in
any material respect any of its other covenants or agreements in
the Agreement which continues unremedied for sixty days after
written notice of such failure to the master servicer in the
manner specified in the Agreement; and
o certain events of insolvency, readjustments of debt, marshalling
of assets and liabilities or similar proceedings and certain
actions by or on behalf of the master servicer indicating its
insolvency, reorganization or inability to pay its obligations.
If specified in the prospectus supplement, the Agreement will permit
the trustee to sell the trust assets and the other assets of the trust described
under "Credit Enhancement" herein in the event that payments in respect thereto
are insufficient to make payments required in the Agreement. The trust assets
will be sold only under the circumstances and in the manner specified in the
prospectus supplement.
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Unless otherwise provided in the prospectus supplement, so long as an
event of default under an Agreement remains unremedied, the trustee may, and at
the direction of holders of securities evidencing not less than 25% of the
aggregate voting rights of such series and under such other circumstances as may
be specified in such Agreement, the trustee shall terminate all of the rights
and obligations of the master servicer under the Agreement relating to such
trust and in and to the related trust assets, whereupon the trustee will succeed
to all of the responsibilities, duties and liabilities of the master servicer
under the Agreement, including, if specified in the prospectus supplement, the
obligation to make advances, and will be entitled to similar compensation
arrangements. In the event that the trustee is unwilling or unable so to act, it
may appoint, or petition a court of competent jurisdiction for the appointment
of, a housing and home finance institution which is a Fannie Mae or Freddie Mac
approved servicer with a net worth of a least $10,000,000 to act as successor to
the master servicer under the Agreement. Pending such appointment, the trustee
is obligated to act in such capacity. The trustee and any such successor may
agree upon the servicing compensation to be paid, which in no event may be
greater than the compensation payable to the master servicer under the
Agreement.
Unless otherwise provided in the prospectus supplement, no
securityholder, solely by virtue of such holder's status as a securityholder,
will have any right under any Agreement to institute any proceeding with respect
to such Agreement, unless such holder previously has given to the trustee
written notice of default and unless the holders of securities evidencing not
less than 25% of the aggregate voting rights for such series have made written
request upon the trustee to institute such proceeding in its own name as trustee
thereunder and have offered to the trustee reasonable indemnity, and the trustee
for 60 days has neglected or refused to institute any such proceeding. However,
the trustee is under no obligation to exercise any of the trusts or powers
vested in it by the Agreement for any series or to make any investigation of
matters arising thereunder or to institute, conduct or defend any litigation
thereunder or in relation thereto at the request, order or direction of any
securityholders, unless such securityholders have offered and provided to the
trustee reasonable security or indemnity against the costs, expenses and
liabilities which may be incurred therein or thereby.
Indenture. Except as otherwise specified in the prospectus supplement,
events of default or rapid amortization events 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.
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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. Rapid amortization events
will trigger an accelerated rate of payment of principal on the notes, as
described in the related prospectus supplement.
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 or a rapid amortization event, 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 66-2/3% 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 or a rapid amortization event, 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 or rapid amortization event, 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 or rapid amortization event.
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.
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Subject to the provisions of the indenture relating to the duties of
the trustee, in case an event of default or a rapid amortization event shall
occur and be continuing with respect to a series of notes, the trustee shall be
under no obligation to exercise any of the rights or powers under the indenture
at the request or direction of any of the holders of notes of such series,
unless such holders offered to the trustee security or indemnity satisfactory to
it against the costs, expenses and liabilities which might be incurred by it in
complying with such request or direction. Subject to such provisions for
indemnification and certain limitations contained in the indenture, the holders
of a majority of the then aggregate outstanding amount of the notes of such
series shall have the right to direct the time, method and place of conducting
any proceeding for any remedy available to the trustee or exercising any trust
or power conferred on the trustee with respect to the notes of such series, and
the holders of a majority of the then aggregate outstanding amount of the notes
of such series may, in certain cases, waive any default with respect thereto,
except a default in the payment of principal or interest or a default in respect
of a covenant or provision of the indenture that cannot be modified without the
waiver or consent of all the holders of the outstanding notes of such series
affected thereby.
Amendment
Except as otherwise specified in the prospectus supplement, each
Agreement may be amended by the sponsor, the master servicer and the trustee,
without the consent of any of the securityholders:
o to cure any ambiguity;
o to correct a defective provision or correct or supplement any
provision therein which may be inconsistent with any other
provision therein;
o to make any other revisions with respect to matters or questions
arising under the Agreement which are not inconsistent with the
provisions thereof; or
o to comply with any requirements imposed by the Code or any
regulation thereunder; provided, however, that no such amendments
(except those pursuant to this clause) will adversely affect in
any material respect the interests of any securityholder.
An amendment will be deemed not to adversely affect in any material
respect the interests of the securityholders if the trustee receives a letter
from each rating agency requested to rate the class or classes of securities of
such series stating that such amendment will not result in the downgrading or
withdrawal of the respective ratings then assigned to such securities. Each
Agreement may also be amended by the sponsor, the master servicer and the
trustee with consent of holders of securities of such series evidencing not less
than 66-2/3% of the aggregate voting rights of each class affected thereby for
the purpose of adding any provisions to or changing in any manner or eliminating
any of the provisions of the Agreement or of modifying in any manner the rights
of the holders of the related securities; provided, however, that no such
amendment may (a) reduce in any manner the amount of, or delay the timing of,
payments received on loans which are required to be distributed on any security
without the consent of the
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holder of such security, or (b) with respect to any series of certificates,
reduce the aforesaid percentage of securities of any class the holders of which
are required to consent to any such amendment without the consent of the holders
of all securities of such class covered by such Agreement then outstanding. If a
REMIC election is made with respect to a trust, the trustee will not be entitled
to consent to an amendment to the related Agreement without having first
received an opinion of counsel to the effect that such amendment will not cause
such trust to fail to qualify as a REMIC.
Termination; Optional Termination
Pooling and Servicing Agreement; Trust Agreement. Unless otherwise
specified in the related Agreement, the obligations created by each pooling and
servicing agreement and trust agreement for each series of securities will
terminate upon the payment to the related securityholders of all amounts held in
the Security Account or by the master servicer and required to be paid to them
pursuant to such Agreement following the later of:
(a) the final payment of or other liquidation of the last of the trust
assets subject thereto or the disposition of all property acquired
upon foreclosure of any such trust assets remaining in the trust,
and
(b) the purchase by the master servicer or, if REMIC treatment has
been elected and if specified in the prospectus supplement, by the
holder of the residual interest or any other party specified to
have such rights (see "Federal Income Tax Consequences" below),
from the related trust of all of the remaining trust assets and
all property acquired in respect of such trust assets.
Unless otherwise specified by the prospectus supplement, any such
purchase of trust assets and property acquired in respect of trust assets
evidenced by a series of securities will be made at the option of the master
servicer, such other person or, if applicable, such holder of the REMIC residual
interest, at a price specified in the prospectus supplement. The exercise of
such right will effect early retirement of the securities of that series, but
the right of the master servicer, such other person or, if applicable, such
holder of the REMIC residual interest, to so purchase is subject to the
principal balance of the related trust assets being less than the percentage
specified in the prospectus supplement of the aggregate principal balance of the
trust assets at the Cut-off Date for the series. The foregoing is subject to the
provision that if a REMIC election is made with respect to a trust, any
repurchase pursuant to clause (b) above will be made only in connection with a
"qualified liquidation" of the REMIC within the meaning of Section 860F(g)(4) of
the Code.
Indenture. The indenture will be discharged with respect to a series of
notes (except with respect to certain continuing rights specified in the
indenture) upon the delivery to the trustee for cancellation of all the notes of
such series or, with certain limitations, upon deposit with the trustee of funds
sufficient for the payment in full of all of the notes of such series.
In addition to such discharge with certain limitations, the indenture
will provide that, if so specified with respect to the notes of any series, the
related trust will be discharged from any and all obligations in respect of the
notes of such series (except for certain obligations relating to temporary notes
and exchange of notes, to register the transfer of or exchange notes of such
series, to replace stolen, lost or mutilated notes of such series, to maintain
paying agencies and to hold monies for payment in trust) upon the deposit with
the trustee, in trust, of money and/or direct obligations of or obligations
guaranteed by the United States of America which through the
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payment of interest and principal in respect thereof in accordance with their
terms will provide money in an amount sufficient to pay the principal of and
each installment of interest on the notes of such series on the last scheduled
distribution date for such notes and any installment of interest on such notes
in accordance with the terms of the indenture and the notes of such series. In
the event of any such defeasance and discharge of notes of such series, holders
of notes of such series would be able to look only to such money and/or direct
obligations for payment of principal and interest, if any, on their notes until
maturity.
The Trustee
The trustee under each Agreement will be named in the prospectus
supplement. The commercial bank, savings and loan association or trust company
serving as trustee may have normal banking relationships with the sponsor, the
master servicer and any of their respective affiliates.
Certain Legal Aspects of the Loans
The following discussion contains summaries, which are general in
nature, of certain legal matters relating to the loans. Because such legal
aspects are governed primarily by applicable state law (which laws may differ
substantially), the descriptions do not, except as expressly provided below,
reflect the laws of any particular state, nor do they encompass the laws of all
states in which the security for the loans is situated. The descriptions are
qualified in their entirety by reference to the applicable federal laws and the
appropriate laws of the states in which loans may be originated.
General
The loans for a series may be secured by deeds of trust, mortgages,
security deeds or deeds to secure debt, depending upon the prevailing practice
in the state in which the property subject to the loan is located. Deeds of
trust are used almost exclusively in California instead of mortgages. A mortgage
creates a lien upon the real property encumbered by the mortgage, which lien is
generally not prior to the lien for real estate taxes and assessments. Priority
between mortgages depends on their terms and generally on the order of recording
with a state or county office. There are two parties to a mortgage, the
mortgagor, who is the borrower and owner of the mortgaged property, and the
mortgagee, who is the lender. Under the mortgage instrument, the mortgagor
delivers to the mortgagee a note or bond and the mortgage. Although a deed of
trust is similar to a mortgage, a deed of trust formally has three parties, the
borrower-property owner called the trustor (similar to a mortgagor), a lender
(similar to a mortgagee) called the beneficiary, and a third-party grantee
called the trustee. Under a deed of trust, the borrower grants the property,
irrevocably until the debt is paid, in trust, generally with a power of sale, to
the trustee to secure payment of the obligation. A security deed and a deed to
secure debt are special types of deeds which indicate on their face that they
are granted to secure an underlying debt. By executing a security deed or deed
to secure debt, the grantor conveys title to, as opposed to merely creating a
lien upon, the subject property to the grantee until such time as the underlying
debt is repaid. The trustee's authority under a deed of trust, the mortgagee's
authority under a mortgage and the grantee's authority under a security deed or
deed to secure debt are governed by law and, with respect to some deeds of
trust, the directions of the beneficiary.
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Foreclosure/Repossession
Deed of Trust. Foreclosure of a deed of trust is generally accomplished
by a non-judicial sale under a specific provision in the deed of trust which
authorizes the trustee to sell the property at public auction upon any default
by the borrower under the terms of the note or deed of trust. In certain states,
such foreclosure also may be accomplished by judicial action in the manner
provided for foreclosure of mortgages. In addition to any notice requirements
contained in a deed of trust, in some states (such as California), the trustee
must record a notice of default and send a copy to the borrower-trustor, to any
person who has recorded a request for a copy of any notice of default and notice
of sale, to any successor in interest to the borrower-trustor, to the
beneficiary of any junior deed of trust and to certain other persons. In some
states (including California), the borrower-trustor has the right to reinstate
the loan at any time following default until shortly before the trustee's sale.
In general, the borrower, or any other person having a junior encumbrance on the
real estate, may, during a statutorily prescribed reinstatement period, cure a
monetary default by paying the entire amount in arrears plus other designated
costs and expenses incurred in enforcing the obligation. Generally, state law
controls the amount of foreclosure expenses and costs, including attorney's
fees, which may be recovered by a lender. After the reinstatement period has
expired without the default having been cured, the borrower or junior lienholder
no longer has the right to reinstate the loan and must pay the loan in full to
prevent the scheduled foreclosure sale. If the deed of trust is not reinstated
within any applicable cure period, a notice of sale must be posted in a public
place and, in most states (including California), published for a specific
period of time in one or more newspapers. In addition, some state laws require
that a copy of the notice of sale be posted on the property and sent to all
parties having an interest of record in the real property. In California, the
entire process from recording a notice of default to a non-judicial sale usually
takes four to five months.
Mortgages. Foreclosure of a mortgage is generally accomplished by
judicial action. The action is initiated by the service of legal pleadings upon
all parties having an interest in the real property. Delays in completion of the
foreclosure may occasionally result from difficulties in locating necessary
parties. Judicial foreclosure proceedings are often not contested by any of the
parties. When the mortgagee's right to foreclosure is contested, the legal
proceedings necessary to resolve the issue can be time consuming. After the
completion of a judicial foreclosure proceeding, the court generally issues a
judgment of foreclosure and appoints a referee or other court officer to conduct
the sale of the property. In some states, mortgages may also be foreclosed by
advertisement, pursuant to a power of sale provided in the mortgage.
Although foreclosure sales are typically public sales, frequently no
third party purchaser bids in excess of the lender's lien because of the
difficulty of determining the exact status of title to the property, the
possible deterioration of the property during the foreclosure proceedings and a
requirement that the purchaser pay for the property in cash or by cashier's
check. Thus the foreclosing lender often purchases the property from the trustee
or referee for an amount equal to the principal amount outstanding under the
loan, accrued and unpaid interest and the expenses of foreclosure in which event
the mortgagor's debt will be extinguished or the lender may purchase for a
lesser amount in order to preserve its right against a borrower to seek a
deficiency judgment in states where such judgment is available. Thereafter,
subject to the right of the borrower in some states to remain in possession
during the redemption period, the lender will assume the burden of ownership,
including obtaining hazard insurance and making such repairs at its own expense
as are
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necessary to render the property suitable for sale. The lender will commonly
obtain the services of a real estate broker and pay the broker's commission in
connection with the sale of the property. Depending upon market conditions, the
ultimate proceeds of the sale of the property may not equal the lender's
investment in the property. Any loss may be reduced by the receipt of any
mortgage guaranty insurance proceeds.
Courts have imposed general equitable principles upon foreclosure,
which are generally designed to mitigate the legal consequences to the borrower
of the borrower's defaults under the loan documents. Some courts have been faced
with the issue of whether federal or state constitutional provisions reflecting
due process concerns for fair notice require that borrowers under deeds of trust
receive notice longer than that prescribed by statute. For the most part, these
cases have upheld the notice provisions as being reasonable or have found that
the sale by a trustee under a deed of trust does not involve sufficient state
action to afford constitutional protection to the borrower.
When the beneficiary under a junior mortgage or deed of trust cures the
default and reinstates or redeems by paying the full amount of the senior
mortgage or deed of trust, the amount paid by the beneficiary so to cure or
redeem becomes a part of the indebtedness secured by the junior mortgage or deed
of trust. See "Junior Mortgages; Rights of Senior Mortgagees" below.
Environmental Risks
Real property pledged as security to a lender may be subject to
unforeseen environmental risks. Under the laws of certain states, contamination
of a property may give rise to a lien on the property to assure the payment of
the costs of clean-up. In several states such a lien has priority over the lien
of an existing mortgage against such property. In addition, under the federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA"), the United States Environmental Protection Agency ("EPA") may impose
a lien on property where the EPA has incurred clean-up costs. However, a CERCLA
lien is subordinate to pre-existing, perfected security interests.
Under the laws of some states, and under CERCLA, it is conceivable that
a secured lender may be held liable as an owner or operator for the costs of
addressing releases or threatened releases of hazardous substances at a
mortgaged property, even though the environmental damage or threat was caused by
a prior or current owner or operator. CERCLA imposes liability for such costs on
any and all responsible parties, including owners or operators. However, CERCLA
excludes from the definition of "owner or operator" a secured creditor who holds
indicia of ownership primarily to protect its security interest (the "secured
creditor exclusion"). Thus, if a lender's activities begin to encroach on the
actual management of a contaminated facility or property, the lender may incur
liability as an owner or operator under CERCLA. Similarly, if a lender
forecloses and takes title to a contaminated facility or property, the lender
may incur CERCLA liability in various circumstances, including, but not limited
to, when it holds the facility or property as an investment (including leasing
the facility or property to a third party), or fails to market the property in a
timely fashion.
If a lender is or becomes liable, it can bring an action for
contribution against any other responsible parties, including a previous owner
or operator, who created the environmental hazard,
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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.
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Rights of Redemption
In some states, after sale pursuant to a deed of trust or foreclosure
of a mortgage, the borrower and foreclosed junior lienors are given a statutory
period in which to redeem the property from the foreclosure sale. In certain
other states (including California), this right of redemption applies only to
sales following judicial foreclosure, and not to sales pursuant to a non
judicial power of sale. In most states where the right of redemption is
available, statutory redemption may occur upon payment of the foreclosure
purchase price, accrued interest and taxes. In other states, redemption may be
authorized if the former borrower pays only a portion of the sums due. The
effect of a statutory right of redemption is to diminish the ability of the
lender to sell the foreclosed property. The exercise of a right of redemption
would defeat the title of any purchaser from the lender subsequent to
foreclosure or sale under a deed of trust. Consequently, the practical effect of
the redemption right is to force the lender to retain the property and pay the
expenses of ownership until the redemption period has run. In some states, there
is no right to redeem property after a trustee's sale under a deed of trust.
Anti-Deficiency Legislation; Bankruptcy Laws; Tax Liens
Certain states have imposed statutory and judicial restrictions that
limit the remedies of a beneficiary under a deed of trust or a mortgagee under a
mortgage. In some states, including California, statutes and case law limit the
right of the beneficiary or mortgagee to obtain a deficiency judgment against
borrowers financing the purchase of their residence or following sale under a
deed of trust or certain other foreclosure proceedings. A deficiency judgment is
a personal judgment against the borrower equal in most cases to the difference
between the amount due to the lender and the fair market value of the real
property at the time of the foreclosure sale. As a result of these prohibitions,
it is anticipated that in most instances the master servicer will utilize the
non-judicial foreclosure remedy and will not seek deficiency judgments against
defaulting borrowers.
Some state statutes require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an attempt
to satisfy the full debt before bringing a personal action against the borrower.
In certain other states, the lender has the option of bringing a personal action
against the borrower on the debt without first exhausting such security;
however, in some of these states, the lender, following judgment on such
personal action, may be deemed to have elected a remedy and may be precluded
from exercising remedies with respect to the security. Consequently, the
practical effect of the election requirement, when applicable, is that lenders
will usually proceed first against the security rather than bringing a personal
action against the borrower. In some states, exceptions to the anti-deficiency
statutes are provided for in certain instances where the value of the lender's
security has been impaired by acts or omissions of the borrower, for example, in
the event of waste of the property. Finally, other statutory provisions limit
any deficiency judgment against the former borrower following a foreclosure sale
to the excess of the outstanding debt over the fair market value of the property
at the time of the public sale. The purpose of these statutes is generally to
prevent a beneficiary or a mortgagee from obtaining a large deficiency judgment
against the former borrower as a result of low or no bids at the foreclosure
sale.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws,
and state laws affording relief to
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debtors, may interfere with or affect the ability of the secured mortgage lender
to realize upon its security. For example, in a proceeding under the federal
Bankruptcy Code, a lender may not foreclose on a mortgaged property without the
permission of the bankruptcy court. The rehabilitation plan proposed by the
debtor may provide, if the mortgaged property is not the debtor's principal
residence and the court determines that the value of the mortgaged property is
less than the principal balance of the mortgage loan, for the reduction of the
secured indebtedness to the value of the mortgaged property as of the date of
the commencement of the bankruptcy, rendering the lender a general unsecured
creditor for the difference, and also may reduce the monthly payments due under
such mortgage loan, change the rate of interest and alter the mortgage loan
repayment schedule. The effect of any such proceedings under the federal
Bankruptcy Code, including, but not limited to, any automatic stay, could result
in delays in receiving payments on the loans underlying a series of securities
and possible reductions in the aggregate amount of such payments.
The federal tax laws provide priority to certain tax liens over the
lien of a mortgage or secured party.
Due-on-Sale Clauses
Each conventional loan generally will contain a due-on-sale clause
which will generally provide that if the mortgagor or obligor sells, transfers
or conveys the property, the loan or contract may be accelerated by the
mortgagee or secured party. Court decisions and legislative actions have placed
substantial restrictions on the right of lenders to enforce such clauses in many
states. For instance, the California Supreme Court in August 1978 held that
due-on-sale clauses were generally unenforceable. However, the Garn-St Germain
Depository Institutions Act of 1982 (the "Garn-St Germain Act"), subject to
certain exceptions, preempts state constitutional, statutory and case law
prohibiting the enforcement of due-on-sale clauses. As a result, due-on-sale
clauses are generally enforceable except in those states whose legislatures
exercised their authority to regulate the enforceability of such clauses with
respect to mortgage loans that were (a) originated or assumed during the "window
period" under the Garn-St Germain Act which ended in all cases not later than
October 15, 1982, and (b) originated by lenders other than national banks,
federal savings institutions and federal credit unions. Freddie Mac has taken
the position in its published mortgage servicing standards that, out of a total
of eleven "window period states," five states (Arizona, Michigan, Minnesota, New
Mexico and Utah) have enacted statutes extending, on various terms and for
varying periods, the prohibition on enforcement of due-on-sale clauses with
respect to certain categories of window period loans. Also, the Garn-St Germain
Act does "encourage" lenders to permit assumption of loans at the original rate
of interest or at some other rate less than the average of the original rate and
the market rate.
As to loans secured by an owner-occupied residence, the Garn-St Germain
Act sets forth nine specific instances in which a mortgagee covered by the
Garn-St Germain Act may not exercise its rights under a due-on-sale clause,
notwithstanding the fact that a transfer of the property may have occurred. The
inability to enforce a due-on-sale clause may result in transfer of the related
property to an uncreditworthy person, which could increase the likelihood of
default or may result in a mortgage bearing an interest rate below the current
market rate being assumed by a new home buyer, which may affect the average life
of the loans and the number of loans which may extend to maturity.
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In addition, under federal bankruptcy law, due-on-sale clauses may not
be enforceable in bankruptcy proceedings and may, under certain circumstances,
be eliminated in any modified mortgage resulting from such bankruptcy
proceeding.
Enforceability of Prepayment and Late Payment Fees
Forms of notes, mortgages and deeds of trust used by lenders may
contain provisions obligating the borrower to pay a late charge if payments are
not timely made, and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations upon the late charges which a lender may
collect from a borrower for delinquent payments. Certain states also limit the
amounts that a lender may collect from a borrower as an additional charge if the
loan is prepaid. Under certain state laws, prepayment charges may not be imposed
after a certain period of time following the origination of mortgage loans with
respect to prepayments on loans secured by liens encumbering owner-occupied
residential properties. Since many of the properties will be owner-occupied, it
is anticipated that prepayment charges may not be imposed with respect to many
of the loans. The absence of such a restraint on prepayment, particularly with
respect to fixed rate loans having higher loan rates, may increase the
likelihood of refinancing or other early retirement of such loans or contracts.
Late charges and prepayment fees are typically retained by servicers as
additional servicing compensation.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, enacted in March 1980 ("Title V") provides that state usury
limitations shall not apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 1980. The Office of Thrift
Supervision, as successor to the Federal Home Loan Bank Board, is authorized to
issue rules and regulations and to publish interpretations governing
implementation of Title V. Title V authorized the states to reimpose interest
rate limits by adopting, before April 1, 1983, a law or constitutional provision
which expressly rejects application of the federal law. Fifteen states adopted
such a law prior to the April 1, 1983 deadline. In addition, even where Title V
was not so rejected, any state is authorized by the law to adopt a provision
limiting discount points or other charges on mortgage loans covered by Title V.
Certain states have taken action to reimpose interest rate limits
and/or to limit discount points or other charges.
The Home Improvement Contracts
General. The home improvement contracts, other than those home
improvement contracts that are unsecured or secured by mortgages on real estate
(such home improvement contracts are hereinafter referred to in this section as
"contracts") generally are "chattel paper" or constitute "purchase money
security interests" each as defined in the UCC. Pursuant to the UCC, the sale of
chattel paper is treated in a manner similar to perfection of a security
interest in chattel paper. Under the related Agreement, the sponsor will
transfer physical possession of the contracts to the trustee or a designated
custodian or may retain possession of the contracts as custodian for the
trustee. In addition, the sponsor will make an appropriate filing of a UCC-1
financing statement in
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the appropriate states to, among other things, give notice of the trust's
ownership of the contracts. Unless otherwise specified in the prospectus
supplement, the contracts will not be stamped or otherwise marked to reflect
their assignment from the sponsor to the trustee. Therefore, if through
negligence, fraud or otherwise, a subsequent purchaser were able to take
physical possession of the contracts without notice of such assignment, the
trust's interest in the contracts could be defeated.
Security Interests in Home Improvements. The contracts that are secured
by the home improvements financed thereby grant to the originator of such
contracts a purchase money security interest in such home improvements to secure
all or part of the purchase price of such home improvements and related
services. A financing statement generally is not required to be filed to perfect
a purchase money security interest in consumer goods. Such purchase money
security interests are assignable. In general, a purchase money security
interest grants to the holder a security interest that has priority over a
conflicting security interest in the same collateral and the proceeds of such
collateral. However, to the extent that the collateral subject to a purchase
money security interest becomes a fixture, in order for the related purchase
money security interest to take priority over a conflicting interest in the
fixture, the holder's interest in such home improvement must generally be
perfected by a timely fixture filing. In general, a security interest does not
exist under the UCC in ordinary building material incorporated into an
improvement on land. Home improvement contracts that finance lumber, bricks,
other types of ordinary building material or other goods that are deemed to lose
such characterization upon incorporation of such materials into the related
property, will not be secured by a purchase money security interest in the home
improvement being financed.
Enforcement of Security Interest in Home Improvements. So long as the
home improvement has not become subject to the real estate law, a creditor can
repossess a home improvement securing a contract by voluntary surrender, by
self-help repossession that is peaceful (i.e., without breach of the peace) or,
in the absence of voluntary surrender and the ability to repossess without
breach of the peace, by judicial process. The holder of a contract must give the
debtor a number of days' notice, which varies from 10 to 30 days depending on
the state, prior to commencement of any repossession. The UCC and consumer
protection laws in most states place restrictions on repossession sales,
including requiring prior notice to the debtor and commercial reasonableness in
effecting such a sale. The law in most states also requires that the debtor be
given notice of any sale prior to resale of the unit that the debtor may redeem
at or before such resale.
Under the laws applicable in most states, a creditor is entitled to
obtain a deficiency judgment from a debtor for any deficiency on repossession
and resale of the property securing the debtor's loan. However, some states
impose prohibitions or limitations on deficiency judgments, and in many cases
the defaulting borrower would have no assets with which to pay a judgment.
Certain other statutory provisions, including federal and state
bankruptcy and insolvency laws and general equitable principles, may limit or
delay the ability of a lender to repossess and resell collateral or enforce a
deficiency judgment.
Consumer Protection Laws. The so-called "Holder-in-Due Course" rule of
the Federal Trade Commission is intended to defeat the ability of the transferor
of a consumer credit contract which is the seller of goods which gave rise to
the transaction (and certain related lenders and
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assignees) to transfer such contract free of notice of claims by the debtor
thereunder. The effect of this rule is to subject the assignee of such a
contract to all claims and defenses which the debtor could assert against the
seller of goods. Liability under this rule is limited to amounts paid under a
contract; however, the obligor also may be able to assert the rule to set off
remaining amounts due as a defense against a claim brought by the trustee
against such obligor. Numerous other federal and state consumer protection laws
impose requirements applicable to the origination and lending pursuant to the
contracts, including the Truth in Lending Act, the Federal Trade Commission Act,
the Fair Credit Billing Act, the Fair Credit Reporting Act, the Equal Credit
Opportunity Act, the Fair Debt Collection Practices Act and the Uniform Consumer
Credit Code. In the case of some of these laws, the failure to comply with their
provisions may affect the enforceability of the related contract:
Applicability of Usury Laws. Title V of the Depository Institutions
Deregulation and Monetary Control Act of 1980, as amended ("Title V"), provides
that, subject to the following conditions, state usury limitations shall not
apply to any contract which is secured by a first lien on certain kinds of
consumer goods. The contracts would be covered if they satisfy certain
conditions governing, among other things, the terms of any prepayments, late
charges and deferral fees and requiring a 30-day notice period prior to
instituting any action leading to repossession of the related unit.
Title V authorized any state to reimpose limitations on interest rates
and finance charges by adopting before April 1, 1983 a law or constitutional
provision which expressly rejects application of the federal law. Fifteen states
adopted such a law prior to the April 1, 1983 deadline. In addition, even where
Title V was not so rejected, any state is authorized by the law to adopt a
provision limiting discount points or other charges on loans covered by Title V.
Installment Contracts
The loans may also consist of installment contracts. Under an
installment contract the seller (referred to in this section as the "lender")
retains legal title to the property and enters into an agreement with the
purchaser (referred to in this section as the "borrower") for the payment of the
purchase price, plus interest, over the term of such contract. Only after full
performance by the borrower of the contract is the lender obligated to convey
title to the property to the purchaser. As with mortgage or deed of trust
financing, during the effective period of the installment contract, the borrower
is generally responsible for maintaining the property in good condition and for
paying real estate taxes, assessments and hazard insurance premiums associated
with the property.
The method of enforcing the rights of the lender under an installment
contract varies on a state-by-state basis depending upon the extent to which
state courts are willing, or able pursuant to state statute, to enforce the
contract strictly according to its terms. The terms of installment contracts
generally provide that upon a default by the borrower, the borrower loses his or
her right to occupy the property, the entire indebtedness is accelerated, and
the buyer's equitable interest in the property is forfeited. The lender in such
a situation does not have to foreclose in order to obtain title to the property,
although in some cases a quiet title action is in order if the borrower has
filed the installment contract in local land records and an ejectment action may
be necessary to recover possession. In a few states, particularly in cases of
borrower default during the early years of an installment contract, the courts
will permit ejectment of the buyer and a forfeiture of his or her
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interest in the property. However, most state legislatures have enacted
provisions by analogy to mortgage law protecting borrowers under installment
contracts from the harsh consequences of forfeiture. Under such statutes, a
judicial or nonjudicial foreclosure may be required, the lender may be required
to give notice of default and the borrower may be granted some grace period
during which the installment contract may be reinstated upon full payment of the
default amount and the borrower may have a post-foreclosure statutory redemption
right. In other states, courts in equity may permit a borrower with significant
investment in the property under an installment contract for the sale of real
estate to share in the proceeds of sale of the property after the indebtedness
is repaid or may otherwise refuse to enforce the forfeiture clause.
Nevertheless, generally speaking, the lender's procedures for obtaining
possession and clear title under an installment contract in a given state are
simpler and less time-consuming and costly than are the procedures for
foreclosing and obtaining clear title to a property subject to one or more
liens.
Soldiers' and Sailors' Civil Relief Act
Generally, under the terms of the Soldiers' and Sailors' Civil Relief
Act of 1940, as amended (the "Relief Act"), a borrower who enters military
service after the origination of such borrower's loan (including a borrower who
is a member of the National Guard or is in reserve status at the time of the
origination of the loan and is later called to active duty) may not be charged
interest above an annual rate of 6% during the period of such borrower's active
duty status, unless a court orders otherwise upon application of the lender. It
is possible that such interest rate limitation could have an effect, for an
indeterminate period of time, on the ability of the master servicer to collect
full amounts of interest on certain of the loans. Unless otherwise provided in
the prospectus supplement, any shortfall in interest collections resulting from
the application of the Relief Act could result in losses to securityholders. The
Relief Act also imposes limitations which would impair the ability of the master
servicer to foreclose on an affected loan during the borrower's period of active
duty status. Moreover, the Relief Act permits the extension of a loan's maturity
and the re-adjustment of its payment schedule beyond the completion of military
service. Thus, in the event that such a loan goes into default, there may be
delays and losses occasioned by the inability to realize upon the Property in a
timely fashion.
Junior Mortgages; Rights of Senior Mortgagees
To the extent that the loans comprising the trust for a series are
secured by mortgages which are junior to other mortgages held by other lenders
or institutional investors, the rights of the trust (and therefore the
securityholders), as mortgagee under any such junior mortgage, are subordinate
to those of any mortgagee under any senior mortgage. The senior mortgagee has
the right to receive hazard insurance and condemnation proceeds and to cause the
property securing the loan to be sold upon default of the mortgagor, thereby
extinguishing the junior mortgagee's lien unless the junior mortgagee asserts
its subordinate interest in the property in foreclosure litigation and,
possibly, satisfies the defaulted senior mortgage. A junior mortgagee may
satisfy a defaulted senior loan in full and, in some states, may cure a default
and bring the senior loan current, in either event adding the amounts expended
to the balance due on the junior loan. In most states, absent a provision in the
mortgage or deed of trust, no notice of default is required to be given to a
junior mortgagee.
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The standard form of the mortgage used by most institutional lenders
confers on the mortgagee the right both to receive all proceeds collected under
any hazard insurance policy and all awards made in connection with condemnation
proceedings, and to apply such proceeds and awards to any indebtedness secured
by the mortgage, in such order as the mortgagee may determine. Thus, in the
event improvements on the property are damaged or destroyed by fire or other
casualty, or in the event the property is taken by condemnation, the mortgagee
or beneficiary under a senior mortgage will have the prior right to collect any
insurance proceeds payable under a hazard insurance policy and any award of
damages in connection with the condemnation and to apply the same to the
indebtedness secured by the senior mortgage. Proceeds in excess of the amount of
senior mortgage indebtedness, in most cases, may be applied to the indebtedness
of a junior mortgage.
Another provision sometimes found in the form of the mortgage or deed
of trust used by institutional lenders obligates the mortgagor to pay before
delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property which appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the property or the rights of the mortgagee under the mortgage. Upon a
failure of the mortgagor to perform any of these obligations, the mortgagee is
given the right under certain mortgages to perform the obligation itself, at its
election, with the mortgagor reimbursing the mortgagee for any sums expended by
the mortgagee on behalf of the mortgagor. All sums so expended by the mortgagee
become part of the indebtedness secured by the mortgage.
The form of credit line trust deed or mortgage generally used by most
institutional lenders which make revolving credit line loans typically contains
a future advance clause, which provides, in essence, that additional amounts
advanced to or on behalf of the borrower by the beneficiary or lender are to be
secured by the deed of trust or mortgage. Any amounts so advanced after the
Cut-off Date with respect to any mortgage will not be included in the trust. The
priority of the lien securing any advance made under a future advance clause may
depend in most states on whether the deed of trust or mortgage is called and
recorded as a credit line deed of trust or mortgage. If the beneficiary or
lender advances additional amounts, the advance is entitled to receive the same
priority as amounts initially advanced under the trust deed or mortgage,
notwithstanding the fact that there may be junior trust deeds or mortgages and
other liens which intervene between the date of recording of the trust deed or
mortgage and the date of the future advance, and notwithstanding that the
beneficiary or lender had actual knowledge of such intervening junior trust
deeds or mortgages and other liens at the time of the advance. In most states,
the trust deed or mortgage lien securing mortgage loans of the type which
includes home equity credit lines applies retroactively to the date of the
original recording of the trust deed or mortgage, provided that the total amount
of advances under the home equity credit line does not exceed the maximum
specified principal amount of the recorded trust deed or mortgage, except as to
advances made after receipt by the lender of a written notice of lien from a
judgment lien creditor of the trustor.
Consumer Protection Laws
Numerous federal and state consumer protection laws impose substantive
requirements upon mortgage lenders in connection with the originating, servicing
and enforcing of loans secured
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by single family properties. These laws include the federal Truth-in-Lending Act
and Regulation Z promulgated thereunder, Real Estate Settlement Procedures Act
and Regulation B promulgated thereunder, Equal Credit Opportunity Act, Fair
Credit Billing Act, Fair Credit Reporting Act and related statutes and
regulations. In particular, Regulation Z requires certain disclosures to
borrowers regarding the terms of the loans; the Equal Credit Opportunity Act and
Regulation B promulgated thereunder prohibit discrimination in the extension of
credit on the basis of age, race, color, sex, religion, marital status, national
origin, receipt of public assistance or the exercise of any right under the
Consumer Credit Protection Act; and the Fair Credit Reporting Act regulates the
use and reporting of information related to the borrower's credit experience.
Certain provisions of these laws impose specific statutory liabilities upon
lenders who fail to comply therewith. In addition, violations of such laws may
limit the ability of the sellers to collect all or part of the principal of or
interest on the loans and could subject the sellers and in some cases their
assignees to damages and administrative enforcement.
Federal Income Tax Consequences
General
The following is a summary of the anticipated material federal income
tax consequences of the purchase, ownership, and disposition of the securities
and is based on advice of tax counsel. The summary is based upon the provisions
of the Code, the regulations promulgated thereunder, including, where
applicable, proposed regulations, and the judicial and administrative rulings
and decisions now in effect, all of which are subject to change or possible
differing interpretations. The statutory provisions, regulations, and
interpretations on which this interpretation is based are subject to change, and
those changes could apply retroactively.
The summary does not purport to deal with all aspects of federal income
taxation that may affect particular investors in light of their individual
circumstances, nor with certain types of investors subject to special treatment
under the federal income tax laws. This summary focuses primarily upon investors
who will hold securities as capital assets within the meaning of Section 1221 of
the Code, but much of the discussion is applicable to other investors as well.
Prospective investors are advised to consult their own tax advisers concerning
the federal, state, local and any other tax consequences to them of the
purchase, ownership and disposition of the securities.
The federal income tax consequences to holders will vary depending on
whether
o the securities are classified as indebtedness;
o an election is made to treat the trust as a REMIC or a FASIT under
the Internal Revenue Code of 1986, as amended (the "Code");
o the securities represent an ownership interest in some or all of
the trust assets; or
o an election is made to treat the trust as a partnership.
The prospectus supplement will specify how the securities will be
treated for federal income tax purposes and will discuss whether a REMIC or
FASIT election will be made.
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Taxation of Debt Securities
Status as Real Property Loans. Except to the extent otherwise provided
in the prospectus supplement, tax counsel will have advised the sponsor that:
o securities held by a domestic building and loan association will
constitute "loans... secured by an interest in real property"
within the meaning of Code Section 7701(a)(19)(C)(v); and
o securities held by a real estate investment trust will constitute
"real estate assets" within the meaning of Code Section
856(c)(5)(A) and interest on these securities will be considered
"interest on obligations secured by mortgages on real property or
on interests in real property" within the meaning of Code Section
856(c)(3)(B).
The Small Business Job Protection Act of 1996, as part of the repeal of
the bad debt reserve method for thrift institutions, repealed the application of
Code Section 593(d) to any taxable year beginning after December 31, 1995.
Interest and Acquisition Discount. Securities representing regular
interests in a REMIC are generally taxable to holders in the same manner as
evidences of indebtedness issued by the REMIC. Stated interest on the regular
interest securities will be taxable as ordinary income and taken into account
using the accrual method of accounting, regardless of the holder's normal
accounting method. Interest, other than original issue discount, on securities,
other than regular interest securities, that are characterized as indebtedness
for federal income tax purposes will be includible in income by holders in
accordance with their usual methods of accounting. Securities characterized as
debt for federal income tax purposes and regular interest securities will be
referred to collectively as debt securities. If a FASIT election is made, the
material federal tax income consequences for investors associated with the
purchase, ownership and disposition of those securities will be set forth under
the heading "Federal Income Tax Consequences" in the prospectus supplement.
Debt securities that are compound interest securities will, and other
debt securities may, be issued with original issue discount, which we refer to
as "OID". The following discussion is based in part on the rules governing OID
which are set forth in Sections 1271-1275 of the Code and the Treasury
regulations issued on February 2, 1994, which we refer to as "OID Regulations."
A holder should be aware, however, that the OID Regulations do not adequately
address some issues relevant to prepayable securities, such as the debt
securities.
In general, OID, will equal the difference between the stated
redemption price at maturity of a debt security and its issue price. A holder of
a debt security must include OID in gross income as ordinary interest income as
it accrues under an accrual method of accounting. In general, OID must be
included in income in advance of the receipt of the cash representing that
income. The amount of OID on a debt security will be considered to be zero if it
is less than a de minimis amount determined under the Code.
The issue price of a debt security is the first price at which a
substantial amount of debt securities of that class are sold to the public,
excluding bond houses, brokers, underwriters or
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wholesalers. If less than a substantial amount of a particular class of debt
securities is sold for cash on or prior to the closing date, the issue price for
the class will be treated as the fair market value of the class on the closing
date. The issue price of a debt security also includes the amount paid by an
initial debt security holder for accrued interest that relates to a period prior
to the issue date of the debt security. The stated redemption price at maturity
of a debt security includes the original principal amount of the debt security,
but generally will not include distributions of interest if distributions
constitute qualified stated interest.
Under the OID Regulations, qualified stated interest generally means
interest payable at a single fixed rate or qualified variable rate, which we
describe below, and those interest payments are unconditionally payable at
intervals of one year or less during the entire term of the debt security. The
OID Regulations state that interest payments are unconditionally payable only if
a late payment or nonpayment is expected to be penalized or reasonable remedies
exist to compel payment. Some debt securities may provide for default remedies
in the event of late payment or nonpayment of interest. The interest on those
debt securities will be unconditionally payable and constitute qualified stated
interest, not OID. However, absent clarification of the OID Regulations, where
debt securities do not provide for default remedies, the interest payments will
be included in the debt security's stated redemption price at maturity and taxed
as OID. Interest is payable at a single fixed rate only if the rate
appropriately takes into account the length of the interval between payments.
Distributions of interest on debt securities on which deferred interest will
accrue will not constitute qualified stated interest payments and will be part
of the stated redemption price at maturity of those debt securities. Where the
interval between the issue date and the first distribution date on a debt
security is either longer or shorter than the interval between subsequent
distribution dates, all or part of the interest foregone, in the case of the
longer interval, and all of the additional interest, in the case of the shorter
interval, will be included in the stated redemption price at maturity and tested
under the de minimis rule described below. In the case of a debt security with a
long first period which has non-de minimis OID, all stated interest in excess of
interest payable at the effective interest rate for the long first period will
be included in the stated redemption price at maturity and the debt security
will generally have OID. Holders of debt securities should consult their own tax
advisors to determine the issue price and stated redemption price at maturity of
a debt security.
Under the de minimis rule, OID on a debt security will be considered to
be zero if the OID is less than 0.25% of the stated redemption price at maturity
of the debt security multiplied by the weighted average maturity of the debt
security. For this purpose, the weighted average maturity of the debt security
is computed as the sum of the amounts determined by multiplying the number of
full years from the issue date until each distribution in reduction of stated
redemption price at maturity is scheduled to be made by a fraction, the
numerator of which is the amount of each distribution included in the stated
redemption price at maturity of the debt security and the denominator of which
is the stated redemption price at maturity of the debt security. Holders
generally must report de minimis OID pro rata as principal payments are
received, and such income will be capital gain if the debt security is held as a
capital asset. However, accrual method holders may elect to accrue all de
minimis OID as well as market discount under a constant interest method.
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Debt securities may provide for interest based on a qualified variable
rate. Under the OID Regulations, interest is treated as payable at a qualified
variable rate and not as contingent interest if, generally,
o the interest is unconditionally payable at least annually,
o the issue price of the debt instrument does not exceed the total
noncontingent principal payments and
o interest is based on a qualified floating rate, an objective rate,
or a combination of qualified floating rates that do not operate
in a manner that significantly accelerates or defers interest
payments on the debt security.
In the case of compound interest securities, some interest weighted securities,
and other debt securities, none of the payments under the instrument will be
considered qualified stated interest, and thus the aggregate amount of all
payments will be included in the stated redemption price.
The IRS recently issued final regulations governing the calculation of
OID on instruments having contingent interest payments. The regulations
specifically do not apply for purposes of calculating OID on debt instruments
subject to Code Section 1272(a)(6), such as the debt security. Additionally, the
OID Regulations do not contain provisions specifically interpreting Code Section
1272(a)(6). Until the Treasury issues guidance to the contrary, the trustee
intends to base its computation on Code Section 1272(a)(6) and the OID
Regulations as described in this Prospectus. However, because no regulatory
guidance currently exists under Code Section 1272(a)(6), there can be no
assurance that this methodology represents the correct manner of calculating
OID.
The holder of a debt security issued with OID must include in gross
income, for all days during its taxable year on which it holds the debt
security, the sum of the "daily portions" of the OID. The amount of OID
includible in income by a holder will be computed by allocating to each day
during a taxable year a pro rata portion of the OID that accrued during the
relevant accrual period. In the case of a debt security that is not a regular
interest security and the principal payments on which are not subject to
acceleration resulting from prepayments on the loans, the amount of OID
includible in income of a holder for an accrual period, which generally is the
period over which interest accrues on the debt instrument, will equal the
product of the yield to maturity of the debt security and the adjusted issue
price of the debt security, reduced by any payments of qualified stated
interest. The adjusted issue price is the sum of its issue price plus prior
accruals or OID, reduced by the total payments made with respect to the debt
security in all prior periods, other than qualified stated interest payments.
The amount of OID to be included in income by a holder of a debt
instrument, that is subject to acceleration due to prepayments on other debt
obligations securing such instruments, is computed by taking into account the
anticipated rate of prepayments assumed in pricing the debt instrument. The
amount of OID that will accrue during an accrual period on a this type of
security is the excess, if any, of the sum of
o the present value of all payments remaining to be made on the
security as of the close of the accrual period and
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o the payments during the accrual period of amounts included in the
stated redemption price of the security, over the adjusted issue
price of the security at the beginning of the accrual period.
The present value of the remaining payments is to be determined on the
basis of three factors:
o the original yield to maturity of the pay-through security, which
is determined on the basis of compounding at the end of each
accrual period and properly adjusted for the length of the accrual
period,
o events which have occurred before the end of the accrual period,
and
o the assumption that the remaining payments will be made in
accordance with the original prepayment assumption.
The effect of this method is to increase the portions of OID required to be
included in income by a holder to take into account prepayments with respect to
the loans at a rate that exceeds the prepayment assumption, and to decrease, but
not below zero for any period, the portions of OID required to be included in
income by a holder of this type of security to take into account prepayments
with respect to the loans at a rate that is slower than the prepayment
assumption. Although OID will be reported to holders of these securities based
on the prepayment assumption, no representation is made to holders that loans
will be prepaid at that rate or at any other rate.
The sponsor may adjust the accrual of OID on a class of regular
interest securities or other regular interests in a REMIC in a manner that it
believes to be appropriate, to take account of realized losses on the loans,
although the OID Regulations do not provide for such adjustments. If the IRS
were to require that OID be accrued without such adjustments, the rate of
accrual of OID for a class of regular interest securities could increase.
Some classes of regular interest securities may represent more than one
class of REMIC regular interests. Unless otherwise provided in the prospectus
supplement, the trustee intends, based on the OID Regulations, to calculate OID
on these securities as if, solely for the purposes of computing OID, the
separate regular interests were a single debt instrument.
A subsequent holder of a debt security will also be required to include
OID in gross income, but a holder who purchases that debt security for an amount
that exceeds its adjusted issue price will be entitled, as will an initial
holder who pays more than a debt security's issue price, to offset such OID by
comparable economic accruals of portions of the excess.
Effects of Defaults and Delinquencies. Holders will be required to
report income with respect to the securities under an accrual method without
giving effect to delays and reductions in distributions attributable to a
default or delinquency on the loans, except possibly to the extent that it can
be established that those amounts are uncollectible. As a result, the amount of
income, including OID, reported by a holder of that security in any period could
significantly exceed the amount of cash distributed to the holder in that
period. The holder will eventually be allowed a loss, or will be allowed to
report a lesser amount of income, to the extent that the aggregate amount
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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
passthrough securities which we refer to interest weighted securities and define
below. The sponsor intends to take the position that all of the income derived
from an interest weighted security should be treated as OID and that the amount
and rate of accrual of such OID should be calculated by treating the interest
weighted security as a compound interest security. However, in the case of
interest weighted securities that are entitled to some payments of principal and
that are regular interest securities the IRS could assert that income derived
from an interest weighted security should be calculated as if the security were
a security purchased at a premium equal to the excess of the price paid by the
holder for the security over its stated principal amount, if any. Under this
approach, a holder would be entitled to amortize such premium only if it has in
effect an election under Section 171 of the Code with respect to all taxable
debt instruments held by such holder, as described below. Alternatively, the IRS
could assert that an interest weighted security should be taxable under the
rules governing bonds issued with contingent payments. That treatment may be
more likely in the case of interest weighted securities that are stripped
securities as described below. See "--Tax Status as a Grantor Trust--Discount or
Premium on Pass-Through Securities."
Variable Rate Debt Securities. In the case of debt securities bearing
interest at a rate that varies directly, according to a fixed formula, with an
objective index, it appears that
o the yield to maturity of those debt securities and
o in the case of pay-through securities, the present value of all
payments remaining to be made on those debt securities, should be
calculated as if the interest index remained at its value as of
the issue date of those securities.
Because the proper method of adjusting accruals of OID on a variable rate debt
security is uncertain, holders of variable rate debt securities should consult
their own tax advisers regarding the appropriate treatment of such securities
for federal income tax purposes.
Market Discount. A purchaser of a security may be subject to the market
discount rules of Sections 1276-1278 of the Code. A holder that acquires a debt
security with more than a prescribed de minimis amount of market discount, which
generally is the excess of the principal amount of the debt security over the
purchaser's purchase price, will be required to include accrued market discount
in income as ordinary income in each month, but limited to an amount not
exceeding the principal payments on the debt security received in that month
and, if the securities are sold, the gain realized. Market discount would accrue
in a manner to be provided in Treasury regulations but, until regulations are
issued, market discount would in general accrue either:
o on the basis of a constant yield, in the case of a security
subject to prepayment, taking into account a prepayment
assumption, or
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o in the ratio of (a) in the case of securities or the loans
underlying pass-through security that have not been originally
issued with OID, stated interest payable in the relevant period to
total stated interest remaining to be paid at the beginning of the
period or (b) in the case of securities or the loans underlying
pass-through security originally issued at a discount, OID in the
relevant period to total OID remaining to be paid.
Section 1277 of the Code provides that, regardless of the origination
date of the debt security or the loans for a pass-through security, the excess
of interest paid or accrued to purchase or carry a security or the underlying
loans for a pass-through security with market discount over interest received on
the security is allowed as a current deduction only to the extent excess is
greater than the market discount that accrued during the taxable year in which
interest expense was incurred. In general, the deferred portion of any interest
expense will be deductible when market discount is included in income, including
upon the sale, disposition, or repayment of the security or an underlying loan
for a pass-through security. A holder may elect to include market discount in
income currently as it accrues, on all market discount obligations acquired by
holder during the taxable year the election is made and after, in which case the
interest deferral rule will not apply.
Premium. A holder who purchases a debt security, other than an interest
weighted security to the extent described above, at a cost greater than its
stated redemption price at maturity, generally will be considered to have
purchased the security at a premium, which it may elect to amortize as an offset
to interest income on such security, and not as a separate deduction item, on a
constant yield method. Although no regulations addressing the computation of
premium accrual on securities similar to the securities have been issued, the
legislative history of the 1986 Act indicates that premium is to be accrued in
the same manner as market discount.
Accordingly, it appears that the accrual of premium on a class of pay-through
securities will be calculated using the prepayment assumption used in pricing.
If a holder makes an election to amortize premium on a debt security, the
election will apply to all taxable debt instruments, including all REMIC regular
interests and all pass-through securities representing ownership interests in a
trust holding debt obligations, held by the holder at the beginning of the
taxable year in which the election is made, and to all taxable debt instruments
acquired after by the holder, and will be irrevocable without the consent of the
IRS. Purchasers who pay a premium for the securities should consult their tax
advisers regarding the election to amortize premium and the method to be
employed. Recently, the IRS issued final regulations dealing with amortizable
bond premium. These regulations specifically do not apply to prepayable debt
instruments subject to Code Section 1272(a)(6) such as the securities. Absent
further guidance from the IRS, the trustee intends to account for amortizable
bond premium in the manner described above. Prospective purchasers of the
securities should consult their tax advisors regarding the possible application
of these regulations.
Election to Treat All Interest as Original Issue Discount. The OID
Regulations permit a holder of a debt security to elect to accrue all interest,
discount, including de minimis market or OID, and premium income as interest,
based on a constant yield method for debt securities acquired on or after April
4, 1994. If an election were to be made with respect to a debt security with
market discount, the holder of the debt security would be deemed to have made an
election to include in income currently market discount with respect to all
other debt instruments having market discount that such holder of the debt
security acquires during the year of the election or
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thereafter. Similarly, a holder of a debt security that makes this election for
a debt security that is acquired at a premium will be deemed to have made an
election to amortize bond premium for all debt instruments having amortizable
bond premium that such holder owns or acquires. The election to accrue interest,
discount and premium on a constant yield method for a debt security is
irrevocable.
Taxation of the REMIC and its Holders
General. In the opinion of tax counsel, if a REMIC election is made
with respect to a series of securities, then the arrangement by which the
securities of that series are issued will be treated as a REMIC as long as all
of the provisions of the applicable Agreement are complied with and the
statutory and regulatory requirements are satisfied. Securities will be
designated as regular interests or residual interests in a REMIC, as specified
in the prospectus supplement.
Except to the extent specified otherwise in a prospectus supplement, if
a REMIC election is made with respect to a series of securities,
o securities held by a domestic building and loan association will
constitute "a regular or a residual interest in a REMIC" within
the meaning of Code Section 7701(a)(19)(C)(xi), assuming that at
least 95% of the REMIC's assets consist of cash, government
securities, "loans secured by an interest in real property," and
other types of assets described in Code Section 7701(a)(19)(C);
and
o securities held by a real estate investment trust will constitute
"real estate assets" within the meaning of Code Section
856(c)(5)(B), and income with respect to the securities will be
considered "interest on obligations secured by mortgages on real
property or on interests in real property" within the meaning of
Code Section 856(c)(3)(B), assuming, for both purposes, that at
least 95% of the REMIC's assets are qualifying assets.
If less than 95% of the REMIC's assets consist of assets described above, then a
security will qualify for the tax treatment described above in the proportion
that REMIC assets are qualifying assets.
The Small Business Job Protection Act of 1996, as part of the repeal of
the bad debt reserve method for thrift institutions, repealed the application of
Code Section 593(d) to any taxable year beginning after December 31, 1995.
REMIC Expenses; Single Class REMICs
As a general rule, all of the expenses of a REMIC will be taken into
account by holders of the residual interest securities. In the case of a single
class REMIC, however, the expenses will be allocated, under Treasury
regulations, among the holders of the regular interest securities and the
holders of the residual interest securities, which we define below, on a daily
basis in proportion to the relative amounts of income accruing to each holder on
that day. In the case of a holder of a regular interest security who is an
individual or a pass-through interest holder, including certain pass-through
entities but not real estate investment trusts, expenses will be deductible only
to the extent that expenses, plus other "miscellaneous itemized deductions" of
the holder, exceed 2% of the holder's adjusted gross income. In addition, for
taxable years beginning after December 31,
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1990, the amount of itemized deductions otherwise allowable for the taxable year
for an individual whose adjusted gross income exceeds the applicable amount,
which amount will be adjusted for inflation for taxable years beginning after
1990, will be reduced by the lesser of:
o 3% of the excess of adjusted gross income over the applicable
amount, or
o 80% of the amount of itemized deductions otherwise allowable for
such taxable year.
The reduction or disallowance of this deduction may have a significant
impact on the yield of the regular interest security to such a holder. In
general terms, a single class REMIC is one that either:
o would qualify, under existing Treasury regulations, as a grantor
trust if it were not a REMIC, treating all interests as ownership
interests, even if they would be classified as debt for federal
income tax purposes, or
o is similar to a trust and which is structured with the principal
purpose of avoiding the single class REMIC rules.
Unless otherwise specified in the prospectus supplement, the expenses of the
REMIC will be allocated to holders of the related residual interest securities.
Taxation of the REMIC
General. Although a REMIC is a separate entity for federal income tax
purposes, a REMIC is not generally subject to entity-level tax. Rather, the
taxable income or net loss of a REMIC is taken into account by the holders of
residual interests. As described above, the regular interests are generally
taxable as debt of the REMIC.
Calculation of REMIC Income. The taxable income or net loss of a REMIC
is determined under an accrual method of accounting and in the same manner as in
the case of an individual, with certain adjustments. In general, the taxable
income or net loss will be the difference between
o the gross income produced by the REMIC's assets, including stated
interest and any OID or market discount on loans and other assets,
and
o deductions, including stated interest and OID accrued on regular
interest securities, amortization of any premium with respect to
loans, and servicing fees and other expenses of the REMIC.
A holder of a residual interest security that is an individual or a pass-through
interest holder, including certain pass-through entities, but not including real
estate investment trusts, will be unable to deduct servicing fees payable on the
loans or other administrative expenses of the REMIC for a given taxable year, to
the extent that such expenses, when aggregated with such holder's other
miscellaneous itemized deductions for that year, do not exceed two percent of
such holder's adjusted gross income.
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For purposes of computing its taxable income or net loss, the REMIC
should have an initial aggregate tax basis in its assets equal to the aggregate
fair market value of the regular interests and the residual interests on the day
that the interests are issued, which we refer to as the "start up day." The
aggregate basis will be allocated among the assets of the REMIC in proportion to
their respective fair market values.
The OID provisions of the Code apply to loans of individuals originated
on or after March 2, 1984, and the market discount provisions apply to loans
originated after July 18, 1984. Subject to possible application of the de
minimis rules, the method of accrual by the REMIC of OID income on the loans
will be equivalent to the method under which holders of pay-through securities
accrue OID, i.e., under the constant yield method taking into account the
prepayment assumption. The REMIC will deduct OID on the regular interest
securities in the same manner that the holders of the regular interest
securities include such discount in income, but without regard to the de minimis
rules. See "Taxation of Debt Securities" above. However, a REMIC that acquires
loans at a market discount must include such market discount in income
currently, as it accrues, on a constant interest basis.
To the extent that the REMIC's basis allocable to loans that it holds
exceeds their principal amounts, the resulting premium, if attributable to
mortgages originated after September 27, 1985, will be amortized over the life
of the loans, taking into account the prepayment assumption on a constant yield
method. Although the law is somewhat unclear regarding recovery of premium
attributable to loans originated on or before that date, it is possible that the
premium may be recovered in proportion to payments of loan principal.
Prohibited Transactions and Contributions Tax. The REMIC will be
subject to a 100% tax on any net income derived from a "prohibited transaction."
For this purpose, net income will be calculated without taking into account any
losses from prohibited transactions or any deductions attributable to any
prohibited transaction that resulted in a loss. In general, prohibited
transactions include:
o subject to limited exceptions, the sale or other disposition of
any qualified mortgage transferred to the REMIC;
o subject to limited exceptions, the sale or other disposition of a
cash flow investment;
o the receipt of any income from assets not permitted to be held by
the REMIC pursuant to the Code; or
o the receipt of any fees or other compensation for services
rendered by the REMIC.
It is anticipated that a REMIC will not engage in any prohibited transactions in
which it would recognize a material amount of net income. In addition, subject
to a number of exceptions, a tax is imposed at the rate of 100% on amounts
contributed to a REMIC after the close of the three month period beginning on
the startup day. The holders of residual interest securities will generally be
responsible for the payment of any such taxes imposed on the REMIC. To the
extent not paid by such holders or otherwise, however, taxes will be paid out of
the trust and will be allocated pro rata to all outstanding classes of
securities of such REMIC.
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Taxation of Holders of Residual Interest Securities
The holder of a security representing a residual interest security will
take into account the "daily portion" of the taxable income or net loss of the
REMIC for each day during the taxable year on which holder held the residual
interest security. The daily portion is determined by allocating to each day in
any calendar quarter its ratable portion of the taxable income or net loss of
the REMIC for such quarter, and by allocating that amount among the holders, on
that day of the residual interest securities in proportion to their respective
holdings on such day.
The holder of a residual interest security must report its
proportionate share of the taxable income of the REMIC whether or not it
receives cash distributions from the REMIC attributable to the income or loss.
The reporting of taxable income without corresponding distributions could occur,
for example, in certain REMIC issues in which the loans held by the REMIC were
issued or acquired at a discount, since mortgage prepayments cause recognition
of discount income, while the corresponding portion of the prepayment could be
used in whole or in part to make principal payments on REMIC regular interests
issued without any discount or at an insubstantial discount. If this occurs, it
is likely that cash distributions will exceed taxable income in later years.
Taxable income may also be greater in earlier years of certain REMIC issues as a
result of the fact that interest expense deductions, as a percentage of
outstanding principal on REMIC regular interest securities, will typically
increase over time as lower yielding securities are paid, whereas interest
income with respect to loans will generally remain constant over time as a
percentage of loan principal.
In any event, because the holder of a residual interest security is
taxed on the net income of the REMIC, the taxable income derived from a residual
interest security in a given taxable year will not be equal to the taxable
income associated with investment in a corporate bond or stripped instrument
having similar cash flow characteristics and pretax yield. Therefore, the
after-tax yield on the residual interest security may be less than that of a
bond or instrument.
Limitation on Losses. The amount of the REMIC's net loss that a holder
may take into account currently is limited to the holder's adjusted basis at the
end of the calendar quarter in which the loss arises. A holder's basis in a
residual interest security will initially equal such holder's purchase price,
and will subsequently be increased by the amount of the REMIC's taxable income
allocated to the holder, and decreased, but not below zero, by the amount of
distributions made and the amount of the REMIC's net loss allocated to the
holder. Any disallowed loss may be carried forward indefinitely, but may be used
only to offset income of the REMIC generated by the same REMIC. The ability of
holders of residual interest securities to deduct net losses may be subject to
additional limitations under the Code, as to which such holders should consult
their tax advisers.
Distributions. Distributions on a residual interest security, whether
at their scheduled times or as a result of prepayments, will generally not
result in any additional taxable income or loss to a holder of a residual
interest security. If the amount of such payment exceeds a holder's adjusted
basis in the residual interest security, however, the holder will recognize
gain, treated as gain from the sale of the residual interest security, to the
extent of the excess.
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Sale or Exchange. A holder of a residual interest security will
recognize gain or loss on the sale or exchange of a residual interest security
equal to the difference, if any, between the amount realized and the holder's
adjusted basis in the residual interest security at the time of the sale or
exchange. Except to the extent provided in regulations, which have not yet been
issued, any loss upon disposition of a residual interest security will be
disallowed if the selling holder acquires any residual interest in a REMIC or
similar mortgage pool within six months before or after the disposition.
Excess Inclusions. The portion of the REMIC taxable income of a holder
of a residual interest security consisting of "excess inclusion" income may not
be offset by other deductions or losses, including net operating losses, on the
holder's federal income tax return. Further, if the holder of a residual
interest security is an organization subject to the tax on unrelated business
income imposed by Code Section 511, the holder's excess inclusion income will be
treated as unrelated business taxable income of the holder. In addition, under
Treasury regulations yet to be issued, if a real estate investment trust, a
regulated investment company, a common trust, or certain cooperatives were to
own a residual interest security, a portion of dividends or other distributions
paid by the real estate investment trust or other entity would be treated as
excess inclusion income. If a Residual security is owned by a foreign person
excess inclusion income is subject to tax at a rate of 30% which may not be
reduced by treaty, is not eligible for treatment as portfolio interest and is
subject to certain additional limitations. See "Tax Treatment of Foreign
Investors."
The excess inclusion portion of a REMIC's income is generally equal to
the excess, if any, of REMIC taxable income for the quarterly period allocable
to a residual interest security, over the daily accruals for the quarterly
period of:
o 120% of the long term applicable federal rate on the startup day
multiplied by
o the adjusted issue price of the residual interest security at the
beginning of the quarterly period.
The adjusted issue price of a residual interest at the beginning of each
calendar quarter will equal its issue price, calculated in a manner analogous to
the determination of the issue price of a regular interest, increased by the
aggregate of the daily accruals for prior calendar quarters, and decreased, but
not below zero, by the amount of loss allocated to a holder and the amount of
distributions made on the residual interest security before the beginning of the
quarter. The longterm 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
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international organization, or any agency or instrumentality of any of the
foregoing, a rural electric or telephone cooperative described in Section
1381(a)(2)(C) of the Code, or any entity exempt from the tax imposed by Sections
1-1399 of the Code, if such entity is not subject to tax on its unrelated
business income. Accordingly, the applicable Agreement will prohibit
disqualified organizations from owning a residual interest security. In
addition, no transfer of a residual interest security will be permitted unless
the proposed transferee shall have furnished to the trustee an affidavit
representing and warranting that it is neither a disqualified organization nor
an agent or nominee acting on behalf of a disqualified organization.
If a residual interest security is transferred to a disqualified
organization in violation of the restrictions set forth above, a substantial tax
will be imposed on the transferor of the residual interest security at the time
of the transfer. In addition, if a disqualified organization holds an interest
in a pass-through entity, including, among others, a partnership, trust, real
estate investment trust, regulated investment company, or any person holding as
nominee, that owns a residual interest security, the pass-through entity will be
required to pay an annual tax on its allocable share of the excess inclusion
income of the REMIC.
Under the REMIC Regulations, if a residual interest security is a
noneconomic residual interest, a transfer of the residual interest security to a
United States person will be disregarded for all federal tax purposes unless no
significant purpose of the transfer was to impede the assessment or collection
of tax. A residual interest security is a noneconomic residual interest unless,
at the time of the transfer:
o the present value of the expected future distributions on the
residual interest security at least equals the product of the
present value of the anticipated excess inclusions and the highest
rate of tax for the year in which the transfer occurs, and
o the transferor reasonably expects that the transferee will receive
distributions from the REMIC at or after the time at which the
taxes accrue on the anticipated excess inclusions in an amount
sufficient to satisfy the accrued taxes.
If a transfer of a residual interest is disregarded, the transferor would be
liable for any Federal income tax imposed upon taxable income derived by the
transferee from the REMIC. The REMIC Regulations provide no guidance as to how
to determine if a significant purpose of a transfer is to impede the assessment
or collection of tax. A similar type of limitation exists with respect to
certain transfers of residual interest securities by foreign persons to United
States persons. See "--Tax Treatment of Foreign Investors."
Mark to Market Rules. Prospective purchasers of a residual interest
security should be aware that the IRS regulations which provide that a residual
interest security acquired after January 3, 1995 cannot be marked-to-market.
Administrative Matters
The REMIC's books must be maintained on a calendar year basis and the
REMIC must file an annual federal income tax return. The REMIC will also be
subject to the procedural and administrative rules of the Code applicable to
partnerships, including the determination of any
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adjustments to, among other things, items of REMIC income, gain, loss,
deduction, or credit, by the IRS in a unified administrative proceeding.
Tax Status as a Grantor Trust
General. As specified in the prospectus supplement if a REMIC election
is not made, in the opinion of tax counsel, the trust relating to a series of
securities will be classified for federal income tax purposes as a grantor trust
under Subpart E, Part I of Subchapter J of the Code and not as an association
taxable as a corporation. In some series there will be no separation of the
principal and interest payments on the loans. In such circumstances, a holder
will be considered to have purchased a pro rata undivided interest in each of
the loans. In other cases, i.e. stripped securities, sale of the securities will
produce a separation in the ownership of all or a portion of the principal
payments from all or a portion of the interest payments on the loans.
Each holder must report on its federal income tax return its share of
the gross income derived from the loans (not reduced by the amount payable as
trustee fees and the servicing fees, at the same time and in the same manner as
those items would have been reported under the holder's tax accounting method
had it held its interest in the loans directly, received directly its share of
the amounts received with respect to the loans, and paid directly its share of
the servicing fees. In the case of pass-through securities other than stripped
securities, the income will consist of a pro rata share of all of the income
derived from all of the loans and, in the case of stripped securities, the
income will consist of a pro rata share of the income derived from each stripped
bond or stripped coupon in which the holder owns an interest. The holder of a
security will generally be entitled to deduct servicing fees under Section 162
or Section 212 of the Code to the extent that the servicing fees represent
reasonable compensation for the services rendered by the trustee and the master
servicer or third parties that are compensated for the performance of services.
In the case of a noncorporate holder, however, servicing fees, to the extent not
otherwise disallowed, e.g., because they exceed reasonable compensation, will be
deductible in computing the holder's regular tax liability only to the extent
that the fees, when added to other miscellaneous itemized deductions, exceed 2%
of adjusted gross income and may not be deductible to any extent in computing
the holder's alternative minimum tax liability. In addition, the amount of
itemized deductions otherwise allowable for the taxable year for an individual
whose adjusted gross income exceeds the applicable amount, which will be
adjusted for inflation, will be reduced by the lesser of:
o 3% of the excess of adjusted gross income over the applicable
amount or
o 80% of the amount of itemized deductions otherwise allowable for
the taxable year.
Discount or Premium on Pass-Through Securities. The holder's purchase
price of a passthrough 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
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portion of the principal balance of the loan allocable to the security, the
interest in the loan allocable to the pass-through security will be deemed to
have been acquired at a discount or premium, respectively.
The treatment of any discount will depend on whether the discount
represents OID or market discount. In the case of a loan with OID in excess of a
prescribed de minimis amount or a stripped security, a holder of a security will
be required to report as interest income in each taxable year its share of the
amount of OID that accrues during that year in the manner described above. OID
with respect to a loan could arise, for example, by virtue of the financing of
points by the originator of the loan, or by virtue of the charging of points by
the originator of the loan in an amount greater than a statutory de minimis
exception, in circumstances under which the points are not currently deductible
pursuant to applicable Code provisions. Any market discount or premium on a loan
will be includible in income, generally in the manner described above, except
that in the case of pass-through securities, market discount is calculated on
the loans underlying the Certificate, rather than on the security. A holder that
acquires an interest in a loan originated after July 18, 1984 with more than a
de minimis amount of market discount, generally, the excess of the principal
amount of the loan over the purchaser's allocable purchase price, will be
required to include accrued market discount in income in the manner set forth
above. See "--Taxation of Debt Securities; Market Discount" and "--Premium"
above.
In the case of market discount on a pass-through security attributable
to loans originated on or before July 18, 1984, the holder generally will be
required to allocate the portion of the discount that is allocable to a loan
among the principal payments on the loan and to include the discount allocable
to each principal payment in ordinary income at the time such principal payment
is made. That treatment would generally result in discount being included in
income at a slower rate than discount would be required to be included in income
using the method described in the preceding paragraph.
Stripped Securities. A stripped security may represent a right to
receive only a portion of the interest payments on the loans, a right to receive
only principal payments on the loans, or a right to receive certain payments of
both interest and principal. Certain stripped securities such as ratio strip
securities may represent a right to receive differing percentages of both the
interest and principal on each loan. Pursuant to Section 1286 of the Code, the
separation of ownership of the right to receive some or all of the interest
payments on an obligation from ownership of the right to receive some or all of
the principal payments results in the creation of stripped bonds with respect to
principal payments and stripped coupons with respect to interest payments.
Section 1286 of the Code applies the OID rules to stripped bonds and stripped
coupons. For purposes of computing OID, a stripped bond or a stripped coupon is
treated as a debt instrument issued on the date that such stripped interest is
purchased with an issue price equal to its purchase price or, if more than one
stripped interest is purchased, the ratable share of the purchase price
allocable to the stripped interest.
Servicing fees in excess of reasonable servicing fees will be treated
under the stripped bond rules. If the excess servicing fees are less than 100
basis points or 1% interest on the loan principal balance or the securities are
initially sold with a de minimis discount, assuming no prepayment assumption is
required, any non-de minimis discount arising from a subsequent transfer of the
securities should be treated as market discount. The IRS appears to require that
reasonable
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servicing fees be calculated on a loan by loan basis, which could result in some
loans being treated as having more than 100 basis points of interest stripped
off.
The Code, OID Regulations and judicial decisions provide no direct
guidance as to how the interest and OID rules are to apply to stripped
securities and other pass-through securities. Under the method described above
for prepayment securities or the cash flow bond method, a prepayment assumption
is used and periodic recalculations are made which take into account with
respect to each accrual period the effect of prepayments during the period.
However, the 1986 Act does not, absent Treasury regulations, appear specifically
to cover instruments such as the stripped securities which technically represent
ownership interests in the underlying loans, rather than being debt instruments
secured by those loans. Nevertheless, it is believed that the cash flow bond
method is a reasonable method of reporting income for the securities, and it is
expected that OID will be reported on that basis unless otherwise specified in
the prospectus supplement. In applying the calculation to pass-through
securities, the trustee will treat all payments to be received by a holder with
respect to the underlying loans as payments on a single installment obligation.
The IRS could, however, assert that OID must be calculated separately for each
loan underlying a security.
Under certain circumstances, if the loans prepay at a rate faster than
the prepayment assumption, the use of the cash flow bond method may accelerate a
holder's recognition of income. If, however, the loans prepay at a rate slower
than the prepayment assumption, in some circumstances the use of this method may
decelerate a holder's recognition of income.
In the case of a stripped security that is an interest weighted
security, the trustee intends, absent contrary authority, to report income to
securityholders as OID, in the manner described above for interest weighted
securities.
Possible Alternative Characterizations. The characterizations of the
stripped securities described above are not the only possible interpretations of
the applicable Code provisions. Among other possibilities, the IRS could contend
that:
o in some series, each non-interest weighted security is composed of
an unstripped undivided ownership interest in loans and an
installment obligation consisting of stripped principal payments;
o the non-interest weighted securities are subject to the contingent
payment provisions of the Contingent Regulations; or
o each interest weighted stripped security is composed of an
unstripped undivided ownership interest in loans and an
installment obligation consisting of stripped interest payments.
Given the variety of alternatives for treatment of the stripped
securities and the different federal income tax consequences that result from
each alternative, potential purchasers are urged to consult their own tax
advisers regarding the proper treatment of the securities for federal income tax
purposes.
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Character as Qualifying Loans. In the case of stripped securities,
there is no specific legal authority existing regarding whether the character of
the securities, for federal income tax purposes, will be the same as the loans.
The IRS could take the position that the loans' character is not carried over to
the securities. Pass-through securities will be, and, although the matter is not
free from doubt, stripped securities should be considered to represent "real
estate assets" within the meaning of Section 856(c)(5)(B) of the Code and "loans
secured by an interest in real property" within the meaning of Section
7701(a)(19)(C)(v) of the Code. In addition, interest income attributable to the
securities should be considered to represent "interest on obligations secured by
mortgages on real property or on interests in real property" within the meaning
of Section 856(c)(3)(B) of the Code. Reserves or funds underlying the securities
may cause a proportionate reduction in the above-described qualifying status
categories of securities.
Sale or Exchange
Subject to the discussion below with respect to trusts as to which a
partnership election is made, a holder's tax basis in its security is the price
such holder pays for a security, plus amounts of original issue or market
discount included in income and reduced by any payments received, other than
qualified stated interest payments, and any amortized premium. Gain or loss
recognized on a sale, exchange, or redemption of a security, measured by the
difference between the amount realized and the security's basis as so adjusted,
will generally be capital gain or loss, assuming that the security is held as a
capital asset. In the case of a security held by a bank, thrift, or similar
institution described in Section 582 of the Code, however, gain or loss realized
on the sale or exchange of a regular interest security will be taxable as
ordinary income or loss. In addition, gain from the disposition of a regular
interest security that might otherwise be capital gain will be treated as
ordinary income to the extent of the excess, if any, of the amount that would
have been includible in the holder's income if the yield on the regular interest
security had equaled 110% of the applicable federal rate as of the beginning of
the holder's holding period, over the amount of ordinary income actually
recognized by the holder on the regular interest security.
Miscellaneous Tax Aspects
Backup Withholding. Subject to the discussion below with respect to
trusts as to which a partnership election is made, a holder, other than a holder
of a residual interest security, may, under certain circumstances, be subject to
"backup withholding" at a rate of 31% with respect to distributions or the
proceeds of a sale of certificates to or through brokers that represent interest
or OID on the securities. This withholding generally applies if the holder of a
security
o fails to furnish the trustee with its taxpayer identification
number ("TIN");
o furnishes the trustee an incorrect TIN;
o fails to report properly interest, dividends or other "reportable
payments" as defined in the Code; or
o under some circumstances, fails to provide the trustee or such
holder's securities broker with a certified statement, signed
under penalty of perjury, that the TIN provided is its correct
number and that the holder is not subject to backup withholding.
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Backup withholding will not apply, however, to some payments made to holders,
including payments to certain exempt recipients, such as exempt organizations,
and to certain nonresidents which we define below. Holders should consult their
tax advisers as to their qualification for exemption from backup withholding and
the procedure for obtaining the exemption.
The trustee will report to the holders and to the master servicer for
each calendar year the amount of any reportable payments during the year and the
amount of tax withheld, if any, with respect to payments on the securities.
Tax Treatment of Foreign Investors
Subject to the discussion below with respect to trusts as to which a
partnership election is made, under the Code, unless interest, including OID,
paid on a security, other than a residual interest security, is considered to be
effectively connected with a trade or business conducted in the United States by
a nonresident alien individual, foreign partnership or foreign corporation,
which we define as "nonresident," those interest will normally qualify as
portfolio interest, except where the recipient is a holder, directly or by
attribution, of 10% or more of the capital or profits interest in the issuer, or
the recipient is a controlled foreign corporation to which the issuer is a
related person, and will be exempt from federal income tax. Upon receipt of
appropriate ownership statements, the issuer normally will be relieved of
obligations to withhold tax from the interest payments. These provisions
supersede the generally applicable provisions of United States law that would
otherwise require the issuer to withhold at a 30% rate, unless that rate were
reduced or eliminated by an applicable tax treaty, on, among other things,
interest and other fixed or determinable, annual or periodic income paid to
nonresidents. Holders of passthrough 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
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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
"Taxation of Holders of Residual Interest Securities--Excess Inclusions."
On October 6, 1997, the Treasury Department issued new regulations (the
"New Regulations") which make certain modifications to the withholding and
information reporting rules described above. The New Regulations attempt to
unify certification requirements and modify reliance standards. The New
Regulations will generally be effective for payments made after December 31,
2000, subject to certain transition rules. Prospective investors are urged to
consult their own tax advisors regarding the New Regulations.
Tax Characterization of the Trust as a Partnership
Tax counsel will deliver its opinion that a trust will not be treated
as a publicly traded partnership taxable as a corporation for federal income tax
purposes. This opinion will be based on the assumption that the terms of the
related Agreement and related documents will be complied with, and on counsel's
conclusions that the nature of the income of the trust will exempt it from the
rule that certain publicly traded partnerships are taxable as corporations or
the issuance of the securities has been structured as a private placement under
an IRS safe harbor, so that the trust will not be characterized as a publicly
traded partnership taxable as a corporation.
If the trust were taxable as a corporation for federal income tax
purposes, the trust would be subject to corporate income tax on its taxable
income. The trust's taxable income would include all its income, possibly
reduced by its interest expense on the Notes. Any such corporate income tax
could materially reduce cash available to make payments on the notes and
distributions on the certificates, and certificateholders could be liable for
any tax that is unpaid by the trust.
Tax Consequences to Holders of the Notes
Treatment of the Notes as Indebtedness. The trust will agree, and the
noteholders will agree by their purchase of notes, to treat the notes as debt
for federal income tax purposes. Tax counsel will, except as otherwise provided
in the prospectus supplement, advise the sponsor that the notes will be
classified as debt for federal income tax purposes. The discussion below assumes
this characterization of the notes is correct.
OID, Indexed Securities, etc. The discussion below assumes that all
payments on the notes are denominated in U.S. dollars, and that the notes are
not indexed securities or strip notes. Moreover, the discussion assumes that the
interest formula for the notes meets the requirements for qualified stated
interest under the OID Regulations, and that any OID on the notes, i.e., any
excess of the principal amount of the notes over their issue price, does not
exceed a de minimis amount, i.e., 0.25% of their principal amount multiplied by
the number of full years included in their term, all within the meaning of the
OID Regulations. If these conditions are not satisfied with respect to
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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 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 not. It is believed that any
prepayment premium paid as a result of a mandatory redemption will be taxable as
contingent interest when it becomes fixed and unconditionally payable. A
purchaser who buys a note for more or less than its principal amount will
generally be subject, respectively, to the premium amortization or market
discount rules of the Code.
A holder of a note that has a fixed maturity date of not more than one
year from the issue date of note which we refer to as a short-term note may be
subject to special rules. An accrual basis holder of a short-term note and
certain cash method holders, including regulated investment companies, as set
forth in Section 1281 of the Code generally would be required to report interest
income as interest accrues on a straight-line basis over the term of each
interest period. Other cash basis holders of a short-term note would, in
general, be required to report interest income as interest is paid or, if
earlier, upon the taxable disposition of the short-term note. However, a cash
basis holder of a short-term note reporting interest income as it is paid may be
required to defer a portion of any interest expense otherwise deductible on
indebtedness incurred to purchase or carry the short-term note until the taxable
disposition of the short-term note. A cash basis taxpayer may elect under
Section 1281 of the Code to accrue interest income on all non-government 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 non-resident 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:
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o is not actually or constructively a "10 percent shareholder" of
the trust or the seller (including a holder of 10% of the
outstanding certificates) or a "controlled foreign corporation"
with respect to which the trust or the seller is a "related
person" within the meaning of the Code and
o provides the trustee or other person who is otherwise required to
withhold U.S. tax with respect to the notes with an appropriate
statement on Form W-8 or a similar form, signed under penalties of
perjury, certifying that the beneficial owner of the note is a
foreign person and providing the foreign person's name and
address.
If a note is held through a securities clearing organization or certain other
financial institutions, the organization or institution may provide the relevant
signed statement to the withholding agent; in that case, however, the signed
statement must be accompanied by a Form W-8 or substitute form provided by the
foreign person that owns the note. If such interest is not portfolio interest,
then it will be subject to United States federal income and withholding tax at a
rate of 30 percent, unless reduced or eliminated pursuant to an applicable tax
treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a note by a foreign person will be exempt from United
States federal income and withholding tax, if:
o the gain is not effectively connected with the conduct of a trade
or business in the United States by the foreign person and
o in the case of an individual foreign person, the foreign person is
not present in the United States for 183 days or more in the
taxable year.
Backup Withholding. Each holder of a note, other than an exempt holder
such as a corporation, tax-exempt organization, qualified pension and
profit-sharing trust, individual retirement account or non-resident alien who
provides certification as to status as a non-resident, 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
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would be subject to U.S. tax and U.S. tax return filing and withholding
requirements, and individual holders might be subject to certain limitations on
their ability to deduct their share of the trust's expenses.
Tax Consequences to Holders of the Certificates
Treatment of the Trust as a Partnership. The trust and the master
servicer will agree, and the certificateholders will agree by their purchase of
certificates, to treat the trust as a partnership for purposes of federal and
state income tax, franchise tax and any other tax measured in whole or in part
by income, with the assets of the partnership being the assets held by the
trust, the partners of the partnership being the certificateholders, and the
notes being debt of the partnership. However, the proper characterization of the
arrangement involving the trust, the certificates, the notes, the trust and the
master servicer is not clear because there is no authority on transactions
closely comparable to that contemplated herein.
A variety of alternative characterizations are possible. For example,
because the certificates have certain features characteristic of debt, the
certificates might be considered debt of the trust. Any such characterization
would not result in materially adverse tax consequences to certificateholders as
compared to the consequences from treatment of the certificates as equity in a
partnership, described below. The following discussion assumes that the
certificates represent equity interests in a partnership.
Indexed Securities, etc. The following discussion assumes that all
payments on the certificates are denominated in U.S. dollars, none of the
certificates are indexed securities or strip certificates, and that a series of
securities includes a single class of certificates. If these conditions are not
satisfied with respect to any given series of certificates, additional tax
considerations with respect to such certificates will be disclosed in the
prospectus supplement.
Partnership Taxation. As a partnership, the trust will not be subject
to federal income tax. Rather, each certificateholder will be required to
separately take into account such holder's allocated share of income, gains,
losses, deductions and credits of the trust. The trust's income will consist
primarily of interest and finance charges earned on the loans including
appropriate adjustments for market discount, OID and bond premium and any gain
upon collection or disposition of loans. The trust's deductions will consist
primarily of interest accruing with respect to the notes, servicing and other
fees, and losses or deductions upon collection or disposition of loans.
The tax items of a partnership are allocable to the partners in
accordance with the Code, Treasury regulations and the related Agreement and
related documents. The Agreement will provide, in general, that the
certificateholders will be allocated taxable income of the trust for each month
equal to the sum of:
o the interest that accrues on the certificates in accordance with
their terms for the month, including interest accruing at the
pass-through rate for the month and interest on amounts previously
due on the certificates but not yet distributed;
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o any trust income attributable to discount on the loans that
corresponds to any excess of the principal amount of the
certificates over their initial issue price;
o prepayment premium payable to the certificateholders for the
month; and
o any other amounts of income payable to the certificateholders for
the month.
The allocation will be reduced by any amortization by the trust of
premium on loans that corresponds to any excess of the issue price of
certificates over their principal amount. All remaining taxable income of the
trust will be allocated to the sponsor. Based on the economic arrangement of the
parties, this approach for allocating trust income should be permissible under
applicable Treasury regulations, although no assurance can be given that the IRS
would not require a greater amount of income to be allocated to
certificateholders. Moreover, even under the foregoing method of allocation,
certificateholders may be allocated income equal to the entire pass-through rate
plus the other items described above even though the trust might not have
sufficient cash to make current cash distributions of such amount. Thus, cash
basis holders will in effect be required to report income from the certificates
on the accrual basis and certificateholders may become liable for taxes on trust
income even if they have not received cash from the trust to pay taxes. In
addition, because tax allocations and tax reporting will be done on a uniform
basis for all certificateholders but certificateholders may be purchasing
certificates at different times and at different prices, certificateholders may
be required to report on their tax returns taxable income that is greater or
less than the amount reported to them by the trust.
All of the taxable income allocated to a certificateholder that is a
pension, profit sharing or employee benefit plan or other tax-exempt entity
including an individual retirement account will constitute unrelated business
taxable income generally taxable to the holder under the Code.
An individual taxpayer's share of expenses of the trust including
servicing fees but not interest expense would be miscellaneous itemized
deductions. The deductions might be disallowed to the individual in whole or in
part and might result in the holder being taxed on an amount of income that
exceeds the amount of cash actually distributed to the holder over the life of
the trust.
The trust intends to make all tax calculations relating to income and
allocations to certificateholders on an aggregate basis. If the IRS were to
require that such calculations be made separately for each loan, the trust might
be required to incur additional expense but it is believed that there would not
be a material adverse effect on certificateholders.
Discount and Premium. It is believed that the loans were not issued
with OID, and, therefore, the trust should not have OID income. However, the
purchase price paid by the trust for the loans may be greater or less than the
remaining principal balance of the loans at the time of purchase. If so, the
loan will have been acquired at a premium or discount, as the case may be. As
indicated above, the trust will make this calculation on an aggregate basis, but
might be required to recompute it on a loan by loan basis.
If the trust acquires the loans at a market discount or premium, the
trust will elect to include any discount in income currently as it accrues over
the life of the loans or to offset any premium
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against interest income on the loans. As indicated above, a portion of market
discount income or premium deduction may be allocated to certificateholders.
Section 708 Termination. Pursuant to regulations under Code Section
708, a sale or exchange of 50% or more of the capital and profits in a
partnership would cause a deemed contribution of assets of the partnership which
we refer to as the "old partnership" to a new partnership which we refer to as
the "new partnership" in exchange for interests in the new partnership. The
interests would be deemed distributed to the partners of the old partnership in
liquidation thereof, which would not constitute a sale or exchange. Accordingly,
under these new regulations, if the Trust Fund were characterized as a
partnership and a sale of certificates terminated the partnership under Code
Section 708, the purchaser's basis in its ownership interest would not change.
Disposition of Certificates. Generally, capital gain or loss will be
recognized on a sale of certificates in an amount equal to the difference
between the amount realized and the seller's tax basis in the certificates sold.
A certificateholder's tax basis in a certificate will generally equal the
holder's cost increased by the holder's share of trust income includible in
income and decreased by any distributions received with respect to such
certificate. In addition, both the tax basis in the certificates and the amount
realized on a sale of a certificate would include the holder's share of the
notes and other liabilities of the trust. A holder acquiring certificates at
different prices may be required to maintain a single aggregate adjusted tax
basis in such certificates, and, upon sale or other disposition of some of the
certificates, allocate a portion of such aggregate tax basis to the certificates
sold rather than maintaining a separate tax basis in each certificate for
purposes of computing gain or loss on a sale of that certificate.
Any gain on the sale of a certificate attributable to the holder's
share of unrecognized accrued market discount on the loans would generally be
treated as ordinary income to the holder and would give rise to special tax
reporting requirements. The trust does not expect to have any other assets that
would give rise to such special reporting requirements. Thus, to avoid those
special reporting requirements, the trust will elect to include market discount
in income as it accrues.
If a certificateholder is required to recognize an aggregate amount of
income not including income attributable to disallowed itemized deductions
described above over the life of the certificates that exceeds the aggregate
cash distributions with respect thereto, the excess will generally give rise to
a capital loss upon the retirement of the certificates.
Allocations Between Transferors and Transferees. In general, the
trust's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the certificateholders
in proportion to the principal amount of certificates owned by them as of the
close of the last day of such month. As a result, a holder purchasing
certificates may be allocated tax items which will affect its tax liability and
tax basis attributable to periods before the actual transaction.
The use of a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed or only applies to transfers
of less than all of the partner's interest, taxable income or losses of the
trust might be reallocated among the certificateholders.
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The trust's method of allocation between transferors and transferees may be
revised to conform to a method permitted by future regulations.
Section 754 Election. In the event that a certificateholder sells its
certificates at a profit or loss, the purchasing certificateholder will have a
higher lower basis in the certificates than the selling certificateholder had.
The tax basis of the trust's assets will not be adjusted to reflect that higher
or lower basis unless the trust were to file an election under Section 754 of
the Code. In order to avoid the administrative complexities that would be
involved in keeping accurate accounting records, as well as potentially onerous
information reporting requirements, the trust will not make an election. As a
result, certificateholders might be allocated a greater or lesser amount of
trust income than would be appropriate based on their own purchase price for
certificates.
Administrative Matters. The trustee is required to keep or have kept
complete and accurate books of the trust. Such books will be maintained for
financial reporting and tax purposes on an accrual basis and the fiscal year of
the trust will be the calendar year. The trustee will file a partnership
information return (IRS Form 1065) with the IRS for each taxable year of the
trust and will report each certificateholder's allocable share of items of trust
income and expense to holders and the IRS on Schedule K-1. The trust will
provide the Schedule K-1 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
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financial institutions that fail to provide the trust with the information
described above may be subject to penalties.
The sponsor will be designated as the tax matters partner in the
Agreement and will be responsible for representing the certificateholders in any
dispute with the IRS. The Code provides for administrative examination of a
partnership as if the partnership were a separate and distinct taxpayer.
Generally, the statute of limitations for partnership items does not expire
before three years after the date on which the partnership information return is
filed. Any adverse determination following an audit of the return of the trust
by the appropriate taxing authorities could result in an adjustment of the
returns of the certificateholders. In some circumstances, a certificateholder
may be precluded from separately litigating a proposed adjustment to the items
of the trust. An adjustment could also result in an audit of a
certificateholder's returns and adjustments of items not related to the income
and losses of the trust.
Tax Consequences to Foreign Certificateholders. It is not clear whether
the trust would be considered to be engaged in a trade or business in the United
States for purposes of federal withholding taxes with respect to non-U.S.
persons because there is no clear authority dealing with that issue under facts
substantially similar to those described herein. Although it is not expected
that the trust would be engaged in a trade or business in the United States for
such purposes, the trust will withhold as if it were so engaged in order to
protect the trust from possible adverse consequences of a failure to withhold.
The trust expects to withhold on the portion of its taxable income that is
allocable to foreign certificateholders pursuant to Section 1446 of the Code, as
if such income were effectively connected to a U.S. trade or business, at a rate
of 35% for foreign holders that are taxable as corporations and 39.6% for all
other foreign holders. Subsequent adoption of Treasury regulations or the
issuance of other administrative pronouncements may require the trust to change
its withholding procedures. In determining a holder's withholding status, the
trust may rely on IRS Form W-8, IRS Form W-9 or the holder's certification of
nonforeign status signed under penalties of perjury.
The term "U.S. Person" means a citizen or resident of the United
States, a corporation, partnership or other entity created or organized in or
under the laws of the United States, any state of the United States or the
District of Columbia, other than a partnership that is not treated as a United
States person under any applicable Treasury regulation , or an estate whose
income is subject to U.S. federal income tax regardless of its source of income,
or a trust if a court within the United States is able to exercise primary
supervision of the administration of the trust and one or more United States
persons have the authority to control all substantial decisions of the trust.
Each foreign holder might be required to file a U.S. individual or
corporate income tax return including, in the case of a corporation, the branch
profits tax on its share of the trust's income. Each foreign holder must obtain
a taxpayer identification number from the IRS and submit that number to the
trust on Form W-8 in order to assure appropriate crediting of the taxes
withheld. A foreign holder generally would be entitled to file with the IRS a
claim for refund with respect to taxes withheld by the trust taking the position
that no taxes were due because the trust was not engaged in a U.S. trade or
business. However, interest payments made or accrued to a certificateholder who
is a foreign person generally will be considered guaranteed payments to the
extent such payments are determined without regard to the income of the trust.
If these interest payments are properly characterized as guaranteed payments,
then the interest will not be
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considered portfolio interest. As a result, certificateholders will be subject
to United States federal income tax and withholding tax at a rate of 30 percent,
unless reduced or eliminated pursuant to an applicable treaty. In that case, a
foreign holder would only be entitled to claim a refund for that portion of the
taxes in excess of the taxes that should be withheld with respect to the
guaranteed payments.
Backup Withholding. Distributions made on the certificates and proceeds
from the sale of the certificates will be subject to a "backup" withholding tax
of 31% if, in general, the certificateholder fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code.
State Tax Considerations
In addition to the federal income tax consequences described in
"Federal Income Tax Consequences," potential investors should consider the state
and local income tax consequences of the acquisition, ownership, and disposition
of the securities. State and local income tax law may differ substantially from
the corresponding federal law, and this discussion does not purport to describe
any aspect of the income tax laws of any state or locality. Therefore, potential
investors should consult their own tax advisors with respect to the various
state and local tax consequences of an investment in the securities.
ERISA Considerations
The following describes certain considerations under the Employee
Retirement Income Security Act of 1974, as amended ("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 and Section 4975 of the Code impose requirements on employee
benefit plans (and on certain other retirement plans and arrangements, including
individual retirement accounts and annuities, and certain Keogh plans, and on
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 arc
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
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Sections 401(a) and 501(a), however, is subject to the prohibited transaction
rules set forth in Code Section 503.
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 Section 4975 of
the Code unless a statutory, regulatory or administrative exemption applies.
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, trusts and
certain other entities in which a Plan makes an equity investment could be
deemed for purposes of ERISA and Section 4975 of the Code to be assets of the
investing Plan in certain circumstances. However, the regulation provides that,
generally, the assets of a corporation or partnership in which a Plan invests
will not be deemed for purposes of ERISA to be assets of such Plan if the equity
interest acquired by the investing Plan is a publicly-offered security. A
publicly-offered security, as defined in the Labor Reg. Section 2510.3-101, is a
security that is widely held, freely transferable and registered under the
Securities Exchange Act of 1934, as amended. The prospectus supplement will
indicate the anticipated treatment under these regulations of securities issued
by the trust.
In 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.
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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 of a specified percentage of interest
payments only or principal payments only, or certain notional amounts of either
principal or interest payments, would be a mortgage passthrough 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
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determine whether, under the general fiduciary standards of investment prudence
and diversification, an investment in the certificates is appropriate for the
Plan, taking into account the overall investment policy of the Plan and the
composition of the Plan's investment portfolio.
The DOL has granted to certain underwriters individual administrative
exemptions (the "Underwriter Exemptions"), from certain of the prohibited
transaction rules of ERISA and the related excise tax provisions of Section 4975
of the Code with respect to the initial purchase, the holding and the subsequent
resale by Plans of certificates in pass-through trusts that consist of certain
receivables, loans and other obligations that meet the conditions and
requirements of the Underwriter Exemptions.
While each Underwriter Exemption is an individual exemption separately
granted to a specific underwriter, the terms and conditions which generally
apply to the Underwriter Exemptions are substantially the following:
o the acquisition of the certificates by a Plan is on terms
(including the price for the certificates) that are at least as
favorable to the Plan as they would be in an arm's-length
transaction with an unrelated party;
o the rights and interests evidenced by the certificates acquired by
the Plan are not subordinated to the rights and interests
evidenced by other certificates of the trust;
o the certificates acquired by the Plan have received a rating at
the time of such acquisition that is one of the three highest
generic rating categories from S&P, Moody's, DCR or Fitch;
o the trustee must not be an affiliate of any other member of the
Restricted Group as defined below;
o the sum of all payments made to and retained by the underwriters
in connection with the distribution of the certificates represents
not more than reasonable compensation for underwriting the
certificates; the sum of all payments made to and retained by the
seller pursuant to the assignment of the loans to the trust
represents not more than the fair market value of such loans; the
sum of all payments made to and retained by the servicer and any
other servicer represents not more than reasonable compensation
for such person's services under the agreement pursuant to which
the loans are pooled and reimbursements of such person's
reasonable expenses in connection therewith; and
o the Plan investing in the certificates is an accredited investor
as defined in Rule 501(a)(1) of Regulation D of the Securities Act
of 1933, as amended.
The trust must also meet the following requirements:
o the corpus of the trust must consist solely of assets of the type
that have been included in other investment pools;
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o the certificates in such other investment pools must have been
rated in one of the three highest rating categories of S&P,
Moody's, Fitch or DCR for at least one year prior to the Plan's
acquisition of the securities; and
o certificates evidencing interests in such other investment pools
must have been purchased by investors other than Plans for at
least one year prior to any Plan's acquisition of certificates.
Moreover, the Underwriter Exemptions generally provide relief from
certain selfdealing/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.
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Any Plan fiduciary that proposes to cause a Plan to purchase securities
is encouraged to consult with its counsel concerning the impact of ERISA and the
Code, the applicability of PTE 83-1, the availability and applicability of any
Underwriter Exemption or any other exemptions from the prohibited transaction
provisions of ERISA and the Code and the potential consequences in their
specific circumstances, before making the investment. Moreover, each Plan
fiduciary should determine whether under the general fiduciary standards of
investment prudence and diversification an investment in the securities is
appropriate for the Plan, taking into account the overall investment policy of
the Plan and composition of the Plan's investment portfolio.
Legal Investment
The prospectus supplement for each series of securities will specify
which, if any, of the classes of securities offered thereby constitute "mortgage
related securities" for purposes of the Secondary Mortgage Market Enhancement
Act of 1984 ("SMMEA"). Classes of securities that qualify as mortgage related
securities will be legal investments for persons, trusts, corporations,
partnerships, associations, business trusts, and business entities (including
depository institutions, life insurance companies and pension funds) created
pursuant to or existing under the laws of the United States or of any state
(including the District of Columbia and Puerto Rico) whose authorized
investments are subject to state regulations to the same extent as, under
applicable law, obligations issued by or guaranteed as to principal and interest
by the United States or any such entities. Under SMMEA, if a state enacted
legislation prior to October 4, 1991 specifically limiting the legal investment
authority of any such entities with respect to mortgage related securities,
securities will constitute legal investments for entities subject to such
legislation only to the extent provided therein. Approximately twenty-one states
adopted such legislation prior to the October 4, 1991 deadline. SMMEA provides,
however, that in no event will the enactment of any such legislation affect the
validity of any contractual commitment to purchase, hold or invest in
securities, or require the sale or other disposition of securities, so long as
such contractual commitment was made or such securities were acquired prior to
the enactment of such legislation.
SMMEA also amended the legal investment authority of
federally-chartered depository institutions as follows: federal savings and loan
associations and federal savings banks may invest in, sell or otherwise deal in
securities without limitations as to the percentage of their assets represented
thereby, federal credit unions may invest in mortgage related securities, and
national banks may purchase securities for their own account without regard to
the limitations generally applicable to investment securities set forth in 12
U.S.C. 24 (Seventh), subject in each case to such regulations as the applicable
federal authority may prescribe. In this connection, federal credit unions
should review the National Credit Union Administration ("NCUA") Letter to Credit
Unions No. 96, as modified by NCUA Letter to Credit Unions No. 108, which
includes guidelines to assist federal credit unions in making investment
decisions for mortgage related securities and the NCUA's regulation "Investment
and Deposit Activities" (12 C.F.R. Part 703), which sets forth certain
restrictions on investments by federal credit unions in mortgage related
securities (in each case whether or not the class of securities under
consideration for purchase constituted a mortgage related security).
All depository institutions considering an investment in the securities
(whether or not the class of securities under consideration for purchase
constitutes a mortgage related security) should review the Federal Financial
Institutions Examination Council's Supervisory Policy Statement on
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the Securities Activities (to the extent adopted by their respective regulators)
(the "Policy Statement") setting forth, in relevant part, certain securities
trading and sales practices deemed unsuitable for an institution's investment
portfolio, and guidelines for (and restrictions on) investing in mortgage
derivative products, including mortgage related securities which are "high-risk
mortgage securities" as defined in the Policy Statement. According to the Policy
Statement, high-risk mortgage securities include securities not entitled to
distributions allocated to principal or interest and subordinate securities.
Under the Policy Statement, it is the responsibility of each depository
institution to determine, prior to purchase (and at stated intervals
thereafter), whether a particular mortgage derivative product is a high-risk
mortgage security, and whether the purchase (or retention) of such a product
would be consistent with the Policy Statement.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to, "prudent investor" provisions which may restrict or prohibit investment in
securities which are not "interest bearing" or "income paying."
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase securities or to purchase
securities representing more than a specified percentage of the investor's
assets. Investors should consult their own legal advisors in determining whether
and to what extent the securities constitute legal investments for such
investors.
Method of Distribution
The securities are being offered hereby in series from time to time
(each series evidencing or relating to a separate trust) through any of the
following methods:
o by negotiated firm commitment underwriting and public reoffering
by underwriters;
o by agency placements through one or more placement agents
primarily with institutional investors and dealers; and
o by placement directly by the sponsor with institutional investors.
A prospectus supplement will be prepared for each series which will
describe the method of offering being used for that series and will set forth:
o the identity of any underwriters thereof,
o either:
o the price at which such series is being offered, the nature
and amount of any underwriting discounts or additional
compensation to such underwriters and the proceeds of the
offering to the sponsor,
o or the method by which the price at which the underwriters
will sell the securities will be determined,
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o information regarding the nature of the underwriters' obligations,
o any material relationship between the sponsor and any underwriter
and,
o where appropriate, information regarding any discounts or
concessions to be allowed or reallowed to dealers or others and
any arrangements to stabilize the market for the securities so
offered.
In firm commitment underwritten offerings, the underwriters will be
obligated to purchase all of the securities of such series if any such
securities are purchased. Securities may be acquired by the underwriters for
their own accounts and may be resold from time to time in one or more
transactions, including negotiated transactions, at a fixed public offering
price or at varying prices determined at the time of sale.
Underwriters and agents may be entitled under agreements entered into
with the sponsor to indemnification by the sponsor against certain civil
liabilities, including liabilities under the securities Act of 1933, as amended,
or to contribution with respect to payments which such underwriters or agents
may be required to make in respect thereof.
GreenPoint Mortgage Funding, Inc. or other affiliates of the sponsor
may purchase securities and pledge them to secure indebtedness or, together with
its pledgees, donees, transferees or other successors in interest, sell the
securities, from time to time, either directly or indirectly through one or more
underwriters, underwriting syndicates or designated agents.
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 or Dewey Ballantine
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
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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 EC. For further information, reference is made to
such registration statement and the exhibits thereto, which may be inspected and
copied at the facilities maintained by the SEC at its Public Reference Section,
450 Fifth Street, N.W., Washington, D.C. 20549, and at its Regional Offices
located as follows:
Chicago Regional Office, New York Regional Office
500 West Madison Street, Seven World Trade Center
Chicago, IL 60661 New York, NY 10048
The SEC maintains a website at http://www.sec.gov. that contains
reports, proxy and information statements and other information regarding
registrants including the sponsor, that file electronically with the SEC.
Incorporation of Certain Documents by Reference
The SEC allows us to incorporate by reference some of the information
we file with it, which means that we can disclose important information to you
by referring you to those documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for all purposes of this prospectus to the extent that
a statement contained herein (or in the accompanying supplement) or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference modifies or replaces such statement. Any such statement so modified or
superseded shall not be deemed, except as modified or superseded, to constitute
a part of this prospectus. Neither the sponsor nor the master servicer for any
series intends to file with the SEC periodic reports with respect to the related
trust following completion of the reporting period required by Rule 15d-1 or
Regulation 15D under the Securities Exchange Act of 1934, as amended (the
"Exchange Act").
All documents filed by or on behalf of the trust referred to in the
accompanying supplement with the SEC pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act on or after the date of such supplement and prior to
the termination of any offering of the securities issued by such trust shall be
deemed to be incorporated by reference in this prospectus and to be a part of
this prospectus from the date of the filing of such documents.
The trust will provide without charge to each person to whom this
prospectus is delivered, on the written or oral request of such person, a copy
of any or all of the documents referred to above that have been or may be
incorporated by reference in this prospectus (not including exhibits to the
information that is incorporated by reference unless such exhibits are
specifically incorporated by reference into the information that this prospectus
incorporates). Such requests should be directed to the corporate trust office of
the trustee specified in the accompanying supplement.
Rating
It is a condition to the issuance of the securities of each series
offered hereby and by the supplement that they shall be rated in one of the four
highest rating categories by the nationally recognized statistical rating agency
or agencies specified in the prospectus supplement.
102
<PAGE>
Ratings on asset-backed securities address the likelihood of receipt by
securityholders of all distributions on the trust assets. These ratings address
the structural, legal and issuer- related aspects associated with such
securities, the nature of the trust assets and the credit quality of the credit
enhancer or guarantor, if any. Ratings on asset-backed securities do not
represent any assessment of the likelihood of principal prepayments by
mortgagors or of the degree by which such prepayments might differ from those
originally anticipated. As a result, securityholders might suffer a lower than
anticipated yield, and, in addition, holders of stripped securities in extreme
cases might fail to recoup their underlying investments.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Further, such ratings do not address the effect
of prepayments on the yield anticipated by the investor. Each security rating
should be evaluated independently of any other security rating.
103
<PAGE>
Index of Defined Terms
Agreement...........................................................9
Belgian Cooperative................................................29
CERCLA.............................................................59
Class Security Balance.............................................20
CLTV...............................................................13
Code...............................................................68
collateral value...................................................13
Cut-off Date........................................................8
DOL................................................................95
EPA................................................................59
ERISA..............................................................94
Euroclear..........................................................28
Euroclear Operator.................................................29
European Depositaries..............................................28
Exchange Act......................................................102
Garn-St Germain Act................................................62
Indemnified Parties................................................51
L/C Bank...........................................................33
LTV................................................................13
Morgan.............................................................29
NCUA...............................................................99
New Regulations....................................................86
OID................................................................69
OID Regulations....................................................69
Parties in Interest................................................95
Permitted Investments..............................................35
Plans..............................................................94
Policy Statement..................................................100
PTE 83-1...........................................................95
RCRA...............................................................60
refinance loan.....................................................13
Relevant Depositary................................................28
Relief Act.........................................................66
Restricted Group...................................................98
secured creditor exclusion.........................................59
Security Account...................................................42
Single Family Securities...........................................95
SMMEA..............................................................99
Terms and Conditions...............................................30
TIN................................................................84
Title V............................................................63
U.S. Person........................................................93
Underwriter Exemptions.............................................97
104
<PAGE>
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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
Prospectus Supplement
Page
----
Summary............................................................. S-4
Risk Factors........................................................ S-12
Formation of the Trust.............................................. S-16
The Trust Property.................................................. S-17
The Insurer and the Policy.......................................... S-17
GreenPoint Mortgage Funding, Inc.................................... S-21
The Company's Mortgage Loan Program................................. S-24
The Sponsor......................................................... S-25
Description of the Mortgage Loans................................... S-25
Yield, Maturity and Prepayment Considerations....................... S-51
Pool Factor and Trading Information................................. S-60
Description of the Class A Notes.................................... S-60
Certain Provisions of the Sale and Servicing Agreement.............. S-70
Use of Proceeds..................................................... S-78
Certain Federal Income Tax Consequences............................. S-78
State Taxes......................................................... S-81
ERISA Considerations................................................ S-81
Legal Investment Considerations..................................... S-82
Method of Distribution.............................................. S-82
Legal Matters....................................................... S-83
Experts............................................................. S-83
Ratings............................................................. S-83
Index of Defined Terms.............................................. S-84
Annex I: Insurer's Audited Financial Statements..................... S-87
Annex II: Insurer's Unaudited Interim Financial Statements.......... S-107
Annex III: Clearance, Settlement and Tax Documentation Procedures... S-115
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................................... 37
The Agreements........................................................ 40
Certain Legal Aspects of the Loans.................................... 57
Federal Income Tax Consequences....................................... 68
State Tax Considerations.............................................. 94
ERISA Considerations.................................................. 94
Legal Investment...................................................... 99
Method of Distribution................................................ 100
Legal Matters......................................................... 101
Financial Information................................................. 101
Available Information................................................. 101
Incorporation of Certain Documents by Reference....................... 102
Rating................................................................ 102
Index of Defined Terms................................................ 104
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GREENPOINT HOME EQUITY LOAN
TRUST 2000-3
$102,736,000 Class A-1 Variable Rate
Asset-Backed Notes
$98,584,000 Class A-2 Variable Rate
Asset-Backed Notes
$97,966,000 Class A-3 Variable Rate
Asset-Backed Notes
HOME EQUITY LOAN
ASSET-BACKED NOTES
SERIES 2000-3
[GREENPOINT MORTGAGE SECURITIES, INC. LOGO]
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PROSPECTUS SUPPLEMENT
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[GREENWICH CAPITAL LOGO]
December 5, 2000
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